ITAD BIR Ruling No. 334-11

December 23, 2011 ITAD BIR RULING NO. 334-11 Article 10, Philippines-Denmark Tax Treaty; BIR Ruling No. ITAD-009-11 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Alexander B. Cabrera Managing Partner, Tax Services Gentlemen : This refers to your tax treaty relief application filed on May 27, 2011, on behalf of Lindberg A/S ("Lindberg"), requesting confirmation that the dividend payments made by Lindberg Subic, Inc. ("LSI") to Lindberg are subject to 10 percent preferential tax rate pursuant to Article 10 of the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Denmark tax treaty"). It is represented that Lindberg, with address at Bjarkesvej 30, 8230 Abyhj, Denmark, is a resident of Denmark within the meaning of the Philippines-Denmark tax treaty based on the Certificate of Residency issued by the Danish Tax and Customs Administration SKAT dated March 8, 2011; that based on the compiled summary of registration from the Danish Commerce and Companies Agency, Lindberg is a company duly incorporated and registered under the laws of Denmark; that per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission (SEC) dated May 25, 2011, SEC approved the petition for cancellation of Lindberg's license to establish a regional or area headquarters in the Philippines on July 30, 2007; and that, on the other hand, LSI is a domestic corporation duly organized and existing under Philippine laws, located at Lot 5, Boton Light and Science Park, Argonaut Highway, Boton Area, SBFZ. It is further represented, as shown in the Secretary's Certificate issued by LSI dated April 25, 2011, that during their annual meeting on March 30, 2011, the Board of Directors of LSI declared cash dividends estimated at P70,000,000.00 to all stockholders of record of LSI as of December 31, 2010, payable on May 31, 2011; that as of May 31, 2011, out of the 12,514 issued and outstanding common shares of LSI, Lindberg beneficially owns 12,509 common shares amounting to Php2,501,800.00 acquired through original subscription to the authorized capital stock of LSI and which constitute 99.96% ownership in LSI. DHIaTS It is finally represented, based on the Sworn Certification by the Treasurer of LSI on April 19, 2011, 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. xxx xxx xxx" With respect to a treaty, Article 10 of the Philippines-Denmark tax treaty which you invoked may apply to the instant case. It provides: SDIACc "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 also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State 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 (other than a partnership) which holds directly at least 25 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. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Denmark 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 beneficial owner of the dividends is a company (other than partnership) which holds directly at least 25 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. This being the case, and considering that Lindberg is a company and holds more than 25 percent of the capital of LSI, such dividends to be paid by LSI to Lindberg 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-Denmark tax treaty. (BIR Ruling No. ITAD-009-11 dated January 19, 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. cIETHa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue