ITAD BIR Ruling No. 209-11

August 12, 2011 ITAD BIR RULING NO. 209-11 Article 10, Philippines-France tax treaty; BIR Ruling No. ITAD-66-11 Baniqued & Baniqued Attorneys at Law 8/F Jollibee Center, San Miguel Avenue Pasig City, 1605 Attention: Laura Victoria A.S. Yuson-Layug Cheryll Ann R. Trinidad Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) dated August 23, 2010, on behalf of your clients, Lafarge Holdings Philippines, Inc. ("LHPI") and S.A.S. Financiere Lafarge ("Financiere Lafarge"), requesting confirmation that the dividends to be paid by LHPI to Financiere Lafarge are subject to the 10 percent preferential final tax rate, pursuant to Article 10 (2) (a) 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. ("Philippines-France tax treaty"), as amended by a Protocol 1 effective January 1, 1998. It is represented that Financiere Lafarge, with principal address at 61 rue des Belles Feuilles, B.P. 40, 75782 Paris Cedex 16, is a corporation organized and existing under the laws of France and is a resident thereof based on Certificate of residence issued on July 13, 2010 by Frdric Cadene, Inspecteur, MINISTRE DU BUDGET, DES COMPTES PUBLICS, ET DE LA FONCTION PUBLIQUE; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated September 15, 2010; and that, on the other hand, LHPI is a corporation organized and existing under the laws of the Philippines with principal address at 25th Floor, The Salcedo Tower, 169 H.V. Dela Costa Street, Salcedo Village, Makati City. It is further represented that on July 5, 2010, the Board of Directors of LHPI, at its special meeting, unanimously adopted a resolution for LHPI to declare cash dividends in the amount of Twenty-Eight and 80/100 Pesos (PhP28.80) per share in favor of the stockholders of LHPI as of August 3, 2010, or in an aggregate amount of Two Billion Three Hundred Two Million Seventy-Three Thousand Three Hundred Eight and 80/100 Pesos (PhP2,302,073,308.80), for the 79,933,101 outstanding shares of stock LHPI, payable on August 27, 2010, based on the Certificate issued by the Corporate Secretary of LHPI on July 8, 2010; and that as of August 3, 2010, Financiere Lafarge owns 79,993,096 of the 79,933,101 outstanding shares of LHPI, each share with a par value of PhP100.00, or a total par value of PhP7,993,309,600.00, based on another Certificate issued by the same Corporate Secretary on August 25, 2010. DHIcET In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to income derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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: HCIaDT 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." Thus, Article 10 of the Philippines-France tax treaty, as amended, which you invoke, may apply to the instant case. It 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 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. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' 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 taxation law of the State of which the company making the distribution is a resident." aIcCTA Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed, beginning January 1, 1998, (a) 10 percent of the gross amount of the dividends if the recipient (excluding partnership) which holds directly at least 10 percent of the voting shares of the company paying the dividends, and (c) 15 percent of the gross amount of the dividends in all other cases. Accordingly, since Financiere Lafarge holds 99.99 percent of the total shares of stock (including voting shares) of LHPI (that is, 79,993,096 out of 79,933,101), which even exceeds the required percentage, such dividends to be paid by LHPI to Financiere Lafarge are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-France tax treaty, as amended. ( BIR Ruling No. ITAD-66-11 dated February 25, 2011 ) This ruling is issued on the basis of the foregoing 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. aEIADT 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.