ITAD BIR Ruling No. 331-12

September 3, 2012 ITAD BIR RULING NO. 331-12 Article 10 (Dividends) Philippines-France tax treaty; BIR Ruling No. ITAD-017-01 Tam-Yap Caga & Associates Attorneys-at-Law Unit B, 15th Floor, ACT Tower H.V. Dela Costa Street Salcedo Village, Makati City Attention: Attys. Teresa R. Tam-Yap and Maria Graciela B. Suratos Gentlemen : This refers to your application for tax treaty relief dated August 24, 2011, on behalf of your client, Egis Road Operations S.A. (formerly known as Transroute International S.A.) (hereinafter referred to as "Egis-France" ), requesting confirmation of the applicable tax on the dividend payments by Tollways Management Corporation (hereinafter referred to as "TMC") to Egis-France based on the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-France tax treaty" ). It is represented that Egis-France is a nonresident foreign corporation duly organized and existing under the laws of France with office address at 11 Avenue Du Centre, 78 280 Guyancourt, France, per the duly consularized authenticated copy of Certificate of Residence issued by the Tax Inspector of the Major Accounts Department of the General Department of Public Finance of France on January 3, 2011; that Egis-France is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission dated January 31, 2011; that, on the other hand, TMC is a domestic corporation duly organized and existing under the laws of the Philippines, with principal office at KM 12 North Luzon Expressway, Balintawak, Quezon City. It is further represented that during the meeting of the Board of Directors of TMC on August 3, 2011, a resolution was passed and approved declaring cash dividends in the aggregate amount of One Hundred Ninety Two Million Pesos (PhP192,000,000.00) payable to the stockholders of record as of August 3, 2011 based on their shareholdings as of said date, which cash dividends shall be paid on or prior to October 31, 2011; that as of August 3, 2011, the number of shares of Egis-Phil registered in the name of Egis-France is 129,200 amounting to Twelve Million Nine Hundred Twenty Thousand Pesos (PhP12,920,000.00) which represents 34% of the total number of shares of TMC; and that Egis-France is entitled to a cash dividend in the amount of Sixty Five Million Two Hundred Eighty Thousand Pesos (PhP65,280,000.00) as its distributive share in such cash dividend declaration based on the Secretary's Certificate issued by TMC on August 10, 2011. EHASaD In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended provides, viz. : "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 . . . dividends . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the same Code provides, viz. : "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 ( i.e. , TITLE II-TAX ON INCOME): 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." DACcIH In this particular case, the tax treaty invoked is the Philippines-France tax treaty, as amended by a Protocol effective January 1, 2000. Its Article 10 provides as follows: "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 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 beneficial owner is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b. in all other cases 15 per cent of the gross amount of the dividends. xxx xxx xxx" Based on the foregoing, the 10 percent preferential tax rate on dividend applies whenever the beneficial owner/recipient of the dividends owns at least 10 percent of the voting shares of the paying company. In view thereof, considering that as of August 3, 2011, Egis-France holds 129,200 shares in TMC amounting to Twelve Million Nine Hundred Twenty Thousand Pesos (PhP12,920,000.00) representing 34% of the total number of shares of TMC, which is more than the required shareholding of 10 percent, and since the subject transaction transpired after the abovementioned Protocol took effect, the dividends payable to Egis-France by TMC shall be subject to a preferential tax rate of 10 percent of the gross amount of the dividends, pursuant to the Philippines-France tax treaty, as amended. ( BIR Ruling No. ITAD-017-01 dated February 19, 2001 ) SECAHa 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