ITAD BIR Ruling No. 066-11

February 25, 2011 ITAD BIR RULING NO. 066-11 Article 10, Philippines-France tax treaty; BIR Ruling No. 017-01; BIR Ruling No. DA-ITAD-004-02; BIR Ruling No. DA-ITAD-064-03; BIR Ruling No. DA-ITAD-196-03; BIR Ruling No. DA-ITAD-101-04 Atty. Zenaida P. Alcantara, CPA Unit 4G Pacopandana, 1845 Paz M. Guazon St. Paco, Manila Gentlemen : This refers to your letter dated January 25, 2010, on behalf of Essidev S.A. ("Essidev"), requesting confirmation that the cash dividends it received from Optodev, Inc. ("Optodev") are subject to the 10 percent preferential tax rate pursuant to Article 10 of the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty"). TcEDHa It is represented that Essidev is a corporation organized and existing under the laws of France with principal address at 147, rue de Paris, 94220 CHARENTON LE PONT, France; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated February 10, 2010; and that, on the other hand, Optodev is a corporation organized and existing under the laws of the Philippines with principal address at B2 L2 corner Star Avenue & Interstar Streets, LIIP-SEPZ, Mamplasan, Bian, Laguna; and that Optodev is registered with the Philippine Economic Zone Authority as an ecozone export enterprise. It is further represented that as of February 5, 2010, Essidev owns 15,969,995 common shares in Optodev equivalent to the amount of P1,596,999,500, and which represent 99.99% of the capital stocks of Optodev; that on February 5, 2010, the Board of Directors of Optodev declared a cash dividend in the amount of P94,000,000.00 or P5.8860 per share to stockholders of record as of the date of declaration, payable by no later than March 31, 2010; and that the transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per the Sworn Statement issued by Optodev dated September 10, 2009. 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 . . ., dividends, . . .: 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: AEHTIC "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, the provisions of Article 10 of the Philippines-France tax treaty, as amended, 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 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 (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 25 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as 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." IHTaCE In accordance with the foregoing, the 15 percent preferential tax rate on dividends applies whenever the beneficial owner/recipient of the dividends owns at least 10 percent of the voting shares of the paying company. However, a Protocol amending the foregoing provisions took effect on January 1, 1998 which reads as follows: "Article 5 In Article 10 of the Convention: In paragraph 2, the rates of '15 percent' and '25 percent' are replaced respectively by '10 percent' and '15 percent';" Based on the above provisions of the Protocol, the dividends payable to Essidev shall be subject to withholding tax at the rate of 10 percent of the gross amount of the dividends considering that the transaction transpired after the effectivity of the Protocol and Essidev is the holder and beneficial owner of 99.99% of the total voting shares of Optodev as of February 5, 2010. (BIR Ruling No. 017-01 dated February 19, 2001; BIR Ruling No. DA-ITAD-004-02 dated January 11, 2002; BIR Ruling No. DA-ITAD-064-03 dated April 25, 2003; BIR Ruling No. DA-ITAD-196-03 dated December 30, 2003; BIR Ruling No. DA-ITAD-101-04 dated September 13, 2004) 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