ITAD BIR Ruling No. 319-13

December 2, 2013 ITAD BIR RULING NO. 319-13 Article 10, Philippines-Netherlands tax treaty Manabat Sanagustin & Co.,CPAs The KPMG Center, 9/F 6787 Ayala Avenue, Makati City Attention: Maria Carmela M. Peralta Principal, Tax Gentlemen : This refers to your tax treaty relief application filed dated July 27, 2012, on behalf of CLSA Philippines, Inc. ("CLSA Phils") ,requesting confirmation that the dividend payment to be paid by CLSA Philippines, Inc. to CLSA B.V. are subject to income tax at the rate of 10 percent 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") . Facts It is represented that CLSA B.V. is a foreign corporation organized and existing under the laws of the Netherlands and is a resident thereof based on its Articles of Incorporation and on the Declaration of Residence issued by the Tax Administration of the Netherlands in Rivierenland on June 28, 2012; that CLSA B.V. is a company the authorized capital of which is divided into 2000,000,000 ordinary shares of stock, each share with a nominal value of 0.450: that CLSA B.V. is situated at Strawinskylaan 3501, 1077 ZX, Amsterdam, Netherlands; that CLSA B.V. is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on July 6, 2012; and that, on the other hand, CLSA Phils is a domestic corporation situated at the 19/F, Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City, Philippines. DTIaHE It is further represented based on the Certificates issued by the Corporate Secretary of CLSA Phils on July 4, 2012, that CLSA Phils (through its Board of Directors which held a meeting on April 26, 2012) declared cash dividends of P180,000,000.00 in favor of all stockholder of record dated April 26, 2012, and payable on July 31, 2012; that as of the date of the declaration CLSA B.V. is a stockholder of record of 52,690 common shares and 950,000 preferred shares representing 100% ownership of CLSA Phils ;and that per notarized Certification issued by Deutsche Bank AG Manila dated August 10, 2012, the dividends were paid on July 31, 2012. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, dividends paid to CLSA-B.V. are subject to income tax at the rate of 30 percent, thus: "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 may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: CETDHA "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." With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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: cHTCaI 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." Under paragraph 2 of Article 10, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient 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 in all other cases. Accordingly, since CLSA B.V. is a company the capital of which is divided into shares and which holds directly at least 10 percent (in fact 99.99 percent) of the capital of CLSA Phils ,such dividend paid by CLSA Phils to CLSA B.V. is subject to income tax at the 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. HTIEaS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue