ITAD BIR Ruling No. 193-14

September 18, 2014 ITAD BIR RULING NO. 193-14 Article 10 (Dividends), Philippines-Germany tax treaty Aranas Law Office Ground Floor, Le Metropole 326 Tordesillas corner De la Costa Streets Salcedo Village, Makati City, Philippines Attention: Jesus Clint O. Aranas Tax Counsel Gentlemen : This refers to your tax treaty relief application filed on September 27, 2013 requesting confirmation that dividends paid by Wincor Nixdorf (Philippines), Inc. ("Wincor Philippines") to Wincor Nixdorf International GmbH ("Wincor Nixdorf") are subject to income tax at the rate of 10 percent pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation to Taxes on Income and Capital ("Philippines-Germany tax treaty"). Wincor Nixdorf is a foreign corporation and a resident of Germany based on its Statutes and Certificate of Residence issued by the German Tax Administration on April 3, 2013. Wincor Nixdorf is located at Heinz-Nixdorf-Ring 1, 33106 Paderborn, Germany. Wincor Nixdorf is not registered as a corporation or partnership in the Philippines as per the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on September 27, 2013. On the other hand, Wincor Philippines is a domestic corporation situated at 24th Floor, Trident Tower, 312 Senator Gil Puyat Avenue, Makati City, Philippines. Based on the Secretary's Certificate issued on September 26, 2013, the Board of Directors of Wincor Philippines , at a special meeting on September 23, 2013, declared cash dividends amounting to P21,716,636.00 or its US Dollar equivalent, in favor of stockholders of record as of September 23, 2013 in proportion to their respective shareholdings, and payable not later than September 30, 2013. As of record date on September 23, 2013, Wincor Nixdorf holds 100,983 common shares of stock valued at P50,491,500.00, representing 99.99 percent of the capital of Wincor Philippines. ETDAaC Based on the Foreign Telegraphic Transfer Application issued by Banco De Oro Unibank 1 on September 30, 2013, Wincor Philippines remitted such dividends to Wincor Nixdorf on September 30, 2013. 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. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, 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%)." aCITEH 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-Germany tax treaty. Paragraphs 1 and 2, Article 10 thereof 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 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 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 partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends." aEIcHA Based on the above provisions, dividends arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company (excluding partnership) which owns directly at least 25 percent of the capital of the company paying the dividends, and 15 percent in all other cases. Considering that Wincor Nixdorf owns directly 99.99 percent or more than 25 percent of the capital of Wincor Philippines , such dividend paid by Wincor Philippines to Wincor Nixdorf shall be subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Germany 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Located at 7899 Makati Avenue, Makati City. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.