ITAD BIR Ruling No. 082-11

March 11, 2011 ITAD BIR RULING NO. 082-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-81-10 Adams Properties, Inc. 7/F 1880 Eastwood Avenue Eastwood City Cyberpark 188 E. Rodriguez, Jr. Avenue Bagumbayan, Quezon City Attention: Atty. Dominic V. Isberto Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) dated November 15, 2010, requesting confirmation that the dividend payments by Adams Properties, Inc. ("Adams") to Star Cruises Philippines Holdings B.V. ("SCPH") are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). DTaAHS It is represented that SCPH is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, with principal address at Strawinskylaan 3105 Atrium, 1077 ZX Amsterdam, The Netherlands, per the Declaration of Residence issued by the Tax and Customs Administration of the Netherlands dated August 18, 2010; that it is a corporation duly organized and existing under the laws of the Netherlands with authorized capital amount of ninety thousand Euro (EUR90,000), divided into nine hundred (900) shares of one hundred Euro (EUR100) each per the Deed of Incorporation of SCPH executed on July 23, 2008; that it is not registered as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated November 12, 2010; and that, on the other hand, Adams is a corporation organized and existing under the laws of the Philippines with business address at 7/F 1880 Eastwood Avenue, Eastwood City Cyberpark, 188 E. Rodriguez, Jr. Avenue, Bagumbayan, Quezon City. It is further represented that based on Secretary's Certificate issued by Adams dated November 12, 2010, SCPH is the legal and beneficial owner of: (a) Four Hundred Million (400,000,000) common shares [inclusive of two (2) common shares in the name of SCPH nominees] with a par value of One Peso (PhP1.00) per share, acquired by SCPH on July 31, 2008 through subscription from the unissued common stock; and (b) Ninety Million (90,000,000) preferred shares with a par value of One Centavo (PhP0.01) per share, acquired by SCPH on May 27, 2009 through subscription from the unissued preferred stock, which is tantamount to holdings of 40% ownership in Adams; that on November 3, 2010, the Board of Directors of Adams declared cash dividends in the amount of Two Hundred Fourteen Million Seven Hundred Eighty-Two Thousand One Hundred Seventy-Five Pesos (Php214,782,175.00) out of Adams' unrestricted retained earnings as of September 30, 2010, payable in cash to Adams' stockholders of record as of October 30, 2010 at the rate of 21.43% for every par value of shares held and to be distributed to such stockholders on November 23, 2010. It is finally represented 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 proceedings, or judicial appeal, per Sworn Statement issued by Adams dated November 15, 2010. 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. 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 obligation binding upon the Government of the Philippines. CTEDSI xxx xxx xxx" Thus, the provisions of Article 10 of the Philippines-Netherlands tax treaty, 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 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. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and 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. xxx xxx xxx" Based on the aforequoted Article 10 insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends applies when the following conditions concur: (1) the payor and recipient of the dividends must be separately treated as a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of the Netherlands, (4) the recipient of the dividends is the beneficial owner thereof, (5) the capital of such recipient is wholly or partly divided into shares, and (6) the recipient holds directly at least 10 percent of the capital of the payor of the dividends. On the other hand, in applying the 15 percent preferential tax rate, less stringent conditions need concurrence, to wit: (1) the payor of the dividends must be a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of the Netherlands, and (4) the recipient of the dividends is the beneficial owner thereof. Article 3 (e) of the Philippines-Netherlands tax treaty defines the term "company" as "any body corporate or any other entity which is treated as a body corporate for tax purposes". For purposes of determining the residency of the payor and/or recipient of the dividends, Article 4 (1) of the same tax treaty provides: "Article 4 FISCAL DOMICILE 1. For the purposes of this Convention, the term 'resident of one of the States' means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." Based on the representations made and the documents presented, it appears that all of the conditions in applying the 10 percent preferential tax rate are present. Firstly, Adams, the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. SCPH, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, Adams is deemed a domestic corporation, while SCPH is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, Adams is a resident of the Philippines since it is treated as a juridical person under the laws of the Philippines, and is liable to taxation therein by reason of its being a domestic corporation. Thirdly, SCPH, the recipient of the subject dividends, is a resident of the Netherlands for purposes of the Philippines-Netherlands tax treaty as declared by the tax authority of the Netherlands. TAESDH Fourthly, SCPH is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated November 20, 2010. Fifthly, the capital of SCPH is wholly divided into shares, based on the Deed of Incorporation SCPH. Lastly, SCPH directly holds 40% of the subscribed and paid up shares of Adams, per Secretary's Certificate dated November 20, 2010 issued by the Corporate Secretary of Adams or more than the required stockholdings of 10 percent. Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner of the dividends owns at least 10 percent of the capital of the paying company. In all other cases, the 15 percent preferential tax rate applies. Such being the case and considering that SCPH holds more than 10 percent of the capital of Adams, this Office is of the opinion and so holds that the dividend payments by Adams to SCPH shall be subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-81-10 dated December 20, 2010) 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