ITAD BIR Ruling No. 076-16

April 6, 2016 ITAD BIR RULING NO. 076-16 Article 10, Philippines-Germany tax treaty Fresenius Kabi Philippines, Inc. Units 5-7 18th Floor, Zuellig Building Makati Avenue corner Paseo de Roxas Makati City 1225 Attention: Ma. Rosario P. Dizon Finance Director Gentlemen : This refers to your tax treaty relief application filed on December 16, 2014, on behalf of Fresenius Kabi Deutschland GmbH ("Fresenius-Germany") , requesting confirmation that dividends paid by Fresenius Kabi Philippines, Inc. ("Fresenius-Philippines") to Fresenius-Germany are subject to a 10 percent preferential withholding tax rate pursuant to Article 10 of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty") . It is represented that Fresenius-Germany is a resident corporation of Germany per the Certificate of Residence issued by the German Tax Administration on October 13, 2014; that it is not registered either 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 December 10, 2014; and that, on the other hand, Fresenius-Philippines is a corporation organized and existing under the laws of the Philippines. It is further represented that on January 23, 2014, the Board of Directors of Fresenius-Philippines declared cash dividends in the amount of Sixty Million Pesos (PhP60,000,000) in favor of all stockholders of record as of December 31, 2013; that as of December 31, 2013, Fresenius-Germany is the legal and beneficial owner of 779,995 common shares and five (5) common shares held by its nominee directors, for a total of 780,000 common shares with a total par value of PhP78,000,000.00, which represents 100 percent ownership of the issued and outstanding shares of Fresenius-Philippines . 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. 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 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%)." aDSIHc 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." In relation thereto, Article 10 of the Philippines-Germany tax treaty, which you invoked, 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 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. 5. The provisions of paragraphs 1 to 3 shall not apply if the recipient of the dividends, being a resident of a Contracting State, has in the other Contracting State, of which the company paying the dividends is a resident, a permanent establishment with which the holding by virtue of which the dividends are paid is effectively connected. In such a case, the provisions of Article 7 shall apply." Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Germany at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 25 percent of the capital of the company paying the dividend. Accordingly, considering that Fresenius-Germany is a resident of Germany, owns 100 percent ownership of the issued and outstanding shares of Fresenius-Philippines , this Office is of the opinion and so holds that dividends paid by Fresenius-Philippines to Fresenius-Germany are subject to the 10 percent preferential tax rate pursuant to the Philippines-Germany 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. ETHIDa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue