ITAD BIR Ruling No. 245-14

October 9, 2014 ITAD BIR RULING NO. 245-14 Article 10, Philippines-Netherlands tax treaty Isla Lipana & Co. 29th Floor Philamlife Tower Paseo de Roxas, Makati City Attention: Lawrence C. Biscocho Partner, Tax Gentlemen : This refers to your tax treaty relief application dated August 29, 2013 requesting confirmation on your opinion that the dividends paid by Shang Properties, Inc. ("Shang Properties") to Travel Aim Investment B.V. ("Travel Aim") are subject to preferential tax rate 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"). Facts Travel Aim is a foreign corporation and a resident of the Netherlands based on its amended Articles of Incorporation and Declaration of Residence issued by the Tax Administration of Kantoor, Rotterdam in the Netherlands on July 15, 2013. Travel Aim is located at Strawinskylaan 3105, (1077 ZX) Amsterdam, Netherlands. Travel Aim is company with an authorized capital 90,000 euros and divided into 200,000 shares, each share with a par value of 0.45 euros. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on July 16, 2013. On the other hand, Shang Properties is a domestic corporation located at 5th Floor, Shangri-La Plaza Mall, EDSA corner Shaw Boulevard, Mandaluyong City, Philippines. Based on the Secretary's Certificates issued on August 20, 2013 and August 27, 2013, the Board of Directors of Shang Properties, during a regular meeting on August 14, 2013, approved a resolution declaring cash dividends amounting to P238,202,949.00 in favor of the company's stockholders of record as of August 30, 2013, and payable on or before September 6, 2013. The dividends will be taken out of the company's unrestricted retained earnings as of June 30, 2013. As of record date, Travel Aim holds 34.61 percent of the common shares of stock of Shang Properties as described below: IcaHTA Stockholder Number and Value Mode of Acquisition Percentage of Shares Acquisition Date of Ownership Travel Aim 1,050,235,269 Purchase 1999 to 2001 34.61 598,634,103 Stock 2002 percent Dividends 1,648,869,372 (P1,648,869,372.00) It is finally represented that the issue or transaction subject of the above application 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 Group Financial Controller of Shang Properties on August 28, 2013. Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, as amended, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "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%). CcHDSA xxx xxx xxx" However, under Section 32 (B) (5) of the Tax Code, as amended such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In this particular case, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2 of Article 10 thereof provide: "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." cSIACD 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 if the company recipient of the dividends has a capital of which is wholly or partly divided into shares and holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent in all other cases. Accordingly, since Travel Aim is a company in the Netherlands the capital of which is wholly divided into shares, and that Travel Aim holds directly at least 10 percent of the capital of Shang Properties, as represented by shares, and where Shang Properties holds 34.61 percent of these shares, such dividend paid by Shang Properties to Travel Aim shall be subject to income tax rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue