ITAD BIR Ruling No. 300-15

November 24, 2015 ITAD BIR RULING NO. 300-15 Article 10, Philippines-Netherlands tax treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Jonald R. Vergara Principal, Business Tax Services Gentlemen : This refers to your tax treaty relief application filed on March 13, 2015, on behalf of Takata International Finance B.V. ("Takata") , requesting confirmation that dividends paid by RTA Holdings, Inc. ("RHI") to Takata are subject to 10 percent preferential tax rate pursuant to Article 10 of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . HTcADC It is represented that Takata is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Certificate of Residence issued by the Tax and Customs Administration of the Netherlands dated February 2, 2015; that it is a corporation organized and existing under the laws of the Netherlands with an authorised capital amounts to nine hundred million Euro (900,000,000.-) divided into five hundred thousand (500,000) preference shares and one million five hundred thousand (1,5000,000) ordinary shares with a nominal value of four hundred and fifty Euro (450.-) each; that it is not registered either 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 February 26, 2015; and that, on the other hand, RHI is a corporation organized and existing under the laws of the Philippines. It is further represented that at the meeting of the Board of Directors of RHI held on March 2, 2015, a resolution was approved declaring cash dividends amounting to Php26,000,000.00 out of RHI's retained earnings as of March 31, 2014, to all stockholders of record as of March 2, 2015, payable on or before March 23, 2015; that as of the dividend declaration and the dividend payment, Takata is the registered owner of Two Thousand Three Hundred Ninety Eight (2,398) common "B" shares of stock and the beneficial owner through its nominees of Two (2) common "B" shares of outstanding stock of RHI with a total par value of Twenty Four Million Pesos (P24,000,000.00), which represents 40 percent of the outstanding and voting shares of RHI; that the shares was acquired by Takata through various dates of subscription beginning July 1, 2010. It is finally represented, per Sworn Statement dated March 6, 2015 issued by RHI 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 income 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%) . . . ." aScITE 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." In relation thereto, Article 10 of the Philippines-Netherlands 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 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. HEITAD 6. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the States, carries on business in the other State, of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State professional 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 a case, the provisions of Article 7 or Article 14, as the case may be, shall apply." Based on the above-cited provision, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed 10 percent of the gross amount of the dividends if the recipient of the dividends is a company, the capital of which is divided into shares, and owns at least 10 percent of the capital of the paying company. In all other cases, the 15 percent preferential tax rate applies. Such being the case and considering that Takata is a company resident in the Netherlands with no fixed place of business in the Philippines, the capital of which is wholly divided into shares, and that it holds 40 percent of the outstanding and voting shares of RHI, this Office is of the opinion and so holds that the dividends paid to Takata by RHI are subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands 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