ITAD BIR Ruling No. 349-12

September 21, 2012 ITAD BIR RULING NO. 349-12 Article 10, Philippines-Denmark tax treaty Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Maria Victoria C. Espao Managing Partner & CEO Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on August 4, 2011 ,on behalf of Burmeister and Wain Scandinavian Contractor A/S ("BWSC") ,requesting confirmation that the cash dividends paid by Burmeister and Wain Scandinavian Contractor Mindanao, Inc. ("BWSC-Phil") to BWSC are subject to the preferential withholding tax rate of 10 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 BWSC, with principal address at Gydevang 35 P.O. Box 235, DK-3450 Allerod, Denmark, is a corporation organized and existing under the laws of Denmark, and is a resident thereof within the meaning of the Philippines-Denmark tax treaty per the Certificate of Residency issued by the SKAT Skattecenter Naerum, Rundforbivej 303, 2850 Naerum on January 7, 2011; that it was licensed to engage in business in the Philippines on July 13, 1993 per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated March 30, 2011; that per the notarized Certification issued by BWSC dated November 28, 2011, Burmeister & Wain Scandinavian Contractor A/S Philippine Branch has no participation whatsoever, directly or indirectly, in the acquisition by its head office of shares in BWSC-Phil, and that the income derived by BWSC from its investment in BWSC-Phil is neither attributable to Burmeister & Wain Scandinavian Contractor A/S Philippine Branch nor paid or coursed through the latter, since any dividend income derived from the said investment is directly recorded in the books of BWSC; that such income which is derived by BWSC from its investment in BWSC-Phil is neither connected with, nor resulting from the ordinary course of trade or business of Burmeister & Wain Scandinavian Contractor A/S Philippine Branch ,and that the investment of BWSC in BWSC-Phil or the dividends derived therefrom are neither used nor held for use in the conduct of trade or business of Burmeister & Wain Scandinavian Contractor A/S Philippine Branch ;that on August 4, 2004, Burmeister & Wain Scandinavian Contractor A/S Philippine Branch filed a cancellation of its registration to the Bureau of Internal Revenue ("BIR") and that the latter has been dormant up to present date and such request was approved on October 19, 2010; and that, on the other hand, BWSC-Phil is a corporation organized and existing under the laws of the Philippines with principal address at Daruma Industries Corporation, Building Km. 7, Lanang 8000, Davao City. It is further represented that at the special meeting of the Board of Directors of BWSC-Phil held on May 17, 2011, the board declared cash dividends in the amount of Php11,511,187 at PhP83.78 per share to the stockholders of record as of December 31, 2010 out of unrestricted retained earnings of BWSC-Phil as of December 31, 2010; that based on the Secretary's Certificate issued by BWSC-Phil dated July 8, 2011, as of December 31, 2010, BWSC is the legal and beneficial owner of One Hundred Thirty-Seven Thousand Three Hundred Ninety-Two (137,392) common shares in BWSC-Phil representing 100% of the capital stock of BWSC-Phil; and that, based on a copy of bank remittance issued by the Bank of the Philippine Islands, said dividends were remitted to BWSC on September 7, 2011. It is finally represented per the Certificate issued by BWSC-Phil dated July 8, 2011, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. TADaES 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 by a nonresident foreign corporation in the Philippines. 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%)." 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." aHTDAc In relation to a treaty, Article 10 of the Philippines-Denmark tax treaty 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 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 aforeqouted provisions, dividends arising in the Philippines and paid to a resident of Denmark may be taxed in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of the dividends if the beneficial owner is a company (other than partnership) which holds directly at least 25 percent of the capital of the company paying the dividends, or (b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof and considering that BWSC holds 100% of the outstanding capital of BWSC-Phil, said dividends paid by BWSC-Phil to BWSC are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of the Philippines-Denmark tax treaty. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. DHSCEc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue