ITAD BIR Ruling No. 048-14

April 30, 2014 ITAD BIR RULING NO. 048-14 Article 10, Philippines-Netherlands tax treaty Quisumbing Torres 12th Floor Net One Center, 26th Street Corner 3rd Avenue Crescent Park West, Bonifacio Global City, Taguig Attention: Atty. Lorybeth R. Baldrias-Serrano Gentlemen : This refers to your application for tax treaty relief filed on December 21, 2012 requesting confirmation that the dividends to be paid by B&M Global Services Manila, Inc. ("B&M") to Baker & McKenzie International B.V. ("BMI BV") are subject to the preferential rate of 10 percent pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . It is represented that BMI BV is a foreign corporation organized and existing under the laws of Netherlands with its principal office address at Claude Debussylaan 54 1082 MD Amsterdam based on its Declaration of Residence issued by the tax authority of Netherlands on December 12, 2012; that BMI BV has an authorized capital of EUR90,000 and is divided into ninety shares with a par value of EUR1000 each based on the Articles of Association of BMI BV; that BMI BV is not registered as a corporation or as a partnership based on the Certification issued by the Securities and Exchange Commission on January 11, 2013; and that on the other hand, B&M is a domestic corporation situated at the 14th Floor, Net One Center, 26th Street corner 3rd avenue, Crescent Park West, Bonifacio Global City, Taguig City. It is further represented that on December 3, 2012, B&M, through its Board of Directors, declared cash dividends of PhP8,060,000.00 to its stockholders according to their respective holdings; that BMI BV holds 9,995 shares in B&M since June 1, 2009, or 99.95% ownership in B&M, based on the Certificate issued by the Corporate Secretary of B&M on March 1, 2013; that B&M has an outstanding receivable from BMI BV in the amount of PhP24,855,650.00 based on the 2011 Financial Statement of B&M and the Certificate issued by the Corporate Secretary of B&M on January 3, 2013; that BMI BV has instructed B&M to offset the cash dividends payable against the outstanding receivable based on the Board Resolution dated December 3, 2012 as contained in the same Secretary's Certificate issued on even date. IESTcD In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides that dividends paid to a non-resident foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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 provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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 this particular case, you invoke the Philippines-Netherlands tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide: " 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. IDAEHT 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. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 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 the distribution is a resident. xxx xxx xxx" (underscoring supplied) Under paragraphs 2 and 3 of Article 10, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent in all other cases. Accordingly, since BMI BV is a company the capital of which is divided into shares and which holds 99.95 percent of the capital of B&M, such dividends paid by B&M to BMI BV are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. 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. cCEAHT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue