ITAD BIR Ruling No. 119-14

July 21, 2014 ITAD BIR RULING NO. 119-14 Article 10 (Dividends), Philippines-Switzerland tax treaty Navarro Amper & Co. 19th Floor, Net Lima Plaza, 5th Avenue, corner 26th Street, Bonifacio Global City, Taguig Attention: Mr. Richard R. Lapres Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 19 September 2013 requesting confirmation that dividends paid by UBS Securities Philippines, Inc. ("UBS-Philippines") to UBS AG ("UBS-Switzerland") are subject to final withholding tax at the preferential rate of ten percent (10%) pursuant to the The Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty"). It is represented that UBS-Switzerland is a non-resident foreign corporation organized and existing under the laws of Switzerland with principal address at Bahnhostrasse 45, 8001 Surich with Tax ID Number J000'060'685 based on a consularized and authenticated Certificate of Residence dated 24 September 2012 issued by Switzerland. It is organized for banking operations based on the consularized and authenticated Articles of Association of UBS-Switzerland issued by Switzerland. UBS-Switzerland is not registered as a corporation or as a partnership based on a Certification of Non-Registration of Company issued by the Securities and Exchange Commission on 19 October 2012. On the other hand, UBS-Philippines is a corporation organized and existing under the laws of the Philippines with principal address at 19th Tower One and Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City. ATHCDa It is further represented that as of 03 September 2013, UBS-Philippines has a total outstanding stock of Three Hundred Forty Million Pesos (Php340,000,000.00) consisting of 3,400,000 common shares with par value of One Hundred Pesos per share (Php100.00) and UBS-Switzerland owns 1,899,995 common shares or One Hundred Eighty Nine Million Nine Hundred Ninety Nine Thousand Five Hundred Pesos (Php189,999,500.00) representing 99.99% of the outstanding shares of UBS-Philippines . UBS-Switzerland acquired the 1,899,995 common shares by way of original issuance from UBS-Philippines on the following dates: Date of Subscription No. of Shares 05 March 1997 99,995 16 April 1997 300,000 16-Apr-97 800,000 25-Apr-01 100,000 28 April 2006 600,000 Total 1,899,995 ======= and that on 23 May 2012, UBS-Philippines declared cash dividends in favor of UBS-Switzerland in the amount of Three Hundred Ninety Five Million Five Hundred Sixty Two Thousand Nine Hundred Fifty Five Pesos (Php395,562,955.00) out of unrestricted retained earnings based on the notarized Secretary's Certificate of UBS-Philippines. Further, on 10 October 2013, UBS-Philippines remitted the amount of Three Hundred Fifty Six Million Six Thousand Two Hundred Eighty Four Pesos and Seventy Six Centavos (Php356,006,284.76), based on a notarized affidavit with attached telegraphic transfer from Deutsche Bank AG, Manila Branch. 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, judicial or administrative protest, collection proceedings or judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" NIRC of 1997 "), as amended, dividends paid to UBS-Switzerland are subject to income tax at the rate of 30 percent, thus: IEaCDH "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 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." CETDHA For this purpose, you invoke the Philippines-Switzerland tax treaty. Paragraphs 1 and 2 of Article 10 on Dividends 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 the 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 beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx (3) The term "dividends" as used in this Article means income from shares or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident." DcCASI Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a rate not to exceed (a) 10% if the company recipient of the dividends holds directly at least 10% of the capital of the paying company; and (b) 15% in all other cases. Considering that UBS-Switzerland owns 99.99% shares in UBS-Philippines , which is more than the 10 percent shareholding requirement to avail of the 10 percent rate, the dividends paid by UBS-Philippines to UBS-Switzerland are subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Switzerland 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 Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.