ITAD BIR Ruling No. 123-12

March 20, 2012 ITAD BIR RULING NO. 123-12 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-037-10 Manabat Delgado Amper & Co. 5th Floor Salamin Building 197 Salcedo Street, Legaspi Village Makati City 1229 Attention: Atty. Walter L. Abela, Jr. Emmanuel E. V. Cruz Representative/s Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 20, 2011, requesting confirmation that the dividends to be received by Aslavis B.V. ("Aslavis") from Qualfon Philippines, Inc. ("Qualfon") are subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands 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 Aslavis is a corporation organized and existing under the laws of The Netherlands with principal address at Strawinskylaan 1143 1077 ZX Amsterdam, The Netherlands and is a resident thereof within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued on November 24, 2010 by the Tax and Customs Administration of the Netherlands; that Aslavis has an authorized capital stock of Ninety Thousand Euros (EUR90,000.00) divided into nine hundred shares with a par value of one hundred Euro (EUR100) each; that it is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated June 8, 2011; and that, on the other hand, Qualfon is a corporation organized and existing under the laws of the Philippines with principal address at 9/F Skyrise Building 3, Asia Town IT Park, Apas, Cebu City. AEIcTD It is further represented per the Corporate Secretary's Certificate issued by Qualfon dated May 20, 2011, that as of May 16, 2011, Aslavis has 190,000 common shares equivalent to 95% of the total capital stock of Qualfon; that at the special meeting of the Board of Directors of Qualfon on July 14, 2011, a resolution was passed and approved declaring cash dividends in the amount equivalent to US$1,000,000.00 or P43,000,000.00 in favor of the stockholders of record as of December 31, 2010, payable on or before December 31, 2011. It is finally represented per Secretary's Certificate issued by Qualfon on March 17, 2011, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to income 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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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." In relation thereto, Article 10 of the Philippines-Netherlands tax treaty, which you invoked, may apply to the instant case. It provides: cAaETS "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: 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 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and 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. . . ." Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner of the dividends is a company, the capital of which is divided into shares, and owns at least 10 percent of the capital of the paying company. In all other cases, 15 percent preferential tax rate applies. Such being the case and considering that the capital of Aslavis is wholly divided into shares, and that Aslavis holds more than 10 percent of the capital of Qualfon, this Office is of the opinion and so holds that the dividend payments by Qualfon to Aslavis shall be subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-037-10 dated September 16, 2010) CTHDcS This ruling is issued on the basis of the foregoing 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