ITAD BIR Ruling No. 316-13

December 2, 2013 ITAD BIR RULING NO. 316-13 Article 10 (Dividends), Philippines-Germany tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. Jules E. Riego Principal, Tax Advisory and Advocacy Group Gentlemen : This refers to your tax treaty relief application filed on August 23, 2013 requesting confirmation that dividends paid by STEAG State Power, Inc. ("STEAG Philippines") (formerly State Power Development Corporation ) to STEAG GmbH ("STEAG") are subject to income tax at the rate of 10 percent pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation to Taxes on Income and Capital ("Philippines-Germany tax treaty") . STEAG is a foreign corporation and a resident of Germany based on its Articles of Association and Certificate of Residence issued by the German Tax Administration on February 28, 2013. STEAG is located at Rttenscheider Strae 1-3, Essen, Germany. STEAG is not registered as a corporation or partnership in the Philippines as per the Certification of Non-Registration issued by the Securities and Exchange Commission on February 12, 2013. On the other hand, STEAG Philippines is a domestic corporation situated at 20th Floor, Yuchengco Tower, RCBC Plaza, Ayala Avenue, Makati, Philippines. Based on the two Secretary's Certificates issued on September 2, 2013 and August 11, 2013, the Board of Directors of STEAG Philippines ,at a special meeting on August 15, 2013, approved a resolution for the declaration and distribution of additional cash dividends for the year amounting to US$0.042217 per share in favor of stockholders of record as of August 29, 2013, and payable on August 30, 2013. As of record date on August 29, 2013 and payment date on August 30, 2013, STEAG holds 51 percent of the capital of STEAG Philippines as described hereunder: SDHacT Stockholder Number and Value of Shares Mode of Acquisition Acquisition Date Percentage of Ownership Common STEAG 1,539,789 Original subscription Aug. 17, 2006 37,908,213 Oct. 20, 2006 1 Dec. 15, 2006 110,810,513 Nov. 12, 2007 7,202,524 Aug. 27, 2008 1 Jun. 16, 2009 1 Jun. 23, 2009 1 May 10, 2011 2 Jul. 19, 2011 157,461,045 (P1,574,610,450.00) 33.237 Redeemable STEAG 30,163,700 Original subscription Jan. 17, 2006 4,701,336 Jun. 1, 2006 32,756,361 Aug. 17, 2006 11,290,978 Nov. 12, 2007 5,001,150 Aug. 27, 2008 236,475 Jul. 19, 2011 84,150,000 (P841,500,000.00) 17.763 Total 241,611,045 (P2,416,110,450.00) 51 percent Based on the Certification issued by DB Trustees (Hong Kong) Ltd. 1 on September 6, 2013, STEAG Philippines remitted such dividends to STEAG as follows: Date of Remittance Reference Number Gross Amount August 30, 2013 65PS201308290023 US$9,180,000.00 (P409,205,349.45) In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines . (A) Gross Income from Sources within the Philippines . The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends . The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: HECTaA "SEC. 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 interests, 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) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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." IAcDET In this particular case, you invoke the Philippines-Germany tax treaty. Paragraphs 1 and 2, Article 10 thereof provides: "Article 10 Dividends 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 be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends." Based on the above provisions, dividends arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company (excluding partnership) which owns directly at least 25 percent of the capital of the company paying the dividends, and 15 percent in all other cases. Accordingly, inasmuch as STEAG owns directly at least 25 percent of the capital of STEAG Philippines (in fact, STEAG holds directly 51 percent of such capital as represented by the common and redeemable shares issued by STEAG Philippines and held by STEAG),such dividends paid by STEAG Philippines to STEAG shall be subject to income tax at the rate of 10 percent , pursuant to paragraph 2 (a), Article 10 of the Philippines-Germany tax treaty. cCESaH 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 Footnotes 1. A wholly owned subsidiary of Deutsche Bank AG and located at 52nd Floor, International Commerce Center, 1 Austin Road, West Kowloon Hong Kong.