ITAD BIR Ruling No. 330-11

December 23, 2011 ITAD BIR RULING NO. 330-11 Article 10, Philippines-Netherlands Tax Treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. ITAD-46-10; BIR Ruling No. ITAD-37-10; BIR Ruling No. ITAD-29-10; BIR Ruling No. ITAD-21-10 Panasonic System Networks Philippines Corporation Lot C3-8 Carmelray Industrial Park II Calamba City Laguna Attention: Hiroyuki Nishida Finance Director Gentlemen : This refers to your letter dated May 28, 2010, requesting confirmation that the dividends paid by Panasonic System Networks Philippines Corporation ("PSNP") to Panasonic Holding (Netherlands) B.V. ("PHN") are subject to income tax in the Philippines at the preferential 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"). It is represented that PHN, with address at Zuidplein 136-Tower H, 1077 XV, Amsterdam, The Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued by the Inspector of the Tax Administration of the Netherlands on April 21, 2010; that PHN is a private company duly organized and existing under the laws of the Netherlands, with authorized capital of one million one hundred thirty-four thousand five hundred Euros (EUR1,134,500), divided into eleven thousand three hundred forty-nine (11,345) n ordinary shares, each having a nominal value of one hundred Euro (EURO 100) each, based on the Articles of Association of PHN; that PHN 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 Philippine Securities and Exchange Commission on May 6, 2010; and that, on the other hand, PSNP is a domestic corporation with principal office at Lot C3-8 Carmelray Industrial Park II, Calamba City, Laguna; that PSNP is registered with the Philippine Economic Zone Authority as an Ecozone Export Enterprise with Amended Certificate of Registration No. 00-075 dated November 9, 2009. It is further represented, based on the Secretary's Certificate issued by the PSNP on May 24, 2010, that during a special meeting of the Board of Directors of PSNP, a resolution was approved declaring cash dividends amounting to Twenty-Seven Million Six Hundred Thirty-Two Thousand Seven Hundred Fifty-One and 89/100 (US$27,632,751.89) in favor of all its stockholders of record as of March 31, 2010 payable on June 25, 2010; that as of March 31, 2010, PHN owns 499,999,994 with par value of Php1.00 per share representing 99.99% of the subscribed capital stocks of PSNP. CTHDcS It is finally represented, based on the Sworn Statement by the Finance Director of PSNP on May 31, 2010, 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 ("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 . . ., 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 income 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. ESCacI xxx xxx xxx" With respect to a treaty, what you invoked for this purpose is the Philippines-Netherlands tax treaty. Its Article 10 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. xxx xxx xxx" Based on the aforequoted provision, 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. AcSCaI Accordingly, inasmuch as PHN is a private company in the Netherlands, the capital of which is wholly divided into shares and since PHN holds directly 99 percent of the capital of PSNP (which is actually more than the required minimum of shareholding of 10 percent), such dividends to be paid by PSNP to PHN 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. [BIR Ruling No. ITAD-46-10 dated October 5, 2010; BIR Ruling No. ITAD-37-10 dated September 16, 2010; BIR Ruling No. ITAD-29-10 dated August 27, 2010; BIR Ruling No. ITAD-21-10 dated August 20, 2010; BIR Ruling No. ITAD-99-08 dated November 17, 2008] 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 n Note from the Publisher: Copied verbatim from the official copy. Discrepancy between amount in words and in figures