ITAD BIR Ruling No. 131-15

May 4, 2015 ITAD BIR RULING NO. 131-15 Article 10 (Dividends), Philippines-Korea tax treaty Geumhwa PSC, Inc. Colon, Naga City Cebu Attention: Mr. Chan Koog Jeon President/Chief Executive Officer Gentlemen : This refers to your tax treaty relief application filed on August 8, 2014 requesting confirmation that dividend paid by Geumhwa PSC, Inc. ("Geumhwa PH") to Geumhwa Plant Service and Construction Co., Ltd. ("GPSCCL") is subject to a preferential tax rate of 10 percent pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty") . It is represented that GPSCCL is a foreign corporation and a resident of Korea based on its Articles of Incorporation and the Certificate of Residence issued by the Yeoksam District Tax Office in Korea on June 23, 2014; that GPSCCL is situated at #643-11, Yeoksam-dong, Gangnam-gu, Seoul, 135-791, Korea; that GPSCCL is not registered as a corporation or partnership in the Philippines as evidenced by Certification of Non-Registration of Company issued by the Securities and Exchange Commission Cebu Extension Office on August 5, 2014; and that, on the other hand, Geumhwa PH is a domestic corporation situated at Colon, Naga City, Cebu, Philippines. It is further represented that GPSCCL is the registered owner of 89,995 common shares of stock representing 99.99% of the issued and outstanding shares of stock of Geumhwa PH as of record date on December 31, 2013; and that on March 31, 2014, the Board of Directors of Geumhwa PH has declared cash dividends of $6.07 per share or an aggregate amount of $546,315 to all stockholders of record as of December 31, 2013 payable on or before the close of the banking day of November 28, 2014. It is finally represented, per sworn certification dated July 1, 2014, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines . (A) Gross Income from Sources within the Philippines . The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends . The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "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-five percent (35%) 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 Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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." In this particular case, you invoke the Philippines-Korea tax treaty. Paragraphs 1 and 2, Article 10 thereof 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 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 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 beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends; and b) 25 per cent of the gross amount of the dividends in all other cases." Based on the above provisions, dividends arising in the Philippines and paid to a resident of Korea may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company (excluding partnership) which owns directly at least 25 percent of the capital of the company paying the dividends, and 25 percent in all other cases. This being the case, considering that GPSCCL is a company that owns directly at least 25 percent of the capital of Geumhwa PH where GPSCCL actually holds 99.99 percent of the common shares of Geumhwa PH , such dividend paid by Geumhwa PH to GPSCCL shall be subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Korea 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.