ITAD BIR Ruling No. 114-14

July 21, 2014 ITAD BIR RULING NO. 114-14 Article 10, Philippines-Netherlands Tax Treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. Fabian K. Delos Santos Partner, Tax Services Gentlemen : This refers to your application for tax treaty relief filed on December 16, 2013, requesting confirmation that the dividends to be paid by CBK Power Company Limited ("CBK") to SLP Caliraya B.V. ("SLP") and to JLP Botocan B.V. ("JLP") are subject to the preferential 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"). It is represented that JLP and SLP, with the same principal place of business at Herikerbergweg 238-Luna Arena, 1101 CM Amsterdam Zuidoost, Netherlands, are corporations organized and existing under the laws of the Netherlands, and are residents of the Netherlands within the meaning of Article 4 of the Convention for the Avoidance of Double Taxation between the Philippines and the Netherlands per Declaration of Residence issued on November 1, 2013; the capital of both corporations are divided into shares as evidenced by Article 3 on Capital and Shares of their respective Articles of Incorporation; that JLP and SLP are not registered as corporations or as partnerships in the Philippines per Certification issued by the Securities and Exchange Commission on November 5, 2013; and that on the other hand, CBK is a domestic corporation situated at the 25th Floor Philamlife Tower, 8767 Paseo de Roxas, Makati City. cHSIAC It is further represented that during the Management Committee meeting on December 2, 2013, CBK approved Resolution No. 2013-028 declaring cash dividends of US$22,000,000.00 to its partners according to their respective holdings; that the respective capital contributions of JLP and SLP in CBK amounted to USD58,501,000.00 and USD78,510,000.00, respectively, each representing 49% of the total Capital of CBK; that the shares were acquired by JLP and SLP on March 15, 2000 as capital contribution based on the Secretary's Certificate of CBK issued on December 10, 2013; and that the said dividends were paid to JLP and SLP on December 18, 2013 based on the HSBC Certification dated January 9, 2014. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the CBK on December 9, 2013. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to JLP and SLP, being foreign corporations not engaged in trade or business in the Philippines, are subject to income tax at the rate 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%). SEDIaH xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation in the Philippines, 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. xxx xxx xxx" In this particular case, you invoke Article 10 of the Philippines-Netherlands tax treaty. 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: AHDcCT 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" Under paragraphs 2 and 3 of Article 10, 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 if the recipient 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 in all other cases. Accordingly, since JLP and SLP are registered companies in the Netherlands, their respective capital of which are capital divided into shares, and respectively hold 49 percent each of the capital of CBK, it is the opinion of this Office that the dividends paid by CBK to JLP and SLP are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. 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