ITAD BIR Ruling No. 306-13

November 8, 2013 ITAD BIR RULING NO. 306-13 Article 10 Philippines-Switzerland tax treaty Omya Chemical Merchants, Inc. 17th Floor, BDO Plaza 8737 Paseo de Roxas Makati City 1226 Attention: Purificacion S. Samson Local Representative Gentlemen : This refers to your Tax Treaty Relief Application filed on May 24, 2012, requesting confirmation that the dividends paid by OMYA CHEMICAL MERCHANTS, INC. ("OMYA PHILS") to OMYA OVERSEAS DISTRIBUTION AG ("OMYA") 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 Swiss Federation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . SHCaDA Facts It is represented that OMYA, with address at Baslestrasse 42 CH-4665 Oftringen, Switzerland, is a corporation duly organized and existing under the laws of Switzerland, and is a resident of Switzerland within the meaning of the Philippines-Switzerland tax treaty per Certificate of Fiscal Residence issued by the Tax Administration of the Canton of Aargau (Switzerland) on August 26, 2011; that OMYA is not registered either as a corporation or partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated September 16, 2011; and that, on the other hand, OMYA PHILS is a corporation organized and existing under the laws of the Philippines with office address at 17th Floor, BDO Plaza 8737, Paseo de Roxas, Makati City 1226. It is further represented, per Secretary's Certificate issued by OMYA PHILS on May 18, 2012, that as of May 4, 2012, OMYA holds 999,995 common shares in OMYA PHILS equivalent to PHP49,999,750.00 and which constitute 99.99 percent ownership in OMYA PHILS; that on May 4, 2012, the Board of Directors of OMYA PHILS unanimously approved the declaration of cash dividends in the amount of Seven Pesos and Sixty (P7.60) and that, per notarized Certification issued by the Banco De Oro dated July 15, 2013, the dividend income was remitted to OMYA by OMYA PHILS on July 11, 2012. Ruling 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%). CAIaHS xxx xxx xxx" 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, the provisions of Article 10 of the Philippines-Switzerland tax treaty, which you invoke, may apply to the instant case. It provides: "Article 10 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 (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. 3. The term 'dividends' as used in this Article means income from 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 taxation law of that State of which the company making the distribution is a resident. . . ." Based on the aforequoted provisions of Article 10, dividends paid by a Philippine corporation to a resident of Switzerland may be taxed at a rate not exceeding 10 percent of the gross amount of dividends if the recipient is a company which holds directly at least 10 percent of the capital of the Philippine corporation; and 15 percent if the shareholdings of the recipient company is below 10 percent of the capital of the paying company. ICcDaA In view thereof, since OMYA directly owns 99.99 percent of the total outstanding common shares or more than 10 percent of the capital stock of OMYA PHILS, this Office is of the opinion and so holds that the dividend payments by OMYA PHILS to OMYA are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Switzerland 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