ITAD BIR Ruling No. 405-12

December 20, 2012 ITAD BIR RULING NO. 405-12 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 219-11 San Roque Power Corporation Principal Office Barangay San Roque, San Miguel 2438 Pangasinan Attention: Carlos M. Echevarria Vice-President, Treasurer and CFO Gentlemen : This refers to your Tax Treaty Relief Application dated January 12, 2012 filed on behalf of KPIC Netherlands B.V. ("KPIC BV"), requesting confirmation that the dividends to be paid by San Roque Power Corporation ("SRPC"), are subject to the 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") . Facts It is represented that KPIC BV, situated at Strawinskylaan 3105, 1077 ZX Amsterdam, The Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, per the Declaration of Residence issued by the Inspector of the Tax Administration of the Netherlands; that KPIC BV is a corporation organized and existing under the laws of the Netherlands with an authorized capital of Ninety Thousand Euro (EURO90,000), divided into Ninety Thousand (90,000) shares of one euro (EURO1.00) each; that KPIC BV is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated December 15, 2011; and that, on the other hand, SRPC is a corporation organized and existing under the laws of the Philippines with principal office address at Barangay San Roque, San Miguel 2438 Pangasinan, Philippines. On January 12, 2012, the Board of Directors of SRPC declared cash dividends of JPY3,013,820,849 out of its unrestricted retaining earnings in favor of all stockholders of record as of January 12, 2012 payable immediately per Secretary's Certificate dated January 12, 2012; that KPIC BV is the owner of 1,000 common shares and 941,162 preferred shares, representing 50% of the SRPC total shares; that SRPC paid the dividends to KPIC BV on January 12, 2012 (New York Time), or January 13, 2012 at 4:54 am (Manila Time); and that payment remittance to KPIC BV by SRPC is supported by a notarized letter issued by Deutsche Bank Trust and Company America dated March 7, 2012. acHTIC Ruling 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 income derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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%)." ICcaST 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." Thus, Article 10 of the Philippines-Netherlands tax treaty, which you invoked, may apply to the instant case. It provides: "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. cIHDaE 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. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not 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. Such being the case, since KPIC BV holds 50% of the total shares of SRPC, this Office is of the opinion and so holds that the dividend payments by SRPC to KPIC BV are subject to the preferential tax rate of 10 percent, based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD 219-11 dated September 1, 2011) 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