ITAD BIR Ruling No. 067-14

June 9, 2014 ITAD BIR RULING NO. 067-14 Articles 10 (Dividends), Philippines-Netherlands tax treaty CLSA Philippines, Inc. 19/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City Attention: Raymond Val M. Tempongko Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 21 June 2013 requesting confirmation that dividends paid by CLSA Philippines, Inc. ("CLSA-Philippines") to CLSA B.V. ("CLSA-Netherlands") are subject to final withholding tax at the preferential rate of ten percent (10%) 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") . It is represented that CLSA-Netherlands is a non-resident foreign corporation organized and existing under the laws of the Netherlands with principal address at Strawinskylaan 729, Toren B-07, 1077 XX Amsterdam, Netherlands based on a notarized and consularized Declaration of Residence issued by the Ministerie Van Financien of the Netherlands and is engaged in the business of financing and administering companies based on the notarized and consularized Articles of Association of CLSA-Netherlands. The company CLSA-Netherlands is not registered as a corporation or as a partnership based on a Certification of Non-Registration of Company issued by the Securities and Exchange Commission on 03 June 2013. On the other hand, CLSA-Philippines is a domestic corporation with principal address at 19/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City. It is represented that as of 03 June 2013, CLSA-Netherlands is a registered shareholder of CLSA-Philippines detailed as follows: Number, value and type of shares Common 52,685 shares Php5,268,500.00 5 shares (nominee shares) Php500.00 1 Share (nominee share) Php100.00 Preferred 950,000 shares Php95,000,000.00 Percentage of Ownership Common 99.99% Preferred 100% Acquisition dates Common 52,690 shares Original subscription; incorporated on 10 March 1997 1 share Transfer from Paul Robert Yap Murga; 22 May 2013 Preferred 950,000 shares Upon increase in authorized capital stock; increase approved on 17 April 1998 Mode of Acquisition of the shares Common 52,690 shares Subscription 1 share Sale Preferred 950,000 shares Subscription based on a notarized Secretary's Certificate executed by the Assistant Corporate Secretary of CLSA-Philippines . It is represented that on 19 July 2013, CLSA-Philippines declared cash dividends in the amount of Two Hundred Million Pesos (Php200,000,000.00) to stockholders of record as of 21 May 2013 based on a notarized Secretary's Certificate executed by the Assistant Corporate Secretary of CLSA-Philippines . It is further represented that on 22 July 2013, CLSA-Philippines remitted cash dividends in the amount of One Hundred Eighty Million Pesos (Php180,000,000.00) based on the notarized Certification of Outward Remittance issued by the Makati Branch of Deutsche Bank. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on a notarized Certification of CLSA-Philippines . In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, dividends paid to CLSA-Netherlands are subject to income tax at the rate of 30 percent, thus: "SEC. 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 interests, 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." HcSCED However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 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." For this purpose, you invoke the Philippines-Netherlands tax treaty. Article 10 on Dividends thereof provide: "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. ADECcI 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." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate (a) of 10% of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly holds directly at least 10% of the capital of the company paying the dividends; and (b) 15% of the gross amount of the dividends in all other cases. Considering that CLSA-Netherlands is a company which owns 99.99% percent of the shares of CLSA-Philippines , the dividend paid by CLSA-Philippines to CLSA-Netherlands is subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 of the Philippines-Netherlands tax treaty. 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. aSTECA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.