ITAD BIR Ruling No. 345-15

December 7, 2015 ITAD BIR RULING NO. 345-15 Article 10, Philippines-France tax treaty, as amended Tam-Yap Caga & Ilao Law Offices Unit B, 15th Floor, ACT Tower 135 H.V. de la Costa Street Salcedo Village, Makati City Attention: Teresa R. Tam-Yap Gentlemen : This refers to your tax treaty relief application filed on January 14, 2014, on behalf of Egis Projects S.A. ("Egis") , requesting confirmation that dividends paid by Manila North Tollways Corporation ("MNTC") to Egis are subject to a preferential tax rate of 10 percent pursuant to Article 10 of the amended 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. ("Philippines-France tax treaty, as amended") . caITAC It is represented that Egis is a resident corporation of France per the Certificate of Tax Residence issued by the Tax Authority of France dated January 3, 2013; 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 January 18, 2013; and that, on the other hand, MNTC is a corporation organized and existing under the laws of the Philippines. It is further represented that at the meeting of the Board of Directors of MNTC on December 18, 2013, the Board of Directors of MNTC approved the declaration of cash dividends in the aggregate amount of One Billion Two Hundred Forty-Three Million Two Hundred Thousand Pesos (Php1,243,200,000) or Seventy Pesos (Php70.00) per share, payable on or before January 31, 2014, to its stockholders of record as of December 18, 2013 based on their shareholdings as of said date; that as of record date, Egis owns 2,468,640 common shares with a total par value of P246,864,000 which represents 13.90 percent ownership in MNTC; that the said shares was acquired by Egis on September 9, 2005. It is finally represented, per Certification dated January 3, 2014 issued by MNTC, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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 received 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 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%)." ICHDca 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 treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" Thus, Article 10 of the Philippines-France tax treaty, as amended, 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 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: TCAScE a) 10 per cent of the gross amount of the dividends if the recipient 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. 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, 'jouissance' shares or 'jouissance' rights, mining shares, founders' 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 taxation law of the State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on business in the other Contracting 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. xxx xxx xxx" Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed (a) 10 percent of the gross amount of the dividends if the recipient company (excluding partnership) holds directly at least 10 percent of the voting shares of the company paying the dividends, and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, since Egis is a company resident in France with no fixed place of business in the Philippines, which holds 13.90 percent of the common shares of stock of MNTC, then this Office is of the opinion and so holds that the dividends paid by MNTC to Egis are subject to the preferential withholding tax at the rate of 10 percent of the gross amount thereof, pursuant to Article 10 of the Philippines-France tax treaty, as amended. cTDaEH This ruling is issued on the basis of the foregoing 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