ITAD BIR Ruling No. 055-15

March 25, 2015 ITAD BIR RULING NO. 055-15 Article 10, Philippines-Singapore tax treaty Roxas Delos Reyes Laurel Rosario & Leagogo Law Offices 19/F BDO Plaza 8737 Paseo De Roxas Makati City Attention: Valerie Anne D. Gonzales Gentlemen : This refers to your tax treaty relief application dated March 16, 2012, requesting confirmation that dividends received by Luxasia Investment Pte., Ltd. ("Luxasia Singapore") from Luxasia, Inc. ("Luxasia Philippines") are subject to income tax of 15 percent preferential rate pursuant to the Convention between the Republic of the Philippines and Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . Facts It is represented that Luxasia Singapore is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its Articles of Association and on the Certificate of Residence issued by the Inland Revenue Authority of Singapore; that Luxasia Singapore is situated at 12 Tai Seng St., Luxasia Building, #05-01, Singapore 534118; that Luxasia Singapore is not registered as corporation in the Philippines per certification issued by the Securities and Exchange Commission dated December 19, 2011; and that, on the other hand, Luxasia Philippines is a corporation organized and existing under the laws of the Philippines with principal address at Unit 7-01 Net Cube Center 3rd Avenue E-Square Crescent Park, West Bonifacio, Global City, Taguig, Philippines. It is further represented that, on February 29, 2012 based on the Certificate issued by the Corporate Secretary of Luxasia Philippines , on February 29, 2012, the Board of Directors of Luxasia Philippines , at a special meeting authorized to declare cash dividends to all shareholders of record as of August 17, 2011 amounting to Seventeen Million Fifty Six Thousand Two Hundred Fifty Pesos (P17,056,250.00) to be taken from the unrestricted retained earnings as of July 31, 2011 and payable on or before March 30, 2012; that as of July 4, 2011, Luxasia Singapore holds 34,111,435 shares, equivalent to 99.99% of the outstanding shares of Luxasia Philippines since April 9, 2004. It is finally represented that the dividend subject of this request is 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 Certification issued by Luxasia Philippines executed on February 28, 2012. Ruling 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 Luxasia Singapore , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: HIaTDS "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 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): 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 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, the treaty involved is the Philippines-Singapore tax treaty , which, in its Article 10, provides: "Article 10 Dividends 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 be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or jouissance rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. 5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on in the other Contracting State of which the company paying the dividends is a resident, trade or business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the holding by virtue 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 above provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Singapore at a rate not exceeding 15 percent of the gross amount dividends if the latter holds directly at least 15 percent of the outstanding voting shares of the first-mentioned company, and such shareholdings should have existed during the part of the taxable year immediately preceding the day of payment of the dividends and during the whole of its prior taxable year. In all other cases, the 25 percent preferential tax rate shall apply. DTIACH In view of the foregoing, since Luxasia Singapore owns 99.99% outstanding shares of Luxasia Philippines , during the part of Luxasia Philippines (since April 9, 2004) taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, this Office is of the opinion and so holds that the cash dividends paid by Luxasia Philippines to Luxasia Singapore are subject to the preferential rate of 15 percent withholding tax pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. This ruling is issued on the basis of the foregoing 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