ITAD BIR Ruling No. 110-11

April 7, 2011 ITAD BIR RULING NO. 110-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD-46-10; BIR Ruling No. ITAD-37-10; BIR Ruling No. ITAD-29-10; BIR Ruling No. ITAD-21-10 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Jules E. Riego Principal, Tax Advisory and Advocacy Group Gentlemen : This refers to your tax treaty relief application dated January 7, 2011, filed on behalf of CEVA Freight Holdings B.V. ("CEVA") , requesting confirmation that dividends paid by CEVA Logistics (Subic), Inc. ("CEVA Philippines") to CEVA are subject to a preferential tax rate of 10 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") . SHIETa It is represented that CEVA 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, as amended, and on the Declaration of Residence issued by the Tax and Customs Administration of the Netherlands on October 12, 2010; that CEVA has an authorized capital of EUR100,000.00, divided into 500,000 shares, each share with a par value of EUR0.20; that CEVA is located at Siriusdreef 20, 2132 WT Hoofddorp, the Netherlands; that CEVA 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 November 2, 2010; and that, on the other hand, CEVA Philippines is a domestic corporation located at Unit 8-B, Brandrex Building, Lot 11/12 Argonaut Highway, Boton Area, Subic Bay Freeport Zone, Olongapo City, Zambales, Philippines. It is further represented that on December 9, 2010, the Board of Directors of CEVA Philippines , at its special meeting, approved the declaration of cash dividends in the amount of Forty-Five Million Pesos (P45,000,000.00), in favor of the stockholders of record of CEVA Philippines as of December 9, 2010, based on the Certificate issued by the Corporate Secretary of CEVA Philippines on December 14, 2010; that the dividends will be taken out of the unrestricted retained earnings of CEVA Philippines and payable on December 14, 2010; that as of the dates of declaration and payment of the dividends, CEVA holds 60,146 common shares of CEVA Philippines with a total par value of Six Hundred One Thousand Four Hundred Sixty Pesos (P601,460.00), and which represent 80.10 percent ownership in the capital stock of CEVA Philippines . It is finally represented, based on the Sworn Statement issued by the Assistant Financial Controller of CEVA Philippines on December 16, 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. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended, provides that dividends payable to CEVA, being 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 Code, provides that such dividends may be exempt or partially exempt (if subject to reduced rate only) to the extent required by any treaty obligation on the Philippines, viz. : EaCDAT "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, what you invoke for this purpose is the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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" 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. Accordingly, since CEVA is a private company in the Netherlands, the capital of which is wholly divided into shares, and since CEVA holds directly 80.10 percent of the capital of CEVA Philippines (which is actually more than the required minimum of shareholding of 10 percent), such dividends to be paid by CEVA Philippines to CEVA are subject to income tax at a reduced rate of 10 percent of the gross amount thereof pursuant to paragraph 2 (a) Article 10 of the Philippines-Netherlands tax treaty. [BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling No. ITAD-46-10 dated May 11, 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] 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. TAIEcS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue