ITAD BIR Ruling No. 218-14

October 8, 2014 ITAD BIR RULING NO. 218-14 Article 10, Philippines-Netherlands Tax Treaty Travellers International Hotel Group, Inc. 10/F Newport Entertainment Commercial Centre Newport Boulevard, Newport Cybertourism Economic Zone Pasay City Attention: Mr. Armando De Asa, Jr. Representative Gentlemen : This refers to your application for tax treaty relief filed on March 10, 2014, on behalf of STAR CRUISES PHILIPPINES HOLDING B.V. ("SCPH") , requesting confirmation that dividends paid by TRAVELLERS INTERNATIONAL HOTEL GROUP, INC. ("TIHGI") to SCPH are subject to 10 percent preferential tax rate 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"). It is represented that SCPH, with address at Strawinskylaan 3105 Atrium, 1077 ZX, The Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued by the Inspector of the Tax and Customs Administration of the Netherlands on February 26, 2014; that based its Deed of Incorporation, SCPH is a company incorporated under the law of the Netherlands with authorized capital of ninety thousand euros (EUR90,000.00), divided into nine hundred (900) shares, with a par value of one hundred Euro (EUR100.00) each; that SCPH is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on February 25, 2014; and that, on the other hand, TIHGI is a domestic corporation located at 10th Floor, Entertainment Commercial Centre, Newport Boulevard Newport Cybertourism Economic Zone, Pasay City. It is further represented, based on the Certificate issued by the Corporate Secretary of TIHGI on February 28, 2014 that on September 30, 2013, the Board of Directors of TIHGI resolved the declaration of cash dividend equivalent to One Billion Two Hundred Ninety-nine Million Two Hundred Ten Thousand (Php1,299,210,000.00) to the holder of common shares as of record of July 31, 2013; that as of July 31, 2012, SCPH is the owner of 2,831,799,980 common shares of TIHGI with a par value of Php0.10 per share and 1,666,666,667 Preferred B shares with a par value of Php0.01 per share, with an aggregate amount of Php299,846,664.67, comprising 19.78 percent ownership in TIHGI ; and that SCPH acquired said shares in TIHGI on July 31, 2008 through secondary purchase and adjusted throughout the years to various changes in the capitalization of TIHGI . aIcETS It is finally represented based on the Sworn Certification by TIHGI dated February 18, 2014, that the issue or transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies in general to income of a nonresident foreign corporation. It provides: "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 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: 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 Thus, Article 10 of the Philippines-Netherlands tax treaty 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 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: IDTcHa 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. xxx xxx xxx 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" Based on the aforequoted article, dividends arising in the Philippines and paid to a resident of the Netherlands are subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the dividends if the recipient of the dividends 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 of the gross amount of the dividends in all other cases. Accordingly, inasmuch as SCPH is a company in the Netherlands the capital of which is wholly divided into shares and that it holds directly 19.78 percent of the capital of TIHGI (which is actually more than the required minimum of shareholding of 10 percent), such dividends to be paid by TIHGI to SCPH are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. cAaDCE 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