ITAD BIR Ruling No. 189-12

May 4, 2012 ITAD BIR RULING NO. 189-12 Article 10, Philippines-Denmark Tax Treaty; BIR Ruling No. ITAD-009-11 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Maria Victoria C. Espao Managing Partner & COO Gentlemen : This refers to your tax treaty relief application filed on April 19, 2011, on behalf of Burmeister & Wain Scandinavian Contractor A/S ("BWSC A/S"),requesting confirmation that the dividend payments made by Burmeister & Wain Scandinavian Contractor Mindanao, Inc. ("BWSCMI") to BWSC A/S are subject to 10 percent preferential tax rate pursuant to Article 10 of the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Denmark tax treaty") ,which took effect on January 1, 1998. It is represented that BWSC A/S, with address at Gydevang 35, P.O. Box 235, DK-3450 Allerod, Denmark, is a resident of Denmark within the meaning of the Philippines-Denmark tax treaty based on the Certificate of Residency issued by the Financial Director of SKAT Skattecenter Nrum Kundforbivel 303, 2850 Nrum, Denmark dated January 7, 2011; that based on its Articles of Association, BWSC A/S is company duly incorporated and registered under the laws of the Denmark; that BWSC A/S was issued a license to establish its representative office in the Philippines on July 13, 1993 with SEC No. AF93-00032, and that, to date, no petition for the withdrawal or cancellation of license has been filed as shown in the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on March 31, 2011; that on October 19, 2010, the Bureau of Internal Revenue approved the application for cancellation of the Certificate of Registration of BWSC A/S-Philippine Representative Office per sworn certification issued by BWSC A/S on May 17, 2011; and that, on the other hand, BWSCMI is a domestic corporation duly organized and existing under Philippine laws, located at Daruma Industries Corp. Building, Km. 7, Lanang 8000, Davao City. It is further represented, as shown in the Secretary's Certificate issued by BWSCMI dated April 12, 2011, that on April 18, 2010 the Board of Directors approved the declaration of cash dividends in the amount of Php34,854,812 at Php253.68 per share in favor of all the stockholders of record as of December 31, 2009, payable between May 1, 2011 and June 30, 2011; and that as of December 31, 2009, BWSC A/S is the legal and beneficial owner of One Hundred Thirty-Seven Thousand Three Hundred Ninety-Two (137,392) common shares in BWSCMI and the beneficial owner of seven (7) common shares with a par value of Php100 per share, recorded in the names of its nominee-directors in BWSCMI; and that said shares constitute 100% ownership in BWSCMI. It is finally represented, based on the Sworn Certification by the General Manager of BWSCMI on March 21, 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") ,as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: SEHaTC "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 income 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-Denmark tax treaty. Its Article 10 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 also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 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. AcICHD The competent authorities of the Contracting States may by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws 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 Denmark 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 beneficial owner of the dividends is a company (other than partnership) which holds directly at least 25 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. This being the case, and considering that BWSC A/S is a company and holds more than 25 percent of the capital of BWSCMI, such dividends to be paid by BWSCMI to BWSC A/S 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-Denmark tax treaty. (BIR Ruling No. ITAD-009-11 dated January 19, 2011) 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