ITAD BIR Ruling No. 204-13

July 17, 2013 ITAD BIR RULING NO. 204-13 Article 10, Philippines-Netherlands tax treaty CBK Power Company Limited 25th Floor Philamlife Tower 8767 Paseo de Roxas, Makati City Gentlemen : This refers to your application for tax treaty relief filed on November 29, 2012, requesting confirmation that the dividends to be paid by CBK Power Company Limited ("CBK") to JLP Botocan B.V. ("JLP") are subject to the preferential rate of 10 percent 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") . AIDcTE It is represented that JLP is a foreign corporation organized and existing under the laws of Netherlands with its principal office address at Herikerbergweg 238 1101 CM Amsterdam based on its Declaration of Residence issued by the tax authority of Netherlands on August 13, 2012; that JLP is not registered as a corporation or as a partnership based on the Certification issued by the Securities and Exchange Commission on November 27, 2012; and that on the other hand, CBK is a domestic corporation situated at 25th Floor Philamlife Tower, 8767 Paseo de Roxas, Makati City. It is further represented that during the Management Committee meeting on October 23, 2012, CBK declared cash dividends of US$21,000,000.00 to its partners according to their respective holdings; that CBK has been a partner in JLP since March 15, 2000 and holds one percent in JLP based on the Certificate of the Assistant Corporate Secretary of JLP issued on December 4, 2012; that the said dividends were paid to CBK on December 5, 2012 based on the HSBC Certification dated April 19, 2013. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the Chief Financial Officer of CBK on November 28, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "),as amended, provides that dividends paid to CBK, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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 provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: TacESD "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" In this particular case, you invoke the Philippines-Netherlands tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide: "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. IcESaA 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. xxx xxx xxx" (underscoring supplied) Under paragraphs 2 and 3 of Article 10, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient 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 in all other cases. Accordingly, since CBK is a company the capital of which is divided into shares and which holds only one percent of the capital of JLP, such dividends paid by JLP to CBK are subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 10 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue