ITAD BIR Ruling No. 106-16

June 22, 2016 ITAD BIR RULING NO. 106-16 Article 10, Philippines-Netherlands tax treaty Isla Lipana & Co. 29th Floor Philamlife Tower Paseo de Roxas, Makati City Attention: Juan R. Bernardino, Jr. Tax Senior Manager Gentlemen : This refers to your tax treaty relief application filed on March 3, 2014, on behalf of NOKIA SIEMENS NETWORKS B.V. ("NOKIA BV"), requesting confirmation that dividends paid by NOKIA SOLUTIONS AND NETWORKS PHILIPPINES, INC. ("NOKIA PHIL") to NOKIA BV 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 NOKIA BV, with principal address at Werner von Siemensstraat 7 2712 PN Zoetermeer, 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 September 20, 2013; that it is a corporation organized and existing under the laws of the Netherlands with authorized capital of four hundred thousand one hundred forty seven euro (EUR400,147) divided into eight hundred thousand two hundred ninety four (800,294) shares with a nominal value of fifty eurocents (EUR0.50) 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 January 16, 2014; and that, on the other hand, NOKIA PHIL is a corporation organized and existing under the laws of the Philippines with principal address at 14th Floor, Sun Life Centre, 5th Avenue corner Rizal Drive, Bonifacio Global City, Taguig City. It is further represented that the Board of Directors of NOKIA PHIL declared cash dividends on December 13, 2013 in the aggregate amount of Two Hundred Ten Million Seven Hundred Sixty One Thousand Nine Hundred Forty Five Pesos (Php210,761,945.00) payable to all stockholders of record as of December 31, 2012, payable on March 31, 2014; that as of the date of record, NOKIA BV holds 260,139 common shares which represent 99% ownership in NOKIA PHIL; and that, based on a certificate of remittance issued on March 27, 2014, such dividend was remitted to NOKIA BV on March 26, 2014. SDAaTC 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. . . ." Based on the above-cited provision, the 10 percent preferential tax rate on dividend 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 the capital of NOKIA PHIL is wholly divided into shares, and that NOKIA BV holds 99 percent of the capital of NOKIA PHIL, this Office is of the opinion and so holds that the dividends paid by NOKIA PHIL to NOKIA BV 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue