ITAD BIR Ruling No. 100-16

June 22, 2016 ITAD BIR RULING NO. 100-16 Article 10, Philippines-Netherlands tax treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Paulo T. Villareal Gentlemen : This refers to your tax treaty relief application filed on January 13, 2012, on behalf of JLP Botocan B.V. ("JLP") , requesting confirmation that dividends paid by CBK Power Company Limited ("CBK") to JLP are subject to 10 percent preferential tax rate pursuant to Article 10 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") . It is represented that JLP is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per Declaration of Residence issued on May 20, 2011 by the Tax and Customs Administration of the Netherlands; that it is a corporation organized and existing under the laws of the Netherlands with authorized capital of ninety thousand seven hundred sixty euro (EUR90,760.--) divided into nine thousand seventy-six (9,076) shares, each share having a nominal value of ten euro (EUR10.--); 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 January 11, 2012; and that, on the other hand, CBK is a limited partnership organized and existing under the laws of the Philippines. aDSIHc It is further represented that on January 6, 2012, CBK approved the distribution to the partners of cash dividends amounting to US$7,740,000 and PhP36,980,000, and out of the total amount of such dividends, there are USD3,792,600.00 and PhP18,120,200.00 payable to JLP; that the subject dividends are payable on or before January 31, 2012; that per the Secretary's Certificate issued by CBK dated May 31, 2012, JLP has, since March 15, 2000, a capital contribution amounting to USD58,501,000.00 representing 49% ownership in CBK; and that, such dividends were remitted to JLP on January 18, 2012 and January 20, 2012, respectively. It is finally represented, per Sworn Statement dated January 6, 2012 issued by JLP, 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 income 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 treaty obligation binding upon the Government of the Philippines." In relation thereto, Article 10 of the Philippines-Netherlands tax treaty, which you invoked, 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." ETHIDa 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 and the documents presented, it appears that all of the conditions in applying the 10 percent preferential tax rate are present. Firstly , CBK and JLP are treated separately as "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 participacion) , 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." Based on the abovementioned provision, CBK, being a partnership duly organized and existing under the laws of the Philippines, can be treated as a domestic corporation and taxed accordingly. On the other hand, JLP is 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 it being a domestic corporation. Thirdly , JLP 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. Fourthly , JLP is the beneficial owner of the subject dividends, based on the Secretary's Certificate issued by CBK dated May 31, 2012. Fifthly , the capital of JLP is wholly divided into shares, based on their Articles of Association. Lastly , JLP directly hold 49% of the total amount subscribed and paid up shares of CBK, per Secretary's Certificate dated May 31, 2012 issued by CBK, or more than the required stockholdings of 10 percent. Based on Article 10 quoted above, 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 JLP 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 JLP are subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. 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. cSEDTC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue