ITAD BIR Ruling No. 262-15

September 9, 2015 ITAD BIR RULING NO. 262-15 Article 10, Philippines-Netherlands tax treaty SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. J.R. Veragara Principal, Tax Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on September 12, 2014, requesting confirmation that dividends paid to Carrier HVACR Investments B.V. ("Carrier") by Carrier Air Conditioning Philippines, Inc. ("Carrier-Philippines") are subject to income tax at a preferential rate of 10 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 Carrier is a corporation duly organized and existing under the laws of the Netherlands based on its Articles of Association, and a resident thereof based on the Declaration of Residence issued by the Tax Administration of The Netherlands on August 15, 2014; that Carrier has an authorized capital of ninety thousand euro (EUR90,000) divided into two thousand (2,000) shares having a par value of forty-five euro (EURO45.00) each, based on the Deed of Amendment to the Articles of Association of Carrier dated March 10, 2010; that Carrier 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 September 9, 2014; and that Carrier-Philippines , on the other hand, is a domestic corporation situated at Km. 20 East Service Road, South Superhighway, Alabang, Muntinlupa City, Philippines. It is further represented that in a special meeting on September 1, 2014, the Board of Directors of Carrier-Philippines approved a declaration of cash dividend of PhP82,749,226.00 out of the unrestricted retained earnings of Carrier-Philippines to all stockholders of record of Carrier-Philippines as of December 31, 2013; and that Carrier holds 280,000 shares, including five nominee shares, equivalent 99.99 percent of the outstanding and voting shares of Carrier-Philippines for taxable year 2014 and as of the taxable year immediately preceding the date of payment of the dividend, in fact since May 21, 1999, based on the Certificate issued by the Corporate Secretary of Carrier-Philippines on September 2, 2014. DcHSEa It is finally represented that the dividends subject of this ruling 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 the Sworn Statement issued by the Treasurer of Carrier-Philippines on September 4, 2014. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends payable to Carrier , 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 Tax Code provides that such dividends may be exempt from income tax 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, 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. 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, inasmuch as Carrier , the recipient of the dividends from Carrier-Philippines , is a company in the Netherlands whose capital is wholly divided into shares, and since Carrier holds directly 99.99 percent of the capital of Carrier-Philippines , such dividends paid by Carrier-Philippines to Carrier are subject to income tax at the 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 of Internal Revenue