ITAD BIR Ruling No. 188-14

September 18, 2014 ITAD BIR RULING NO. 188-14 Article 10, Philippines-Netherlands Tax Treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Lucil Q. Vicerra Principal, Tax & Customs Services Gentlemen : This refers to your tax treaty relief application dated September 26, 2013, on behalf of Ushio International BV ("UIB") , requesting confirmation that the dividends paid by Ushio Philippines, Inc. ("UPI") to UIB 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 UIB, with address at Herikerbergweg 238, 1101 CM Amsterdam, 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 Regional Tax Manager Office of the Netherlands dated April 15, 2013; that based on its Articles of Association, UIB is company incorporated under the laws of the Netherlands with authorized capital of fifty million Dutch guilders (50,000,000) divided into fifty thousand of one thousand NGL1,000) each; that UIB 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 March 19, 2013; and that, on the other hand, UPI is a domestic corporation duly organized and existing under Philippine laws, located at the Block 2, Lot 7 & 8, Phase 3, FCIE, Brgy. Lankaan 2, Dasmarias, Cavite. TSacAE It is further represented that on June 4, 2013, on their 17th organizational meeting, the UPI Board of Directors unanimously approved a resolution declaring cash dividends amounting to the total amount of One Hundred Sixteen Million One Hundred Twelve Thousand Pesos (P116,112,000.00) at Fifty-six Pesos and Sixty-four centavos (P56.64) per share of stock to all stockholders on record as of March 31, 2013, half of said total amount to be distributed by September 30, 2013, and the remaining half of said total amount to be distributed by March 31, 2014; that as of September 25, 2013, UIB holds 2,049,995 outstanding shares in UPI, with par value of Php100.00 each share, consisting of 99.99% of the total subscribed and paid-up capital of UPI; and that such shares were acquired by UIB thru cash investments on various dates from January 1996 to September 2008 as evidenced by Secretary's Certificate issued by UPI dated September 25, 2013. It is finally represented, based on the Certificate of No Pending Case issued by UPI on September 24, 2013, 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%). EcHIAC 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" With respect to a treaty, what you invoke for this purpose is the Philippines-Netherlands tax treaty. Its Article 10 provides: "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: aETASc 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 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. Accordingly, inasmuch as UIB is a private company in the Netherlands the capital of which is wholly divided into shares, and since UIB holds directly 99.99% percent of the capital of UPI (which is actually more than the required minimum shareholding of 10 percent), such dividends to be paid by UPI to UIB 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. 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. ESTcIA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue