ITAD BIR Ruling No. 350-15

December 7, 2015 ITAD BIR RULING NO. 350-15 Article 10, Philippines-France tax treaty, as amended Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Roselle K. Yu Executive Director Tax Services Gentlemen : This refers to your tax treaty relief application filed on November 14, 2014, on behalf of Essidev, S.A. ("Essidev") , requesting confirmation that dividends paid by Essilor Manufacturing Philippines, Inc. ("Essilor") to Essidev 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") . It is represented that Essidev is a corporation organized and existing under the laws of France per the Certificate of Residence for Tax Purposes issued by the Direction Generale Des Finances Publiques, Direction des Grandes Entreprises dated September 16, 2014; 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 August 15, 2014; and that, on the other hand, Essilor is a corporation organized and existing under the laws of the Philippines. It is further represented that on October 3, 2014, the Board of Directors of Essilor declared cash dividends in the total amount of US$9,000,000.00 (equivalent to P402,957,000) to all stockholders of record as of October 3, 2014, payable on or before December 31, 2014; that Essidev owns a total of 5,177,119 shares of the common stock of Essilor with a total par value of P517,711,900.00 which represents 99.99 per cent of the issued and outstanding stock of Essilor ; that the said shares was acquired by Essidev through various dates of subscription since June 28, 2013. 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%)." 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: 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 Essidev is a company resident in France with no fixed place of business in the Philippines, which holds 99.99 per cent of the issued and outstanding stock of Essilor , then this Office is of the opinion and so holds that the dividends paid by Essilor to Essidev 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. 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