ITAD BIR Ruling No. 082-14

June 17, 2014 ITAD BIR RULING NO. 082-14 Article 10 (2) (a), Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-99-08 SyCip Salazar Hernandez & Gatmaitan Attorneys-at-Law SSHG Law Centre 105 Paseo De Roxas, 1226 Makati City Attention: Hector M. de Leon Jr. & Hiyasmin H. Lapitan Gentlemen : This refers to your Tax Treaty Relief Application filed on December 28, 2010, on behalf of your clients, SLP Caliraya B.V. ("SLP Caliraya") and JLP Botocan B.V. ("JLP Botocan") , requesting preferential tax rate of 10 percent on the dividend payments made to them by CBK Power Company Limited under Article 10 of 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 ("Philippines-Netherlands tax treaty") . Facts It is represented that SLP Caliraya is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, with Tax ID No. 0094.28.501, per Declaration of Residence dated November 7, 2007, issued by the inspector of the Tax Administration of the Belastingdienst/Rijnmond/kantoor Rotterdam, the Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per certification dated November 24, 2008 issued by the Securities and Exchange Commission; that JLP Botocan is also a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, with Tax ID No. 8084.71.508, per Declaration of Residence dated November 9, 2007, issued by the inspector of the Tax Administration of the Belastingdienst/Rijnmond/kantoor Rotterdam, the Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per certification dated November 26, 2008 issued by the Securities and Exchange Commission; that both SLP Caliraya's and JLP Botocan's principal offices are located at Locatellikade 1, 1076 AZ Amsterdam, The Netherlands; that SLP Caliraya 's authorized capital amounts to Ninety Thousand Euro (EUR90,000.00), divided into Nine Hundred (900) shares, each share having a nominal value of One Hundred Euro (EUR100.00), and JLP Botocan's authorized capital amounts to Ninety Thousand Seven Hundred Sixty Euro (EUR90,760.00), divided into Nine Thousand Seventy-Six (9,076) shares, each share having a nominal value of Ten Euro (EUR10.00), as evidenced by the Articles of Association of both companies; and that, on the other hand, CBK Power Company Limited ("CBK") is a limited partnership organized and existing under Philippine laws, with business address at National Power Corporation Compound, Kalayaan, Laguna, Philippines; that it is registered with the Securities and Exchange Commission with business purpose to engage in all aspects of (a) the design, financing, construction, testing, commissioning, operation, maintenance, management and ownership of the Kalayaan II pumped-storage hydroelectric power plant, the New Caliraya Spillway, and other assets to be located in the province of Laguna, and (b) the rehabilitation, upgrade, expansion, testing, commissioning, operation, maintenance of the Caliraya, Botocan, and Kalayaan I hydroelectric power plants and their related facilities located in the Province of Laguna (the "Project" ); and that the activities of the Partnership shall include generally the entering into, carrying out and performing of the agreement (including financing agreements) to which it is a party, undertaking all other activities identified as necessary or desirable to implement the Project and undertaking any activities incidental to any of the foregoing. ADEacC It is further represented that SLP Caliraya and JLP Botocan are the legal and beneficial owners of 49%, limited partnership interest each, of CBK; that as evidenced by a Certification dated December 28, 2010, issued by the Corporate Secretary of CBK, on January 31, 2011, the Management Committee of CBK confirms the dividend declarations in favor of SLP Caliraya and JLP Botocan , specified in the following table: Amount Declared in USD CBK Power Corporation (1%) 66,348.14 JLP Botocan BV (49%) 3,251,058.86 SGP Kalayaan BV (1%) 66,348.14 SLP Caliraya BV (49%) 3,251,058.86 It is finally represented, per the Certification issued by CBK on December 23, 2010, that the issue or transaction subject of the above 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 a judicial appeal of the taxpayer/s involved. Ruling In reply, please be informed that the dividends derived in the Philippines by SLP and JLP, being foreign corporations not engaged in trade or business in the Philippines, are generally subject to income tax at the rate of 30 percent. Section 28 (B) (1) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, 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%)." DTSaHI 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." Thus, 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: TCADEc 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. Based on the representations made, it appears that all of the conditions in applying the 10 percent preferential tax rate are present. Firstly, CBK, SLP Caliraya and JLP Botocan are separately treated as a "company". 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 ". In connection therewith, Section 22 (B) of the Tax Code provides as follows: "SEC. 22. Definition . When used in this Title: (B) The term 'corporation' shall include partnerships , no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation) , associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." DCcTHa Based on the abovementioned provision, CBK, being a partnership having its business activities as mentioned in the foregoing representations can be treated as a domestic corporation and taxed accordingly. On the other hand, SLP Caliraya and JLP Botocan , the recipients of the dividend, are deemed as nonresident foreign corporations, for purposes of the income tax law of the Philippines. Secondly, CBK 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, SLP Caliraya and JLP Botocan , the recipients of the subject dividends, are residents of The Netherlands for purposes of the Philippines-Netherlands tax treaty as declared by the tax authority of The Netherlands. Fourthly, SLP Caliraya and JLP Botocan are the beneficial owners of the subject dividends, based on the Secretary's Certificate issued by CBK dated December 28, 2010. Fiftly, the capital of both SLP Caliraya and JLP Botocan are wholly divided into shares, based on their respective Articles of Association. Lastly, both SLP Caliraya and JLP Botocan directly hold 49% of the total amount subscribed and paid up shares of CBK, per Secretary's Certificate dated December 28, 2010, issued by CBK, or more than the required stockholdings of 10 percent. Such being the case and considering that both SLP Caliraya and JLP Botocan hold more than 10 percent of the capital of CBK, this Office is of the opinion and so holds that the dividend payments by CBK to SLP Caliraya and JLP Botocan 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-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. aATCDI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue