ITAD BIR Ruling No. 145-11

May 4, 2011 ITAD BIR RULING NO. 145-11 Article 10, Philippines-Switzerland tax treaty; BIR Ruling No. ITAD-009-10 goFluent Philippines, Inc. 10F IBM Plaza Building Eastwood City, Libis Quezon City Attention: Eric Savina Chief Finance Officer Gentlemen : This refers to your letter dated April 5, 2010, requesting for a ruling on the tax treatment of dividends to be paid by goFluent Philippines, Inc. ("goFluent Phils") to goFluent Group SA (Limited) ("goFluent Swiss") under 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 goFluent Swiss , with principal address at #14 rue de l'Arquebuse, 1204 Genve, is a resident of Switzerland within the meaning of Article 4 of the Philippines-Switzerland tax treaty per Certificate issued by the Cheffe de service of the Administration Fiscale Cantonale of Switzerland dated February 7, 2011; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated April 6, 2010; and that goFluent Phils is a corporation organized and existing under the laws of the Philippines with principal address at 10/F IBM Plaza Building, Eastwood City, Cyberpark, Bagumbayan, Libis, Quezon City, with tax identification no. 214-101-891-000. It is further represented that goFluent Swiss owns 2,495 shares, amounting to P249,500, which correspond to 99.80% of capital stock of goFluent Phils as of March 18, 2010 per certification of the Corporate Secretary of goFluent Phils dated March 19, 2010; that at a meeting of the Board of Directors of goFluent Phils held on March 18, 2010, a resolution was adopted and approved declaring cash dividend of Php3,622.77 per share of common stock amounting to Php9,056,926.00 payable to stockholders of record as of December 31, 2009; and that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per certification issued by goFluent Phils dated May 13, 2010. AHaETS In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended applies, in general, to dividends received by a nonresident foreign corporation which provides: "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%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended 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. xxx xxx xxx" Thus, the provisions of Article 10 of the Philippines-Switzerland tax treaty, which you invoke, may apply to the instant case. It provides "Article 10 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; HTCDcS b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 3. 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 of Article 10, dividends paid by a Philippine corporation to a resident of Switzerland may be taxed at a rate not exceeding 10 percent of the gross amount of dividends if the recipient is a company which holds directly at least 10 percent of the capital of the Philippine corporation and 15 percent in all other cases. In view thereof, since goFluent Swiss holds at least 10 percent (in fact it holds directly 99.80%) of the capital stock of goFluent Phils, this Office is of the opinion and so holds that the dividend payments by goFluent Phils to goFluent Swiss are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. (BIR Ruling No. ITAD-009-10 dated June 3, 2010) CaDATc 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