ITAD BIR Ruling No. 169-15

June 2, 2015 ITAD BIR RULING NO. 169-15 Article 10, Philippines-France tax treaty Baniqued & Baniqued Attorneys at Law 8/F Jollibee Center, San Miguel Avenue Pasig City, 1605 Attention: Laura Victoria A.S. Yuson-Layug Joni R. Gomez Gentlemen : This refers to your tax treaty relief application dated April 30, 2014, on behalf of your clients, Lafarge Holdings Philippines, Inc . ("LHPI") and S.A.S. Financiere Lafarge ("Financiere Lafarge"), requesting confirmation that the dividends to be paid by LHPI to Financiere Lafarge are subject to the 10 percent preferential final tax rate, pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income . ("Philippines-France tax treaty"), as amended by a Protocol 1 effective January 1, 1998. Facts It is represented that Financiere Lafarge , with principal address at 61 rue des Belles Feuilles, B.P. 40, 75782 Paris Cedex 16, is a corporation organized and existing under the laws of France and is a resident thereof based on Certificate of residence issued on May 19, 2014 by Frdric Cadene, Inspecteur, MINISTRE DU BUDGET, DES COMPTES PUBLICS, ET DE LA FONCTION PUBLIQUE; that Financiere Lafarge is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated October 23, 2012; and that, on the other hand, LHPI is a corporation organized and existing under the laws of the Philippines with principal address at 25th Floor, The Salcedo Tower, 169 H.V. Dela Costa Street, Salcedo Village, Makati City. It is further represented that on April 10, 2014, the Board of Directors of LHPI, at its special meeting, unanimously adopted a resolution for LHPI to declare cash dividends in the amount of Ten and 25/100 Pesos (PhP10.25) per share in favor of the stockholders of LHPI as of April 30, 2014, payable on May 16, 2014; that as of April 30, 2014, the following are the stockholdings of Financiere Lafarge in LHPI: Subscribed Par Value Mode of Acquisition Acquisition Date Percentage of number of Shares Ownership 79,933,097 P100.00 Original Subscription April 11, 2012 99.99% It is finally represented that the dividends subject of the above application 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 LHPI dated April 29, 2014. Ruling 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 paid to a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 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 a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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, Article 10 of the Philippines-France tax treaty, as amended, which you invoke, may apply to the instant case. It 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 be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law 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 (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' 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 the State of which the company making the distribution is a resident." Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed, beginning January 1, 1998, (a) 10 percent of the gross amount of the dividends if the recipient (excluding partnership) which holds directly at least 10 percent of the voting shares of the company paying the dividends, and (c) 15 percent of the gross amount of the dividends in all other cases. Accordingly, since Financiere Lafarge holds 100 percent of the total shares of stock (including voting shares) of LHPI (that is, 79,993,097 out of 79,933,101), which even exceeds the required percentage, such dividends to be paid by LHPI to Financiere Lafarge are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-France tax treaty, as amended. 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 Footnotes 1. Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976.