ITAD Ruling No. 066-04

July 7, 2004 ITAD RULING NO. 066-04 Article 10, Philippines-Spain tax treaty BIR Ruling No. DA-ITAD-32-03 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated June 30, 2004, requesting confirmation of your opinion that the dividend payments of your clients, Marubeni Mindanao Power Holdings Corporation (MMPHC), Marubeni Pacific Energy Holdings Corporation (MPEHC), Marubeni Mindanao II Power Holdings Corporation (MMIIPHC), Marubeni Pacific II Energy Holdings Corporation (MPIIEHC) and Marubeni Energy Services Corporation (MESC) collectively referred to as the " Corporations ," to Armada Power Holdings, S.L. ( AP ), are subject to the preferential tax rate of 10% of the gross amount of royalties pursuant to Article 10(2)(a) of the Philippines-Spain tax treaty. It is represented that AP is a nonresident foreign corporation duly organized and existing under and by virtue of the laws of Spain with principal office address at Pedro Teixeira, 8, 4th Floor, Madulo 1, Edificio Iberia Mart 1, 28020, Madrid Spain; that AP is not registered either as corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated June 22, 2004; that the Corporations , on the other hand, are domestic corporations organized and existing under Philippine laws; that AP is a stockholder of record, including shares held by the nominee directors in trust and on behalf of AP , of the Corporations as follows: Name of No. of Shares Percentage Corporation Ownership MMPHC 100,000 (Common) 100% 100,000 (Preferred) MPEHC 52,613. (Common) 100% 69,477 (Preferred) MMIIPHC 80,980 (Common) 100% 71,168 (Preferred) MPIIEHC 80,980 (Common) 100% 87,400 (Preferred) MESC 82,300 (Common) 100% It is further represented that on June 21, 2004, the Board of Directors of MMPHC declared cash dividends in the amount of US$55,000.00 to all of its stockholders of record as of June 21, 2004; and that MPEHC, MMIIPHC, MPIIEHC and MESC will also declare cash dividends in favor of AP . In reply, please be informed that Article 10 of the Philippines-Spain tax treaty provides as follows: "Article 10 DIVIDENDS "1. Dividends paid by a corporation 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 corporation paying the dividends is a resident, and according to the law 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 corporation (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends ; (Emphasis supplied) b) in all other cases, 15 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. "3. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founder's shares or other rights not being debt-claims, participating in profits, as well as 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 above, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Spain at a rate not exceeding 10% of the gross amount of dividends if the last-mentioned company holds directly at least 10% of the voting shares of the company paying the dividends. Considering that AP is the beneficial owner of the 100% of the outstanding capital stock in each of the Corporations , this Office is of the opinion and so holds that the dividend remittances of MMPHC to AP are subject to a preferential rate of 10% of the gross amount of dividends pursuant to Article 10(2)(a) of the Philippines-Spain tax treaty. ( BIR Ruling No. DA-ITAD-32-03 dated February 13, 2003 ) Moreover, similarly situated as MMPHC, MPEHC, MMIIPHC, MPIIEHC and MESC, all wholly-owned subsidiaries of AP, once they declare dividends in favor of AP , the 10% preferential tax rate may also apply to them, provided, the percentage ownership of AP in said corporations shall not change at the time of declaration of dividends. 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. ICAcTa Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service