ITAD BIR Ruling No. 248-14

October 9, 2014 ITAD BIR RULING NO. 248-14 Article 10, Philippines-France tax treaty Tam-Yap Caga & Ilao Law Offices Unit B, 15th Floor, ACT Tower 135 H.V. De La Costa Street, Salcedo Village, Makati City Attention: Atty. Teresa R. Tam-Yap Gentlemen : This refers to your tax treaty relief application filed on August 15, 2013 requesting confirmation that dividends paid by MANILA NORTH TOLLWAYS CORPORATION ("Manila North Tollways") to Egis Projects SA ("Egis Project") are subject to preferential tax rate of 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty"), as amended by a Protocol. 1 Facts Egis Project is a corporation organized and existing under the laws of France and a resident thereof based on its update Articles of Association, the Certificate of Incorporation issued by the Commercial Court of Versailles in France on December 6, 2012 and the Certificate of Residence issued by the Direction Gnrale Des Finances Publiques of France on January 3, 2013. Egis Project is not a registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on August 22, 2013. On the other hand, Manila North Tollways is a corporation organized and existing under the laws of the Philippines located at NLEX Compound Balintawak, Caloocan City, Philippines. On July 24, 2013, the Board of Directors of Manila North Tollways declare cash dividends in the aggregate amount of Eight Hundred Sixteen Million Nine Hundred Sixty Thousand Pesos (P816,960,000.00) or Forty-Six Pesos (P46.00) per share, payable to the stockholders of record of the Manila North Tollways as of July 24, 2013, based on their shareholdings as of said date, which cash dividends shall be paid on or before August 31, 2013. As of record date, Egis Project holds 13.90% percent of the outstanding capital stock of Egis Project as represented by the common shares of stock it issued, to wit: ISCa Number and Par Mode of Acquisition Date Percentage Amount of Value of Value Acquisition of Dividend Shares Ownership Received 2,468,640 P100.00 Subscription September 9, 2005 13.90% P113,557,440.00 Common shares 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, 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: "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: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." SECATH However, under Section 32 (B) (5) of the Tax Code, 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: 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, you invoke the provisions of Article 10 of the Philippines-France tax treaty, as amended, which state: "Article 10 Dividends 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law 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 (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; cSaATC b) In all other cases, 15 per cent of the gross amount of the dividends." Under Article 10, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company (excluding partnership) which holds directly at least 10 percent of the voting shares of the company paying the dividends and 15 percent in all other cases. Accordingly, since Egis Project holds at least 10 percent of the voting shares of Manila North Tollways where it actually holds 13.90 percent of the common shares of Manila North Tollways, such dividends paid to Egis Project by Manila North Tollways are subject to income tax rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-France tax treaty, as amended. 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 Footnotes 1. Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976.