ITAD Ruling No. 055-01

June 28, 2001 ITAD RULING NO. 055-01 RP-Japan Article 10 Sec. 109 (w), 173, and 176 of 1997 Tax Code BIR Ruling No. ITAD 44-99 BIR Ruling No. 108-93 BIR Ruling No. 488-99 Sycip Gorres Velayo & Co . 3rd Floor, Insular Life Building Cor. Gorordo & Gen. Maxilom Avenues Cebu City Attention: Lauris L . dela Pea Tax Division Gentlemen : This refers to your letter dated December 01, 2000, requesting confirmation of your opinion that the cash and property dividends to be remitted by FAS Cebu Corporation (FAS) to Nissan Altia Co., Ltd. (NISSAN) are subject to 10% withholding tax pursuant to the RP-Japan Tax Treaty. It is represented that FAS is a corporation organized and existing under the laws of the Philippines with business address at Mactan Economic Zone, Lapu-lapu City, Cebu; that during the regular meeting of FAS' Board of Directors held on December 01, 2000, the Board declared cash dividends in the amount of P8,000,000.00 and property dividends in the form of treasury shares in the total number of 5,999,998 to all stockholders of record as of October 31, 2000; that NISSAN is a stockholder of FAS from September 20, 1995, the date of incorporation, up to October 31, 2000; that as of July 3, 2000, Nissan's shareholdings in FAS amounted to 99.99% of the total subscribed and issued capital stock of the latter; that NISSAN is a non-resident foreign corporation, organized and existing under the laws of Japan with principal office at Minato-ku Tokyo Japan; and that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated November 21, 2000. In reply, please be informed that Article 10 of the RP-Japan Tax Treaty provides as follows: "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 Contracting 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 Contracting State but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; b) 25 percent of the gross amount of the dividends in all other cases. The provisions of this paragraph shall not affect the taxation of company in respect of the profits out of which the dividends are paid. xxx xxx xxx "4. 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 assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. TAEcCS "5. To be entitled to the application of the 10% preferential tax rate on dividends, the recipient, who is the beneficial owner of the shares of stocks shall hold directly at least 25% of the voting shares or the total shares issued by the company issuing the dividend and such shares must be held for the period of at least six (6) months immediately preceding the date of payment of the dividend." The 10% preferential tax rate on dividend applies whenever the beneficial owner/recipient of the dividends owns at least 25% of the outstanding voting shares of the paying company and has been holding the said shares six months immediately preceding the date of payment of the dividends. Since NISSAN owns 99.99% of the total outstanding stocks of FAS as of record date and having been the holder thereof from September 20, 1995 to October 31, 2000, the property dividend in the amount of P5,999,995 and cash dividend in the amount of P7,999,996 remitted by FAS to NISSAN are entitled to the 10% preferential tax rate under Article 10 (2)(a) of the RP-Japan Tax Treaty. On the other hand, the issuance of the property dividend consisting of shares of stock in the amount of P5,999,995 is not subject to the 10 percent (10%) output VAT as the said shares of stock were not primarily held for sale to customers or held for lease in the ordinary course of business as enunciated in BIR Ruling DA-488-08-26-99 dated August 26, 1999, citing Sec. 109(w) of the Tax Code of 1997: "5. . . . Moreover, the declaration by Program of the property dividend consisting of shares of stock of Tondo Realty Co . is not subject to value-added tax inasmuch as the shares of stock distributed as property dividend was not primarily held for sale to customers or held for lease in the ordinary course of business of Program [Sec . 109 (w) of the 1997 Tax Code] However, the certificate of stocks representing the property dividends issued by FAS to NISSAN, shall be subject to the documentary stamp tax under Section 176 of the 1992 Tax Code. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group