ITAD BIR Ruling No. 360-15

December 16, 2015 ITAD BIR RULING NO. 360-15 Article 10, Philippines-Switzerland tax treaty Salvador Llanillo Bernardo Attorneys-At-Law 815-816 Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue 1226 Makati City Attention: Maria Rosario L. Bernardo Gentlemen : This refers to your tax treaty relief application filed on October 7, 2013, on behalf of Nestle S. A. ("Nestle-Swiss") , requesting confirmation that dividends paid by Wyeth Philippines, Inc. ("Wyeth") to Nestle-Swiss are subject to final withholding tax at the rate of 10 percent, pursuant to Article 10 of the Convention between the Republic of the Philippines and the Swiss Federation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty"). HEITAD It is represented that Nestle-Swiss is a resident of Switzerland within the meaning of the Philippines-Switzerland tax treaty per the Certificate of Residence issued on May 14, 2013 by the Department of Finance of the Canton of Vaud, Switzerland; that it is a company limited by shares incorporated and organized in accordance with the Swiss Code of Obligations per its Articles of Incorporation; that it is not registered either as a corporation or partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated May 28, 2013; and that, on the other hand, Wyeth is a corporation organized and existing under the laws of the Philippines. It is further represented that at the meeting of the Board of Directors of Wyeth held on September 23, 2013, the Board of Directors of Wyeth declared cash dividend of Ps.491.47 per share, or a total of Ps.3,000,000,000.00, in favor of stockholders of record as of the close of business on August 30, 2013, payable on or before October 15, 2013; that as of the declaration and the payment of the dividend, Nestle-Swiss holds 100 percent (including 9 Class B shares held in trust by its nominee shareholders) ownership of Wyeth ; that the said shares was acquired by Nestle-Swiss on November 30, 2012. 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 in the Philippines 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-Switzerland tax treaty, which you invoke, may apply to the instant case. It provides: "Article 10 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 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 beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; ATICcS b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 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 taxation law of that State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner 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 independent personal 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 case, the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. . . ." Based on the aforequoted provisions of Article 10, dividends paid by a Philippine corporation to a resident of Switzerland may be taxed at a rate not exceeding 10 percent of the gross amount of dividends if the recipient is a company which holds directly at least 10 percent of the capital of the Philippine corporation; and 15 percent if the shareholdings of the recipient company is below 10 percent of the capital of the paying company. In view thereof, considering that Nestle-Swiss is a resident corporation in Switzerland with no fixed place of business in the Philippines, and directly holds 100 percent ownership of Wyeth , this Office is of the opinion and so holds that the dividends paid by Wyeth to Nestle-Swiss are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. 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