ITAD BIR Ruling No. 114-11

April 11, 2011 ITAD BIR RULING NO. 114-11 Article 10, Philippines-Germany tax treaty; BIR Ruling No. 559-88; BIR Ruling No. DA-ITAD-052-02; BIR Ruling No. DA-ITAD-109-02; BIR Ruling No. DA-ITAD-171-02; BIR Ruling No. DA-ITAD-144-03 Aboitiz Project T.S. Corporation Columbia Airfreight Complex 1 Miascor Drive, NAIA Ave., Paraaque City Attention: Mr. Walter Ramos Chief Finance Officer Gentlemen : This refers to your tax treaty relief application filed June 11, 2010 on behalf of HEGO PARTNER HOLDING GMBH ("HPH GmbH") , requesting confirmation that dividend payments of ABOITIZ PROJECT T.S. CORPORATION ("Aboitiz") to HPH GmbH are subject to a preferential withholding tax rate pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty"). EcSCAD It is represented that HPH GmbH, with address at Flughafenallee 26, 28199 Bremen, and registered under tax number 71/569/03943, is a resident of Germany per the Certification of registration of subjection to taxation (entrepreneur) issued by the Bremen Central Inland Revenue Office dated September 7, 2010; that it is not registered as a corporation or as a partnership in the Philippines per the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated December 1, 2009; and that Aboitiz , on the other hand, is a corporation duly organized and existing under the laws of the Philippines, with office at Columbia Airfreight Complex 1, Miascor Drive NAIA Ave., Paraaque City. It is further represented, based on the Secretary's Certificate issued by Aboitiz dated December 1, 2009, that as of November 30, 2009, HPH GmbH is the registered owner of TWENTY-TWO THOUSAND NINE HUNDRED NINETY-EIGHT (22,998) common shares of the capital stock of Aboitiz with a par value of P100.00 or with a total amount of Php2,299,800.00; that HPH GmbH owns 39.99% of the authorized capital stock of Aboitiz , having acquired the said shares on March 27, 2009; that at the regular meeting of the Board of Directors of Aboitiz on July 13, 2009, a resolution was unanimously passed and approved declaring a cash dividend of Philippine Pesos: Twelve Million Pesos (P12,000,000.00) to be distributed on July 31, 2009 to the stockholders of record as of May 31, 2009 per the Secretary's Certificate issued by Aboitiz dated August 14, 2009; and that the issue or transaction subject of the above 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 a judicial appeal of the taxpayer/s involved per the sworn statement of the Chief Finance Officer of Aboitiz dated February 4, 2011. In reply, please be informed that dividend income derived in the Philippines by a nonresident foreign corporation is generally taxable under Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended. It provides: "SEC. 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%)." However, said income may be exempt or partially exempt pursuant to Section 32 (B) (5) of the Tax Code of 1997, as amended. It provides: "SEC. 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 this particular case, the treaty being invoked is the Philippines-Germany tax treaty, specifically its Article 10, which provides, viz. : "Article 10 Dividends 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. ECTAHc 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; (b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust." Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Germany at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 25 percent of the capital of the company paying the dividend. Accordingly, since HPH GmbH owns 39.99 percent of the authorized capital stock of Aboitiz , which is more than the shareholding requirement of 25 percent to avail of the 10 percent tax rate, this Office is of the opinion and so holds that the dividend payment of Aboitiz to HPH GmbH is subject to the 10 percent preferential tax rate pursuant to the Philippines-Germany tax treaty. (BIR Ruling No. 559-88 dated November 24, 1988; BIR Ruling No. DA-ITAD-052-02 dated April 16, 2002; BIR Ruling No. DA-ITAD-109-02 dated May 30, 2002; BIR Ruling No. DA-ITAD-171-02 dated October 2, 2002; BIR Ruling No. DA-ITAD-144-03 dated September 25, 2003) 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