ITAD BIR Ruling No. 256-14

October 10, 2014 ITAD BIR RULING NO. 256-14 Article 10, Philippines-Netherlands tax treaty JGLAW Attorneys & Counsellors At Law SOL Building, 112 Amorsolo Street Legaspi Village, Makati City Attention: Atty. Olivia P. Taganas Gentlemen : This refers to your tax treaty relief application filed on June 25, 2014 requesting confirmation on your opinion that the dividends paid by Servier Philippines, Inc. ("Servier-Philippines") to Servier International B.V. ("Servier") 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 Servier is a foreign corporation and a resident of the Netherlands based on its Deed of Amendment to the Articles of Association Incorporation, Commercial Register Extract of the Netherlands' Chamber of Commerce and the Declaration of Residence issued by the Tax Administration of Kantoor in the Netherlands on June 2, 2014. Servier is located at Tijberg 9 2716 LH Zeotermeer, the Netherlands. Servier is a company with an authorized capital of 227,000 euros and divided into 500 shares, each share with a value of 454 euros. It is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration of Company issued by the Securities and Exchange Commission on May 8, 2014. On the other hand, Servier-Philippines is a domestic corporation located at No. 2 Orion corner Mercedes Streets Bel-Air Village, Makati City, Philippines. Based on the Secretary's Certificate issued on July 10, 2014, the Board of Directors of Servier-Philippines, during a meeting on June 10, 2014, approved a resolution declaring cash dividends amounting to P175,000,000.00 in favor of the company's stockholders of record as of June 10, 2014, and payable on or before September 25, 2014. As of record date on June 10, 2014, Servier owns 1,999,995 common shares of stock of Servier-Philippines, each share with a par value of P100.00, which constitute 99.99 percent ownership on the issued and outstanding shares of stock of Servier-Philippines. caIDSH Finally, the dividends subject of the request are 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 Sworn Statement issued by the Controller and Managing Director of Servier-Philippines on June 23, 2014. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "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: "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, 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." DHIaTS In this particular case, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, 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." Based on the abovementioned 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 10 percent if the recipient 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 15 percent in all other cases. Accordingly, since Servier is a company in the Netherlands the capital of which is wholly divided into shares, and that Servier holds directly at least 10 percent of the capital of Servier-Philippines (as represented by shares) and where Servier holds 99.99 percent of these shares, such dividends paid by Servier-Philippines to Servier shall be subject to income tax rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. cCESaH 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.