ITAD BIR Ruling No. 280-13

September 20, 2013 ITAD BIR RULING NO. 280-13 Article 10, Philippines-Netherlands Tax Treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Romulo S. Danao, Jr. Partner, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 16 November 2012 ,requesting confirmation that the cash dividend paid by Katolec Philippines Corporation ("Katolec PH") ,to Katolec Enterprises B.V. ("Katolec") ,is subject to the preferential tax rate of 10 percent (10%) 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") . 1 DSETcC It is represented that Katolec is a corporation organized and existing under the laws of Netherlands and is a resident thereof with business address at Strawinskylaan 3105,1077 ZX Amsterdam Netherlands, as evidenced by the Certificate of Residence dated 21 December 2012, which was authenticated by the Vice Consul of the Republic of the Philippines in and for Netherlands dated 15 January 2013; that Katolec is a corporation the authorized capital of which is divided into shares, as evidenced by its Deed of Incorporation, duly authenticated by the Vice Consul of the Republic of the Philippines in and for Netherlands dated 07 January 2013; that Katolec 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 dated 28 November 2012; and that, on the other hand, Katolec PH is a corporation organized and existing under the laws of the Philippines with business address at 103 East Main Avenue SPEZ Laguna Technopark Bian, Laguna. It is further represented, as certified by the Corporate Secretary of Katolec PH, executed on 12 November 2012, that in a special meeting of the Board of Directors of Katolec PH held on 12 November 2012, the latter declared cash dividends equivalent to Four Million Five Hundred Thousand United States Dollars (USD4,500,000.00) for all stockholders on record as of 31 December 2011 payable on 14 December 2012; that as of 09 September 2009, Katolec holds 124,994 shares of stock of Katolec PH, or equivalent to 99.99% of its outstanding capital stock. It is further represented that the payment of the subject dividends were made by Katolec PH through Mizuho Corporate Bank, Ltd. Manila Branch ("Mizuho Bank") in the amount of Four Million Fifty Thousand United States Dollars (USD4,050,000.00),on 14 December 2012, as evidenced by a Certification issued by Mizuho Bank executed on 15 February 2013. It is finally represented that the dividends subject of this TTRA 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 Certification issued by the Director of Katolec PH executed on 12 November 2012. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, dividends paid to Katolec are subject to income tax at the rate of 30 percent, thus: EHSADc "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 percent (30%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, 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) and (d) above." * However, under Section 32 (B) (5) of the Tax Code, such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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: 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." With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2 of Article 10 thereof provide: DCATHS "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." Under paragraph 2 (a) of Article 10, dividends arising in the Philippines and paid to a resident of Netherlands may be taxed in the Philippines at a rate not to exceed 10% of the gross amount of the dividends if the company recipient of the dividends has a capital which is wholly or partly divided into shares and which holds directly at least 10% of the capital of the company paying the dividends. Accordingly, since Katolec holds directly more than 10% of the outstanding capital stock Katolec PH (in fact 99.99%),the dividend paid by Katolec PH to Katolec is 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. TADcCS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Its provisions on taxes apply on income derived or which accrued beginning January 1, 1992.