ITAD BIR Ruling No. 164-14

September 3, 2014 ITAD BIR RULING NO. 164-14 Article 10, Philippines-Netherlands tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. Jonald R. Vergara Principal, Tax Services Gentlemen : This refers to your tax treaty relief application filed on March 19, 2014 requesting confirmation on your opinion that the dividends paid by RTA Properties, Inc. ("RTAPI") to Takata International Finance B.V. ("Takata International") are subject to preferential tax rate 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"). Facts Takata International is a foreign corporation and a resident of the Netherlands based on its Articles of Association Incorporation and Declaration of Residence issued by the Tax Administration of Rotterdam in the Netherlands on February 26, 2014. Takata International is located at Kerkstraat 339-B 1017HV Armsterdam, Netherlands. Takata International is a company with an authorized capital of 900,000,000 euros and divided into 500,000 preference shares and 1,500,000 ordinary shares, each share with a nominal value of 450 euros. It 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 March 6, 2014. On the other hand, RTAPI is a domestic corporation located at 106 East Main Avenue, Special Economic Zone, Laguna Technopark, Bian, Laguna, Philippines. Based on the Secretary's Certificates issued on March 14, 2014 and March 21, 2014, the Board of Directors of RTAPI, during a meeting on March 6, 2014, approved a resolution declaring cash dividends amounting to P14,000,000.00 in favor of the company's stockholders of record as of March 6, 2014, and payable on March 21, 2014. As of record date and payment date on March 21, 2014, Takata International , holds 40 percent of the outstanding and voting shares of stock of RTAPI as described below: cSHATC Stockholder Number and Mode of Acquisition Date Percentage of Value of Shares Acquisition Ownership Takata 1,598 Property Dividend July 1, 2010 40 percent International 1 Nominee July 5, 2012 1 Nominee February 8, 2013 1,600 (P16,000,000.00) ============= 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 Sworn Statement issued by the Chief Financial Officer of RTAPI on March 11, 2014. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, 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%)." ACTIcS 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-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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." HcTIDC Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient 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 15 percent in all other cases. Accordingly, inasmuch as Takata International is a company in the Netherlands the capital of which is wholly divided into shares, and that Takata International holds directly at least 10 percent of the capital of RTAPI (as represented by shares) and where Takata International holds 40 percent of these shares, such dividends paid by RTAPI to Takata International shall be subject to income tax rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands 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 Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.