ITAD Ruling No. 070-05

July 19, 2005 ITAD RULING NO. 070-05 Philippines-Japan Tax Treaty, Article 10; BIR Ruling No. DA-ITAD-130-04 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Ma. Victoria A. Villaluz Tax Services Gentlemen : This refers to your letter dated May 9, 2005, applying for tax treaty relief, on behalf of your clients, Kyuden International Corporation (KIC) and Kyuden Ilijan Holding Corporation (KIHC), for the dividend income earned by KIC as the major stockholder of KIHC, pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that KIC is a nonresident foreign corporation and is a resident of Japan for tax purposes, with principal office at 1-82 Watanabedori 2-Chome, Chuo-ku, Fukouka, Japan as evidenced by the Certification dated April 12, 2005 issued by the District Director, Fukuoka Tax Office; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated March 11, 2005; that KIHC is a domestic corporation organized and existing under the laws of the Philippines and a wholly owned subsidiary of KIC, with principal address located in Philippine Stock Exchange Center, 26/F Units 2603 BCD, West Tower, Exchange Road, Ortigas Center, Pasig City; that its primary business purpose is "to invest in and hold shares in the capital stock, bonds and other securities of companies engaged in the construction, installation, erection, commissioning, repair, rehabilitation, operation and maintenance of power stations"; that the authorized capital stock of KIHC is One Hundred Sixty-Eight Million, Nine Hundred Sixty-Two Thousand Pesos (Php168,962,000.00) divided into Eight Million Nine Hundred Sixty-Two Thousand (8,962,000) shares of common stock, which are voting shares, with a par value of One Peso (Php1.00) per share, and One Thousand Six Hundred (1,600) shares of preferred stock with a par value of One Hundred Thousand Pesos (P100,000.00) per share; that KIHC holds the Eight Million Nine Hundred Sixty-One Thousand Nine Hundred Ninety-Five (8,961,995) common shares representing 99.99% of the voting stock of KIHC, and One Thousand Six Hundred (1,600) redeemable preferred shares; that in a meeting of the Board of Directors of KIHC held on March 17, 2005, the Board approved the declaration of cash dividends of Three Pesos & 57/100 (Php3.57) per share out of the unrestricted retained earnings as of December 31, 2004, amounting to Thirty One Million, Nine Hundred Ninety Four Thousand, Seven Hundred Fifty Three Pesos (Php31,994,753.00), for common shares and the total amount of Five Thousand Seven Hundred Twelve Pesos (Php5,712.00) for preferred shares; that the cash dividends shall be distributed and paid to the stockholders as of the date of meeting; and that the cash dividends shall be paid to the stockholders not later than seven business days from the time of the approval of the Bureau of Internal Revenue of the treaty relief application authorizing the use of the preferential tax treaty rate on dividends. aCIHAD In reply, please be informed that Article 10 of the Philippines-Japan tax treaty provides: "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 per cent 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 ; (Emphasis supplied) b) 25 per cent of the gross amount of the dividends in all other cases. The provisions of this paragraph shall not affect the taxation of the 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. "xxx xxx xxx" Based on the abovequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding ten percent (10%) if the latter holds directly at least twenty-five percent (25%) either of the voting shares or of the total shares of the former for a period of six (6) months immediately preceding the date of payment of the dividends. Considering that KIC directly holds 99.99% of KIHC shares of stock as of December 31, 2004 as evidenced by the Certification issued by KIHC's Corporate Secretary dated July 4, 2005, this Office is of the opinion and hereby holds that the dividend payments of KIHC to KIC are subject to the ten percent (10%) preferential tax rate pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-130-44 dated November 10, 2004) This ruling is issued based on 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. ICHDca Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service