ITAD BIR Ruling No. 072-14

June 10, 2014 ITAD BIR RULING NO. 072-14 Article 10, Philippines-Sweden tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Harold S. Ocampo Director, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on August 10, 2012, requesting confirmation that dividends to be paid by Cebu Air, Inc. ("Cebu Air") to Speaking Partners AB ("SPAB") are subject to the preferential final withholding tax rate of 15 percent pursuant to Article 10 of the amended Convention between the Republic of the Philippines and the Kingdom of Sweden for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Sweden tax treaty") . STHDAc Facts It is represented that SPAB, with principal address at the Municipality of Gothenburg in Vastra Gtaland country, Sweden, is a corporation organized and existing under the laws of Sweden per its Articles of Association, and is a resident of Sweden as evidenced by its Certificate issued by the Swedish Tax Agency on February 7, 2012; that it is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated August 15, 2012; and that, on the other hand, Cebu Air is a corporation organized and existing under the laws of the Philippines with principal address at 2nd Floor Doa Juanita Marquez Lim Building, Osmea Boulevard, Cebu City, Philippines. It is further represented per Certification issued by Cebu Air on August 13, 2012, in a special meeting held on June 28, 2012 by its Board of Directors, a resolves and approved declaration of a cash dividend in the amount of One Peso (P1.00) per share from the unrestricted retained earnings of Cebu Air , to all stockholders of record as of July 18, 2012 and payable on August 13, 2012; that per Certification of Citibank NA Securities and Funds Services ("Citibank"), custodian of various nonresident foreign shareholders in Cebu Air , SPAB holds 7,624,850 common shares equivalent to 1.25832298% of the total outstanding common shares of Cebu Air. It is finally represented, per the Certification issued by Cebu Air on August 13, 2012, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. Ruling 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 dividends 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%)." SDTIHA However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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." In relation to a treaty, Article 10 of the Philippines-Sweden tax treaty, as amended, reads: "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 law 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 (excluding partnership) which holds directly at least 25 percent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx 4. 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 taxation law of the State of which the company making the distribution is a resident." caIEAD Based on the aforequoted provisions, the 10 percent preferential tax rate on dividends shall apply whenever the recipient, who is the beneficial owner of the dividends, holds directly at least 25 percent of the capital of the paying company. In all other cases, the 15 percent preferential tax rate shall apply. Such being the case and considering that SPAB holds only 1.258% of the total outstanding and issued shares in Cebu Air , such dividends are subject to a 15 percent of the gross amount of dividend under Article 10 (2) (b) of the Philippines-Sweden tax treaty. 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