ITAD BIR Ruling No. 177-14

September 18, 2014 ITAD BIR RULING NO. 177-14 Article 10, Philippines-Germany Tax Treaty DHL Global Forwarding (Phils.) Inc. 8th Floor Star Cruises Center 100 Andrews Avenue, Newport Cybertourism Zone Pasay City Attention: Mr. Gerardo C. Batallones Chief Finance Officer Gentlemen : This refers to your tax treaty relief application filed July 23, 2013, on behalf of Deutsche Post Beteiligungen Holding GmbH ("DPBH") requesting confirmation that the dividend paid by DHL Global Forwarding (Philippines), Inc. ("DHL") to DPBH is subject to 10 percent preferential tax rate pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty"). It is represented that DPBH, with principal address at Charles-de-Gaulle-Str. 20, 53113 Bonn, Germany, is a resident of the Germany within the meaning of Article 4 of the Philippines-Germany tax treaty based on the Certificate of Residence issued by the German Tax Administration dated August 22, 2012; that DPBH is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on July 22, 2013; and that, on the other hand, DHL is a domestic corporation duly organized and existing under Philippine laws, located at the 8th Floor Star Cruises Center, 100 Andrews Avenue, Newport Cybertourism Zone, Pasay City. It is further represented, as shown in the Secretary's Certificate issued by DHL dated July 10, 2013, that in a special meeting of the Board of Directors held on May 8, 2013, the Board of Directors approved the declaration of cash dividends in the amount of Nine Million Two Hundred Eighty-six Thousand Eight Hundred Eighty-five Pesos (Php90,286,885.00) n out of the unrestricted retained earnings as of December 31, 2012 to be distributed among its stockholders by the end of August 2013; that DPBH owns 499,999 common shares, consisting of 99.99999% ownership in DHL; that said shares were acquired by DPBH through subscription or additional purchase from existing stockholders on various dates; and that the said dividends was remitted to DPBH on August 31, 2013 as evidenced by a Sworn Remittance Advice to Deutsche Post AG dated October 1, 2013. aSDCIE 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 DPBH, being 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. HcTDSA xxx xxx xxx" In this particular case, you invoke Article 10 of the Philippines-Germany tax treaty. 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 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 partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx 4. The term "dividends" as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines, at a rate not to exceed: (a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; and (b) in all other cases, 15 per cent of the gross amount of dividends. IDATCE This being the case, and considering that DPBH holds 99.99999 percent of the capital of DHL, this Office is of the opinion and so holds that such dividend paid by DHL to DPBH is subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Germany 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: Copied verbatim from the official copy. Discrepancy between amount in words and in figures.