ITAD BIR Ruling No. 104-15

March 27, 2015 ITAD BIR RULING NO. 104-15 Article 10, Philippines-Netherlands tax treaty Tam-Yap Caga & Ilao Law Offices Unit B, 15th Floor, ACT Tower 135 H.V. de la Costa Street Salcedo Village, Makati City Attention: Teresa R. Tam-Yap Gentlemen : This refers to your tax treaty relief application filed on November 13, 2012, on behalf of CBK Netherlands Holdings B.V. ("CBK") , requesting confirmation that dividend paid by Kalayaan Power Management Corporation ("KPMC") to CBK is 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 CBK, with principal address at HERIKERBERGWEG 238, 1101 CM Amsterdam, the Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per Declaration of Residence issued by the Tax and Customs Administration of the Netherlands on August 13, 2012; that it is a corporation organized and existing under the laws of the Netherlands with authorized capital of ninety thousand euro (EUR90,000) divided into nine hundred (900) shares of one hundred Euro (EUR100) each; 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 November 9, 2012; and that, on the other hand, KPMC is a corporation organized and existing under the laws of the Philippines with principal address at NPC Compound, Kalayaan, Laguna. It is further represented that on October 19, 2012, the Board of Directors of KPMC approved the declaration of cash dividend in the amount of US$561,611.00 to all stockholders on record as of December 31, 2011 and payable on December 5, 2012; that as of the date of record, CBK holds 98,494 common shares with a total par value of Php9,849,400.00 which represents 99% ownership in KPMC; that these shares were acquired by CBK on May 26, 2000 through subscription; and that, the subject dividend was remitted by KPMC to CBK on December 10, 2012. It is finally represented, per Sworn Statement dated November 12, 2012 issued by KPMC, 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: HDTISa "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. ECHSDc 6. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the States, carries on business in the other State, of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State professional services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. . . ." Based on the above-cited provision, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner of the dividends is a company, the capital of which is divided into shares, and owns at least 10 percent of the capital of the paying company. In all other cases, 15 percent preferential tax rate applies. Such being the case and considering that CBK is a resident of Netherlands with no fixed place of business in the Philippines, and the capital of CBK is wholly divided into shares, and that CBK holds more than 10 percent of the capital of KPMC (in fact, 99%), this Office is of the opinion and so holds that the dividend paid by KPMC to CBK shall be 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue