ITAD BIR Ruling No. 052-15

March 25, 2015 ITAD BIR RULING NO. 052-15 Article 10, Philippines-Netherlands Tax Treaty Jardine Distribution, Inc. 2/F, Jardine Building, JM Compound 2901 Faraday corner Osmea Highway Makati City Attention: Ms. Azenith B. Tingchuy Legal and Administrative Officer Gentlemen: This refers to your tax treaty relief application filed on December 17, 2012 on behalf of JARDINE MATHESON EUROPE B.V. ("JMEBV") for confirmation that dividends paid by JARDINE DISTRIBUTION, INC. ("JDI") to JMEBV 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 JMEBV, with address at Strawinskylaan 3007, 1077 ZX Amsterdam, The Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Declaration of Residence issued by the Director General of the Tax and Customs Administration of the Netherlands dated December 13, 2012; that based on the Extract from the Trade Register of the Chamber of Commerce, JMEBV is company incorporated under the laws of the Netherlands with authorized capital of one hundred thousand euros (EUR100,000), with a nominal value of one euro (EUR1.00); that JMEBV is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on January 11, 2013; and that, on the other hand, JDI is a domestic corporation situated at 2nd Floor, Jardine Building, JM Compound Faraday corner Osmea Highway, Makati City, Philippines. It is further represented that on December 13, 2012, the Board of Directors of JDI approved the declaration of cash dividends in the amount of Php168,000,000.00 from the unrestricted retained earnings of JDI, based on the unaudited accounts as of November 30, 2012 to stockholders of record as of November 30, 2012; that as of the date of record, JMEBV wholly owns JDI with 535,000 common shares at Php100 per share; and that these shares were acquired on December 29, 2005 through sale from Jardine Davies, Inc., based on the Certification issued by the Corporate Secretary of JDI on December 13, 2012. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal based on the Sworn Statement issued by JDI on December 13, 2012. 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 payable to JMEBV, a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 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%). cIETHa 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 reduced rate to the extent required by any treaty obligation on the Philippines, viz. : "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 relation thereto, Article 10 of the Philippines-Netherlands tax treaty, may apply to the instant case. 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. 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 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" Based on the aforequoted provisions, 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 of the gross amount of dividends if the recipient of the dividends 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 of the gross amount of the dividends in all other cases. Accordingly, inasmuch as JMEBV is a private company in the Netherlands, the capital of which is wholly divided into shares, and since JMEBV holds directly 100 percent of the capital of JDI (which is actually more than the required minimum shareholding of 10 percent), such dividends paid by JDI to JMEBV are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) 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. SEIaHT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue