ITAD BIR Ruling No. 046-10

October 5, 2010 ITAD BIR RULING NO. 046-10 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 99-08; BIR Ruling Nos. DA-ITAD-085-09; 040-09; and 08-09 Alfa Laval Philippines, Inc. 3rd Floor, Molave Building 2231 Pasong Tamo Makati City, Philippines Attention: Cielito A. Rellores Accountant Gentlemen : This refers to your application for tax treaty relief dated November 11, 2006, requesting confirmation of your opinion that the cash dividends to be paid by Alfa Laval Philippines, Inc. (AL Philippines) to Alfa Laval NV (AL Netherlands) are subject to the preferential tax rate of 10% pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. aAHISE It is represented that AL Netherlands is a nonresident foreign corporation organized and existing under the laws of the Netherlands with address at Baarschot 2, 4817 ZZ Breda per Declaration of Residence issued by the inspector of the Tax Administration of Rijnmond/kantoor Rotterdam, the Netherlands; that its authorized capital is divided into one million (1,000,000) shares of two hundred and twenty-eight Euro (EUR 228) each; that it is not registered either as a corporation or as a partnership in the Philippines per certification dated October 25, 2006 issued by the Securities and Exchange Commission; that AL Philippines is a corporation duly organized and existing under and by virtue of Philippine laws, with principal office address at 3rd Floor, Molave Building, 2231 Pasong Tamo, Makati City, Philippines. It is also represented that AL Philippines has a subscribed and paid-up capital stock of Seventy-One Thousand Nine Hundred Ninety-Seven (71,997) Class A shares with a par value of PhP100.00 per share and Forty-Seven Thousand Nine Hundred Ninety-Eight (47,998) Class B shares with a par value PhP100.00 or an aggregate value of Twelve Million Pesos (PhP12,000,000.00) including five nominee shares, representing 100% of the total outstanding capital stock; that on April 11, 2006, the Board of Directors of AL Philippines declared cash dividends in the total amount of Fourteen Million Pesos (PhP14,000,000.00), to be distributed among stockholders of record as of December 31, 2005 pro-rata to their respective shareholdings, based on the number of shares held by them as of December 31, 2005; that the cash dividends shall be paid not later than October 31, 2006; and that the issue/s or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997 as amended, applies in general. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: TaDIHc "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" In reply, please be informed that Article 10 of the Philippines-Netherlands tax treaty provides as follows: "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment, as income from shares by the taxation law of the State of which the company making that distribution is a resident. aATEDS xxx xxx xxx" Based on the aforequoted Article 10 insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends apply when the following conditions concur: (1) the payor and recipient of the dividends must be separately treated as a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, (4) the recipient of the dividends is the beneficial owner thereof, (5) the capital of such recipient is wholly or partly divided into shares, and (6) the recipient holds directly at least 10 percent of the capital of the payor of the dividends. On the other hand, in applying the 15 percent preferential tax rate, less stringent conditions need concurrence, to wit: (1) the payor of the dividends must be a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, and (4) the recipient of the dividends is the beneficial owner thereof. Article 3 (e) of the Philippines-Netherlands tax treaty defines the term "company" as "any body corporate or any other entity which is treated as a body corporate for tax purposes". For purposes of determining the residency of the payor and/or recipient of the dividends, Article 4 (1) of the same tax treaty provides: "Article 4 FISCAL DOMICILE 1. For the purposes of this Convention, the term 'resident of one of the States' means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." Based on the representations made and the documents presented, it appears that all of the conditions in applying the 10 percent preferential tax rate are present. Firstly, AL Philippines , the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. AL Netherlands , the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, AL Philippines is deemed domestic corporation, while AL Netherlands is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, AL Philippines is a resident of the Philippines since it is treated as a juridical person under the laws of the Philippines, and is liable to taxation therein by reason of its being a domestic corporation. Thirdly, AL Netherlands, the recipient of the subject dividends, is a resident of The Netherlands for purposes of the Philippines-Netherlands tax treaty as declared by the tax authority of The Netherlands. Fourthly, AL Netherlands is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated August 15, 2007. Fifthly, the capital of AL Netherlands is wholly divided into shares, based on a copy of the Articles of Association of AL Netherlands. Lastly, AL Netherlands directly holds 99.98% of the issued and outstanding authorized capital stock of AL Philippines , per Secretary's Certificate dated August 15, 2007 issued by the Corporate Secretary of AL Philippines , or more than the required stockholdings of 10%. Thus, this Office is of the opinion and so holds that herein subject dividends which are paid by AL Philippines to AL Netherlands are subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-99-08 dated 17 November 2008; BIR Ruling No. DA-ITAD 008-09 dated January 27, 2009; BIR Ruling No. DA-ITAD-040-09 dated March 25, 2009; BIR Ruling No. DA-ITAD-085-09 dated September 10, 2009) This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. DCHIAS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue