ITAD BIR Ruling No. 298-12

July 27, 2012 ITAD BIR RULING NO. 298-12 Article 10 (Dividends), Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 89-11 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. Luis Jose P. Ferrer Partner, Tax Advisory and Advocacy Group Gentlemen : This refers to your application for tax treaty relief dated April 4, 2012, requesting confirmation that dividends paid by The Zuellig Corporation ("Zuellig-PH") to Zuellig Pharma Holdings BV ("Zuellig BV") are subject to preferential tax 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 Zuellig BV is a foreign corporation organized and existing under the laws of the Netherlands and a resident thereof with principal business address at Claude Debussylaan 24 1082 MD Amsterdam, based on the Declaration of Residence issued by the Inspector of the Tax Administration Rivierenland, the Netherlands on February 15, 2012; that Zuellig BV is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on February 13, 2012; and that, on the other hand, Zuellig-PH is a domestic corporation with principal address at Km 14 West Service Road, South Superhighway corner Edison Street, Sun Valley, Paraaque City. It is further represented, that Zuellig BV has an authorized capital stock of ninety thousand euros (EUR90,000) divided into ninety thousand (90,000) shares, each having a nominal value of one euro (EUR1) based on its Deed of Incorporation dated July 7, 2010; that Zuellig BV has issued capital of eighteen thousand euro (EUR18,000) and is divided into eighteen thousand (18,000) shares with a nominal value of one euro each; that as of March 1, 2011, Zuellig BV is the legal and beneficial owner of 890,248 Class A shares and 3,561,006 Class B shares, and the beneficial owner of four Class A shares and one Class B shares held by nominee shareholders with a total par value of PhP44,512,590.00 in Zuellig-PH based on the Certificate issued by the Corporate Secretary of Zuellig-PH; that Zuellig BV owns 100% shares in Zuellig-PH; that during a special meeting of the Board of Directors of Zuellig-PH held on March 14, 2012, Zuellig-PH approved and declared dividends in the amount of PhP580,000,000.00 payable to all of its stockholders of record as of February 29, 2012; that the said dividends shall be payable on April 11, 2012 based on the Certificate issued by the Corporate Secretary of Zuellig-PH on March 26, 2012. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, the dividends paid to Zuellig BV are subject to income tax at the rate of 30 percent, thus: CcaDHT "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, 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: "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, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1, 2 and 5, Article 10 thereof provide: "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 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." Based on the above-cited paragraph 2, 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 of the dividends is a company whose capital 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. This being the case, since Zuellig BV holds more than 10 percent of the capital of Zuellig-PH (in fact, it holds 100% of the issued capital stock of Zuellig-PH) ,such dividends paid by Zuellig-PH to Zuellig BV are subject to income tax at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. 89-11 dated March 14, 2011) . DSATCI 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