ITAD BIR Ruling No. 115-15

April 30, 2015 ITAD BIR RULING NO. 115-15 Article 10 (Dividends) Philippines-Sweden tax treaty Isla Lipana & Co. 29/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention : Harold S. Ocampo Authorized Representative Gentlemen : This refers to your tax treaty application ("TTRA") filed on August 7, 2014, requesting confirmation that dividends paid by Cebu Air, Inc. ("Cebu Air") to Dunross & Co., AB ("Dunross") is subject to income tax at the rate of 15% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Sweden with respect to Taxes on Income ("Philippines-Sweden" tax treaty) . It is represented that Dunross is a private limited liability company organized and existing under the laws of Sweden; that it is a resident of thereof within the meaning of Article 4 of the Convention between the Philippines and Sweden for the avoidance of double taxation; that it is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on July 9, 2014. On the other hand, Cebu Air , is a domestic corporation duly organized and existing under the laws of the Philippines. It is also represented that Dunross is the beneficial owner of Thirteen Million Eighty-Five Thousand Seven Hundred Seventy (13,085,770) common shares as of the record date and date of payment of the subject dividends, constituting 2.1339% of the outstanding common shares of Cebu Air per certification issued by Citibank dated July 24, 2014; that Cebu Air declared cash dividends in the amount of Php1.00 per share from the unrestricted retained earnings of the corporation to all stockholders of record as of the July 16, 2014, payable on August 11, 2014. It is further represented, per sworn certification dated August 11, 2014 issued by the Senior Vice President of Cebu Air that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends paid to Dunross are subject to income tax at the rate of 30 percent, thus: SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Non-resident 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 interests, 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). . . However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: 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. . . For this purpose, you invoke the Philippines-Sweden tax treaty. Paragraphs 1 & 2 of Article 10 thereof provide: 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. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company (excluding partnerships) which holds directly at least 25 per cent of the capital of the paying company; (b) 15 per cent of the gross amount of the dividends in all other cases. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. . . Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of Sweden may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company other than a partnership which owns directly at least twenty-five percent (25%) of the capital of the company paying the dividends; and (b) 15 percent in all other cases. Accordingly, considering that Dunross , a company registered in Sweden, holding 13,085,770 common shares , constituting 2.1339% of the stocks of Cebu Air which is less than 25% of the issued and outstanding stocks of the latter, this Office is of the opinion that the dividend paid by Cebu Air to Dunross is subject to income tax at the rate of fifteen percent (15%) of the gross amount of dividend, pursuant to Article 10 (2) (b) of the Philippines-Sweden 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.