ITAD BIR Ruling No. 374-12

November 16, 2012 ITAD BIR RULING NO. 374-12 Article 10 (Dividend), Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 176-11 Siguion Reyna Montecillo & Ongsiako 4th and 6th Floors, Citibank Center 8741 Paseo de Roxas 760 Makati City Attention: Atty. Ferdinand M. Hidalgo Atty. Ma. Corazon U. del Castillo Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on August 3, 2012, requesting confirmation that dividends paid to Swedish Match Group B.V. ("Swedish") by Swedish Match Philippines, Inc. ("Swedish-Philippines") are subject to income tax at a preferential rate of 10 percent 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") . It is represented that Swedish is a corporation duly organized and existing under the laws of the Netherlands and is a resident thereof based on its Articles of Association, and on the Declaration of Residence issued by the Tax Administration of Rivierenland, The Netherlands on March 12, 2012; that Swedish is situated at John F. Kennedy, Laan 3, 5555 XC Valkenswaard, The Netherlands; that Swedish has an authorized capital amount of Five Million Guilders (DFL5,000,000) divided into fifty million (50,000,000) shares having a par value of ten cents (DFL0.10) each; that Swedish is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on May 31, 2012; and that Swedish-Philippines , on the other hand, is a domestic corporation situated at 104 Technology Avenue, Laguna Technopark, Bian, Laguna, Philippines. On July 11, 2012, the Board of Directors of Swedish-Philippines approved a declaration of cash dividend of USD6,018,312.00, or approximately USD1.50 per share to all stockholders of record of Swedish-Philippines as of August 13, 2012, paid on August 13, 2012 per HSBC Certification dated September 3, 2012; that Swedish holds 4,012,003 common shares constituting 99.99 percent of the issued and outstanding shares of Swedish-Philippines. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certificate of No Pending Case issued by the Finance Manager of Swedish-Philippines on July 11, 2012. ATcEDS In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides that dividends payable to Swedish , a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that such dividends may be exempt from income tax or subject to reduced rate to the extent required by any treaty obligation on the Philippines, viz. : "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" With respect to a treaty, 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. xxx xxx xxx" 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: (a) 10 percent of the gross amount of dividends if the recipient of the dividends 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 (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as Swedish , the recipient of the dividends from Swedish-Philippines , is a company in the Netherlands whose capital is wholly divided into shares, and since Swedish holds directly 99.99 percent of the capital of Swedish-Philippines , such dividends paid by Swedish-Philippines to Swedish are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-176-11 dated June 27, 2011) 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. aHSTID Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue