ITAD BIR Ruling No. 264-13

September 16, 2013 ITAD BIR RULING NO. 264-13 Article 10, Philippines-Germany tax treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Jules E. Riego Legal Counsel Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on April 18, 2013, on behalf of STEAG GmbH ("Steag-Germany") ,requesting confirmation that dividends paid by STEAG State Power, Inc. ("Steag-Phil") to Steag-Germany are subject to 10 percent preferential withholding tax rate pursuant to Article 10 of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty") . HCITcA It is represented that Steag-Germany , with address at Ruttenscheider Strabe 1-3, 45128 Essen, Germany, is a corporation organized and existing under the laws of Germany, and is a resident of Germany within the meaning of the Philippines-Germany tax treaty per the Certificate of Residence issued by the German Tax Administration on February 28, 2013; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated February 12, 2013; and that, on the other hand, Steag-Phil is a corporation duly organized and existing under the laws of the Philippines, with principal address at 20th Floor Yuchengco Tower, RCBC Plaza, Ayala Avenue, Makati City 2816. It is further represented, that at the special meeting of the Board of Directors of Steag-Phil held on March 20, 2013, the Board of Directors of Steag-Phil declared cash dividends at US$0.068366 cent per share to the stockholders of record as of the end of business on March 20, 2013 (Manila time) and to pay out on April 22, 2013; that through original subscription beginning year 2006, Steag-Germany is a stockholder of Steag-Phil with a total shareholdings of 157,461,045 common and 84,150,000 redeemable shares which represent 51% ownership in Steag-Phil; and that per the Certification dated May 15, 2013 issued by Deutsche Bank AG Hong Kong Branch, Steag-Phil remitted funds amounting to USD14,866,183.00 as payment of dividends to Steag-Germany on April 22, 2013. It is finally represented, based on the Sworn Statement issued by Steag-Phil on April 12, 2013, 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. TDEASC In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (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 interest, 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): 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: "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. DACcIH xxx xxx xxx" In this particular case, the Philippines-Germany tax treaty, which you invoked may apply. It provides: "Article 10 Dividends 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may 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 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 partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; (b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. DcCHTa xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Germany at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 25 percent of the capital of the company paying the dividend. Accordingly, considering that Steag-Germany is a company which holds 51% of the outstanding capital stock of Steag-Phil, this Office is of the opinion and so holds that the dividends paid by Steag-Phil to Steag-Germany are subject to the 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Germany 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