ITAD BIR Ruling No. 136-14

July 22, 2014 ITAD BIR RULING NO. 136-14 Article 10, Philippines-Netherlands tax treaty Philippine Telecommunications Investment Corporation (PTIC) 6/F Ramon Cojuangco Building Makati Avenue 1226 Makati City Attention: Kathryn A. Zarate Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on September 28, 2011 requesting confirmation that the dividends paid by Philippine Telecommunications Investment Corporation ("PTIC") to Larouge BV ("Larouge") are subject to a preferential tax rate of 10 percent 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"). 1 It is represented that Larouge is a corporation duly organized and existing under the laws of the Netherlands with principal business address at Prins Bernhardplein 200 1097 JB Amsterdam, The Netherlands; that it is a fiscal resident in the Netherlands for purposes of taxation as certified by the Tax and Customs Administration of the Netherlands on February 25, 2011; that it is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company dated March 9, 2011 issued by the Securities and Exchange Commission; and that PTIC, on the other hand, is a domestic corporation duly organized and existing under Philippine laws with business address at the 6/F Ramon Cojuangco Building, Makati Avenue 1226, Makati City, Philippines. It is further represented that on August 3, 2011 the Board of Directors of PTIC approved a declaration of cash dividend in the amount of Php2,026,672,514.00 to the holders of record as of September 1, 2011, payable on September 28, 2011; that as per certification issued by the Corporate Secretary of PTIC, Larouge holds 96,619 common shares constituting 40 percent of the issued and outstanding shares of PTIC as of September 1, 2011. DaHISE In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It states: "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, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It provides: "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." TcCSIa Thus, Article 10 of the Philippines-Netherlands tax treaty, which you invoke, 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 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. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. . . ." Based on the foregoing provisions, the Philippines may tax the dividends paid by a resident company to a company which is a resident of the Netherlands at a rate not exceeding 10 percent if the last-mentioned company, the capital of which is wholly or partly divided into shares, holds directly at least 10 percent of the capital of the company paying the dividends. IHaCDE Such being the case and considering that Larouge is a company, the capital of which is wholly or partly divided into shares, and since it holds 40 percent of the capital of PTIC, this Office is of the opinion and so holds that the dividend payments by PTIC to Larouge shall be subject to the preferential tax rate of 10 percent based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Netherlands 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 Footnotes 1. Signed March 9, 1989 and effective September 20, 1991.