ITAD BIR Ruling No. 299-15

November 24, 2015 ITAD BIR RULING NO. 299-15 Article 10, Philippines-Korea tax treaty KEPCO Philippines Holdings, Inc. 18th Floor, Citibank Tower 8741 Paseo de Roxas, Salcedo Village Makati City 1227 Attention: Atty. Guillermo P. Dabbay, Jr. General Manager Gentlemen : This refers to your tax treaty relief application filed on January 23, 2015, requesting confirmation that dividends payment of KEPCO Philippines Holdings, Incorporated ("KPHI") to Korea Electric Power Corporation ("KEPCO") are subject to 10 percent final withholding tax rate pursuant to Article 10 of the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty"). It is represented that KEPCO is a resident corporation in Korea for purposes of Korean taxation based on the Certificate of Residence issued on December 12, 2014 by the National Tax Service of Korea; that it is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated May 23, 2014; and that, on the other hand, KPHI is a corporation organized and existing under the laws of the Philippines. It is further represented that at the special meeting of the Board of Directors of KPHI held on January 21, 2015, the Board of Directors of KPHI approved the declaration of cash dividend in the amount of US$5,650,000.00 (inclusive of applicable taxes) to KEPCO, to be paid on January 26, 2015; that, per the Certification issued by the Corporate Secretary of KPHI, at the time of the declaration of the dividends, KEPCO is the registered owner of 10,784,995 of the authorized, subscribed and paid-up shares of KPHI with a par value of P1.00 representing 99.9 percent ownership of KPHI; and that, such dividends payment was made by KPHI to KEPCO on January 27, 2015. It is finally represented, per Certification dated January 23, 2015 issued by KPHI, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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." Thus, Article 10 of the Philippines-Korea tax treaty, which you invoked, may apply to the instant case. It provides. "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 also be taxed in the Contracting 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 beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends; and b) 25 per cent of the gross amount of the dividends in all other cases. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx 4. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the foregoing provisions, dividends paid by a company resident of the Philippines to a resident of Korea which does not carry on business in the Philippines through a fixed place of business therein, may be taxed in Korea. However, such dividends may also be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 percent of the capital of the company paying the dividends; and (b) 25 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as KEPCO is a resident of Korea with no fixed place of business in the Philippines which holds directly 99.9 percent of the authorized, subscribed and paid-up shares of KPHI, such dividends paid by KPHI to KEPCO 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-Korea tax treaty. This ruling is issued on the basis of the foregoing 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