ITAD BIR Ruling No. 126-14

July 22, 2014 ITAD BIR RULING NO. 126-14 Article 10, Philippines-Netherlands Tax Treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Malou P. Lim Managing Partner, Tax Gentlemen : This refers to your tax treaty relief application filed on July 9, 2013, on behalf of LAIII MEDICAL CITY COOPERATIEF U.A. ("LMCC"), requesting confirmation that dividends paid by PROFESSIONAL SERVICES, INC. ("PSI") to LMCC are subject to 10 percent preferential tax rate pursuant to the Convention between the Kingdom of The Netherlands and the Republic of the Philippines 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 LMCC, with address at De Entree 99, 1101 HE Amsterdam, Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued by the Inspector of the Tax and Customs Administration of the Netherlands on July 29, 2013; that LMCC is a cooperative with no liability for its members under Dutch law based on its Deed of Incorporation; that LMCC 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 July 25, 2013; and that, on the other hand, PSI is a domestic corporation located at the Don Eugenio Lopez Sr., Medical Complex, Ortigas Avenue, Pasig City. It is further represented, as shown in the Secretary's Certificate issued by PSI dated August 6, 2013, that at the meeting held on April 5, 2013, the Board of Directors of PSI approved a resolution declaring cash dividends in the amount of One Hundred Fifty Pesos (Php150.00) per share to all stockholders of record as of December 31, 2012; that as of the date of declaration, 159,321 shares of PSI are owned by LMCC, with a total par value of Php15,932,100.00 and which represents 18.23% ownership in PSI; and that these shares were acquired by LMMC thru subscription on various dates stating October 14, 2008 until June 14, 2012. cDTaSH It is finally represented, based on the Sworn Statement by PSI on March 21, 2014, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. 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, . . .: 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 that any income may be exempt or subject to a reduced rate to the extent required by any treaty obligation binding upon the Philippine Government, 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. ScTIAH xxx xxx xxx" With respect to a treaty, what you invoke for this purpose is Article 10 of the Philippines-Netherlands tax treaty. 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 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. IHaECA xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Such being the case, since LMCC is a cooperative, the capital of which is not divided into shares, contrary to what is being required in the treaty to qualify for the requested 10 percent preferential tax rate, such dividends paid by PSI to LMCC are instead subject to the higher preferential tax rate of 15 percent of the gross amount thereof pursuant to Article 10 (2) (b) of the Philippines-Netherlands 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