ITAD BIR Ruling No. 313-15

December 7, 2015 ITAD BIR RULING NO. 313-15 Article 10, Philippines-Netherlands tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Ms. Malou P. Lim Managing Partner Gentlemen : This refers to your tax treaty relief applications filed on November 22, 2013, on behalf of CPI Asia Ten B.V. ("CPI") , requesting confirmation that the dividends paid by 6-3 Property Holdings, Inc. ("6-3"), 18-2 Property Holdings, Inc. ("18-2"), 6-24 Property Holdings, Inc. ("6-24") , and 14-678 Property Holdings, Inc. ("14-678") to CPI are subject to 10 percent preferential tax rate pursuant to the Convention between the Kingdom of The Netherlands and the Republic of the Philippines 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 CPI is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Declaration of Residence issued by the Director General of the Tax and Customs Administration of the Netherlands dated October 18, 2013; that based on its Articles of Incorporation, CPI, which owns and operates real estate properties, is company incorporated under the laws of the Netherlands with authorized capital of ninety thousand euros (EUR90,000), divided into nine hundred (900) shares, each having a nominal value of one hundred euros (EUR100); that CPI is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on November 14, 2013; that 6-3, 18-2, 6-24 , and 14-678 are entities organized and existing under the Philippine laws and engaged in owning, developing and leasing real estate of all kinds. It is represented that on November 14, 2014, that the Board of Directors ("BOD") of 6-3, 18-2, 6-24 , and 14-678 resolved the declaration and payment of cash dividends accruing from August 7, 2013 until November 14, 2013 out of unrestricted retained earnings of 6-3, 18-2, 6-24 , and 14-678 as of December 31, 2012, in favor of their respective stockholders' holding the respective redeemable preferred shares as of November 14, 2013, which cash dividends shall be paid on November 25, 2013 in the following amount: Corporation Amount Per Redeemable Aggregate Amount Preferred Share 6-3 PhP0.9685 PhP2,421,180.56 18-2 PhP0.9685 PhP1,210,590.28 6-24 PhP0.9685 PhP5,229,750.00 14-678 PhP0.9685 PhP7,263,541.67 It also further represented that as of November 14, 2013, CPI owns shares of stocks in the following corporations: Corporation Common Total Par Redeemable Total Par Percentage Share Value (PhP) Preferred Value (PhP) of Share Shares 6-3 3,078,671 307,867,100 2,500,000 250,000,000 94.22 18-2 2,669,676 266,967,600 1,250,000 125,000,000 92.96 6-24 5,776,009 577,600,900 5,400,000 540,000,000 94.57 14-678 8,995,357 899,535,700 7,500,000 750,000,000 94.29 It is finally represented, based on the Sworn Statements by 6-3; 18-2; 6-24 ; and 14-678 on November 20, 2013 that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: HESIcT "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 . . ., dividends, . . .: 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 Tax Code of 1997, as amended, provides that any income may be exempt from tax to the extent required by any treaty obligation binding upon the Philippine Government, thus: "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. xxx xxx xxx" Thus, 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. 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 aforequoted provisions, 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: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as CPI is a private company in the Netherlands, the capital of which is wholly divided into shares, and since CPI holds directly more than the required minimum shareholding of 10 percent in 6-3- 94.22%, 18-2 - 92.96%, 6-24 - 94.57% and 14-678 - 94.29%, such dividends paid by 6-3; 18-2; 6-24 and 14-678 to CPI are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. caITAC 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