ITAD BIR Ruling No. 291-14

October 10, 2014 ITAD BIR RULING NO. 291-14 Article 10, Philippines-Netherlands Tax Treaty San Roque Power Corporation Barangay San Roque San Miguel, Pangasinan Attention: Mr. Carlos M. Echevarria Authorized Representative Gentlemen : This refers to your tax treaty relief application filed on November 13, 2012, on behalf of KPIC Netherlands B.V. ("KPN"), requesting confirmation that the dividend payments made by San Roque Power Corporation ("SRPC") to KPN are subject to 10 percent preferential tax rate pursuant to the Convention between the Republic of the Philippines and the Kingdom of The Netherlands 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 KPN, with address at Herikerbergweg 238, 11101 CM, Amsterdam, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Declaration of Residence issued by the Inspector of the Tax and Customs Administration of the Netherlands dated September 30, 2012; that based on its Deed of Amendments of the Articles of Association, KPN is a company incorporated under the laws of the Netherlands with authorized capital of ninety thousand euro (90,000.00) divided into ninety thousand (90,000) shares with a par value of one euro (1.00) each; that KPN is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company, issued by the Securities and Exchange Commission on October 25, 2012; that, on the other hand, SRPC is a domestic corporation duly organized and existing under Philippine laws located at Barangay San Roque, San Miguel, Pangasinan; and that SRPC is registered with the Philippine Board of Investments (BOI) under Certificate of Registration No. 97-356 dated February 11, 1998 which registration still subsists and has not been cancelled per SRPC certification dated October 24, 2012. cISDHE It is further represented, as shown in the Secretary's Certificate issued by SRPC dated November 13, 2012, that the Board of Directors of SRPC unanimously approved the declaration of cash dividends of Japanese Yen or JPY985,78081 per share (or a total of JPY1,857,530,435) in favor of all stockholders of record as of November 11, 2012 on the basis of the outstanding capital stock held by such stockholders; that as of November 11, 2012 (date of record of transaction and on November 16, 2012 (payment of dividends), KPN owns 1,000 common shares (including four common shares registered in the name of KPN's four nominee directors) and 941,162 Series A Preferred Shares with par value of Php3,525 per share amounting to Php3,525,000.00 and Php3,317,596,050.00, respectively, which represent 50% ownership of SRPC's total shares, and acquired by KPN as follows: Type and Number of Shares Acquisition Date Mode of Acquisition Common Series A Preferred 150 141,174 June 1, 2004 Assignment of shares by KPIC Singapore Pte Ltd. 327 328,465 June 20, 2008 Sale of shares by Axia Power Holdings B.V. 23 942 June 20, 2008 Sale of shares by Sithe Philippines Holdings, Inc. 500 470,581 June 9, 2009 Sale of shares by Axia Power Holdings B.V. Total 1,000 Total 941,162 ======== ========== It is finally represented, based on the Sworn Statement by the same Corporate Secretary on October 24, 2012, 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 taxpayers involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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 . . ., dividends, . . .: 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 that any income may be exempt or partially exempt to the extent required by any treaty obligation binding upon the Philippine Government, thus: EIDTAa "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" With respect to a treaty, what you invoke for this purpose is Article 10 the Philippines-Netherlands tax treaty. It provides: "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. EADCHS xxx xxx xxx 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, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends 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 of the gross amount of the dividends in all other cases. Accordingly, inasmuch as KPN is a private company in the Netherlands the capital of which is wholly divided into shares, and since KPN holds directly 50 percent of the capital of SRPC (which is actually more than the required minimum shareholding of 10 percent), such dividends to be paid by SRPC to KPN are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to 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