ITAD BIR Ruling No. 277-14

October 10, 2014 ITAD BIR RULING NO. 277-14 Article 10, Philippines-Netherlands tax treaty Ericsson Telecommunications, Inc. 22nd Floor Net Square Building, 3rd Avenue Corner 28th Street, Crescent Park West Bonifacio Global City, Taguig Attention: Elizabeth B. Bedonia Tax Specialist This refers to your tax treaty relief application ("TTRA") filed on January 9, 2013, on requesting confirmation that the dividends paid to Ericsson Holding International B.V. ("Ericsson B.V.") by the Ericsson Telecommunications, Inc. ("Ericsson PH") are subject to preferential rate of 10 percent pursuant to Article 10 (2) (a) of 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 Ericsson B.V. is a resident of Netherlands with address at Ericssonstraat 2 5121 ML Rijen, The Netherlands based on the Declaration of Residence issued by the tax authority of the Netherlands on April 16, 2013; that it is a company duly organized and incorporated under the laws of the Netherlands with an authorized capital amounting to one billion five hundred million Dutch Guilders (NLG1,500,000.00), divided into one million five hundred thousand (1,500,000) shares of one thousand guilders (NLG1,000) each, based on its Articles of Incorporation dated April 10, 1997; 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 Philippine Securities and Exchange Commission on December 18, 2012; that Ericsson PH, on the other hand, is a corporation duly organized and existing under the Philippine laws, with office address at 22nd Floor Net Square Building, 3rd Avenue corner 28th Street, Crescent Park West, Bonifacio Global City, Taguig; and that Ericsson B.V. holds 149,975 shares in Ericsson PH, representing 99.98 percent of the outstanding capital stock of Ericsson PH based on the General Information Sheet of Ericsson PH for the period covering December 28, 2012. ADETca It is further represented that at the meeting of the Board of Directors of Ericsson PH on August 17, 2012, a resolution was approved and adopted declaring cash dividends in the amount of PhP195,000,000.00 to the stockholders of record as of December 5, 2012, per Certificate issued by the Assistant Corporate Secretary issued by Ericsson PH on March 27, 2012. 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 corporate secretary of Ericsson PH on December 11, 2012. In reply, please be informed that dividend income derived in the Philippines by a nonresident foreign corporation is generally taxable under Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended. It provides: "SEC. 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%)." However, Section 32 (B) (5) of the NIRC of 1997, as amended, provides as follows: "SEC. 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 ( i.e., TITLE II TAX ON INCOME): 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." In the instant case, the treaty invoked is the Philippines-Netherlands tax treaty, Article 10 of which states that: EAHcCT "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. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 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. xxx xxx xxx" Based on the aforequoted provisions, insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends applies when the following conditions concur: 1) the payor and recipient of the dividends are separately treated as a "company"; 2) the payor of the dividends is a resident of the Philippines; 3) the recipient of the dividends is a resident of the Netherlands; 4) the recipient of the dividends is the beneficial owner thereof; 5) the capital of such recipient is wholly or partly divided into shares; and 6) the recipient holds directly at least 10 percent of the capital of the payor of the dividends. In all other cases, the 15 percent preferential rate shall apply. AHSEaD Accordingly, inasmuch as Ericsson B.V. is a resident company of the Netherlands, the capital of which is wholly divided into shares, and since Ericsson B.V. directly holds 99.98% of the outstanding capital stock of Ericsson PH, which shareholdings are more than the minimum required 10 percent to qualify for the 10 percent preferential tax rate, this Office is of the opinion as it hereby holds that the dividends to be paid by Ericsson PH to Ericsson B.V. are 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 Bureau of Internal Revenue