ITAD BIR Ruling No. 057-15

March 25, 2015 ITAD BIR RULING NO. 057-15 Article 10, Philippines-Netherlands Tam-Yap Caga & Associates Unit B, 15th Floor, ACT Tower 135 H.V. de la Costa Street Salcedo Village, Makati City Attention: Teresa R. Tam-Yap Maria Graciela B. Suratos Gentlemen : This refers to your tax treaty relief application filed on January 9, 2012, on behalf of your client JGP CBK Power B.V. ("JGP BV"), requesting confirmation that the dividend payments made by CBK Power Corporation ("CPC") to JGP BV 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"). Facts It is represented that JGP BV, with principal address at Locatellikade 1, 1076 AZ 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 Tax and Customs Administration of the Netherlands dated May 20, 2011; that based on its Articles of Association, JGP BV is a company incorporated under the laws of the Netherlands with authorized capital of ninety thousand seven hundred sixty euro (90,760.00) divided into nine thousand seventy-six (9,076) shares with a nominal value of ten euro (EUR10) each; that JGP BV is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on December 14, 2011; and that, on the other hand, CPC is a domestic corporation duly organized and existing under Philippine laws, located at the Penthouse, 2nd Deck, Salamin Building, 197 Salcedo Village, Makati City. It is further represented that, on January 6, 2012, the Board of Directors of CPC declare cash dividends amounting to US$77,400.00 and P369,800.00 to all stockholder of record December 31, 2011, and payable on January 31, 2012; that the following are the stockholdings of JGP BV to CPC: Type of Number Par Mode of Date of Acquisition Percentage of Shares of Shares Value Acquisition Ownership Common 78,365 P100.00 Subscription 22-Nov-00 99% It is finally represented that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal per sworn statement issued by CPC dated January 6, 2012. Ruling 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 income derived in the Philippines by a nonresident foreign corporation. It provides: DAHaTc "Section 28. Rates of Income Tax on Foreign Corporations. (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 interest, 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%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Thus, Article 10 of the Philippines-Netherlands tax treaty, which you invoke, 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." Based on the aforequoted provision, dividends arising in the Philippines and paid to a resident of the Netherlands may be 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 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 JGP BV is a private company in the Netherlands, the capital of which is wholly divided into shares and since JGP BV holds 99 percent of the capital of CPC (which is actually more than the required minimum shareholding of 10 percent to avail of the 10 percent preferential rate), such dividends by CPC to JGP BV 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 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. aIcTCS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue