ITAD BIR Ruling No. 224-11

September 2, 2011 ITAD BIR RULING NO. 224-11 Article 10 (Dividend), Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-46-10; BIR Ruling No. ITAD-37-10; BIR Ruling No. ITAD-29-10; BIR Ruling No. ITAD-21-10; BIR Ruling No. ITAD-99-08 Zambrano & Gruba Law Offices 27th Floor, 88 Corporate Center 141 Sedeo Street, Salcedo Village 1227 Makati City Attention: Atty. Antero Jose M. Caganda Atty. Michael Geronimo G. Martin Atty. Samantha Paula G. Dy Gentlemen : This refers to your tax treaty relief application filed on June 30, 2011, on behalf of E D & F Man Holdings B.V. ("E D & F") , requesting confirmation that dividends paid by E D & F Man Philippines, Inc. ("E D & F Philippines") to E D & F are subject to income tax at a preferential rate of 10 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") . AaEcHC It is represented that E D & F is a foreign corporation organized and existing under the laws of the Netherlands and is a resident of the Netherlands, based on its Articles of Association and on the Declaration of Residence issued by the Tax and Customs Administration of Rivierenland in the Netherlands on September 27, 2010; that E D & F has an authorized capital of EUR10,000,000.00, divided into 100,000 shares and with a nominal value of EUR100.00 each; that E D & F is located at De Ruyterkade 6 (6th Floor), 1013 AA Amsterdam, the Netherlands; that E D & F is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on June 21, 2011; and that, on the other hand, E D & F Philippines is a domestic corporation situated at Unit 37C, 37th Floor, Rufino Tower, 6784 Ayala Avenue, Makati City, and at 2nd Floor, Capitol Subdivision Building, Lacson Street, Bacolod City, Negros Occidental, in the Philippines. It is further represented based on the Certificate issued by the Corporate Secretary of E D & F Philippines on June 27, 2011, that on June 15, 2011, the Board of Directors of E D & F Philippines, at its special meeting, approved the declaration of cash dividends in the amount of Php577.83 per share of stock, or an aggregate amount of Php81,877,950.00, in favor of the stockholders of record of E D & F Philippines as of September 30, 2010, and payable on or before July 30, 2011; that the dividends will be taken out of the unrestricted retained earnings of E D & F Philippines as of September 30, 2010; and that as of the date of payment of the dividends and up to present, E D & F holds 141,695 common shares of E D & F Philippines with a par value of P100 per share, and which represent 99.99 percent ownership in the capital stock of E D & F Philippines . It is finally represented that the dividends subject of this ruling 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 President of E D & F Philippines on March 23, 2011. 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 payable to E D & F, 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). EcAHDT xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that 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 aforequoted provisions, 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 of the gross amount of 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. aITECD Accordingly, since the capital of E D & F, the company recipient of the dividends, is wholly divided into shares, and since E D & F holds directly 99.99 percent of the capital of E D & F Philippines (which is actually more than the required minimum of shareholding of 10 percent), such dividends paid by E D & F Philippines to E D & F are subject to income tax at a reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. [BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling No. ITAD-46-10 dated October 5, 2010; BIR Ruling No. ITAD-37-10 dated September 16, 2010; BIR Ruling No. ITAD-29-10 dated August 27, 2010; BIR Ruling No. ITAD-21-10 dated August 20, 2010] 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