ITAD BIR Ruling No. 337-14

December 22, 2014 ITAD BIR RULING NO. 337-14 Article 10 (Dividend), Philippines-Netherlands tax treaty Romulo Mabanta Buenaventura Sayoc & De Los Angeles Attorneys at Law 21st Floor, Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Priscilla B. Valer Partner Gentlemen : This refers to your tax treaty relief application filed on August 17, 2012, on behalf of CYS NEDERLANDS B.V. ("CYS"), requesting confirmation that dividends paid by CHOOSEYOURSHOES PHILIPPINES (CYS-PH) ("CHOOSEYOURSHOES") to CYS are subject to income tax at a 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 CYS is a foreign corporation organized and existing under the laws of the Netherlands and is a resident of the Netherlands, based on the Certificate of Residency issued by the Tax and Customs Administration of Limburg/Kantoor Roemond in The Netherlands on May 29, 2012; that CYS is situated at Roorveld 12 6093 PL Heythuysen-Netherlands; that CYS has an authorized capital of EUR90,000.00 and is divided into shares; that CYS is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on February 8, 2012; and that, on the other hand, CHOOSEYOURSHOES is a domestic corporation situated at National Road, Dampol 2-B, Pulilan, Bulacan, Philippines. It is further represented that the Board of Directors of CHOOSEYOURSHOES, in its special meeting on April 27, 2012, declared cash dividends in the amount of P3,057,867.00 to all stockholders of record as of December 31, 2011 payable on or after June 30, 2012 upon certification by the Treasurer of CHOOSEYOURSHOES of the availability of funds for distribution of cash dividends; that as of December 31, 2011, CYS is the legal owner of 5,000 common shares which represent 100 percent of the total shares of CHOOSEYOURSHOES as evidenced by the Secretary's Certificate dated August 13, 2012; and that said dividend payment was made on November 25, 2013 as evidenced by the Debit Note issued CYS and acknowledged by CHOOSEYOURSHOES. HATEDC It is finally represented that the dividends subject of this ruling 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 Corporate Secretary of CHOOSEYOURSHOES on April 4, 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 payable to CYS, 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 . . ., 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 provides that such dividends may be exempt from income tax or subject to reduced rate to the extent required by any treaty obligation on the Philippines, viz. : "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. DIEAHc xxx xxx xxx" With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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" Based on aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to 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. Accordingly, inasmuch as CYS, the recipient of the dividends from CHOOSEYOURSHOES, is a company in the Netherlands whose capital is wholly divided into shares, and since CYS holds directly 100 percent of the capital of CHOOSEYOURSHOES, such dividends paid by CHOOSEYOURSHOES to CYS are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. EacHCD 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 Bureau of Internal Revenue