ITAD BIR Ruling No. 121-14

July 21, 2014 ITAD BIR RULING NO. 121-14 Article 10, Philippines-Germany Tax Treaty Staedtler (Philippines), Inc. 2nd Floor, 15 Gilmore Avenue New Manila, Quezon City Attention: Mr. Peter S. Yupitun President Gentlemen : This refers to your tax treaty relief application filed November 29, 2012, on behalf of Staedtler Noris GmbH ("Staedtler Noris") , requesting confirmation that the dividend payments made by Staedtler (Philippines), Inc. ("Staedtler Inc") to Staedtler Noris is subject to 15 percent preferential tax rate pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Germany tax treaty"). It is represented that Staedtler Noris , with principal address at Moos ckerstr 3, 90427 N rnberg, Germany, is a resident of the Germany within the meaning of Article 4 of the Philippines-Germany tax treaty based on the Certificate of Residence issued by the German Tax Administration dated June 4, 2013; that Staedtler Noris is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on December 18, 2012; and that, on the other hand, Staedtler Inc is a domestic corporation duly organized and existing under Philippine laws, located at the 2nd Floor, 15 Gilmore Avenue, New Manila, Quezon City. It is further represented, as shown in the Secretary's Certificate issued by Staedtler Inc dated December 17, 2012, that in a special meeting of the Board of Directors held on October 25, 2012, the Board of Directors approved the declaration of dividends in the amount of Three Million Pesos (Php3,000,000.00) to stockholders of record as of September 30, 2012; that Staedtler Noris , with its nominee, owns 450,000 shares ( Staedtler Noris , 449,986 shares and Axel Marx, 14 shares) in Staedtler Inc , representing 25% of the outstanding capital stock of Steadtler Inc ; that said shares were acquired by Staedtler Noris by purchase; and that as of February 21, 2013, Staedtler Inc has not yet made any dividend payment to Staedtler Noris. IAEcCa 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 Staedtler Noris , being a foreign corporation 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%). 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 on 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. TIcEDC xxx xxx xxx" In this particular case, you invoke the Philippines-Germany tax treaty, as amended. Paragraphs 1 and 2, 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 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." Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines, at a rate not to 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; and (b) in all other cases, 15 per cent of the gross amount of dividends. This being the case, and considering that Staedtler Noris holds 25 percent of the total shares of Staedtler Inc , this Office is of the opinion and so holds that such dividend paid by Staedtler Inc to Staedtler Noris is subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Germany tax treaty. CcHDaA 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