ITAD BIR Ruling No. 174-14

September 18, 2014 ITAD BIR RULING NO. 174-14 Article 10 (Dividends), Philippines-Netherlands tax treaty San Roque Power Corporation Barangay San Roque, San Miguel, 2438 Pangasinan Attention: Carlos M. Echevarria Authorized Representative Gentlemen : This refers to your application for tax treaty relief (TTRA) dated 11 July 2012 requesting for application of the preferential tax rate of 10 percent for dividend income earned by KPIC Netherlands B.V. ("KPIC-Netherlands") from San Roque Power Corporation ("San Roque Power-Philippines") 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"). It is represented that KPIC-Netherlands is a company the capital of which is divided wholly or partially into shares and is a non-resident foreign corporation organized and existing under the laws of the Netherlands with principal address at Jerikerbergweg 238, 1101 CM Amsterdam, Netherlands based on a notarized and consularized Declaration of Residence issued by the Ministerie Van Financien of the Netherlands and notarized and consularized Articles of Association. KPIC-Netherlands is not registered as a corporation or as a partnership based on a Certification of Non-Registration of Company issued by the Securities and Exchange Commission on 25 June 2012. On the other hand, San Roque Power-Philippines is a domestic corporation with principal address at Brgy. San Roque, San Miguel, Pangasinan and duly registered with the Board of Investments under Certificate of Registration No. 97-356. It is represented that as of 11 July 2012, KPIC-Netherlands is a registered shareholder of San Roque Power-Philippines with a subscription of One Thousand (1,000) common shares and Nine Hundred Forty One Thousand One Hundred Sixty Two (941,162) Series A redeemable preferred shares. The dates and mode of acquisition of the foregoing shares of KPIC-Netherlands in San Roque Power-Philippines are set forth below: cISAHT Type and Number of Shares Acquisition Date Mode of Acquisition Common Series A Preferred 150 147,174 01 June 2004 Assignment of shares by KPIC Singapore Pte. Ltd. to KPIC-Netherlands 327 328,465 20 June 2008 Sale of shares by Axia Power Holdings B.V. to KPIC-Netherlands 23 942 20 June 2008 Sale of shares by Sithe Philippine Holdings, Inc. to KPIC-Netherlands 500 470,581 29 June 2009 Sales of shares by Axia Power Holdings B.V. to KPIC-Netherlands (Total) (Total) 1,000 941,162 common preferred ======= ======= The number, value and type of shares of KPIC-Netherlands in San Roque Power-Philippines is set forth below: Number and Type of Shares Value of Shares (Based on the Issue Value of P3,525 per Share) 1,000 common shares (including four common P3,525,000.00 shares registered in KPIC-Netherlands' four nominee directors) 941,162 Series A Preferred Shares P3,317,596,050.00 KPIC-Netherlands owns 50% of the total subscribed capital stock of San Roque Power-Philippines based on a notarized Secretary's Certificate executed by the Corporate Secretary of San Roque Power-Philippines. It is represented that on 11 July 2012, San Roque Power-Philippines declared cash dividends in the amount of One Thousand Fifty Four Japanese Yen and 29321/100000 (1,054.29321) per share or a total of One Billion Nine Hundred Eighty Six Million Six Hundred Thirty Thousand Two Japanese Yen (1,986,630,002.00) to stockholders of record as of 11 July 2012 based on a notarized Secretary's Certificate executed by the Corporate Secretary of San Roque Power-Philippines. cDCHaS On 12 July 2012, San Roque Power-Philippines remitted the amounts of Eleven Million Two Hundred Fifty Thousand US Dollars (US$11,250,000.00) and Twelve Million Five Hundred Thousand US Dollars (US$12,500,000.00) to KPIC-Netherlands based on a notarized Certification issued by the Deutsche Bank and Trust Company Americas. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on a notarized Sworn Certification issued by the Vice President and Treasurer of San Roque Power-Philippines. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" NIRC of 1997 "), as amended, dividends paid to KPIC-Netherlands are subject to income tax at the rate of 30 percent, thus: "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, these 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: SIcTAC "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." For this purpose, you invoke the Philippines-Netherlands tax treaty. Article 10 on Dividends 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." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate (a) of 10% 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% of the capital of the company paying the dividends; and (b) 15% of the gross amount of the dividends in all other cases. aESIHT Considering that KPIC-Netherlands is a company the capital of which is wholly divided into shares and owns 50% of the shares in San Roque Power-Philippines , the dividends paid by San Roque Power-Philippines to KPIC-Netherlands is subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to 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.