ITAD BIR Ruling No. 215-13

August 13, 2013 ITAD BIR RULING NO. 215-13 Article 10, Philippines-Germany Tax Treaty SGV & Co. ERNST & YOUNG 6760 Ayala Avenue Makati City Attention: Carolina A. Racelis Principal Tax Services Gentlemen : This refers to your tax treaty relief application filed on December 20, 2012 requesting for confirmation of your opinion that the dividends received by adidas AG (adidas AG) from adidas Philippines, Inc. (API) are subject to 10 percent preferential tax rate pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty") . aECTcA It is represented that adidas AG is a nonresident foreign corporation existing and organized under the laws of Germany and a resident thereof as evidenced by the Certificate of Fiscal Residence issued by the Finanzamt on September 26, 2012; that adidas AG is situated at Adi-Dassler-Str., Herzogenaurach, Bayern, Germany; that adidas AG is not registered as corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by Securities and Exchange Commission ("SEC") on September 24, 2012; and that, on the other hand, API is a domestic corporation situated at 14th Floor Fort Legend Tower, 3rd Avenue corner 31st Street, Bonifacio Global City, Taguig City, Metro Manila, Philippines. It is further represented that the Board of Directors of API, at its meeting on December 11, 2012, declared cash dividend of Php40,000,000.00 in favor of all its stockholders of record as of December 17, 2012, on the basis of the outstanding capital stock held by such stockholders, payable on February 15, 2013; that as of the date of dividend declaration, adidas AG is a stockholder of record of 1,500,000 common shares with a total par value of P150,000,000.00 representing 100 percent (inclusive of the 5 nominees) of the outstanding common shares of API and that it has acquired said shares in 1995 and 2002, based on the Certificate issued by API's Corporate Secretary on January 16, 2013; and that per Certification issued by Banco De Oro (BDO) dated May 28, 2013, the payment for the said dividends was made on May 22, 2013. It is finally represented that the dividends subject of the above application 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 Senior Finance Manager of API on October 17, 2013. 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 adidas AG , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 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 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). DTEAHI xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that such income may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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, the treaty involved is the Philippines-Germany tax treaty which, in its Article 10 provides as follows: "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; cATDIH b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx 4. The term "dividends" as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. xxx xxx xxx" Based on the foregoing, dividends paid by a Philippine corporation to a resident of Germany may be taxed at a rate not exceeding 10 percent of the gross amount of dividends provided that the recipient is a company and that it holds directly at least 25 percent of the capital of the Philippine corporation. In all other cases, a 15 percent preferential tax rate applies. In the instant case, adidas AG holds 100 percent of the outstanding capital stock of API, therefore, the cash dividend paid by API to adidas AG is subject to the 10 percent preferential tax rate on the gross amount thereof pursuant to Article 10 (2) (a) 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