ITAD BIR Ruling No. 232-13

August 15, 2013 ITAD BIR RULING NO. 232-13 Article 10, Philippines-Switzerland Tax Treaty Riego De Dios Law Offices 28th Floor, Tower 2, The Enterprise Center Cor. Kalayaan Ave.,Quezon City Attention: Maria Rachel V. Riego de Dios Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 20 December 2012 ,requesting confirmation that dividends paid by Franke Foodservice Systems Philippines, Inc. ("Franke PH") to Franke Foodservice Systems AG ("Franke") ,are subject to the preferential tax rate of 10 percent (10%) pursuant to Article 10 (2) (a) of The Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . 1 CSTDIE It is represented that Franke is a corporation organized and existing under the laws of Switzerland and is a resident thereof with business address at Franke-Strasse 2, 4663 Aarburg, Switzerland, as evidenced by the Certificate of Residence dated 04 July 2012, which was authenticated by the Consul of the Republic of the Philippines in and for Switzerland dated 13 November 2012; that Franke 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 dated 09 July 2012; and that, on the other hand, Franke PH is a corporation organized and existing under the laws of the Philippines with principal address at B1-6 & 7 Phase 1, Carmelray Industrial Park II, Brgy. Tulo, Calamba, Laguna 4027. It is further represented, as certified by the Corporate Secretary of Franke PH, executed on 04 December 2012, that in a special meeting of the Board of Directors of Franke PH held on 03 December 2012, declared additional cash dividends equivalent to Four Hundred Thousand ($400,000.00) United States Dollars; and that as of 03 December 2012, Franke ,holds 24,999,995 shares of stock of Franke PH, or equivalent to 99.99% of its outstanding capital stock. It is further represented that the payment of the subject dividends were made by Franke PH through S.W.I.F.T. with Deutsche Bank AG in the amount of Three Hundred Fifty-Six Thousand Seven Hundred Five and 33/100 United States Dollars ($356,705.33) net of taxes and fees, on 04 January 2013. This was confirmed by UBS AG of Zurich, Switzerland with Franke as beneficiary, dated 04 April 2013. It is finally represented that the dividends subject of this TTRA 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 Certification issued by the General and Finance Manager of Franke PH executed on 14 November 2012. 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 Franke are subject to income tax at the rate of 30 percent, thus: SITCcE "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 percent (30%) 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 However, under Section 32 (B) (5) of the Tax Code, 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: "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." With respect to a treaty, you invoke the Philippines-Switzerland tax treaty. Paragraphs 1 and 2 of Article 10 thereof provide: aAHDIc "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 also be taxed in the Contracting 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 beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases." Under paragraph 2 (a) of Article 10, dividends arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a rate not to exceed 10% of the gross amount of the dividends if the company recipient of the dividends has a capital which is wholly or partly divided into shares and which holds directly at least 10% of the capital of the company paying the dividends. Accordingly, since Franke is a company which holds directly more than 10% of Franke PH (in fact 99.99%),the dividend paid by Franke PH to Franke is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Switzerland 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. EHASaD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Its provisions on taxes apply on income derived or which accrued beginning January 1, 2002. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.