ITAD BIR Ruling No. 231-11

October 4, 2011 ITAD BIR RULING NO. 231-11 Article 10 (Dividends) Philippines-France tax treaty, as amended; BIR Ruling No. ITAD-034-10; BIR Ruling No. DA-ITAD-101-04; BIR Ruling No. ITAD-017-01; BIR Ruling No. DA ITAD-015-10; BIR Ruling No. DA ITAD-057-10 Tam-Yap Caga & Associates Unit B, 15th Floor, ACT Tower 135 H.V. de la Costa Street, Salcedo Village Makati City Attention: Atty. Teresa R. Tam-Yap Atty. Maria Graciela B. Suratos Gentlemen : This refers to your tax treaty relief application ("TTRA"), which we received on January 28, 2011, on behalf of your client, Egis Projects S.A. ("Egis") , requesting confirmation that dividends paid by Manila North Tollways Corporation ("MNTC") to Egis are subject to a preferential tax rate of 10 percent pursuant to the Convention between the Republic of the Philippines and the Government of French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty") as amended by the Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic, effective January 1, 1998. Basic Facts It is represented that Egis is a foreign corporation organized and existing under the laws of France and is a resident of France based on its Articles of Association and on by its Certificate of Tax Residence issued by the General Department of Public Finance of France on January 3, 2011; that Egis is located at 11 avenue du Centre, 78 280 Guyancourt, France; that Egis 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 January 13, 2011; that, on the other hand, MNTC is a domestic corporation located at NLEX Compound, Balintawak, Caloocan City, Philippines; and that MNTC is registered with the Board of Investments under Certificate of Registration No. 97-086 dated September 15, 1997. It is further represented based on the two Certificates issued by the Corporate Secretary of MNTC both on December 28, 2010, that on December 17, 2010, the Board of Directors of MNTC, at its meeting, declared cash dividend amounting to ONE BILLION ONE HUNDRED AND ONE MILLION ONE HUNDRED TWENTY THOUSAND PESOS (Php1,101,120,000.00), or SIXTY TWO PESOS (Php62.00) per share, in favor of the stockholders of record of MNTC as of December 17, 2010, and payable on or before December 29, 2010; and that since September 9, 2005, up to present, Egis holds 2,468,638 shares of stock of MNTC with a par value of Php100.00 per share, which represent 13.90 percent of the total outstanding capital stock of MNTC. DECcAS It is finally represented based on the Certification issued by the Authorized Representative of MNTC on January 26, 2011, that the dividends subject of the application for tax treaty relief are not subject of 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. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended, provides that the dividends payable to Egis , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax in the Philippines at the rate of 30 percent, to wit: "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 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Code, as amended, provides that such dividends may be exempt or partially exempt (if subject to a reduced rate only) 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" In this particular case, you invoke the Philippines-France tax treaty, as amended. 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. CAaDTH 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 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 (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and derived by a resident of France may be taxed in the Philippines at the rate of, beginning January 1, 1998, (a) 10 percent of the gross amount of the dividends if the company recipient of the dividends holds directly at least 10 percent of the voting shares of the company paying the dividends, and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, since Egis holds directly at least 10 percent (in fact, 13.90 percent) of the common (voting) shares of stock of MNTC, such dividends paid by MNTC to Egis are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippine-France tax treaty, as amended. (BIR Ruling No. ITAD-034-10 dated September 14, 2010; BIR Ruling No. DA ITAD-101-04dated September 13, 2004; n BIR Ruling No. ITAD-017-01 dated February 19, 2001; BIR Ruling No. DA-ITAD-057-10 dated June 4, 2010; and BIR Ruling No. DA-ITAD-015-10 dated February 1, 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 n Note from the Publisher: Written as BIR Ruling No. DA ITAD-101-4 dated September 13, 2004 in the original document.