ITAD BIR Ruling No. 139-12

March 28, 2012 ITAD BIR RULING NO. 139-12 Article 10 (Dividend), Philippines-Switzerland tax treaty V.C. Mamalateo & Associates Attorneys-at-Law Unit 6C, 20 Lansbergh Place 170 T. Morato Avenue, Quezon City Attention: Atty. Carmencita P. Victorino Partner Gentlemen : This refers to your tax treaty relief application filed on November 9, 2011, requesting confirmation that dividends paid by Bakels Philippines, Inc. ("Bakels Philippines") to Emu AG ("Emu") are subject to income tax at a preferential rate of 10 percent pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty"). It is represented that Emu is a foreign corporation organized and existing under the laws of Switzerland and is a resident of Switzerland, based on its Articles of Association, and on the Certificate of Residence issued by Kantonschwyz in Switzerland on June 14, 2011; that Emu is situated at Faennring 1, 6403 Kuessnacht am Rigi, Switzerland; that Emu 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 on June 16, 2011; and that, on the other hand, Bakels Philippines is a domestic corporation situated at Suites 601 and 602 Raffles Corporate Center Building, Pasig City, Philippines. It is further represented, that on October 21, 2011, the Board of Directors of Bakels Philippines, at its meeting, declared cash dividends amounting to P10,000,000.00 in favor of the stockholders of record of Bakels Philippines as of October 11, 2011, to be paid on December 31, 2011, at the rate of P10,000.00 per share; that Emu is the legal and beneficial owner of 950 shares constituting 95 percent of the entire stockholdings of Bakels Philippines, which were acquired on various dates from September 15, 2003 to February 6, 2008. DHEaTS It is finally represented that the dividends subject of this ruling 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 the Certification issued by the President and General Manager of Bakels Philippines on October 25, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends payable to Emu, a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 provides that such dividends may be exempt from income tax or subject to reduced rate to the extent required by any treaty obligation on the Philippines, viz.: "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. CASTDI xxx xxx xxx" With respect to a treaty, you invoke the Philippines-Switzerland tax treaty. Paragraphs 1 and 2, and 5, 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 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 (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; 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 or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Switzerland may be taxed in the Philippines at a rate not to exceed: (a) 10 percent of the gross amount of dividends if the beneficial owner is a company (excluding partnerships) which holds directly at least 10 percent of the capital of the paying company; and (b) 15 percent of the gross amount of the dividends in all other cases. IAEcCa Accordingly, considering that Emu holds directly at least 10 percent of the total shares of stock of Bakels Philippines, such dividends paid by Bakels Philippines to Emu are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Switzerland 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