ITAD BIR Ruling No. 079-16

April 6, 2016 ITAD BIR RULING NO. 079-16 Article 10, Philippines-France tax treaty, as amended Tam-Yap & Ilao Law Offices Unit B, 15th Floor, ACT Tower 135 H.V. de la Costa Street Salcedo Village, Makati City Attention: Atty. Teresa R. Tam-Yap Gentlemen : This refers to your tax treaty relief application filed on March 30, 2015, on behalf of Egis Road Operation SA ("ERO") , requesting confirmation that dividends paid by Tollways Management Corporation ("TMC") to ERO are subject to a preferential tax rate of 10 percent pursuant to Article 10 of the amended Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. ("Philippines-France tax treaty, as amended") . It is represented that ERO is a resident corporation of France per the Certificate of Residence for Tax Purposes issued by the Tax Authority of France dated April 29, 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 March 26, 2015; and that, on the other hand, TMC is a corporation organized and existing under the laws of the Philippines. It is further represented that at the meeting of the Board of Directors of TMC held on February 12, 2015, the Board of Directors of TMC declared cash dividends in the aggregate amount of Three Hundred Twenty-Six Million Seven Hundred Twenty-Three Thousand Eight Hundred Eighty Pesos (Php326,723,880.00) to stockholders of record as of February 12, 2015, payable on or before April 30, 2015; that as of February 12, 2015, ERO is the legal and beneficial owner of one hundred twenty-nine thousand two hundred (129,200) common shares with a total par value of Php12,920,000, which represents 34 percent of the total issued and outstanding capital stock of TMC; and that the said shares were held by ERO since August 30, 2006. AcICHD It is finally represented, per Certification dated March 10, 2015 issued by TMC, that the issue or 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. 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 received 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%)." 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. xxx xxx xxx" Thus, 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) 10 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, 15 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. 4. The provisions of paragraphs 1 and 2 shall not apply if the recipient 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 professional 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 a case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed (a) 10 percent of the gross amount of the dividends if the recipient company (excluding partnership) holds directly at least 10 percent of the voting shares of the company paying the dividends, and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, since ERO is a company resident of France with no fixed place of business in the Philippines, which holds 34 percent of the total issued and outstanding capital stock of TMC, then this Office is of the opinion and so holds that the dividends paid by TMC to ERO are subject to the preferential withholding tax at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-France tax treaty, as amended. TAIaHE 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