ITAD BIR Ruling No. 132-15

May 4, 2015 ITAD BIR RULING NO. 132-15 Article 10 (Dividends), Philippines-Netherlands tax treaty Holcim Philippines, Inc. 7th Floor, Two World Square McKinley Hill, Fort Bonifacio Taguig City Attention: Ms. Shirley S. Go Authorized Representative Gentlemen : This refers to your tax treaty relief application filed on July 7, 2014 requesting confirmation that the dividend paid by Holcim Philippines, Inc. ("Holcim") to Holderfin B.V. ("Holderfin") are subject to 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") . Facts Holderfin is a foreign corporation and a resident of the Netherlands based on its Deed of Amendment to the Articles of Association Incorporation, Commercial Register Extract of the Netherlands' Chamber of Commerce and the Declaration of Residence issued by the Tax Administration of Kantoor in the Netherlands on June 24, 2014. Holderfin is located at De Lairessestraat 131-135, 1075 HJ Amsterdam, Netherlands. Holderfin is a company with an authorized capital of 15,000,000 euros and divided into 30,000 shares, each share with a nominal value of 500 euros. It is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration of Company issued by the Securities and Exchange Commission on June 27, 2014. On the other hand, Holcim is a domestic corporation located at 7th Floor, Two World Square, McKinley Hill, Fort Bonifacio, Taguig City, Philippines. Based on the Secretary's Certificate issued on June 16, 2014, the Board of Directors of Holcim , during a regular meeting on May 16, 2014, unanimously approved a resolution declaring cash dividend amounting to P0.70 per share in favor of the company's stockholders of record as of June 13, 2014, payable not later than July 9, 2014. As of record date on June 13, 2014, Holderfin owns 1,148,726,044 common shares of stock of Holcim , each share with a par value of P1.00, which constitute 17.80 percent ownership on the issued and outstanding shares of stock of Holcim . Finally, the dividends subject of the request are 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 same Secretary's Certificate issued by the Corporate Secretary of Holcim on June 16, 2014. 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 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 are 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-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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 abovementioned provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient 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 15 percent in all other cases. Accordingly, since Holderfin is a company in the Netherlands the capital of which is wholly divided into shares, and that Holderfin holds directly at least 10 percent of the capital of Holcim (as represented by shares) and where Holderfin holds 17.80 percent of these shares, such dividend paid by Holcim to Holderfin is subject to income tax rate of 10 percent , pursuant to paragraph 2 (a), Article 10 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.