ITAD BIR Ruling No. 301-15

November 24, 2015 ITAD BIR RULING NO. 301-15 Article 10, Philippines-Netherlands tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City Attention: Fabian K. Delos Santos Authorized Representative Gentlemen : This refers to your tax treaty relief application filed on December 10, 2014, requesting confirmation that the dividends paid to JLP Botocan B.V. (" JLP ") and SLP Caliraya B.V. ("SLP") by CBK Power Company Limited ("CBK") are subject to the preferential tax rate of 10 percent 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") . ATICcS It is represented that JLP and SLP are corporations organized and existing under the laws of the Netherlands, and are residents of the Netherlands for tax purposes based on the Certificate of Residence issued by the Tax and Customs Administration of the Netherlands both dated October 29, 2014; that JLP is a company with authorized capital stock of Ninety Thousand Seven Hundred Sixty Euro (90,760.00) divided into 9,076 shares with nominal value of Ten Euro (10.00) each, and SLP is a company with authorized capital stock of Ninety Thousand Euro (90,000.00) divided into 900 shares with nominal value of One Hundred Euro (100.00) each; that JLP and SLP are 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 November 24 and 26, 2014, respectively; and that, on the other hand, CBK is a limited partnership organized and existing under the laws of the Philippines. It is further represented, that on December 1, 2014, at the special meeting of the Management Committee of the Partnership of CBK, the Management Committee of CBK declared cash dividends in the amount of Twenty Three Million Two Hundred Thousand US Dollars (US$23,200,000.00) to be taken out of its unrestricted retained earnings in favor of all its partners according to their respective holdings as of close of business on December 1, 2014; that as of to date, the respective capital contributions of JLP and SLP in CBK amounted to US$58,501,000.00 and US$78,510,000.00, respectively, each constituting of 49% of the total outstanding capital stock of CBK since March 15, 2000; and that the said dividends were paid to JLP and SLP on December 15, 2014 based on Certification issued by Metrobank dated January 30, 2015. It is finally represented, per the Sworn Statement dated December 1, 2014 issued by CBK, 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 which 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%)." TIADCc 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 obligation binding upon the Government of the Philippines. xxx xxx xxx" Thus, the provisions of Article 10 of the Philippines-Netherlands tax treaty, which you invoke, 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. SDAaTC 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." xxx xxx xxx" 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. Moreover, Article 3 (e) of the Philippines-Netherlands tax treaty defines the term " company " as " any body corporate or any other entity which is treated as a body corporate for tax purposes ". In connection therewith, Section 22 (B) of the Tax Code provides as follows: "SEC. 22. Definition . When used in this Title: (B) The term ' corporation ' shall include partnerships , no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation) , associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." Based on the abovementioned provision, CBK, being a partnership having its business activities as mentioned in the foregoing representations can be treated as a domestic corporation and taxed accordingly. acEHCD In view thereof and considering that JLP and SLP, are residents of the Netherlands with no fixed place of business in the Philippines, their respective capital of which are divided into shares, and respectively holding 49 percent ownership of each capital of CBK since March 15, 2000, such dividends paid by CBK to JLP and SLP are subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. 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