ITAD BIR Ruling No. 300-13

October 29, 2013 ITAD BIR RULING NO. 300-13 Article 10, Philippines-France tax treaty Tam-Yap Caga and Associates Unit 15 B, Act Tower No. 35 H.V. Dela Costa, Salcedo Village Makati City Attention: Atty. Teresa R. Tam-Yap Atty. Maria Graciela B. Suratos Gentlemen : This refers to your tax treaty relief application filed on September 13, 2012, requesting confirmation that dividends paid to EGIS PROJECTS S.A. ("EGIS") by MANILA NORTH TOLLWAYS CORPORATION ("MNTC") are subject to 10 percent preferential tax rate 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 ("Philippines-France tax treaty"), as amended by a Protocol 1 which took effect on January 1, 1998 . Facts It is represented that EGIS is a foreign corporation organized and existing under the laws of France and a resident of France based on its Articles of Incorporation and on its Certificate of Tax Residence issued by the General Department of Public Finance of France on MAY 10, 2012; that EGIS is situated at 11 Avenue Du Centre, 78280 Guyancourt, France; that EGIS is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 28, 2012; and that MNTC, on the other hand, is a domestic corporation with principal address at NLEX Compound, Balintawak, Caloocan City, Philippines; and that MNTC is registered with the Board of Investments under Certificate of Registration No. 97-086 dated September 15, 1997. aDcEIH It is further represented that on July 26, 2012, the Board of Directors of MNTC, at its meeting, declared cash dividends in the amount of P870,240,000 or P49.00 per share, in favor of the stockholders of record of MNTC as of July 26, 2012, payable on September 15, 2012; and since September 9, 2005, up to present, EGIS holds 2,468,638 common shares of MNTC with a par value of P100.00 per share, which represent 13.90 percent of the outstanding capital stock of MNTC; and that the dividend income was remitted to EGIS by MNTC on September 17, 2012 based on the notarized actual remittance through telegraphic transfer by BDO Unibank dated January 24, 2013. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to EGIS, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . aIAEcD (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): 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 same Code provides that 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, viz. : "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. aDHCEA xxx xxx xxx" In this particular case, you invoke the Philippines-France tax treaty, as amended, Paragraphs 1 and 2, Article 10 thereof provide 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 recipient 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. 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" Based on the aforequoted provisions, dividends arising in the Philippines and derived by a resident of France may be taxed in the Philippines at the rate of (a) 10 percent of the gross amount of the dividends if the beneficial owner of the dividends is a company (excluding partnership) which holds directly at least 10 percent of the voting shares of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. AScHCD Accordingly, since EGIS holds directly at least 10 percent (in fact, 13.90 percent) of the common (voting) shares of MNTC, dividend paid by MNTC to EGIS is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-France 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 Footnotes 1. Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976.