ITAD BIR Ruling No. 103-11

April 4, 2011 ITAD BIR RULING NO. 103-11 Article 10, Philippines-Netherlands Tax Treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. ITAD-46-10; BIR Ruling No. ITAD-37-10; BIR Ruling No. ITAD-29-10; BIR Ruling No. ITAD-21-10 Manabat San Agustin & Co. The KPMG Center, 9/F 6787 Ayala Avenue Makati City Attention: Ma. Carmela M. Peralta Principal, Tax Gentlemen : This refers to your tax treaty relief application filed on December 14, 2010, on behalf of New Asia B.V. ("New Asia") , requesting confirmation that dividend payments made by Unilever Philippines, Inc. ("Unilever") to New Asia are subject to 10 percent 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"). DIESaC It is represented that New Asia , with address at Weena 455, 3013 Al Rotterdam, Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issue by the Inspector of the Tax and Customs Administration of the Netherlands on August 16, 2010; that New Asia is a private company duly organized and existing under the laws of the Netherlands, with authorized capital of one hundred thousand Euro (EUR100,000), divided into one hundred thousand (100,000) shares, each with a nominal value of one Euro (EUR1.00), based on its Deed of Incorporation; that New Asia is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 24, 2010; and that, on the other hand, Unilever is a domestic corporation located at the 1351 United Nations Avenue, Philippines. It is further represented that at the special meeting held on December 13, 2010, the Board of Directors of Unilever unanimously approved the declaration of cash dividends as evidenced by the Secretary's Certificate issued by Unilever dated December 13, 2010 as follows: Amount of Dividends Stockholders Shareholding Payment date Dividends for of Record as as of of Php1,010,800,162.64 Third November November 30, On or before Quarter of 30, 2010 2010 30 December 2010 2010 Php918,797,670.69 Second November November 30, On or before Quarter of 30, 2010 2010 30 December 2010 2010 That as of the dates of declaration and payment of dividends, 4,918,523 subscribed shares of Unilever are registered under the name of New Asia, which represent 100% of the total outstanding capital stock of Unilever, with a total par value of P245,926,150.00; and that these shares were transferred from Mavibel B.V. to New Asia on June 26, 2003. It is finally represented, based on the Sworn Statement by the Corporate Secretary of Unilever on December 9, 2010, that the transaction subject of the 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 of the taxpayer/s involved. cCESaH In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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 . . ., 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 of 1997, as amended, provides that any income may be exempt or subject to a reduced rate to the extent required by any treaty obligation binding upon the Philippine Government, thus: "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. cHSIDa xxx xxx xxx" With respect to a treaty, what you invoke for this purpose is the Philippines-Netherlands tax treaty. Its Article 10 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 provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not 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. cSATEH Accordingly, inasmuch as New Asia is a private company in the Netherlands, the capital of which is wholly divided into shares and since New Asia holds directly 100 percent of the capital of Unilever (which is actually more than the required minimum of shareholding of 10 percent), the dividends to be paid by Unilever to New Asia are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. [BIR Ruling No. ITAD-46-10 dated October 5, 2010; BIR Ruling No. ITAD-37-10 dated September 16, 2010; BIR Ruling No. ITAD-29-10 dated August 27, 2010; BIR Ruling No. ITAD-21-10 dated August 20, 2010; 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue