ITAD BIR Ruling No. 226-14

October 8, 2014 ITAD BIR RULING NO. 226-14 Article 10 (Dividends) Philippines-Germany tax treaty Interadent Zahntechnik Philippines, Inc. 3275 Interadent Bldg. Pascor Drive, Sto. Nio Paraaque City Attention: Gregoria A. Guillermo Authorized Representative Gentlemen : This refers to your tax treaty application ("TTRA") filed on May 28, 2013, requesting confirmation that dividends paid by Interadent Zahntechnik Philippines, Inc. ("Interadent-PH") to Interadent Zahntechnik GMBH ("Interadent-Germany") are subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Federal Republic of Germany with respect to Taxes on Income. Interadent-Germany is a foreign corporation organized and existing under the laws of the Federal Republic of Germany and is a resident thereof within the meaning of Article 4 under the tax treaty of the Philippines and Germany for the avoidance of double taxation with business address in Roggenhorster, Strabe, Lubeck, Germany. It is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on September 13, 2013. On the other hand, Interadent-PH is a corporation duly organized and existing in accordance with the laws of the Republic of the Philippines with principal address at 3275 Interadent Bldg., Pascor Drive, Sto. Nio, Paraaque City. It is represented that Interadent-Germany is the registered owner of Twenty One Million Nine Hundred Eleven Thousand Two Hundred Forty-One (21,911,241) common shares with a par value of P1.00 per share constituting 94.34% of the 23,226,300 issued and outstanding shares of Interadent-PH as of December 31, 2012; that on March 19, 2013 the board of directors of Interadent-PH declared cash dividends in the amount of Ten Million Pesos (Php10,000,000.00) to be taken from the unrestricted retained earnings as of December 31, 2012; and that, per notarized certification issued by the Bank of Philippine Islands (BPI) dated October 16, 2013, One Hundred Sixty Thousand Three Hundred Forty-Eight and 1/100 Euros (160,348.01) was remitted to Interadent-Germany. cHDaEI It is further represented, per sworn certification issued by the Treasurer of Interadent-PH on October 14, 2013 that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, dividends paid to Interadent-Germany are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Non-resident 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these dividends may be subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 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. " IAaCST For this purpose, you invoke the Philippines-Germany tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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; b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx" Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company which owns directly at least twenty-five percent (25%) of the capital of the company paying the dividends; and (b) 15 percent in all other cases. aHIEcS Accordingly, considering that Interadent-Germany, a company registered in Germany, holds 21,911,241 common shares, constituting 94.33 percent of the stocks of Interadent-PH, which is more than twenty-five percent (25%) of the capital of the latter, this Office is of the opinion and so holds that the dividend paid by Interadent-PH to Interadent-Germany is subject to income tax at the rate of ten percent (10%) of the gross amount of the dividends, pursuant to Article 10 (2) (a) of the Philippine-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 Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.