ITAD BIR Ruling No. 205-14

October 3, 2014 ITAD BIR RULING NO. 205-14 Article 10 (Dividends) Philippines-France tax treaty Alvaro O. Lon Ritz Tower Unit 2604A 6745 Ayala Avenue Makati City Gentlemen : This refers to your tax treaty application ("TTRA") filed on December 5, 2013, requesting confirmation that dividend paid by Veolia Water Solutions & Technologies (Philippines), Inc. ("Veolia-PH") to Veolia Water Solutions & Technologies S.A. ("Veolia-France") is subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic with respect to Taxes on Income ("Philippines-France" tax treaty), as amended. It is represented that Veolia-France is a non-resident foreign corporation organized and existing under the laws of France and is a resident thereof within the meaning of Article 4 of the tax treaty between the Philippines and France for the avoidance of double taxation with principal address in Immeuble I' Aquarne, place Montgolfier, 94417 Saint-Maurice Cedex, France. It is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on December 10, 2013. On the other hand, Veolia-PH, is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at No. 16, Philcrest Compound, KM23 West Service Road, Cupang, Muntinlupa City. It is also represented that Veolia-France is the registered owner of Two Hundred Two Thousand Three Hundred Twelve (202,312) common shares as of July 1, 2013 constituting 99.98% of the issued and outstanding shares of Veolia-PH; that 52, 312 of the said shares were acquired through purchase from US Filter Finance BV (The Netherlands) and the remaining 150,000 shares were stock dividends from the increase in the authorized capital stock of Veolia-PH as approved by the Securities and Exchange Commission; that on November 21, 2013, the board of directors of Veolia-PH has declared cash dividends in the amount of Php Six Million Two Hundred Thousand (6,200,000.00) in favor of all stockholders of record as of July 1, 2013 on the basis of the outstanding capital stock held by such stockholders, payable on December 17, 2013; and as per certification issued by Standard Chartered Bank on January 8, 2014, a net cash dividends amounting to EUR36,310.82, EUR36,310.82, EUR19,142.12 with a total of EUR91,763.76 was paid by Veolia-PH to Veolia-France. CaAIES It is further represented, per sworn certification issued by the Acting Chairman/ Director of Veolia-PH dated November 25, 2013, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, dividends paid to Veolia-France are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Non-resident 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, these 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: "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. " For this purpose, you invoke the Philippines-France tax treaty. Paragraphs 1 & 2 of Article 10 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. TaISDA 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. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx" Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company other than a partnership which owns directly at least ten percent (10%) of the voting shares of the company paying the dividends; and (b) 15 percent in all other cases. Accordingly, considering that Veolia-France, a company registered in France, holds 202,312 common shares, constituting 99.98% of the stocks of Veolia-PH which is more than 10% of the voting shares of the latter company, this Office is of the opinion and so holds that the dividend paid by Veolia-PH to Veolia-France is subject to income tax at the rate of ten percent (10%) of the gross amount of dividend, pursuant to Article 10 (2) (a) of the Philippines-France tax treaty, as amended. HcaDIA 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.