ITAD BIR Ruling No. 299-12

July 27, 2012 ITAD BIR RULING NO. 299-12 Article 10 (Dividends) Philippines-France tax treaty; BIR Ruling No. ITAD-037-09 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Carolina A. Racelis Principal, Tax Services Gentlemen : This refers to your application for tax treaty relief dated March 27, 2012, on behalf of your client, Veolia Water Solutions & Technologies S.A. (hereinafter referred to as "Veolia-France" ), requesting confirmation that the dividend payments by Veolia Water Solutions & Technologies (Philippines), Inc. (hereinafter referred to as "Veolia-PH" ) to Veolia-France shall be subject to preferential rate of 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-France tax treaty"). It is represented that Veolia-France is a foreign corporation organized and existing under the laws of France and a resident thereof with office address at L'aquarene 1 Place Montgolfier 94417 Saint Maurice Cedex, based on the Certificate of Residence issued by the tax authority of France on November 17, 2011; that Veolia-France is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission dated March 22, 2012; that, on the other hand, Veolia-PH is a domestic corporation with principal office at No. 16 Philcrest Compound, KM 23 West Service Road, Cupang, Muntinlupa City. It is further represented that on November 10, 2011, during the meeting of the Board of Directors of Veolia-PH, a resolution was passed and approved declaring cash dividends in the aggregate amount of Fifteen Million Pesos (PhP15,000,000.00) payable to the stockholders of record as of February 18, 2011 based on their shareholdings, which cash dividends were paid on April 4, 2012 based on the Certification issued by the Standard Chartered Bank on April 23, 2012; that as of February 18, 2011, the number of common shares in Veolia-PH registered in the name of Veolia-France is 52,312, which represents 99.98% of the total number of shares of Veolia-PH, based on the Secretary's Certificate issued by Veolia-PH on March 16, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended provides, viz. : "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%)." DaEcTC However, Section 32 (B) (5) of the same Code provides, viz. : "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 this particular case, the tax treaty invoked is the Philippines-France tax treaty, as amended by a Protocol effective January 1, 2000. Its Article 10 provides as follows: "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 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 beneficial owner is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b. in all other cases 15 per cent of the gross amount of the dividends. xxx xxx xxx" Based on the foregoing, the 10 percent preferential tax rate on dividend applies whenever the beneficial owner/recipient of the dividends owns at least 10 percent of the voting shares of the paying company. In view thereof, considering that as of February 18, 2011, the number of common shares in Veolia-PH registered in the name of Veolia-France is 52,312, which represents 99.98% of the total number of shares of Veolia-PH, which is more than the required shareholding of 10 percent, and since the subject transaction transpired after the abovementioned Protocol took effect, the dividends payable to Veolia-France by Veolia-PH shall be subject to a preferential tax rate of 10 percent of the gross amount of the dividends, pursuant to the Philippines-France tax treaty, as amended. (BIR Ruling No. ITAD-037-09 dated March 18, 2009) 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. TDCAHE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue