ITAD BIR Ruling No. 226-15

July 15, 2015 ITAD BIR RULING NO. 226-15 Article 10 (Dividends), Philippines-Netherlands tax treaty Tam-Yap & Ilao Law Offices Unit B, 15th Floor, ACT Tower, 135 H.V. de la Costa St., Salcedo Village, Makati City Attention: Teresa R. Tam-Yap Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 13 December 2013 requesting confirmation that dividends paid by CBK Power Corporation (" CBK-Philippines ") to JGP CBK Power B.V. (" CBK-Netherlands ") are subject to final withholding tax at the preferential rate of ten percent (10%) 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 CBK-Netherlands is a non-resident foreign corporation organized and existing under the laws of the Netherlands based on a notarized and consularized Declaration of Residence issued by the Ministerie Van Financien of the Netherlands and is engaged in the business of incorporating, participating in, managing, supplying services to and financing other legal entities and companies, among other based on the notarized and consularized Articles of Association of CBK-Netherlands . The company CBK-Netherlands is not registered as a corporation or as a partnership based on a Certification of Non-Registration of Company issued by the Securities and Exchange Commission (SEC) on 04 December 2013. On the other hand, CBK-Philippines is a domestic corporation organized and existing under Philippine laws. It is represented that CBK-Netherlands owns Seventy Eight Thousand Three Hundred Sixty Five (78,365) common shares valued at One Hundred Pesos (Php100.00) amounting to Seven Million Eight Hundred Thirty Six Thousand Five Hundred Pesos (Php7,836,500.00) owns representing 99% of the authorized capital stock of CBK-Philippines acquired by way of subscription based on a notarized Secretary's Certificate from CBK-Philippines . It is represented that on 02 December 2013, CBK-Philippines declared cash dividends in the amount of Two Hundred Thousand US Dollars (US$200,000.00) to all stockholders on record as of 30 November 2013 based on a notarized Secretary's Certificate from CBK-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, judicial or administrative protest, collection proceedings or judicial appeal based on a notarized Certification from CBK-Philippines . In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" NIRC of 1997 "), as amended, dividends paid to CBK-Netherlands 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 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 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%)." HEITAD However, under Section 32 (B) (5) of the Tax Code, these 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: "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." For this purpose, you invoke the Philippines-Netherlands tax treaty. Article 10 on Dividends 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." aDSIHc Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate (a) of 10% of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly holds directly at least 10% of the capital of the company paying the dividends; and (b) 15% of the gross amount of the dividends in all other cases. Considering that CBK-Netherlands is a company which owns 99% of the shares of CBK-Philippines , the dividends paid by CBK-Philippines to CBK-Netherlands are subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 of the Philippines-Netherlands 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.