ITAD BIR Ruling No. 220-14

October 8, 2014 ITAD BIR RULING NO. 220-14 Article 10, Philippines-Netherlands tax treaty Philex Mining Corporation Philex Building, 27 Brixton Street Pasig City Attention: Manuel V. Pangilinan Gentlemen : This refers to your tax treaty relief application filed on August 29, 2012, on behalf of Asia Link B.V. ("Asia Link"), requesting confirmation that dividends paid by Philex Mining Corporation ("Philex") to Asia Link are subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands 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 Asia Link is a corporation organized and existing under the laws of The Netherlands with principal address at Prins Bernhardplein 200, 1097 JB Amsterdam, The Netherlands, and is a resident thereof within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued on March 2, 2012 by the Tax and Customs Administration of the Netherlands; that the authorized capital of Asia Link amounts to ninety-one thousand euro (EUR91,000.00) divided into nine hundred and ten (910) shares, with a nominal value of one hundred euro (EUR100) each; that it is not registered either as corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated March 23, 2012; and that, on the other hand, Philex is a corporation registered with the Board of Investments (BOI) under Certificate of Registration No. EP 2004-080, organized and existing under the laws of the Philippines, with principal address at Philex Building, 27 Brixton Street, Pasig City; and that as of August 8, 2012, there are 1,023,275,990 shares, representing 20.744% of the outstanding capital stock of Philex owned by Asia Link. caIETS It is further represented that at the meeting of the Board of Directors of Philex on July 25, 2012, a resolution was passed and approved declaring cash dividends in the amount of Eleven centavos (P0.11) per share to all stockholders of record as of August 8, 2012, payable on September 3, 2012; and that such dividends were remitted to Asia Link on September 3, 2012. It is finally represented, based on the Certification issued by Philex on August 24, 2012, that the 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 (Tax Code) of 1997, as amended, applies, in general, to income derived in the Philippines by a nonresident foreign corporation. It provides: aIHCSA "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 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%) . . . ." aScIAC 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. . . ." In relation thereto, Article 10 of the Philippines-Netherlands tax treaty, which you invoked, 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: SEcAIC 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. 6. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the States, carries on business in the other State, of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State professional services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. " Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner of the dividends is a company, the capital of which is divided into shares, and owns at least 10 percent of the capital of the paying company. In all other cases, 15 percent preferential tax rate applies. cDHCAE Such being the case and considering that Asia Link is a resident of the Netherlands with no fixed place of business in the Philippines, and its capital is wholly divided into shares, and that Asia Link holds 20.744% or more than 10 percent of the capital stock of Philex, this Office is of the opinion and so holds that the dividends paid by Philex to Asia Link are subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue