ITAD BIR Ruling No. 071-14

June 10, 2014 ITAD BIR RULING NO. 071-14 Article 10, Philippines-Denmark tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Malou P. Lim Gentlemen : This refers to your tax treaty relief application filed on October 4, 2012 requesting for confirmation that dividends paid by Heidelberg Philippines, Inc. ("Heidelberg PH") to Heidelberg International Ltd. ("Heidelberg DK") are subject to a preferential tax rate of 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. ("Philippines-Denmark tax treaty") . It is represented that Heidelberg DK is a foreign corporation organized and existing under the laws of Denmark with its principal office address at Stamholmen 193 E 2650 Hvidovre, Denmark based on its Certificate of Residence issued by the tax authorities of Denmark on October 2, 2012; that Heidelberg DK is not registered as a corporation or partnership based on the Certification issued by the Securities and Exchange Commission on September 17, 2012; and that on the other hand, Heidelberg PH is a domestic corporation with address at Molave Building, 2231 Chino Roces Avenue, Makati City. It is further represented that on September 3, 2012, Heidelberg PH passed and approved the declaration of dividends to all its shareholders amounting to PhP54,000,000.00 based on the Certificate issued by the Corporate Secretary of Heidelberg PH on September 3, 2012; and that, since July 30, 2012, Heidelberg DK holds 2,341,395 shares or 99% ownership in Heidelberg PH based on the Certificate issued by Heidelberg PH . SIcCTD In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides, to wit: "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%). xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such 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: "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: 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. SCaDAE xxx xxx xxx" In this particular case, you invoke the Philippines-Denmark tax treaty. Paragraphs 1, 2 and 3, Article 10 thereof provide: "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 also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 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. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of these limitations. 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 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 laws of the State of which the company making the distribution is a resident. ADScCE 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State. 6. Nothing in this Article shall prevent either Contracting State from imposing, in addition to the corporate income tax, a tax on remittance of profits by a branch to its head office provided that the tax so imposed shall not exceed 10 per cent of the amount remitted. If in any Convention for the avoidance of double taxation concluded by either of the Contracting States with a third State after the date of signature of this Convention any provision which excludes any item of income covered by Article 8 of this Convention from the tax mentioned in this paragraph or reduces the rate to a rate which is lower than 10 per cent, such exclusion or lower rate shall automatically apply between Denmark and the Philippines." THEDcS Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Denmark may be taxed in the Philippines at a rate not to exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 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. In this case, considering that Heidelberg DK is a company based on its Articles of Incorporation, and holds 2,341,395 shares in Heidelberg PH or equivalent to 99 percent share based on the relevant Certificate issued by the Corporate Secretary of Heidelberg PH , this Office is of the opinion and so holds that the dividends received by Heidelberg DK from Heidelberg PH are subject to the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Denmark 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue