ITAD BIR Ruling No. 236-15

July 27, 2015 ITAD BIR RULING NO. 236-15 Article 10 (Dividends), Philippines-Netherlands tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue, Makati City 1226 Attention: Luis Jose P. Ferrer Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 10 January 2014 requesting confirmation that dividends paid by Nike Philippines, Inc. ("Nike-Philippines") to Nike Lase Holding, BV ("Nike-Netherlands") are subject to final withholding tax at the preferential rate of ten percent (10%) 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"). CAacTH It is represented that Nike-Netherlands is a non-resident foreign corporation organized and existing under the laws of the Netherlands based on a notarized and consularized Declaration of Residence issued by the Ministerie Van Financien of the Netherlands and that Nike-Netherlands has an authorized capital stock amounting to 90,000 euros, divided into 900 shares with a par value of 100 euros each. The company Nike-Netherlands is not registered as a corporation or as a partnership based on a Certification of Non-Registration of Company issued by the Securities and Exchange Commission on 14 November 2014. On the other hand, Nike-Philippines is a domestic corporation. It is represented that as of 06 December 2013, Nike-Netherlands is a registered shareholder of Nike-Philippines with a subscription of Seventy Seven Eight Hundred (77,800) common shares valued at One Hundred Pesos (Php100.00) per share with a total value of Seven Million Seven Hundred Eighty Thousand Pesos (Php,7,780,000.00) and that Nike-Netherlands owns 100% of the total subscribed capital stock of Nike-Philippines based on a notarized Secretary's Certificate executed by the Corporate Secretary of Nike-Philippines. It is represented that on 06 December 2013, Nike-Philippines declared cash dividends in the amount of Three Hundred Thirty Million Pesos (Php330,000,000.00) to stockholders of record as of 31 May 2013 based on a notarized Secretary's Certificate executed by the Corporate Secretary of Nike-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, judicial or administrative protest, collection proceedings or judicial appeal based on a notarized Sworn Statement executed by Commercial Director of Nike-Philippines. CTIEac In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997"), as amended, dividends paid to Nike-Netherlands are subject to income tax at the rate of 30 percent, thus: "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 Tax Code, these 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." For this purpose, you invoke the Philippines-Netherlands tax treaty. Article 10 on Dividends thereof provide: SaCIDT "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." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate (a) of 10% of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly holds directly at least 10% of the capital of the company paying the dividends; and (b) 15% of the gross amount of the dividends in all other cases. Considering that Nike-Netherlands is a company which owns 100 percent of the shares of Nike-Philippines, the dividends paid by Nike-Philippines to Nike-Netherlands are subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to 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. cHECAS 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.