ITAD BIR Ruling No. 244-11

November 9, 2011 ITAD BIR RULING NO. 244-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-089-11 Manabat Sanagustin & Co. Certified Public Accountants 9th Floor, The KPMG Center 6787 Ayala Avenue, Makati City Attention: Atty. Herminigildo G. Murakami Principal, Tax Gentlemen : This refers to your tax treaty relief application filed on behalf of DP World Mabuhay First B.V. ("DP World") , requesting confirmation that dividend paid by Aberlour Holding Company ("Aberlour") to DP World is subject to a preferential tax rate of 15 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 DP World 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 and on the Declaration of Residence issued by the Tax and Customs Administration of the Netherlands on November 23, 2010; that DP World has an authorized capital of EUR90,000.00, divided into 90,000 shares, each share with a par value of EUR1; that DP World is located at Albert Plesmanweg 43g 3088 6b Rotterdam, Netherlands; that DP World 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 November 23, 2010; and that, on the other hand, Aberlour is a domestic corporation located at 7th Floor, PhilFirst Building, 6764 Ayala Avenue, Makati City, Philippines. It is further represented that on May 30, 2011, the Board of Directors of Aberlour , at its special meeting, approved the declaration of cash dividends in the amount of Twenty Million, Ten Thousand Pesos (P21,010,000.00), n in favor of the stockholders of record of Aberlour as of May 31, 2011, based on the Certificate issued by the Corporate Secretary of Aberlour on June 1, 2011; that the cash dividends be payable on or before June 15, 2011; that as of the dates of declaration and payment of the dividends, DP World holds 24,000 common shares of Aberlour with a total par value of Twenty Four Thousand Pesos (P24,000.00), and which represent .02 percent ownership in the capital stock of Aberlour . CSHDTE It is finally represented, that the dividend subject of this ruling is 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 same Corporate Secretary of Aberlour on May 18, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended, provides that dividends payable to DP World, being 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 Code, provides that such dividends may be exempt 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, what you invoke for this purpose is the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: IcHSCT "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. EIcSDC 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, since DP World is a private company in the Netherlands, the capital of which is wholly divided into shares, and since DP World holds directly .02 percent of the capital of Aberlour , such dividend to be paid by Aberlour to DP World is subject to income tax at a reduced rate of 15 percent of the gross amount thereof pursuant to paragraph 2 (b) Article 10 of the Philippines-Netherlands tax treaty. [BIR Ruling No. ITAD-089-11 dated March 14, 2011] 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: Copied verbatim from the official copy. Discrepancy between amount in words and in figures