ITAD BIR Ruling No. 180-11

June 29, 2011 ITAD BIR RULING NO. 180-11 Article 10, Philippines-Netherlands Tax Treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. ITAD-46-10; BIR Ruling No. ITAD-37-10; BIR Ruling No. ITAD-29-10; BIR Ruling No. ITAD-21-10 Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West Bonifacio Global City Taguig City Attention: Jose Jaime Cruz Partner Lorybeth Baldrias-Serrano Associate Gentlemen : This refers to your tax treaty relief application filed March 2, 2011, on behalf of Publicis Groupe Holdings B.V. ("Publicis") , requesting confirmation that the dividend payments made by Hemisphere-Leo Burnett, Inc. ("Hemisphere") to Publicis are subject to 10 percent 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") . It is represented that Publicis , with principal address at Prof. W.H. Keesomlaan 12 1183 DJ Amstelveen, Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Certificate of Residence issued by the Tax and Customs Administration of the Netherlands dated February 28, 2011; that based on its Articles of Association, Publicis is a company incorporated under the laws of the Netherlands with authorized capital of one million euro (1,000,000.00) divided into one million shares with a nominal value of one euro (EUR1) each; that Publicis 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 February 24, 2011; and that, on the other hand, Hemisphere is a domestic corporation duly organized and existing under Philippine laws, located at the 24/F Tower 2, The Enterprise Center, 6766 Ayala Avenue corner Paseo de Roxas, Makati City. It is further represented, as shown in the Secretary's Certificate issued by Hemisphere dated February 21, 2011, that in a special meeting of the Board of Directors held on December 10, 2010, the Board of Directors approved the declaration of dividends of Thirty Million Pesos (Php30,000,000.00), to be distributed among stockholders of record as of December 31, 2009 pro-rata to their respective shareholdings as of December 31, 2009, and payable not later than February 15, 2011; that since October 24, 2007, Publicis is the registered owner of fourteen thousand nine hundred ninety-nine (14,999) shares with par value of Ten Pesos (Php10.00) per share, representing 29% of the outstanding shares in Hemisphere ; and that said shares were acquired by Publicis by purchase. CSaHDT It is finally represented, based on the Sworn Statement by the Chief Operating Officer of Hemisphere on March 2, 2011, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "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 of 1997, as amended, provides that any income may be exempt from tax to the extent required by any treaty obligation binding upon the Philippine Government, 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, the provisions of Article 10 of the Philippines-Netherlands tax treaty, which you invoke, may apply to the instant cases. It provides, to wit: "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 dividends; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and 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. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends 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 (b) 15 percent of the gross amount of the dividends in all other cases. SHTcDE Accordingly, inasmuch as Publicis is a company in the Netherlands, the capital of which is wholly divided into shares, and since Publicis holds directly 29% percent of the capital of Hemisphere (which is actually more than the required minimum shareholding of 10 percent), such dividends to be paid by Hemisphere to Publicis are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-46-10 dated October 5, 2010; BIR Ruling No. ITAD-37-10 dated September 16, 2010; BIR Ruling No. ITAD-29-10 dated August 27, 2010; BIR Ruling No. ITAD-21-10 dated August 20, 2010; BIR Ruling No. ITAD-99-08 dated November 17, 2008) 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