ITAD BIR Ruling No. 101-12

February 20, 2012 ITAD BIR RULING NO. 101-12 Masinloc AES Partners Co. Ltd. 30th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mr. Moazzam Nazir Chanda Chief Finance Officer Gentlemen : This refers to your tax treaty relief application filed on September 21, 2011, requesting confirmation that profit shares paid by Masinloc AES Partners Co. Ltd. ("Masinloc") to AES Normandy Holdings B.V. ("AES") are subject to income tax at a preferential rate of 15 percent 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"). It is represented that AES is a foreign corporation organized and existing under the laws of the Netherlands and is a resident of the Netherlands, based on its Articles of Association, and on the Declaration of Residence issued by the Tax and Customs Administration of Rotterdam in the Netherlands on July 11, 2011; that AES has an authorized capital of EUR90,000.00 which are divided into 90,000 ordinary shares of stock, each with a par value of 1Euro; that AES is situated at Parklaan 32, Rotterdam, the Netherland; that AES is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 22, 2011; and that, on the other hand, Masinloc is a partnership situated at 30th Floor Philamlife Tower, 8767 Paseo de Roxas, Makati City, Philippines. It is further represented, based on the Certificate issued by the authorized representative of Masinloc on September 20, 2011, that Masinloc earned a profit of P397,723,406.28 as of September 19, 2011 from its business operations which is ready for distribution to its partners; that AES owns 0.08 percent of the capital contributions of the partnership. It is finally represented that the shares of profits subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the Chief Finance Officer of Masinloc on September 19, 2011. SECATH In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends payable to AES ,a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that such dividends may be exempt from income tax or subject to reduced rate to the extent required by any treaty obligation on the Philippines, viz.: "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. xxx xxx xxx" With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, and 5, Article 10 thereof, provide: IcCEDA "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 percent 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 percent of the capital of the company paying the dividends; b) 15 percent 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 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: (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. The term "dividends" include other rights participating in profits which in this case the shares from the profits of AES from Masinloc are deemed dividends. Accordingly, inasmuch as AES ,the recipient of the dividends from Masinloc, is a company in the Netherlands whose capital is wholly divided into shares, and since AES holds directly less than 10 percent of the capital of Masinloc, such dividends paid by Masinloc to AES are subject to income tax at the rate of 15 percent of the gross amount thereof, 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. STIHaE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue