ITAD BIR Ruling No. 267-11

November 10, 2011 ITAD BIR RULING NO. 267-11 Article 10, Philippines-Switzerland tax treaty; BIR Ruling No. ITAD-009-10 Riego de Dios Law Offices 28th Floor, Tower 2, The Enterprise Center 6766 Ayala Avenue corner Paseo de Roxas Makati City 1226 Attention: Ma. Rachel V. Riego de Dios Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on July 20, 2011, on behalf of Franke Foodservice Systems Philippines, Inc. ("Franke-Phil") , requesting confirmation that the cash dividends paid by Franke-Phil to Franke Foodservice Systems AG ("Franke-Switzerland") are subject to final withholding tax at the rate of 10 percent, pursuant to Article 10 of the Convention between the Republic of the Philippines and the Swiss Federation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty"). It is represented that Franke-Switzerland, with principal address at Franke-Strasse 2, CH-4663 Aarburg, Switzerland, is a resident of Switzerland within the meaning of the Philippines-Switzerland tax treaty per the Certificate of Fiscal Residence issued by the Tax Administration of the Canton Aargau, Switzerland on June 6, 2011; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 24, 2011; and that, on the other hand, Franke-Phil is a corporation organized and existing under the laws of the Philippines with principal address at B1-6 & 7 Phase 1, Carmelray Industrial Park II, Barangay Tulo, Calamba, Laguna 4027. It is further represented that per the Certification issued on by the Corporate Secretary of Franke-Phil on July 15, 2011, Franke-Switzerland owns 24,999,995 common shares of stock, representing 99.99% ownership in Franke-Phil; that during the special meeting of the Board of Directors of Franke-Phil on July 1, 2011, a resolution was unanimously passed and approved declaring cash dividends in the amount of Five Hundred Thousand United States Dollars ($500,000.00) in favor of all stockholders of record to be paid on or before July 31, 2011. aHTEIA It is finally represented, per the Sworn Statement dated July 18, 2011 issued by Franke-Phil, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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: IDETCA 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-Switzerland tax treaty, which you invoke, may apply to the instant case. It provides: "Article 10 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. EASIHa 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 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 beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 3. The term 'dividends' as used in this Article means income from shares or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions of Article 10, dividends paid by a Philippine corporation to a resident of Switzerland may be taxed at a rate not exceeding 10 percent of the gross amount of dividends if the recipient is a company which holds directly at least 10 percent of the capital of the Philippine corporation; and 15 percent if the shareholdings of the recipient company is below 10 percent of the capital of the paying company. In view thereof, since Franke-Switzerland directly owns more than 10 percent of the capital stock of Franke-Phil, this Office is of the opinion and so holds that the dividend payments by Franke-Phil to Franke-Switzerland are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. (BIR Ruling No. ITAD-009-10 dated June 3, 2010) ESIcaC This ruling is issued on the basis of the foregoing 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