ITAD BIR Ruling No. 049-11

February 11, 2011 ITAD BIR RULING NO. 049-11 Article 10, Philippines-Switzerland tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. ITAD 53-10; BIR Ruling No. ITAD 42-10; BIR Ruling No. ITAD 9-10; BIR Ruling No. ITAD 2-10 Manabat Sanagustin & Co. The KPMG Center, 9th Floor 6787 Ayala Avenue Makati City Attention: Roberto L. Tan Legal Representative Gentlemen : This refers to your Tax Treaty Relief Application filed on December 3, 2010, on behalf of your client, GALDERMA PHILIPPINES, INC. ( "Galderma" ), requesting confirmation that the repatriation by Galderma of dividends to its parent company, GALDERMA PHARMA S.A. ("GPSA") is subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . It is represented that GPSA is a nonresident foreign corporation organized and existing under the laws of Switzerland with registered office address at World Trade Center, Avenue Gratta-Paille 2, CH-1000 Lausanne 30, Switzerland per Certificate of Residence issued by the Office Cantonal de l'Impt Anticip dated August 13, 2010; that GPSA's main line of business is the acquisition, management and alienation of shares on any company, mainly in pharmaceutical branch; that GPSA is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated December 2, 2010; and that, on the other hand, Galderma is a domestic corporation engaged in the manufacture, distribution and sale of skin care dermatology solutions, with office address at Unit 3001 Atlanta Center, 31 Annapolis Street, Greenhills, San Juan, Metro Manila. It is also represented that GPSA acquired 124,995 common shares of Galderma from Therapinvest, S.A. on January 2, 1998, and that the aforementioned shares, represent 99.9% of the outstanding capital stock of Galderma per Secretary's Certificate dated November 19, 2010; that at the organizational meeting of the Board of Directors of Galderma held on June 21, 2010, it was resolved that a cash dividend amounting to Sixty-Seven Million Three Hundred Ninety-Seven Thousand Eight Hundred Sixty-Six Pesos (Php67,397,866.00) be distributed among Galderma's stockholders of record as of December 31, 2009, pro-rata to their respective shareholdings, based on the number of shares held by them as of December 31, 2009, payable on installments on or before December 31, 2010; and that, per Sworn Statement of Galderma dated November 18, 2010, the dividends subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. SEAHcT 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, to dividends derived in the Philippines by a nonresident foreign corporation. 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: "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, the treaty involved is the Philippines-Switzerland tax treaty, which, in its Article 10, provides: "Article 10 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 also be taxed in the Contracting 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 beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. 3. The term "dividends" as used in this Article means income from shares or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal 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 case, the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. aCTADI xxx xxx xxx" Based on the above provision, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Switzerland at a rate not exceeding 10 percent of the gross amount dividends if the latter holds directly at least 10 percent of the capital of the first-mentioned company. In all other cases, the 15 percent preferential tax rate shall apply. In view of the foregoing, since GPSA owns 99.9% of the outstanding capital stock of Galderma, the paying corporation, this Office is of the opinion and so holds that the cash dividends to be remitted by Galderma to GPSA are subject to the preferential rate of 10 percent withholding tax pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. (BIR Ruling No. ITAD 53-10 dated October 18, 2010; BIR Ruling No. ITAD 42-10 dated September 23, 2010; BIR Ruling No. ITAD 9-10 dated June 3, 2010; BIR Ruling No. ITAD 2-09 dated January 14, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue