ITAD BIR Ruling No. 063-10

November 19, 2010 ITAD BIR RULING NO. 063-10 Article 10, Philippines-Germany tax treaty; BIR Ruling No. 559-88; BIR Ruling No. ITAD-171-02; BIR Ruling No. ITAD-144-03; BIR Ruling No. ITAD-181-03; BIR Ruling No. ITAD-012-05 Staedtler (Philippines), Inc. 2/F, 15 Gilmore Avenue New Manila, Quezon City Philippines Attention: Peter S. Yupitun Gentlemen : This refers to your application for tax treaty relief dated February 15, 2007, in relation to your request for tax refund/credit of the difference between the actual amount withheld on the cash dividends paid by Staedtler (Philippines), Inc. (Staedtler Philippines) to Staedtler Noris GmbH (Staedtler Germany) and the applicable rate of tax pursuant to Article 10 paragraph 2 of the Philippines-Germany tax treaty. It is represented that Staedtler Germany is a non-resident foreign corporation duly organized and existing under the laws of Germany, with principal office address at Moosckerstr. 3, 90427 Nuremberg, Germany, and is subject to German taxation as an unrestricted taxable corporation at the Central Tax Office of Nuremberg under the tax number 241/116/60065, per confirmation by Mr. Gebhard of the Central Tax Office of Nuremberg, dated December 19, 2006; that it is not registered either as a corporation or as a partnership in the Philippines per Certification dated February 13, 2007, issued by the Securities and Exchange Commission; that Staedtler Philippines is a corporation duly organized and existing under the laws of the Philippines, with business address at 2/F, 15 Gilmore Avenue, New Manila, Quezon City, Philippines. It is further represented that as evidenced by a Certification dated February 12, 2007 and September 15, 2010, issued by the Corporate Secretary of Staedtler Philippines, Staedtler Germany has Three Hundred Seventy-Four Thousand Nine Hundred Eighty-Eight (374,988) subscribed and paid up shares of Staedtler Philippines, while Mr. Axel Marx, its nominee, owns 12 shares; that, together it represents 25% of the total subscribed and paid up capital stock of Staedtler Philippines ; that on September 1, 2006, the Board of Directors of Staedtler Philippines declared cash dividends in the total amount of Seven Million Pesos (PhP7,000,000.00) out of Staedtler Philippines' earned surplus to stockholders of record as of June 30, 2006, payable on or before December 1, 2006; that Staedtler Philippines declared stock dividend in the total amount of Three Million Pesos (PhP3,000,000.00) out of Staedtler Philippines' earned surplus to stockholders of record as of June 30, 2006, payable on or before December 1, 2006; and that the issue/s or transaction subject of the above 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 a judicial appeal of the taxpayer/s involved. DISTcH In reply, please be informed that Section 28 (B) (5) (a) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; 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 relation thereto, the provisions of the Philippines-Germany tax treaty may apply to the instant case, Article 10 of which provides: "Article 10 DIVIDENDS 1. Dividend 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 the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. xxx xxx xxx" Based on the aforequoted, dividends paid by a Philippine corporation to a resident of Germany may be taxed at a rate not exceeding 10 percent of the gross amount of dividends provided that the recipient is a company and that it holds directly at least 25 percent of the capital of the Philippine corporation. In all other cases, a 15 percent preferential tax rate applies. In the instant case, considering that Staedtler Germany, excluding the shares of its nominee holds less than 25 percent of the total outstanding capital stock of Staedtler Philippines, this Office is of the opinion and so holds that the cash dividends paid by Staedtler Philippines to Staedtler Germany shall be subject to the preferential tax rate of 15 percent, based on the gross amount thereof, pursuant to Article 10 (2) (b) of the Philippines-Germany tax treaty. (BIR Ruling No. 559-88 dated November 24, 1988; BIR Ruling No. ITAD-171-02 dated October 2, 2002; BIR Ruling No. ITAD-144-03 dated September 25, 2003; BIR Ruling No. ITAD-181-03 dated November 25, 2003; and BIR Ruling No. ITAD-012-05 dated February 16, 2005.) This ruling is issued on the basis of the facts as represented and is rendered only for the purpose of determining whether Staedtler Germany and Staedtler Philippines are entitled to the benefits of the Philippines-Germany tax treaty. The determination on whether the above request for refund should be given due course is upon the Office which will be conducting the investigation for that purpose. Thus, the docket pertaining thereto (including a copy of this ruling) shall be indorsed to the proper Office for processing and investigation. HTacDS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue