ITAD BIR Ruling No. 177-15

June 3, 2015 ITAD BIR RULING NO. 177-15 Article 10 (Dividends), Philippines-Netherlands tax treaty 10/F MGO Building Legaspi cor Dela Rosa Streets Makati City Attention: Ms. Rizza Blanco Latorre Authorized Representative Gentlemen : This refers to your tax treaty application ("TTRA") filed on April 10, 2014, requesting confirmation that dividend paid by Philippine Telecommunications Investment Company ("PTIC") to Larouge, B.V. ("Larouge") is subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of the Netherlands with respect to Taxes on Income ("Philippines-Netherlands" tax treaty) . It is represented that Larouge is a non-resident foreign corporation organized and existing under the laws of the Netherlands, the capital of which is divided into shares as evidenced by Article 3 on Share Capital and Shares of its Articles of Incorporation; that it is a resident of the Netherlands within the meaning of Article 4 of the Convention for the avoidance of double taxation between the Philippines and the Netherlands; that it is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on March 12, 2014; and that on the other hand, PTIC, is a domestic corporation duly organized and existing under the laws of the Philippines. It is also represented that Larouge is the registered owner of Ninety-Six Thousand Six Hundred Nineteen (96,619) common shares as of March 19, 2014 constituting 40% of the issued and outstanding shares of PTIC; that on March 10, 2014 the board of directors of PTIC has declared cash dividends amounting to Php3,011,974,508 out of unrestricted retained earnings in favor of holders of record payable on April 21, 2014. It is further represented, per sworn certification dated April 8, 2014, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. 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 Larouge 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 Non-resident 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: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." cSEDTC However, under Section 32 (B) (5) of the Tax Code, these dividends may be subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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. Paragraphs 1 & 2 of 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. xxx xxx xxx" Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which owns directly at least ten percent (10%) of the capital of the company paying the dividends; and (b) 15 percent in all other cases. Accordingly, considering that Larouge , a registered company in the Netherlands with capital divided into shares, holds 96,619 common shares , constituting 40% of the stocks of PTIC which is more than 10% of the issued and outstanding stocks of the latter, this Office is of the opinion and so holds that the dividend paid by PTIC to Larouge is subject to income tax at the rate of ten percent (10%) of the gross amount of dividend, pursuant to Article 10 (2) (a) 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. SDAaTC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue