ITAD BIR Ruling No. 222-11

September 2, 2011 ITAD BIR RULING NO. 222-11 Article 10 (Dividends) Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 89-11 Manabat Sanagustin & Co. 9th Floor, KPMG Center 6787 Ayala Avenue Makati City Attention: Herminigildo G. Murakami Gentlemen : This refers to your application for tax treaty relief dated June 7, 2011, on behalf of your client, DP World Mabuhay First BV ("DP First") , requesting confirmation that the dividends paid by SG Holdings, Inc. ("SG Holdings") to DP First are subject to income tax at a preferential rate of 15 percent 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") . TCcIaA It is represented that DP First is a corporation organized and existing under the laws of the Netherlands and is a resident of the Netherlands based on its Articles of Incorporation and on the Declaration of Residence issued by the Tax Administration of Rotterdam in the Netherlands on November 15, 2010; that DP First is situated at Albert Plesmanweg 43G 3088 GB, Rotterdam, the Netherlands; that it is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on November 23, 2010; and that, on the other hand, SG Holdings is a corporation organized and existing under the laws of the Philippines, situated at 7th Floor, Philfirst Building, 6764 Ayala Avenue, Makati City, Philippines. It is further represented, based on the Certificates issued by the Corporate Secretary of SG Holdings on June 1, 2011, that the Board of Directors of SG Holdings, at its meeting on May 30, 2011, declared cash dividends in the amount of PhP38,610,000.00 to the stockholders of record of SG Holding as of May 31, 2011; that the dividends will be paid on or before June 15, 2011, and will be taken out of the present retained earnings of SG Holdings; and that as of the dates of declaration and payment of the dividends, and at present, DP World owns 240,000 common shares of stock of SG Holdings with a total par value of PhP24,000.00, and equivalent to 0.59 percent of the latter's equity. It is finally represented that the dividends subject of this application for tax treaty relief 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 same Corporate Secretary on April 1, 2011. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, the dividends paid to DP First 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). CDScaT xxx xxx xxx" However, under Section 32 (B) (5) of the Tax Code, such 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: "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" With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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: 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" Based on the above-cited paragraph 2, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company whose capital 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 in all other cases. AIcECS This being the case, since DP World does not hold directly at least 10 percent of the capital of SG Holdings, (in fact, it merely holds 0.59 percent), such dividends paid by SG Holdings to DP World are subject to income tax at the rate of 15 percent of the gross amount thereof pursuant to Article 10 (2) (b) of the Philippines-Netherlands tax treaty. ( BIR Ruling No. 89-11 dated March 14, 2011). 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