ITAD BIR Ruling No. 190-15

June 3, 2015 ITAD BIR RULING NO. 190-15 Article 10 (Dividends), Philippines-France tax treaty, as amended Sycip Salazar Hernandez and Gatmaitan Attorneys-at-Law SyCipLaw Center 105 Paseo de Roxas Makati City Attention: Atty. Carina C. Laforteza Atty. John Paul V. De Leon Atty. Roselle Jean L. Nonato Gentlemen : This refers to your tax treaty relief application filed on November 24, 2014 requesting confirmation that the dividends paid by Bostik Philippines, Inc. ("Bostik Philippines") to Bostik Holding S.A. ("Bostik France") are subject to income tax at the rate 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income as amended by a Protocol 1 ("Philippines-France tax treaty, as amended"). Facts Bostik France is a foreign corporation and a resident of the France based on its amended Articles of Incorporation and Certificate of Residence issued by the French tax authority on October 10, 2014. The business purpose of Bostik France is to operate in France or overseas, directly or through the companies it has under its control or where it owns a share or whose creation it shall initiate if needed, in the field of direct or indirect research, production, distribution, and marketing of all chemical and plastic products as well all their derivatives, different sub-products and all parachemical products. Bostik France is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration issued by the Securities and Exchange Commission on August 19, 2014. On the other hand, Bostik Philippines is a domestic corporation in the Philippines. Based on the Secretary's Certificate issued on July 18, 2014, the Board of Directors of Bostik Philippines , at a meeting on July 4, 2014, declared cash dividends of P850,000,000.00 in favor of the company's stockholders of record as of June 30, 2014, and payable not later than December 31, 2014. As of record date on June 30, 2014, Bostik France holds 143,049,997 common shares of stock (excluding five common shares held in trust) of Bostik Philippines with a total par value of P143,049,997.00 which accounts for 99.99 percent of Bostik Philippines' issued and outstanding capital stock. Finally, the issue or transaction subject of the above request for ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal per the Certification issued by the President and Treasurer of Bostik Philippines dated October 21, 2014. Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "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 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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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." In this particular case, you invoke the Philippines-France tax treaty, as amended. Paragraphs 1 and 2, Article 11 thereof provide: "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 be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law 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 (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of the dividends." Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines at a rate not to exceed 15 percent of the gross amount of the dividend, and 10 percent if the recipient is a company (excluding partnership) if it holds at least 10 percent of the voting shares of the company paying the dividends. Accordingly, inasmuch as Bostik France is a company in France, and that Bostik France holds directly at least 10 percent of the voting shares of Bostik Philippines (as represented by shares) and where Bostik France holds 99.99 percent of these shares, such dividends paid by Bostik Philippines to Bostik France shall be subject to income tax rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-France tax treaty, as amended. 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 Footnotes 1. Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976 effective January 1, 1998. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.