ITAD BIR Ruling No. 056-10

October 22, 2010 ITAD BIR RULING NO. 056-10 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; BIR Ruling No. DA-ITAD-038-10 Travellers International Hotel Group, Inc. 5th Floor, Star Cruises Centre 100 Andrews Avenue, Pasay City Attention: Atty. Reinard A. Domingo Atty. Gretchen U. Aquino Gentlemen : This refers to your application for tax treaty relief dated September 16, 2010 requesting confirmation of the application of a 10% preferential tax rate on the dividend payments by Travellers International Hotel Group, Inc. (hereinafter referred to as "TIHGI") to Star Cruises Philippines Holding B.V. (hereinafter referred to as "SCPH") 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 (hereinafter referred to as "Philippines-Netherlands tax treaty" ). It is represented that SCPH is foreign corporation organized in and existing under the laws of the Netherlands and is a resident of the Netherlands based its Deed of Incorporation and on its Declaration of Residence issued by the Inspector of the Tax Administration of Revierenland/kantoor Arnhem of the Netherlands dated August 18, 2010; that SCPH is a private company in the Netherlands with limited liability, and with authorized capital of 90,000.00 Euros, divided into 900 shares, with a par value of 100 Euros each; that SCPH is situated at Strawinskylaan 3105 Atrium, 1077 ZX, the Netherlands; that SCPH is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on August 31, 2010; and that, on the other hand, TIHGI is a domestic corporation registered with the Philippine Economic Zone Authority (PEZA) as a tourism economic zone enterprise and as an ecozone facilities enterprise at the Newport City Cybertourism Zone under Certificate of Registration Nos. 08-03-T and 09-02-F (IT) issued by PEZA on December 16, 2008, and on April 1, 2009, respectively; and that TIHGI is located at 5th Floor, Star Cruises Centre, 100 Andrews Avenue, Pasay City, Philippines. It is further represented based on the Minutes of the Special Meeting of the Board of Directors of TIHGI on August 9, 2010, that the Board unanimously approved a resolution for TIHGI to declare cash dividends in the amount of US$20,000,000.00, to be divided equally to each share of common stock of the registered shareholders of TIHGI as of August 9, 2010; that based on the Certificate issued by the Corporate Secretary of TIHGI on September 6, 2010, SCPH is the stockholder of record of TIHGI and is the legal and beneficial owner of the 2,000,000,000 common shares of TIHGI (inclusive of two common shares in the name of two nominees of SCPH) with a par value of PHP1.00 each, which represents 20 percent ownership in TIHGI; and that these shares are acquired by SCPH on December 17, 2003, by subscription upon the incorporation of TIHGI, and that SCPH continues to own this number of shares as of September 6, 2010. EcaDCI It is finally represented based on the Sworn Statement by the Manager for Legal and Corporate Affairs of TIHGI dated September 8, 2010 that the issue or 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 Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies in general to income of 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 accordance with the foregoing, Article 10 of the Philippines-Netherlands tax treaty provides as follows: "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" Based on the aforequoted article, dividends arising in the Philippines and paid to a resident of the Netherlands are subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the 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. aHSCcE Accordingly, inasmuch as SCPH is a private company in the Netherlands the capital of which is wholly divided into shares and that it holds directly 20 percent of the capital of TIHGI (which is actually more than the required minimum of shareholding of 10 percent), such dividends to be paid by TIHGI to SCPH are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof. (BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling No. DA-ITAD-008-09 dated January 27, 2009; BIR Ruling No. DA-ITAD-040-09 dated March 25, 2009; BIR Ruling No. DA-ITAD-085-09 dated September 10, 2009; BIR Ruling No. DA-ITAD-038-10 dated April 15, 2010) 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