ITAD BIR Ruling No. 058-15

March 25, 2015 ITAD BIR RULING NO. 058-15 Article 10, Philippines-Netherlands tax treaty The Purefoods-Hormel Co., Inc. 21/F JMT Corporate Condominium ADB Avenue, Ortigas Center Pasig City Attention: Celestino L. De Guzman Gentlemen : This refers to your request for review of BIR Ruling No. ITAD-042-13 relative to the application of the preferential tax treaty rate of 10% on dividend payments made by The Purefoods-Hormel Co., Inc. ("Purefoods") to Hormel Netherlands B.V. ("Hormel Netherlands") pursuant to Philippines-Netherlands tax treaty, 1 filed with the Department of Finance (DOF) on April 23, 2013, which was indorsed to this Bureau on May 13, 2014 for appropriate action, inviting attention to the ruling of the Supreme Court in the case of Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue , G.R. 188550 dated 19 August 2013 (Deutsche Bank case) . In BIR Ruling No. ITAD-042-13 it is represented that Hormel Netherlands , situated at Parnassustoren, 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, per the Declaration of Residence issued by the Inspector of the Tax Administration of the Netherlands; that Hormel Netherlands is a corporation organized and existing under the laws of the Netherlands with an authorized capital of Two Hundred Thousand dutch guilders (NLG200,000), divided into two hundred (200) shares each with a par value of one thousand guilder (NLG1,000.00); that Hormel Netherlands is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 9, 2012; and that, on the other hand, Purefoods is a corporation organized and existing under the laws of the Philippines with office address at 21/F JMT Corporate Condominium, ADB Avenue, Ortigas Center, Pasig City, Philippines. On March 2, 2012, the Board of Directors of Purefoods approved and declared cash dividends amounting to P1,000,000,000.00 out of the unrestricted retaining earnings of Purefoods in favor of all of stockholders of record, per Secretary's Certificate dated May 10, 2012; that Hormel Netherlands B.V. is the beneficial owner of the 242,563,332 common shares, representing 40% of the Purefoods total shares and that the cash dividends were paid out on May 9, 2012 based on the Secretary's Certificate dated May 10, 2012. 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: "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. 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: aTADCE 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." Thus, Article 10 of the Philippines-Netherlands tax treaty, which you invoked, 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. xxx xxx xxx" Based on the aforequoted provisions, 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. Hence, considering that Hormel Netherlands is a company of which is divided into shares and which holds directly 40 percent of the capital stock of Purefoods since November 15, 2011, this Office is of the opinion that the dividends paid by Purefoods to Hormel Netherlands are subject to the preferential rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. In view thereof and in light of the Supreme Court decision in the Deutsche Bank case, BIR Ruling No. ITAD-042-13 is hereby revised accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 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.