ITAD BIR Ruling No. 336-15

December 7, 2015 ITAD BIR RULING NO. 336-15 Article 10, Philippines-Netherlands tax treaty Romulo Mabanta Buenaventura Sayoc & De Los Angeles Attorneys at Law 21st Floor, Philamlife Tower 8767 Paseo de Roxas Makati City 1220 Attention: Jayson L. Fernandez Partner Gentlemen : This refers to your tax treaty relief application filed on May 15, 2014, on behalf of Hexagon Investments B.V. ("HIBV") , requesting confirmation that dividends paid to HIBV by Rizal Commercial Banking Corporation ("RCBC") are subject to the preferential tax rate of 10 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands 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 HIBV 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 Tax and Customs Administration of the Netherlands dated January 31, 2014; that it is a corporation organized and existing under the laws of the Netherlands with an authorised capital amounts to Ninety Thousand Euro (EUR90,000.-) divided into Ninety Thousand (90,000) shares, each having a nominal value of one euro (EUR1.-); that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 8, 2014; and that, on the other hand, RCBC is a corporation organized and existing under the laws of the Philippines. It is further represented that at the special meeting of the Board of Directors of RCBC held on March 31, 2014, the Board of Directors of RCBC approved the declaration and payment of cash dividends on common and preferred shares amounting to P1.00 per share or approximately P1.275 Billion payable to holders of common class shares and approximately P342.0 Thousand payable to holders of preferred class shares as of the close of the 10th trading day from the receipt of approval by Bangko Sentral ng Pilipinas (BSP) ("record date"), payable within five (5) calendar days from record date; that as of April 29, 2014, HIBV's total outstanding shares of stock in RCBC is 139,199,198 which represents 10.91 percent of the outstanding capital stock of RCBC; and that the said dividends was remitted by RCBC to HIBV on June 17, 2014. cSaATC 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 which 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 interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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 obligation binding upon the Government of the Philippines. xxx xxx xxx" Thus, the provisions of Article 10 of the Philippines-Netherlands tax treaty, which you invoke, may apply to the instant case. It 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. 6. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the States, carries on business in the other State, of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State professional services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply." Based on the above-cited 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 10 percent of the gross amount of the dividends if the recipient of the dividends is a company, the capital of which is divided into shares, and owns at least 10 percent of the capital of the paying company. In all other cases, the 15 percent preferential tax rate applies. Such being the case and considering that HIBV is a company resident in the Netherlands with no fixed place of business in the Philippines, the capital of which is wholly divided into shares, and that it holds more than 10 percent of the capital of RCBC, this Office is of the opinion and so holds that the dividends paid to HIBV by RCBC are subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. cHDAIS 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