ITAD BIR Ruling No. 159-15

June 2, 2015 ITAD BIR RULING NO. 159-15 Article 10 (Dividends), Philippines-Switzerland tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Lucil Q. Vicerra Principal, Tax and Customs Services Gentlemen : This refers to your tax treaty relief application filed on December 26, 2013 requesting confirmation on your opinion that the dividends paid by DKSH Philippines, Inc. ( "DPI" ) to DKSH Holding Ltd. ( "DHL" ) are subject to preferential tax rate 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" ). Facts DHL is a foreign corporation and a resident of Switzerland based on the Certification issued by the Commercial Registry of Canton, Zurich and Certificate of Residence issued by the Tax Administration of Switzerland on December 6, 2012. DHL is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration issued by the Securities and Exchange Commission on January 24, 2014. On the other hand, DPI is a domestic corporation in the Philippines. Based on the Secretary's Certificates issued on January 2, 2014 and August 29, 2014, the Board of Directors of DPI, during a special meeting on December 26, 2013, approved a resolution declaring cash dividends amounting to P60,200,000.00 in favor of the company's stockholders of record as of December 31, 2012, and payable immediately. As of December 31, 2012, DHL owns 115,000 common shares of stock of DPI, including 5 common shares held by its directors, each share with a par value of P100.00, which constitute 100 percent ownership on the total issued and outstanding shares of stock of DPI. 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 the Sworn Statement issued by the Comptroller of DPI on December 26, 2013. Ruling 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 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-Switzerland tax treaty. 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 (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. 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." Based on the above quoted provisions, dividends arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company (excluding partnerships) which holds directly at least 10 percent of the capital of the company paying the dividends, and 15 percent in all other cases. Accordingly, inasmuch as DHL is a company in Switzerland which holds directly at least 10 percent of the capital of DPI and where DHL holds 100 percent of these shares, such dividend paid by DPI to DHL shall be subject to income tax rate of 10 percent , 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.