ITAD BIR Ruling No. 347-15

December 7, 2015 ITAD BIR RULING NO. 347-15 Article 10 (Dividends), Philippines-Germany tax treaty Temic Semiconductor Test, Inc . 102 Accuracy Drive cor. Excellence Ave., Carmelray Industrial Park 1 Canlubang, Laguna Attention: Melanio Jarin, Jr . Authorized Representative Gentlemen : This refers to your tax treaty relief application filed on March 5, 2015, requesting confirmation that the dividends paid to Atmel Automotive GMBH ("AAG") by Temic Semiconductor Test, Inc. ("TSTI") 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 Government of the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Germany tax treaty") . ETHIDa It is represented that AAG is a corporation organized and existing under the laws of the Federal Republic of Germany, and is a resident of the Germany for tax purposes based on the Certificate of Residence issued by the German Tax Administration dated January 28, 2015; 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 February 23, 2015; and that, on the other hand, TSTI is a corporation organized and existing under the laws of the Philippines. It is further represented, that on December 12, 2014, at the special meeting of the Board of Directors of TSTI, the Board of Directors of TSTI declared cash dividends in the amount of Twenty Eight Million Five Hundred Sixty Four Thousand Five Hundred Ninety Six Pesos (Php28,564,596.00) to be taken out of its unrestricted retained earnings in favor of all the stockholders of record as of close of business on December 12, 2014; that as of to date, AAG is the beneficial owner of 22,000,000 common shares of TSTI including 5 nominal shares assigned to and held by the members of the AAG's Board of Directors constituting of 100.00 percent of the total outstanding capital stock of TSTI since September 16, 2013. It is finally represented, per the Sworn Statement dated March 5, 2015 issued by TSTI, 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 under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends paid to AAG are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Non-resident 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 capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)". cSEDTC However, under Section 32 (B) (5) of the Tax Code, these dividends may be subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 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." For this purpose, you invoke the Philippines-Germany tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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 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; SDAaTC b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx" Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company which owns directly at least twenty-five percent (25%) of the capital of the company paying the dividends; and (b) 15 percent in all other cases. In view thereof and considering that AAG, a resident of Germany with no fixed place of business in the Philippines, holding 100 percent ownership of the capital of TSTI since September 16, 2013, such dividends paid by TSTI to AAG are subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.