ITAD BIR Ruling No. 302-15

November 24, 2015 ITAD BIR RULING NO. 302-15 Article 10, Philippines-Netherlands tax treaty CLSA Exchange Capital, Inc. 3F Corporate Business Centre 151 Paseo de Roxas Makati City 1229 Attention: Rufia Dorothy C. Vera Managing Director Gentlemen : This refers to your tax treaty relief application filed on July 15, 2014, on behalf of CLSA B.V . (" CLSA-Netherlands "), requesting confirmation that dividends paid by CLSA Exchange Capital, Inc. (" CLSA-Philippines ") to CLSA-Netherlands are subject to the preferential tax rate of 10 percent of the gross amount of the dividends 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 "). It is represented that CLSA-Netherlands is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued on June 20, 2014 by the Tax and Customs Administration of the Netherlands; that CLSA-Netherlands has an authorized share capital amounts to thirty-six million euro (EUR36,000,000.00) divided into eighty million (80,000,000) ordinary shares each having a nominal value of forty-five eurocent (EUR0.45); that it is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated July 10, 2014; and that, on the other hand, CLSA-Philippines is a corporation organized and existing under the laws of the Philippines. EcTCAD It is further represented that at the organizational meeting of the Board of Directors of CLSA-Philippines held on April 28, 2014, the Board of Directors of CLSA-Philippines declared cash dividends in the total amount of Thirty-Nine Million Three Hundred Eighty-Nine Thousand Nine Hundred Ninety-Four Philippine Pesos (Php39,389,994) in favor of all stockholders of record as of March 31, 2014, in accordance with the amount of cash dividends each stockholder is entitled to pursuant to the Articles of Incorporation, payable on April 28, 2014; that as of April 28, 2014, CLSA-Netherlands is the legal and beneficial owner of 898,498 (including six [6] common shares held by its nominee directors) common shares with a total par value of Php89,849,800.00 which represents 60.00 per cent of the total outstanding capital of CLSA-Philippines ; that the said shares was acquired by CLSA-Netherlands thru various dates of subscription beginning December 14, 2001. 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%)." HSAcaE 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: HESIcT 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. 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 CLSA-Netherlands 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 60.00 per cent of the total outstanding capital of CLSA-Philippines , this Office is of the opinion and so holds that the dividends paid to CLSA-Netherlands by CLSA-Philippines 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. TAIaHE 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