ITAD BIR Ruling No. 181-11

June 29, 2011 ITAD BIR RULING NO. 181-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09 Philippine Telecommunications Investment Corporation Ramon Cojuangco Building Makati Avenue, Makati City Attention: Kathryn A. Zarate Authorized Representative Gentlemen : This refers to your tax treaty relief application ["TTRA"] filed on April 14, 2011, on behalf of LAROUGE BV ("Larouge") , requesting confirmation that the dividends paid to it by the PHILIPPINE TELECOMMUNICATIONS INVESTMENT CORPORATION ("PTIC") are subject to final withholding tax at the preferential rate of 10 percent pursuant to Article 10 (2) (a) of 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 Larouge , with address at Prins Bernhardplein 200 1097 JB Amsterdam, and with Tax id. nr: 807551193, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued by the Director-General of the Tax and Customs Administration of the Netherlands on February 25, 2011; that it is a private limited liability company duly organized and incorporated under the laws of the Netherlands under its former name "Laries Funding B.V." with an authorized capital amounting to Ninety Thousand Eight Hundred Euro (EUR90,800.--), divided into Two Hundred (200) shares with a nominal value of Four Hundred and Fifty-four Euro (EUR454.--) each, as evidenced by its 'Deed of Incorporation' dated March 25, 1989, and the 'Amendment of the Articles of Association of Larouge B.V.' dated July 29, 2003; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission on March 9, 2011; that PTIC, on the other hand, is a corporation duly organized and existing under the Philippine laws, with office address at 6th Floor Ramon Cojuangco Building, Makati Avenue, Makati City 1200; and that based on PTIC's records, there are 96,619 shares, valued at Php9,661,900.00, representing 40% of the outstanding capital stock of PTIC, owned by Larouge which were acquired by the latter from the former on November 1998 by purchase as shown in the Secretary's Certificate issued by PTIC on April 12, 2011. It is further represented that at the meeting of the Board of Directors of PTIC on March 2, 2011, a resolution was approved and adopted declaring, out of PTIC's unrestricted retained earnings, cash dividends in the amount of Php3,740,933,872.00 payable on April 20, 2011 to the stockholders of record as of March 17, 2011, per the Secretary's Certificate issued by PTIC on March 31, 2011; and that the issue subject of the 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 as certified by the authorized representative of PTIC on April 13, 2011. AEcIaH In reply, please be informed that dividend income derived in the Philippines by a nonresident foreign corporation is generally taxable under Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended. It provides: "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 . . . dividends . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the NIRC of 1997, as amended, provides as follows: "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 ( i.e. , TITLE II TAX ON INCOME): 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." In the instant case, the treaty invoked is the Philippines-Netherlands tax treaty, Article 10 of which states that: "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. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 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. 6. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the States, carries on business in the other State, of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State professional services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 7. If a resident of one of the States has a permanent establishment in the other State, this permanent establishment may be subject to an additional tax on the profits remitted by that permanent establishment to its head office in accordance with the law of the last-mentioned State, but the additional tax so charged shall not exceed 10 per cent of the amount of the remitted profits. This provision shall not apply to profits mentioned in Article 8. AHDacC 8. Where a company which is a resident of one of the States derives profits or income from the other State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State." Based on the aforequoted provisions, insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends applies when the following conditions concur: 1) the payor and recipient of the dividends are separately treated as a "company"; 2) the payor of the dividends is a resident of the Philippines; 3) the recipient of the dividends is a resident of the Netherlands; 4) the recipient of the dividends is the beneficial owner thereof; 5) the capital of such recipient is wholly or partly divided into shares; and 6) the recipient holds directly at least 10 percent of the capital of the payor of the dividends. In all other cases, the 15 percent preferential rate shall apply. Accordingly, inasmuch as Larouge is a resident company of the Netherlands, the capital of which is wholly divided into shares, and since Larouge directly holds 40% of the outstanding capital stock of PTIC, which shareholdings are more than the minimum required 10 percent to qualify for the 10 percent preferential tax rate, this Office is of the opinion as it hereby holds that the dividends to be paid by PTIC to Larouge 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-99-08 dated November 17, 2008; BIR Ruling No. DA-ITAD-008-09 dated January 27, 2009; BIR Ruling No. DA-ITAD-040-09 dated March 25, 2009) 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. HCSDca Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue