ITAD Ruling No. 012-05

February 16, 2005 ITAD RULING NO. 012-05 Article 10, Philippines-Germany tax treaty BIR Ruling No. DA ITAD 181-03 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 226 Makati City Philippines Attention: J.A. Osana Tax Division Gentlemen : This refers to your application for tax treaty relief dated November 8, 2004, on behalf of your client, T-Systems ITC Philippines, Inc. (TSP), requesting confirmation of your opinion that distribution of cash dividends by TSP to its parent company, T-Systems International GmbH (TSIG), is subject to the preferential tax rate of 10% pursuant to Article 10(2)(a) of the Philippines-Germany tax treaty. cITAaD It is represented that TSIG is a nonresident foreign corporation organized and existing under the laws of Germany with office address at Hahnstrasse 43d, 60528 Frankfurt am Main, Germany; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated August 9, 2004 issued by the Securities and Exchange Commission; that TSP is a domestic corporation organized and existing under laws of the Philippines, with office address at 3rd Floor, Temic Building, Bagsakan Road, FTI Estate, Taguig, Metro Manila, Philippines; that TSP has total outstanding capital stock of Thirty Million Pesos (Php30,000,00.00) divided into Thirty Million (30,000,000) shares with a par value of Php1.00 per share; that TSIG holds Twenty Nine Million Nine Hundred Ninety Nine Thousand Nine Hundred Ninety (29,999,990) shares of stock of TSP with a total par value of Twenty Nine Million Nine Hundred Ninety Nine Thousand Nine Hundred Ninety Pesos (Php29,999,990.00); that TSIG beneficially owns the 10 shares of stock of TSP held by its nominee-directors; that at the meeting of the Board of Directors of TSP held on July 22, 2004, it was resolved that cash dividends in the aggregate amount of Fifteen Million Three Hundred Sixteen Thousand Six Hundred Nineteen Pesos (Php15,316,619.00) be declared out of TSP's unrestricted retained earnings of Sixteen Million Five Hundred Forty Six Thousand One Hundred Forty Five Pesos (Php16,546,145.00) as of December 31, 2003, to stockholders of record as of July 22, 2004; that the cash dividends be declared and paid to TSP's parent company, TSIG, which, as of the record date, directly and/or beneficially owns 100% of the Corporation's total outstanding capital stock per the Corporate Secretary's Certificate dated July 22, 2004; that the Corporation's Chief Financial Officer (or Treasurer) be authorized to pay the cash dividends to TSIG as soon as the cash becomes available; that, however, during the meeting of the Board of Directors of TSP held on July 30, 2004, it was further resolved that the cash dividends of Fifteen Million Three Hundred Sixteen Thousand Six Hundred Nineteen Pesos (Php15,316,619.00) previously declared on July 22, 2004 be amended to a cash dividend of Twelve Million One Hundred Fifty Three Thousand Six Hundred Pesos (Php12,153,600.00) as evidenced by Secretary's Certificate dated December 21, 2004; that the adjusted cash dividend amounting to Twelve Million One Hundred Fifty Three Thousand Six Hundred Pesos (Php12,153,600.00) be declared and paid to TSP's parent company, TSIG; and that TSIG has consented to the foregoing amendment of the cash dividend declared as evidenced by its letter dated July 30, 2004. In reply, please be informed that Article 10 of the Philippines-Germany tax treaty provides as follows: "Article 10 "DIVIDENDS "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 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 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 partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends. "xxx xxx xxx" "4. The term `dividends' as used in this Article means income from shares, raining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. "xxx xxx xxx" Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner/recipient of the dividend owns directly at least 25 percent of the capital of the paying company. In all other cases, the 15 percent preferential tax rate applies. Such being the case, and considering that TSIG holds 100% percent of the capital of TSP, this Office is of the opinion and so holds that the dividend payments by TSP to TSIG shall be 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-Germany tax treaty. (BIR Ruling No. DA ITAD 181-03 dated November 25, 2003) 2005cdtai This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group