ITAD BIR Ruling No. 122-15

April 30, 2015 ITAD BIR RULING NO. 122-15 Article 10, Philippines-France Tax Treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Ms. Malou P. Lim Managing Partner Gentlemen : This refers to your tax treaty relief application filed on December 18, 2013 requesting confirmation that dividends paid by Schneider Electric IT Philippines, Inc . ("SEI-PH") to Schneider Electric IT France ("SEI-France") are subject to preferential tax rate pursuant to the amended Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ( "Philippines-France tax treaty, as amended" ). It is represented that SEI-France , with office address at 140 Rue Jean Kuntzman, 38330 Montbonnot St. Martin, France, is a corporation organized and existing under the laws of France and a resident thereof based on its updated Articles of Association and the Certificate of Residence for Tax Purposes issued by the Direction Gnrale Des Finances Publiques of France on November 14, 2013; that it is not registered either as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on December 12, 2013; and that, on the other hand, SEI-PH is a corporation organized and existing under the laws of the Philippines located at 24th Floor, Forth Legend Tower, Block 7, Lot 3, 3rd Avenue corner 31st St., Bonifacio, Global City, Taguig. Based on the Secretary's Certificate issued on November 27, 2013, the Board of Directors of SEI-PH, at its special meeting on November 8, 2013, declared cash dividends from the earned surplus for fiscal year ending December 31, 2012, in the amount of P201,777,741.00 to all stockholders of record as of October 24, 2013 proportionate to their shareholdings in SEI-PH, and payable on or December 20, 2013; that SEI-France owns 15,999,995 common shares in SEI-PH with par value of Php1.00 per share amounting to Php15,999,995 representing 99.99% of the outstanding capital stock of SEI-PH. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code of 1997"), as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "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, rents, royalties . . .: 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 of 1997, as amended, provides: "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" Thus, you invoke the provisions of Article 10 of the Philippines-France tax treaty, as amended. It provides: "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 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 recipient is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' 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 the State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the foregoing, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines at a rate not exceeding 10 percent if the recipient is a company (excluding partnership) which holds directly at least 10 percent of the voting shares of the company paying the dividends and 15 percent in all other cases. In view thereof, considering that SEI-France is a resident company in France which holds 15,999,995 common shares in SEI-Phils. , representing 99.99% of the total number of shares of SEI-Phils. , which is more than the required shareholding of 10 percent, the dividends paid by SEI-Phils . to SEI-France are subject to a preferential tax rate of 10 percent of the gross amount of the dividends pursuant to the Philippines-France tax treaty, as amended. 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