ITAD BIR Ruling No. 235-11

October 25, 2011 ITAD BIR RULING NO. 235-11 Article 10 (Dividend), Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 060-11 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Carolina A. Racelis Principal, Tax Services Gentlemen : This refers to your tax treaty relief application filed on July 14, 2011, on behalf of your clients, AXIA POWER HOLDINGS PHILIPPINES CORPORATION ("Axia Philippines") and AXIA POWER HOLDINGS B.V. ("Axia") , requesting confirmation that dividends paid by Axia Philippines to Axia are subject to income tax at a preferential 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") . It is represented that Axia is a foreign corporation organized and existing under the laws of the Netherlands and is a resident of the Netherlands, based on its Articles of Association, as amended, and on the Declaration of Residence issued by the Tax and Customs Administration of Rotterdam in the Netherlands on December 29, 2010; that Axia has an authorized capital of 90,000.00 Euros which are divided into 900 ordinary shares of stock, each with a par value of 100 Euros; that Axia is situated at Strawinskylaan 1327, 1077 XX Amsterdam, the Netherland; that Axia 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 January 13, 2011; and that, on the other hand, Axia Philippines is a domestic corporation situated at 700-C, 20th Drive, McKinley Business Park, Fort Bonifacio, Taguig City, Philippines. DAEICc It is further represented, based on the Certificate issued by the Corporate Secretary of Axia Philippines on July 14, 2011, that the Board of Directors of Axia Philippines , at its special meeting on July 14, 2011, declared cash dividends in the amount of 3,221.5891 per share of stock (or a total of 996,147,564.80) in favor of the stockholders of record of Axia Philippines , and payable on July 14, 2011; and that since December 9, 2005 and up to present, Axia holds 2,256 common shares and 306,954 preferred shares of Axia Philippines, with a par value of P225,600.00 and P30,695,400.00, respectively, and which represent almost 100 percent of the total shares of Axia 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, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the President of Axia Philippines on July 14, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides that dividends payable to Axia , a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 . . ., dividends, . . .: 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 Tax Code provides that such dividends may be exempt from income tax or subject to reduced rate to the extent required by any treaty obligation on the Philippines, viz. : "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" With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: AIcECS "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. xxx xxx xxx" Based on the aforequoted provisions, 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 of the gross amount of dividends if the recipient of the dividends 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 of the gross amount of the dividends in all other cases. Accordingly, inasmuch as Axia , the recipient of the dividends from Axia Philippines, is a company in the Netherlands whose capital is wholly divided into shares, and since Axia holds directly at least 10 percent (in fact, almost 100 percent) of the capital of Axia Philippines, such dividends paid by Axia Philippines to Axia 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 Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-60-11 dated February 22, 2011) ETaSDc 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