ITAD BIR Ruling No. 276-13

September 20, 2013 ITAD BIR RULING NO. 276-13 Article 10, Philippines-Netherlands tax treaty CBK Power Company Limited 25th Floor Philamlife Tower 8767 Paseo de Roxas, Makati City Gentlemen : This refers to your application for tax treaty relief filed on November 29, 2012, requesting confirmation that the dividends to be paid by CBK Power Company Limited ("CBK") to JLP Botocan B.V. ("JLP") and SLP Caliraya B.V. ("SLP") are subject to the 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 JLP and SLP are foreign corporations organized and existing under the laws of the Netherlands, both the capital of which are divided into shares as evidenced by Article 3 on Capital and Shares of JLP and SLP's Articles of Incorporation; that both corporations are residents of the Netherlands within the meaning of Article 4 of the Convention for the avoidance of double taxation between the Philippines and the Netherlands, with similar principal place of business at Herikerbergweg 238, 1101 CM Amsterdam, Netherlands per Declaration of Residence issued on August 13, 2012; that JLP and SLP are not registered as corporations or as partnerships in the Philippines per Certification issued by the Securities and Exchange Commission on November 29, 2012 and November 27, 2012 respectively; and that on the other hand, CBK is a domestic corporation situated at 25th Floor Philamlife Tower, 8767 Paseo de Roxas, Makati City. ScaAET It is further represented that during the Management Committee meeting on October 23, 2012, CBK declared cash dividends of US$21,000,000.00 to its partners according to their respective holdings; that both the capital contribution of JLP and SLP in CBK amounted to USD10,290,000.00 representing 49% each of the total Capital of CBK based on the Certificate of the Assistant Corporate Secretary of CBK issued on December 4, 2012; and that the said dividends were paid to JLP and SLP on December 5, 2012 based on the HSBC Certification dated April 19, 2013 and the attached certification from the Chief Financial Officer of CBK dated May 16, 2013. 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 Chief Financial Officer of CBK on November 28, 2012. 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 paid to JLP and SLP, being foreign corporations not engaged in trade or business in the Philippines, are subject to income tax at the rate 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%). acEHCD 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 a reduced rate to the extent required by any treaty obligation in the Philippines, 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" In this particular case, you invoke the Philippines-Netherlands tax treaty, Article 10 thereof provides: TcDIEH "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" Under paragraphs 2 and 3 of Article 10, 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 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 (b) 15 percent in all other cases. Accordingly, since JLP and SLP are registered companies in the Netherlands with capital divided into shares and hold 49 percent each of the capital of CBK, it is the opinion of this Office that the dividends paid by CBK to JLP and SLP 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. IESAac 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