ITAD BIR Ruling No. 395-12

December 18, 2012 ITAD BIR RULING NO. 395-12 Article 10 (Dividends) Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 89-11 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: W.U. Villanueva Principal, Tax Services Gentlemen : This refers to your application for tax treaty relief dated April 18, 2012, requesting confirmation that dividends paid by Team Diamond Holding Corporation ("Team Diamond") to DGA Ilijan B.V. ("DGA") are subject to preferential tax 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 DGA is a corporation organized and existing under the laws of the Netherlands; that it is a resident of the Netherlands, with principal business address at Claude Debussylaan 28 12 Amsterdam, based on the Declaration of Residence issued by the Inspector of the Tax Administration Rivierenland, the Netherlands on January 19, 2012; that DGA is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on January 11, 2012; and that, on the other hand, Team Diamond is a partnership organized and existing under the laws of the Philippines, situated at CTC Building, 2332 Roxas Boulevard, Pasay City. It is further represented, that DGA has an authorized capital stock of ninety thousand euros (EUR 90,000) divided into ninety thousand (90,000) shares, each having a nominal value of one euro (EUR 1) based on its Deed of Incorporation dated February 10, 2011; that DGA has a total outstanding common shares of 24,155,982 with par value of PhP10 per share; that as of April 17, 2012, the total outstanding common shares registered under the name of Mitsubishi Corporation and its nominee directors are 12,370,688 shares or 51.21% of the total issued and outstanding common shares of Team Diamond; the effective June 10, 2011, Mitsubishi Corporation transferred and conveyed all of its shares in Team Diamond to DGA based on the Deed of Exchange entered into by and between Mitsubishi Corporation and DGA; that pursuant to a Deed of Trust entered into by and between Mitsubishi Corporation and DGA. Mitsubishi Corporation shall hold the shares in Team Diamond in trust and for the benefit of DGA pending the filing and issuance by the Bureau of Internal Revenue of the requisite Certificate Authorizing Registration and Tax Clearance where the shares can thereafter be recorded in the name of DGA; that during a special meeting of the Board of Directors of Team Diamond held on April 17, 2012, Team Diamond approved and declared dividends in the amount of US$9,013,000.00 payable to all of its stockholders of record as of April 17, 2012; that the said dividends shall be payable on or before May 31, 2012, provided that the actual date of payment within the said period will be determined by any of the directors based on the Certificate issued by the Corporate Secretary of Team Diamond on April 17, 2012; that on April 27, 2012, Citibank, N.A. remitted the amount of USD$4,154,216.17 to DGA based on the Certification issued by Citibank on May 28, 2012. TSADaI In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, the dividends paid to DGA 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, under Section 32 (B) (5) of the Tax Code, such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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. TaSEHC xxx xxx xxx" With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1, 2 and 5, 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 5. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and 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." Based on the above-cited paragraph 2, 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 if the recipient of the dividends is a company whose capital 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 in all other cases. EaIDAT This being the case, since DGA holds more than 10 percent of the capital of Team Diamond (in fact, it holds 51.21% of the outstanding capital stock of Team Diamond ),such dividends paid by Team Diamond to DGA are subject to income tax at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. 89-11 dated March 14, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue