ITAD BIR Ruling No. 081-10

December 20, 2010 ITAD BIR RULING NO. 081-10 Article 10, Philippines-Netherlands Tax Treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. ITAD-46-10; BIR Ruling No. ITAD-37-10; BIR Ruling No. ITAD-29-10; BIR Ruling No. ITAD-21-10 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Romulo S. Danao, Jr. Partner, Tax Services Gentlemen : This refers to your application for tax treaty relief dated November 26, 2010, on behalf of Katolec Enterprises B.V. (hereinafter referred to as "KE-BV"), requesting confirmation that dividend payments made by Katolec Philippines Corporation (hereinafter referred to as "KPC") to KE-BV are subject to 10 percent preferential tax rate 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 (hereinafter referred to as the "Philippines-Netherlands tax treaty" ). It is represented that KE-BV, with address at Strawinskylaan 3105, 1077 ZX, Amsterdam, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Declaration of Residence issued by the Inspector of the Tax Administration of Rijnmond/kantoor Rotterdam, the Netherlands dated September 3, 2010; that based on its Incorporation of a Private Company, KE-BV is private company with limited liability incorporated under the laws of the Netherlands with authorized capital of ninety thousand euro (90,000.00) divided into ninety (90) shares with a par value of one thousand euro (1,000) each; that KE-BV is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on October 29, 2010; and that, on the other hand, KPC is a domestic corporation duly organized and existing under Philippine laws, located at the 103 East Main Avenue, SEPZ, Laguna Technopark, Bian, Laguna. TAaHIE It is further represented, as shown in the Secretary's Certificate issued by KPC dated November 12, 2010, that during the special meeting of the Board of Directors of KPC on November 10, 2010, a resolution was unanimously approved declaring cash dividends in the amount of US Dollar Sixteen Million (US$16,000,000.00) out of the unrestricted retained earnings of KPC as of December 31, 2009 in favor of all of KPC's shareholders on record, to be paid on or before December 23, 2010; that as of December 31, 2009, out of the total 125,000 subscribed and paid-up shares of KPC, KE-BV owns 124,994 thereof representing 99.99952% ownership of KPC's total shares and that KE-BV acquired the said shares by purchase. It is finally represented, based on the Sworn Statement by the same Corporate Secretary on October 15, 2010, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies in general to dividend income of 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). HCSAIa xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that any income may be exempt to the extent required by any treaty obligation binding upon the Philippine Government, thus: "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: ICTDEa 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" With respect to a treaty, what you invoke for this purpose is the Philippines-Netherlands tax treaty. Article 10 thereof provides: "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. 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. ISTHED xxx xxx xxx" Based on the aforequoted article, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as KE-BV is a private company in the Netherlands the capital of which is wholly divided into shares, and since KE-BV holds directly 99.9952 percent of the capital of KPC (which is actually more than the required minimum shareholding of 10 percent), such dividends to be paid by KPC to KE-BV are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof. (BIR Ruling No. ITAD-46-10 dated October 5, 2010; BIR Ruling No. ITAD-37-10 dated September 16, 2010; BIR Ruling No. ITAD-29-10 dated August 27, 2010; BIR Ruling No. ITAD-21-10 dated August 20, 2010; BIR Ruling No. ITAD-99-08 dated November 17, 2008) 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