ITAD BIR Ruling No. 053-11

February 18, 2011 ITAD BIR RULING NO. 053-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09; BIR Ruling No. DA-ITAD-085-09 DBP-Daiwa Capital Markets Philippines, Inc. 18/F Citibank Tower 8741 Paseo de Roxas, Salcedo Village Makati City 1226 Attention: Dorris Magtibay-Tuazon EVP & Treasurer Gentlemen : This is refers to your tax treaty relief application (TTRA) filed on August 2, 2010, on behalf of Daiwa Capital Markets Asia Holding B.V. (DCMAH) , on the cash dividend which your company, DBP-Daiwa Capital Markets Philippines, Inc. (DCMP) , paid to DCMAH on July 8, 2010, requesting confirmation of the 10 percent withholding tax, 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). AICEDc It is represented that DCMAH (previously named Daiwa Securities SMBC Asia Holding B.V. ) is a private company with limited liability, with office address at Teleportboulevard 140, 1043 EJ Amsterdam, with authorized capital amounting to five hundred million euros (EUR500,000,000) and is divided into five hundred million (500,000,000) shares with a par value of one euro (EUR1) each as shown in the Deed of Amendment to the Articles of Incorporation of DCMAH executed on December 14, 2009; that it is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued by the Tax Customs Administration of the Netherlands dated August 19, 2010; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Philippine Securities and Exchange Commission dated September 2, 2010; that DCMP, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with business address at 18th Floor, Citibank Tower, Paseo de Roxas, Salcedo Village, Makati City 1226, Philippines; that based on the Certification issued by DCMP dated July 30, 2010, DCMAH holds 102 Million common shares and 85 Million preferred shares in DCMP with a par value of 1 Peso per share as of June 17, 2010, and that said ownership represents 40% and 33%, respectively, of DCMP's subscribed capital stock. It is further represented, based on the Secretary's Certificate issued by DCMP dated August 4, 2010, that at the regular meeting of the Board of Directors of DCMP on February 22, 2010, a resolution was unanimously approved, but subject to the further approval of the shareholders in accordance with law, to declare and pay dividends on preferred shares in the amount of PhP One Million Seven Hundred Thousand Pesos (P1,700,000.00) from the retained earnings for 2009; that, moreover, at the annual stockholders meeting on June 17, 2010, a resolution was unanimously approved confirming and ratifying the resolution passed on February 22, 2010 declaring and paying cash dividends on preferred shares in the amount of P1,700,000.00. Finally, it is represented that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal per the Certification issued by DCMP dated August 23, 2010. In reply, please be informed that dividend income derived by a nonresident foreign corporation in the Philippines is generally taxable under Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended. It provides as follows: "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 . . . dividends . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the NIRC of 1997 provides as follows, 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 ( i.e. , TITLE II TAX ON INCOME): 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, the treaty invoked is the Philippines-Netherlands tax treaty which in its Article 10 thereof provides that: aICcHA "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. 7. If a resident of one of the States has a permanent establishment in the other State, this permanent establishment may be subject to an additional tax on the profits remitted by that permanent establishment to its head office in accordance with the law of the last-mentioned State, but the additional tax so charged shall not exceed 10 per cent of the amount of the remitted profits. This provision shall not apply to profits mentioned in Article 8. 8. Where a company which is a resident of one of the States derives profits or income from the other State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State." Based on the aforequoted provision, insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends applies when the following conditions concur: 1) the payor and recipient of the dividends are separately treated as a "company", 2) the payor of the dividends is a resident of the Philippines, 3) the recipient of the dividends is a resident of the Netherlands, 4) the recipient of the dividends is the beneficial owner thereof, 5) the capital of such recipient is wholly or partly divided into shares, and 6) the recipient holds directly at least 10 percent of the capital of the payor of the dividends. On the other hand, the 15 percent preferential tax rate will apply upon concurrence of the following: 1) the payor of the dividends is a "company", 2) the payor of the dividends is a resident of the Philippines, 3) the recipient of the dividends is a resident of the Netherlands, and 4) the recipient of the dividends is the beneficial owner thereof. Article 3 (e) of the Philippines-Netherlands tax treaty defines the term "company" as "any body corporate or any other entity which is treated as a body corporate for tax purposes". For purposes of determining the residency of the payor and/or recipient of the dividends, Article 4 (1) of the same tax treaty provides: IHCSTE "Article 4 FISCAL DOMICILE 1. For the purposes of this Convention, the term 'resident of one of the States' means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." Based on the representations made and the documents presented, it appears that all of the conditions in applying the 10 percent preferential tax rate are present. Firstly, the payor of the subject dividends is a "company" since it is treated as a body corporate for tax purposes. DCMAH, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, DCMP is deemed a domestic corporation, while DCMAH is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, DCMP is a resident of the Philippines since it is treated as a juridical person under the laws of the Philippines, and is liable to taxation therein by reason of its being a domestic corporation. Thirdly, DCMAH, the recipient of the subject dividends, is a resident of the Netherlands for purposes of the Philippines-Netherlands tax treaty as evidenced by its Amendment to the Articles of Association. Fourthly, DCMAH is the beneficial owner of the subject dividends, based on a Secretary's Certificate executed by DCMP on July 30, 2010. Fifthly, the capital of DCMAH is wholly divided into shares, based on its Amendment to the Articles of Association. Lastly, DCMAH directly holds 40% common shares and 33% preferred shares of the capital of DCMP as evidenced by a Secretary's Certificate executed by DCMP on July 30, 2010, or more than the required stockholding of 10 percent. Thus this Office is of the opinion as it hereby holds that the dividends received by DCMAH from DCMP shall be subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling Nos. DA-ITAD 008-09 dated January 27, 2009; 040-09 dated March 25, 2009; 085-09 dated September 10, 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. TEHIaD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue