ITAD BIR Ruling No. 331-13

December 2, 2013 ITAD BIR RULING NO. 331-13 Article 10, Philippines-Germany Tax Treaty Croma Medic, Inc. Suite 301, Alegria Building 2229 Chino Roces Avenue Makati City Attention: Mr. Wolfram Heinisch Managing Director Gentlemen : This refers to your tax treaty relief application filed on December 1, 2012 requesting for confirmation of your opinion that the dividends received by BEPHA Beteiligungsgesellschaft fr Pharmawerte mbH (BEPHA) from Croma Medic, Inc. (Croma) are subject to 10 percent preferential tax rate pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty") . It is represented that BEPHA is a nonresident foreign corporation existing and organized under the laws of Germany and a resident thereof as evidenced by the Certificate of Residence issued by the Finanzamt on October 23, 2012; that BEPHA is situated at Stadastrae 2-18, 61118 Bad Vilbel, Germany; that BEPHA is not registered as corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by Securities and Exchange Commission ("SEC") on November 27, 2012; and that, on the other hand, CROMA is a domestic corporation situated at Suite 301, Alegria Building, 2229 Chino Roces Avenue, Makati City, Philippines. It is further represented that the Board of Directors of CROMA, at its meeting on September 25, 2012, declared cash dividend of Euro500,000.00 payable to BEPHA; that as of the date of dividend declaration, BEPHA is a stockholder of record of 5,749,395 common shares with a total par value of P57,749,395.00 representing 100 percent of the outstanding common shares of CROMA and that it has acquired said shares in April, 2010, based on the Certificate issued by CROMA's Corporate Secretary on November 28, 2012; and that per Sworn Statement issued by the VP-Finance & Admin of Croma on January 10, 2013, the payment for the said dividend was made on January 8, 2013. AcaEDC It is finally represented that the dividends subject of the above application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the Senior Finance Manager of CROMA on November 20, 2012. 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 BEPHA, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 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 cCromatal gains, except cCromatal gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). aEcTDI xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that such income 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, the treaty involved is the Philippines-Germany tax treaty which, in 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. acEHCD 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. xxx xxx xxx 4. The term "dividends" as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. xxx xxx xxx" Based on the foregoing, dividends paid by a Philippine corporation to a resident of Germany may be taxed at a rate not exceeding 10 percent of the gross amount of dividends provided that the recipient is a company and that it holds directly at least 25 percent of the capital of the Philippine corporation. In all other cases, a 15 percent preferential tax rate applies. EAIaHD In the instant case, BEPHA holds 100 percent of the outstanding capital stock of CROMA, therefore, the cash dividend paid by CROMA to BEPHA is subject to the 10 percent preferential tax rate on the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Germany 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue