ITAD BIR Ruling No. 321-12

August 23, 2012 ITAD BIR RULING NO. 321-12 Article 10, Philippines-Germany tax treaty; BIR Ruling No. ITAD-199-11 Alba Romeo & Co. 7th Floor, Multinational Bancorporation Center 6805 Ayala Avenue, Makati City Attention: Atty. Prackie Jay T. Acaylar Gentlemen : This refers to your tax treaty relief application filed on March 14, 2012, on behalf of Software AG ,requesting confirmation that the dividends paid to Software AG by Software AG (Phils.),Inc. ("Software PH") are subject to preferential tax rate of ten percent pursuant to Article 10 of the Convention between the Government of the Republic of the Philippines and the Government of the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Germany tax treaty") . It is represented that Software AG is a nonresident corporation organized and existing under the laws of Germany with address at Darmstadt, Germany with Tax Identification Number 00722573906 since January 1, 1962 based on the Certificate of Residence issued by the fiscal authorities in Darmstadt dated April 11, 2011; that Software AG is not registered either 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 February 7, 2012; and that, on the other hand, Software PH is a domestic corporation duly organized and existing under Philippine laws located at the 22nd Floor PCIB Tower, ADB Avenue corner Poveda Street, Ortigas Center, Pasig City. It is further represented that during a meeting of the board of directors of Software PH held on February 29, 2012, Software PH declared cash dividends in the amount of PhP20,000,000.00 in favor of its stockholders of record as of February 29, 2012 payable within the month of April 2012; that as of February 29, 2012 and since May 10, 2002, Software AG is the registered owner of 232,400 shares, inclusive of five nominee shares, consisting 100 percent of the outstanding capital of the Software PH based on the Certificate issued by the Corporate Secretary of Software PH ;and that on June 1, 2012, Software PH remitted the dividends to Software AG in the amount of EUR160,000.00 through telegraphic transfer as evidenced by the Foreign/Domestic Telegraphic Transfer Application Form issued by Banco de Oro on even date. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, provides that dividends paid to Software AG ,being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: EAcCHI "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 provides that 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: "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" In this particular case, you invoke the Philippines-Germany tax treaty, as amended. Paragraphs 1 and 2, Article 10 thereof provide: "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: STHAaD 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 aforequoted 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: (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; and (b) in all other cases, 15 per cent of the gross amount of dividends. This being the case, and considering that Software AG holds 100 percent of the total shares of Software PH ,this Office is of the opinion and so holds that such dividends paid by Software PH to Software AG are subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Germany tax treaty, as amended. (BIR Ruling No. ITAD-199-11 dated July 26, 2011) . 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