ITAD BIR Ruling No. 091-15

March 25, 2015 ITAD BIR RULING NO. 091-15 Article 10, Philippines-Netherlands tax treaty Manabat Sanagustin & Co., CPAs The KPMG Center, 9th Floor 6787 Ayala Avenue, Makati City Attention: Ms. Maria Carmela M. Peralta Principal, Tax Gentlemen : This refers to your tax treaty relief application filed on December 10, 2013 requesting confirmation on your opinion that the dividends paid by Unilever Philippines, Inc. ("Unilever") to New Asia B.V. ("New Asia") are subject to 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 ("Philippines-Netherlands tax treaty"). Facts New Asia is a foreign corporation and a resident of the Netherlands based on its Deed of Incorporation and Declaration of Residence issued by the Tax Administration of Arnhem in the Netherlands on November 21, 2013. New Asia is located at Weena 455, 3013 AL Rotterdam, Netherlands. New Asia is a company with an authorized capital of 100,000 euros and divided into 100,000 shares, each share with a par value of 1 euro. It is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration issued by the Securities and Exchange Commission on June 20, 2013. On the other hand, Unilever is a domestic corporation located at 1351 United Nations Avenue, Metro Manila, Philippines. Based on the two Secretary's Certificates issued on December 9, 2013, the Board of Directors of Unilever , during the special meeting on December 6, 2013, approved a resolution declaring cash dividends amounting to P481,741,710.04 in favor of the company's stockholders of record as of November 30, 2013, and payable on June 28, 2013. As of record date on December 31, 2012 and payable on or before December 13, 2013, New Asia is a registered shareholder of Unilever with 4,918,523 subscribed common shares at a par value per share of P50.00 or 100 percent of the outstanding stock of Unilever. Based on the Certification issued by Hongkong and Shanghai Banking Corporation Limited 1 on December 27, 2013, the dividends were remitted by Unilever to New Asia on as follows: Date of Remittance Gross Amount December 13, 2013 US$9,857,156.08 Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: aEHIDT "SEC. 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 interests, 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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 this particular case, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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." Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient 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 15 percent in all other cases. Accordingly, since New Asia is a company in the Netherlands the capital of which is wholly divided into shares, and that New Asia holds directly at least 10 percent of the capital of Unilever (as represented by shares) and where New Asia holds 100 percent of these shares, such dividends paid by Unilever to New Asia shall be subject to income tax rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. 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. TcDAHS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Located at 7th Floor HSBC Centre, 3058 Fifth Avenue West, Bonifacio Global City, Taguig City, Philippines. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.