ITAD BIR Ruling No. 352-13

December 9, 2013 ITAD BIR RULING NO. 352-13 Article 10 (Dividends), Philippines-France 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 August 15, 2013 requesting confirmation that dividends paid by Tollways Management Corporation ("Tollways Management") to Egis Road Operation SA ("Egis Road") are subject to preferential tax rate of 10 percent pursuant to the 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 by a Protocol . 1 Facts Egis Road is a corporation organized and existing under the laws of France and a resident thereof based on its update Articles of Association, the Certificate of Incorporation issued by the Commercial Court of Versailles in France on December 7, 2012 and the Certificate of Residence issued by the Direction Gnrale Des Finances Publiques of France on January 3, 2013. Egis Road is situated at 11 Avenue Du Centre, Guyancourt, France. It is not registered either as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on August 22, 2013. On the other hand, Tollways Management is a corporation organized and existing under the laws of the Philippines located at Kilometer 12, Balintawak Toll Plaza, North Luzon Expressway, East Libis, Baesa, Caloocan City, Philippines. AHCaED Based on the Secretary's Certificate issued on August 5, 2013, the Board of Directors of Tollways Management ,at its regular meeting on July 24, 2013, declared cash dividends of P271,500,000.00 in favor of the company's stockholders of record as of July 24, 2013 based on their respective shareholdings as of said date, and payable on or before September 30, 2013. As of record date, Egis Road holds 34 percent of the outstanding capital stock of Tollways Management as represented by the common shares of stock it issued, to wit: Stockholder Number and Value of Shares Mode of Acquisition Acquisition Date Percentage of Ownership Egis Road 340 (P34,000.00) Original Subscription August 2, 2000 34 percent 128,860 (P12,860,000.00) August 30, 2006 Based on this stockholding, Egis Road is entitled to receive dividends of P92,310,000.00 from Tollways Management. Based on the Affidavit issued by Tollways Management on October 10, 2013 and the transaction document issued by Banco de Oro, Unibank, Inc. 2 on September 27, 2013, the dividends were remitted as follows: Date of Reference Gross Amount Net Amount Receiving Bank Remittance Number After Withholding Tax September 30, 2013 0067- P92,310,000.00 1397559.96 Standard 1300010FXTT (P82,127,611.05) Charted Bank Germany Branch 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: DIECTc "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: 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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." aTSEcA 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: 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." Thus, you invoke the provisions of Article 10 of the Philippines-France tax treaty, as amended, which state: "Article 10 Dividends 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other State may be taxed in that other State. TCDHaE 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 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." Under Article 10, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company (excluding partnership) which holds directly at least 10 percent of the voting shares of the company paying the dividends and 15 percent in all other cases. Accordingly, since Egis Road holds at least 10 percent of the voting shares of Tollways Management where it actually holds 34 percent of the common shares of Tollways Management ,such dividends paid to Egis Road by Tollways Management are subject to income tax rate of 10 percent , pursuant to paragraph 2 (a), Article 10 of the Philippines-France tax treaty, as amended. 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. CIcEHS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976 effective January 1, 1998 . 2. Located at BDO Corporate Center, 7899 Makati Avenue, Makati, Philippines.