ITAD BIR Ruling No. 164-11

May 27, 2011 ITAD BIR RULING NO. 164-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-88-11 Angara Abello Concepcion Regala & Cruz Law Offices ACCRA Building 122 Gamboa Street, Lagaspi Village 0770 Makati City Attention: Ruby Rose J. Yusi Rochelle Magnolia F. Tamin Gentlemen : This refers to your letter dated September 25, 2007, on behalf of your client, Philips Electronics and Lighting, Inc. (PELI), requesting confirmation of your opinion that the dividend payments of PELI to Koninklijke Philips Electronics N.V. (KPENV) are subject to a ten percent (10%) preferential withholding tax rate pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . It is represented that KPENV is a corporation organized and existing under the laws of The Netherlands with principal address at Groenewoudseweg 1, 5621 BA Eindhoven, The Netherlands; 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 February 13, 2008; that PELI is a corporation organized and existing under the laws of the Philippines with principal address at 48th Floor, PBCom Tower, Ayala Avenue, Makati City. It is further represented that KPENV is the registered owner of Two Million Five Hundred Ninety-Nine Thousand Nine Hundred and Ninety-Five (2,599,995) common shares of PELI with a par value of One Hundred Pesos (PhP100.00) per share, or an aggregate value of Two Hundred Fifty-Nine Million Nine Hundred Ninety-Nine Thousand and Five Hundred Pesos (PhP259,999,500.00), representing 57% of the total amount of the subscribed and paid up shares in PELI; that on September 10, 2007, PELI declared cash dividends in the aggregate amount of Four Hundred Thirty-Four Million Nine Hundred Twenty-Nine Thousand (PhP434,929,000.00) out of the retained earnings of PELI as of December 31, 2006, to be distributed to PELI's stockholders of record as of December 31, 2006, pro-rated to the number of shares held as of said date, and payable on October 15, 2007. It is finally represented 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 sworn certification issued by PELI dated February 15, 2008. CTEDSI 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. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Thus, the provisions of Article 10 of the Philippines-Netherlands tax treaty, which you invoked, 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. 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." ISTECA Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends 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 (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as KPENV is a private company in the Netherlands, the capital of which is wholly divided into shares and since KPENV holds directly 57% of the capital of PELI (which is actually more than the required minimum of shareholding of 10 percent), such dividends to be paid by PELI to KPENV are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-88-11 dated March 14, 2011) 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