ITAD BIR Ruling No. 048-15

March 25, 2015 ITAD BIR RULING NO. 048-15 Article 10, Philippines-Netherlands tax treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Jonald R. Vergara Principal, Tax Services Gentlemen : This refers to your tax treaty relief application filed on November 20, 2013, on behalf of MJN Holdings (Asia) B. V. ("MJN Holdings"), for a confirmation that the dividends paid by Mead Johnson Nutrition (Philippines), Inc. ("Mead Johnson") to MJN are subject to 10 percent preferential tax rate 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 MJN Holdings, with office address at Zuidplein 142 Tower H 17th Floor, 1077 Amsterdam, The Netherlands, is a corporation organized and existing under the laws of Netherlands and is a resident thereof based on its Deed of Amendment of the Articles of Association and on the Certificate of Residence issued by the Tax Administration Office Arnhem, The Netherlands on October 10, 2013; that MJN Holdings is a company with authorized capital of ninety thousand Euro (EUR90,000) divided into 90,000 shares of one Euro (EUR1) each; that MJN Holdings is not registered as corporation in the Philippines per certification issued by the Securities and Exchange Commission on November 7, 2013; and that, on the other hand, Mead Johnson is a corporation organized and existing under the laws of the Philippines with principal address at 2309 Chino Roces Avenue Extension, Makati City, Philippines. It is further represented based on the Certificates issued by the Corporate Secretary of Mead Johnson on November 13, 2014, that its Board of Directors declared cash dividends of US$12,500,000 equivalent to US$8.945 per share in favor of Mead Johnson stockholders of record as of November 8, 2013 payable not earlier than November 22, 2013; that as of November 8, 2013, MJN Holdings is a stockholder with 1,397,495 common shares with a total par value of P139,749,500.00 equivalent to 99.99999 percent of the total issued and outstanding shares of Mead Johnson ; that these shares were acquired by MJN Holdings on August 30, 2005 by virtue of a transfer of shares pursuant to a global corporate reorganization; and that per Certification issued by Citibank Manila dated December 3, 2013, the dividends were paid on November 22, 2013. It is finally represented, based on the Certification by Mead Johnson on November 18, 2014, that the transaction subject of the 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 judicial appeal of the taxpayer/s involved. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, dividends paid to MJN Holdings are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. aEIcHA (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 may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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." With respect to a treaty, you invoke the Article 10 of the Philippines-Netherlands tax treaty. It provides: "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. 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. 6. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the States, carries on business in the other State, of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State professional services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Under paragraph 2 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. cAEDTa Accordingly, since MJN Holdings is a resident company in the Netherlands the capital of which is wholly divided into shares and which holds directly at least 10 percent (in fact 99.99999 percent) of the capital of Mead Johnson, such dividends paid by Mead Johnson to MJN Holdings 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue