ITAD BIR Ruling No. 227-13

August 15, 2013 ITAD BIR RULING NO. 227-13 Article 10 (Dividends), Philippines-Netherlands tax treaty Romulo Mabanta Buenaventura Sayoc and De Los Angeles Attorneys at Law 21st Floor, Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Juan Ricardo B. Tan Partner Atty. Jayson L. Fernandez Partner Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on May 23, 2013 requesting confirmation that dividends paid by Rizal Commercial Banking Corporation ("RCBC") to Hexagon Investments B.V. ("Hexagon") are subject to income tax at the 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") . SDHCac Facts Hexagon is a foreign corporation and a resident of Netherlands based on its Articles of Association and the Declaration of Residence issued by the Tax Administration of Arnhem in the Netherlands on February 8, 2013. Hexagon has an authorized capital of 90,000.00 euros divided into 90,000 shares, each having a nominal value of 1 euro. Hexagon is located at 1118 BJ Schiphol, Schiphol Boulevard 369, WTC Tower F, the Netherlands. It 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 May 22, 2013. On the other hand, RCBC is a domestic corporation located at 46th Floor, Yuchengco Tower, RCBC Plaza, 6819 Ayala Avenue corner Sen. Gil Puyat Avenue, Makati City, Philippines. Based on the Corporate Secretary's Certificates issued by RCBC on June 7, 2013 and March 26, 2013, the Board of Directors of RCBC approved Resolution No. BR-013-055 declaring cash dividends amounting P1.00 per share, or approximately P1.141 billion payable to common stockholders and P342.0 thousand payable to preferred stockholders of RCBC. The dividends are payable within 5 calendar days from record date. As of May 21, 2013, Hexagon holds 139,199,198 shares in RCBC representing 10.91 percent of the latter's outstanding capital stock. These shares are lodged with Philippine Depository and Trust Corporation by RCBC Securities, Inc. and has a current market value of P10.022 billion. Based on the Certification issued by RCBC on June 6, 2013, it paid dividends to Hexagon on May 31, 2013 amounting to P125,279,278.20 via fund transfer to Hexagon 's account at RCBC. HSEIAT Ruling 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 a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "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%)." However, under Section 32 (B) (5) of the same Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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." aATCDI In this regard, Article 10 of the Philippines-Netherlands tax treaty provides relief to dividends as follows: "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." Under this article, 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 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 in all other cases. Accordingly, since Hexagon is a company in the Netherlands whose capital is wholly or partly divided into shares and it holds directly at least 10 percent of the capital stock of RCBC (currently, 10.91 percent),such dividends paid by RCBC to Hexagon shall be subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (a), 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. cTEICD 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.