ITAD BIR Ruling No. 124-14

July 21, 2014 ITAD BIR RULING NO. 124-14 Article 10, Philippines-Germany tax treaty Hansa Meyer-ATS Projects, Inc. Columbia Airfreight Complex I, Miascor Drive NAIA Road, Paraaque City Attention: Mr. Stefan Schmitz Chief Operating Officer Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on October 29, 2012, requesting confirmation that dividends paid by HANSA MEYER-ATS PROJECTS, INC. (" Hansa Phil ") to HEGO PARTNER HOLDING GMBH (" Hego Germany ") is subject to 10 percent preferential tax rate pursuant to Article 10 of the Convention between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty"). It is represented that Hego Germany , with principal address at Flughafenallee 26, 28199 Bremen, Germany is a corporation organized and existing under the laws of Germany, and is resident Germany within the meaning of the Philippines-Germany tax treaty per the Certificate of Residence issued by the German Tax Administration on September 13, 2012; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated September 17, 2012; and that on the other hand, Hansa Phil is a corporation duly organized and existing under the laws of the Philippines, with principal office address at Columbia Airfreight Complex I, Miascor Drive, NAIA Road, Paraaque City. aTADCE It is further represented, that at the meeting of the Board of Directors of Hansa Phil held on October 24, 2012, a resolution was approved declaring cash dividends in the amount of Thirty Million Pesos (PhP30,000,000.00) payable to all stockholders of record as of September 30, 2012, payable on November 15, 2012; that based on the Corporate Secretary's Certificate of Hansa Phil issued on October 24, 2012, beginning May 2, 2007 and as of the date of payment of the subject dividends, Hego Germany owns a total of 72,998 shares as of March 26, 2012 which represents 40% ownership in Hansa Phil ; and that based on a foreign telegraphic transfer application form from BDO, such dividends was remitted to Hego Germany on November 15, 2012. 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: EcHAaS "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-Germany tax treaty, which you invoked, may apply to the instant case. It provides: "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 (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 the dividends. aAcDSC xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Germany at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 25 percent of the capital of the company paying the dividend. Accordingly, considering that Hego Germany is a company which holds 40% or more than 10% of the outstanding capital stock of Hansa Phil , this Office is of the opinion and so holds that the dividend paid by Hansa Phil to Hego Germany is 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-Germany tax treaty. 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