ITAD BIR Ruling No. 260-15

September 9, 2015 ITAD BIR RULING NO. 260-15 Article 10, Philippines-Netherlands tax treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. Luis Jose P. Ferrer Partner, Tax Advisory and Advocacy Group Gentlemen : This refers to your Tax Treaty Relief Application filed on February 27, 2014, on behalf of Ecolab NL 10, B.V. ("Ecolab") , requesting confirmation that the dividend paid by Ecolab Philippines, Inc. ("EPI") to Ecolab is subject to 10 percent 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") . It is represented that Ecolab is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Declaration of Residence issued by the Tax Administration Office Arnhem of the Netherlands issued on November 15, 2013; that based on its Deed of Incorporation, Ecolab is a company incorporated under the laws of the Netherlands with authorized capital of ninety thousand Euro (EUR90,000) divided into ninety thousand (90,000) shares, each share having a nominal value of one Euro (EUR1); that Ecolab is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on November 14, 2013; that Ecolab is engaged in the business of providing water, hygiene and energy technologies and services to the food, energy, healthcare, industrial and hospitality markets; and that, on the other hand, EPI is a domestic corporation that engaged manufacturing, importing, exporting or otherwise dealing in cleaning and sanitizing agents, water miscible and water-soluble bottle transport agents, industrial surface treating agents, sanitizers and related equipment dispenser for industrial use. It is further represented, that based on the Certificate issued by the Corporate Secretary of EPI on February 26, 2014, the Board of Directors of EPI resolved to approve the declaration of cash dividend in the amount of Sixty-five Million Pesos (Php65,000,000.00) to be distributed among stockholders of record as of October 31, 2013 pro-rate to their respective shareholdings, based on the number of shares held by them as of October 31, 2013, payable as of February 28, 2014; that as of October 31, 2013, Ecolab is the registered owner of 500,000 common shares of EPI, including five (5) common shares held by its nominee shareholders, with a par value of Php100.00 per share, comprising 100 percent of the total outstanding common shares of EPI; and that the subject dividend was paid to EPI on February 28, 2014 as evidenced by Certification issued by Citibank on March 21, 2014. ITAaHc It is finally represented, based on the Sworn Statement issued by EPI on February 12, 2014, that the transaction subject of the request for 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 of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "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 Tax Code of 1997, as amended, provides that any income may be exempt from tax to the extent required by any treaty obligation binding upon the Philippine Government, thus: "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" Thus, Article 10 of the Philippines-Netherlands tax treaty which you invoke, may apply to the instant case. It provides: "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. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. 6. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the States, carries on business in the other State, of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State professional services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not 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. CHTAIc Accordingly, inasmuch as Ecolab is a company in the Netherlands the capital of which is wholly divided into shares, and since Ecolab holds directly 100 percent of the capital of EPI (which is actually more than the required minimum shareholding of 10 percent), such dividends to be paid by EPI to Ecolab is subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) 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 of Internal Revenue