ITAD BIR Ruling No. 236-12

June 6, 2012 ITAD BIR RULING NO. 236-12 Article 10 (2) (a), Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 029-10 Ong Meneses Gonzales & Gupit Law Offices 18th Floor, 88 Corporate Center 141 Valero corner Sedeo Streets Salcedo Village, Makati City Attention: Francisco B. Gonzales V Tax Counsel Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on July 7, 2011 requesting confirmation that the withholding tax rate on the dividends paid to Hongkong Land (PPI) B.V. ("Hongkong Land") by Northpine Land, Inc. ("Northpine") is 10 percent pursuant to Article 10 (2) (a) of 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") . 1 It is represented that Hongkong Land is a corporation duly organized and existing under the laws of the Netherlands and a resident thereof for tax treaty purposes with principal business address at Deipenbrockstraat 19 1077 VX Amsterdam, Netherlands based on the Declaration of Residence issued by the Tax and Customs Administration of Netherlands dated February 3, 2011; that it is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company dated May 4, 2011 issued by the Securities and Exchange Commission; and that Northpine , on the other hand, is a domestic corporation duly organized and existing under Philippine laws with business address at Units 1505-1508 The Taipan Place, F. Ortigas, Jr. Road, Ortigas Center, Pasig City, Metro Manila, Philippines. It is further represented that during the regular meeting of the Board of Directors held on July 15, 2010 the Board of Directors approved the cash dividend of .28 percent of the aggregate par value of the outstanding capital stock, payable in cash to stockholders of record as of July 15, 2010 out of the unrestricted retained earnings of Northpine as of December 31, 2009 per Secretary's Certificate dated August 2, 2010; that as per Secretary's Certificate issued by the Corporate Secretary of Northpine dated July 31, 2011, Hongkong Land holds 11,600,000 common shares constituting 40 percent of the total shares outstanding of Northpine ; that the said shares were acquired by Northpine in the years 1996 and 2005 based on the Secretary's Certificate dated July 31, 2011; that, per Certification issued by the President of NorthPine on March 13, 2012, Northpine released to Hongkong Land on November 22, 2011 an amount of One Million Three Hundred Thirty-Two Thousand One Hundred Sixty Pesos and 70/100 (Php1,332,160.70) representing payment of the subject dividends, and that in support thereof, a copy of bank remittance slip was submitted. aATCDI It is finally represented that the dividend declaration which is the subject matter of this application is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the President of Northpine dated June 13, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It states: "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 interest, 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%). . . ." However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It provides: "Section 32. Gross Income. aSATHE 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. . . ." Thus, Article 10 of the Philippines-Netherlands tax treaty, which you invoke, may apply to the instant case. It provides: "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 percent 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. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. EDISaA xxx xxx xxx" Based on the foregoing provisions, the Philippines may tax the dividends paid by a resident company to a company which is a resident of the Netherlands at a rate not exceeding 10 percent if the last-mentioned company, the capital of which is wholly or partly divided into shares, holds directly at least 10 percent of the capital of the company paying the dividends. Such being the case and considering that Hongkong Land is a company, the capital of which is wholly or partly divided into shares, and holds 40 percent of the capital of Northpine , this Office is of the opinion and so holds that the dividend payments by Northpine to Hongkong Land shall be subject to the preferential tax rate of 10 percent based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD 029-10 dated August 27, 2010) . This ruling is issued on the basis of the foregoing 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 Footnotes 1. Signed March 9, 1989 and effective September 20, 1991.