ITAD BIR Ruling No. 351-13

December 9, 2013 ITAD BIR RULING NO. 351-13 Article 10, Philippines-Netherlands tax treaty Tam-Yap Caga & Ilao Law Offices Unit B, 15th Floor, ACT Tower 135 H.V. De La Costa Street Salcedo Village Makati City Attention: Atty. Teresa R. Tam-Yap Gentlemen : This refers to your tax treaty relief application filed on June 10, 2013 requesting confirmation on your opinion that the dividends paid by Kalayaan Power Management Corporation ("Kalayaan Power") to CBK Netherlands Holdings B.V. ("CBK Netherlands") are subject to preferential tax rate 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") . Facts CBK Netherlands is a foreign corporation and a resident of the Netherlands based on its Articles of Association Incorporation and Declaration of Residence issued by the Tax Administration of Rotterdam in the Netherlands on August 13, 2012. CBK Netherlands is located at Luna Arena, Herikerbergweg 238, Amsterdam, Netherlands. CBK Netherlands is a company with an authorized capital of 90,000 euros and divided into 900 shares, each share with a par value of 100 euros. It is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration issued by the Securities and Exchange Commission on June 7, 2013. On the other hand, Kalayaan Power is a domestic corporation located at CBK Complex, San Juan, Kalayaan, Laguna, Philippines. DACIHc Based on the Secretary's Certificate issued on June 10, 2013, the Board of Directors of Kalayaan Power ,during a meeting on June 3, 2013, approved a resolution declaring cash dividends amounting to US$200,000.00 in favor of the company's stockholders of record as of December 31, 2012, and payable on June 28, 2013. As of record date on December 31, 2012 and payment date on June 28, 2013, CBK Netherlands holds 99 percent of the common shares of stock of Kalayaan Power as described below: Stockholder Number and Mode of Acquisition Percentage of Value of Acquisition Date Ownership Shares CBK 98,494 Original May 26, 2000 99 percent Netherlands (P9,849,400.00) subscription Based on the Certification issued by Metropolitan Bank and Trust Company 1 on July 12, 2013, the dividends) were remitted by Kalayaan Power to CBK Netherlands on as follows: Date of Reference Number Gross Amount Net Amount After Remittance Withholding Tax June 28, 2013 096/TT/09876/13 US$200,000.00 US$180,000.00 (P8,630,733.94) (P7,767,660.55) Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines . (A) Gross Income from Sources within the Philippines . The following items of gross income shall be treated as gross income from sources within the Philippines: IcHAaS xxx xxx xxx (2) Dividends . The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "SEC. 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 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: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." CScaDH However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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: IADaSE 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." In this particular case, 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." Based on the 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 10 percent if the recipient 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 15 percent in all other cases. aTDcAH Accordingly, inasmuch as CBK Netherlands is a company in the Netherlands the capital of which is wholly divided into shares, and that CBK Netherlands holds directly at least 10 percent of the capital of Kalayaan Power (as represented by shares) and where CBK Netherlands holds 99 percent of these shares, such dividends paid by Kalayaan Power to CBK Netherlands shall be subject to income tax rate of 10 percent , pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands 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 Footnotes 1. Located at Metrobank Plaza, Sen. Gil Puyat Avenue, Makati, Philippines.