ITAD BIR Ruling No. 295-13

October 25, 2013 ITAD BIR RULING NO. 295-13 Article 10 (Dividends), Philippines-Germany tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower, 8767 Paseo de Roxas, 1226 Makati City Attention: Alexander B. Cabrera Managing Partner Gentlemen : This refers to your application for tax treaty relief dated 10 August 2012 requesting confirmation that dividends paid by DHL Global Forwarding (Philippines), Inc. ("DHL-Philippines") to Deutsche Post Beteiligungen Holding GMBH ("Deutsche-Germany") are subject to final withholding tax at the preferential rate of ten percent (10%) pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty") . It is represented that Deutsche-Germany is a non-resident foreign corporation organized and existing under the laws of Germany, with office address at Charles-de-Gaulle-Str. 20, 53113 Bonn, Germany based on the notarized and consularized Certificate of Residence issued by the competent German government agency. The company Deutsche-Germany is engaged in the business of purchasing, administering and selling of shares to domestic and foreign companies based on its notarized and consularized Shareholder's Agreement. The company Deutsche-Germany is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on 24 August 2012. DHL-Philippines , on the other hand, is a domestic corporation with office address at 8th Floor, Star Cruise Center, 100 Andrew's Avenue, New Port Tourism Zone, Manila. The firm of Isla Lipana & Co. is authorized by Deutsche-Germany to act on its behalf relative to application for tax treaty relief based on a notarized and consularized Special Power of Attorney executed by authorized representatives of Deutsche-Germany . It is further represented that Deutsche-Germany owns 99.99% of the authorized capital stock of DHL-Philippines amounting to Four Hundred Ninety Nine Thousand Nine Hundred Ninety Nine (499,999) common shares acquired in various dates sometime in 1996, 2001 and 2006 based on the notarized Secretary's Certificate executed by the Corporate Secretary of DHL-Philippines . On 01 August 2012, DHL-Philippines declared cash dividends in the total amount of Sixteen Million Pesos (Php16,000,000.00) to be distributed among the stockholders of record as of 31 December 2011 to be payable on 31 August 2012 based on the notarized Secretary's Certificate executed by the Corporate Secretary of DHL-Philippines . Further, on 31 August 2012, DHL-Philippines remitted the amount of Sixteen Million Pesos (Php16,000,000.00) based on a notarized Sworn Statement executed by the Chief Country Financial Officer and the corresponding Certified True Copy of the bank statement. 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, judicial or administrative protest, collection proceedings or judicial appeal based on the notarized Sworn Statement of DHL-Philippines Chief Financial Officer Gerardo C. Batallones. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, dividends paid to Deutsche-Germany are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . cSEaDA (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 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: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these 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." For this purpose, you invoke the Philippines-Germany tax treaty. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: aTHCSE "Article 10 Dividends 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. 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends. Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines at a rate not to exceed (a) 10% of the gross amount of the dividends if the recipient is a company which owns directly at least 25% of the capital of the company paying the dividends and (b) 15% of the gross amount of dividends in all other cases. SDTIHA Considering that Deutsche-Germany is a company owning 99.99% shares of DHL-Philippines , which is more than the 25% shareholding requirement to avail of the 10 percent rate, this Office is of the opinion and so holds that the dividends paid by DHL-Philippines to Deutsche-Germany is subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Germany tax treaty, as amended. 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