ITAD BIR Ruling No. 127-14

July 22, 2014 ITAD BIR RULING NO. 127-14 Article 10, Philippines-Sweden tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mr. Harold S. Ocampo Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 08 August 2013, requesting confirmation that the dividend payment by Cebu Air, Inc. ("Cebu Air") , to Speaking Partners AB ("SPAB") , is subject to the preferential tax rate of 15 percent pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Kingdom of Sweden for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Sweden tax treaty"). 1 Facts It is represented that SPAB is a corporation organized and existing under the laws of Sweden and is a resident thereof with business address at Municipality of Gothenburg, Vastra Gotaland County, Sweden, as evidenced by the Certificate of Residence issued by the Swedish tax Agency dated 07 March 2013, which was authenticated by the Consul of the Embassy of the Philippines in Oslo, Norway, executed on 29 April 2013; that SPAB is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated 16 May 2013; and that, on the other hand, Cebu Air is a corporation organized and existing under the laws of the Philippines with principal address at 2nd Floor Doa Juanita Marquez Lim Building, Osmea Boulevard, Pasay City, Philippines. SaCDTA It is further represented, as certified by the Corporate Secretary of Cebu Air , executed on 14 August 2013, that in a meeting of the Board of Directors of Cebu Air held on 27 June 2013, the latter declared cash dividend of P1.00 per share for all stockholders of record as of 17 July 2013; that SPAB is the beneficial owner of 11,051,790 shares representing 1.82% ownership in Cebu Air . It is finally represented that the dividend subject of this request is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by Cebu Air executed on 14 August 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, dividends paid to SPAB are subject to income tax at the rate of 30 percent, thus: "SEC. 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 percent (30%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, 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) and (d) above." n cIACaT However, under Section 32 (B) (5) of the Tax Code, 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: "SEC. 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." With respect to a treaty, you invoke the Philippines-Sweden tax treaty. Paragraphs 1 and 2 of 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 also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed: cSHATC (a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company (excluding partnerships) which holds directly at least 25 per cent of the capital of the paying company; (b) 15 per cent of the gross amount of the dividends in all other cases. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid." Under paragraph 2 (a) and (b) of Article 10, dividends arising in the Philippines and paid to a resident of Sweden may be taxed in the Philippines at a rate not to exceed 10% of the gross amount of the dividends if the company recipient holds directly at least 25% of the capital of the company paying the dividends. On the other hand, a tax of 15% of the gross amount of the dividends shall be imposed in all other cases. Accordingly, since SPAB is the beneficial owner of 1.823% of the outstanding shares of Cebu Air, the dividend paid by Cebu Air to SPAB is subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 10 of the Philippines-Sweden 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 Footnotes 1. The Convention between the Republic of the Philippines and the Kingdom of Sweden for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.