ITAD BIR Ruling No. 047-15

March 25, 2015 ITAD BIR RULING NO. 047-15 Article 10 (Dividends), Philippines-France tax treaty SyCip Salazar Hernandez and Gatmaitan Attorneys-at-Law SyCip Law Center 105 Paseo de Roxas Makati City Attention: Atty. Carina C. Laforteza Atty. John Paul V. De Leon Atty. Rachel T. Uy Gentlemen : This refers to your tax treaty relief application filed on November 13, 2013 requesting confirmation on your opinion that the dividends paid by Bostik Philippines, Inc. ("Bostik Philippines") , to Bostik Holding S.A. ("Bostik") are subject to income tax at the rate 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty"). 1 Facts Bostik is a foreign corporation and a resident of the France based on its amended Articles of Incorporation and Certificate of Residence issued by the French tax authority on July 4, 2013. Bostik is located at 2 Place Jean Millier La Defense 6-92400 Courbevoie, France. It is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration issued by the Securities and Exchange Commission on August 1, 2013. On the other hand, Bostik Philippines is a domestic corporation located at 35th Floor Raffles Corporate Center, F. Ortigas Jr. Road, Ortigas Business District Center, Pasig City, Philippines. Based on the Secretary's Certificate issued on November 6, 2013, the Board of Directors of Bostik Philippines, during its meeting on September 25, 2013, approved the declaration of cash dividends amounting to P294,395,904.00 in favor of the company's stockholders of record as of August 31, 2013, and payable not later than December 30, 2013. As of record date on August 31, 2013, Bostik holds 100 percent of the outstanding common shares of stock of Bostik Philippines as described below: Stockholder Number and Mode of Acquisition Percentage of Value of Shares Acquisition Date Ownership Bostik 97,050,002 By purchase Nov. 16, 2005 100 percent 46,000,000 By purchase Dec. 16, 2005 Total 143,050,002 (P143,050,002.00) ============== Based on the Certificate of Remittance and Debit Advice issued by Citibank N.A. Manila 2 on January 13, 2014, the dividends were remitted by Bostik Philippines to Bostik on as follows: Date of Net Amount After Remittance Gross Amount Withholding Tax November 29, EUR4,927,952.86 EUR4,435,157.58 2013 (P294,395,904) (P264,956,313.83) Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: AHDaET "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "SEC. 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5 (c) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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." In this particular case, you invoke the Philippines-France tax treaty. Paragraphs 1 and 2, Article 11 thereof provide: "Article 10 Dividends 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law 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 (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of the dividends." Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines at a rate not to exceed 15 percent of the gross amount of the dividend, and 10 percent if the recipient is a company (excluding partnership) if it holds at least 10 percent of the voting shares of the company paying the dividends. Accordingly, inasmuch as Bostik is a company in France, and that Bostik holds directly more than 10 percent of the voting shares of Bostik Philippines (as represented by shares), in fact, Bostik holds 100 percent of these shares, such dividends paid by Bostik Philippines to Bostik shall be subject to income tax rate of 10 percent pursuant to paragraph 2 (a), Article 10 of the Philippines-France tax treaty. AaEcDS 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. As amended by the Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976 effective January 1, 1998. 2. Located at 8741 Paseo de Roxas, Makati City, Philippines.