ITAD Ruling No. 094-02

May 16, 2002 ITAD RULING NO. 094-02 RP-France Tax Treaty Article 11 Interest BIR Ruling ITAD 40-99 Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles 30th/Floor Citibank Tower, Citibank Plaza 8741 Paseo de Roxas, Makati City Attention: Atty. Jayson L. Fernandez Gentlemen : This refers to your application for relief from double taxation dated March 22, 2000, on behalf of Carr Indosuez Asia S.A. (CIA), requesting confirmation of your opinion that the interest paid by Indosuez W.I. Carr Securities (Philippines), Inc. (IWCSP) to CIA shall be subject to the 15% preferential tax rate by virtue of the RP-France tax treaty. It is represented that IWCSP is a corporation organized and existing under the laws of the Republic of the Philippines duly licensed to operate as a stock brokerage firm; that IWCSP is a wholly-owned subsidiary of CIA, a corporation duly organized and existing under the laws of France; that CIA 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 (SEC) dated March 31, 2000: that in order to comply with the Net Capital Rule pursuant to Section 24 of the Revised Securities Act and RSA Rule 24(a)-2 of the New Rules on Net Capital, Business Conduct and Books and Records (the "Rules") issued by the SEC, IWCSP entered into a Subordinated Loan Agreement with CIA using the standardized form prescribed by the SEC and the Philippine Stock Exchange (PSE); that the Subordinated Loan Agreement became effective upon its acceptance by Mr. Jose Luis Y. Yulo, Jr., President of PSE, on September 16, 1997; that under the Agreement, CIA lends IWCSP the amount of JP120,119,000.00, and IWCSP promised to pay the said sum and interest thereon at the rate of 1.5% per annum on September 16, 1999; that CIA irrevocably agreed that the obligations under the said Agreement with respect to the payment of principal and interest shall be and are subordinate in right and payment and subject to the prior payment or provision for payment in full of all claims of all present and future creditors of IWCSP, except for claims which are subject to subordination agreements which rank on the same priority as, or are junior to the claim of CIA under such subordination agreements; that under the Net Capital Rule, every broker or dealer shall at all times have highest minimum amount applicable such that its aggregate indebtedness will not exceed 2,000% of its net capital; that the term "aggregate indebtedness," as defined under the Rules, excludes indebtedness subordinated to the claims of the creditors pursuant to a satisfactory subordination agreement in conformity with RSA Rule 24(a)-2; that in effect, the Rules allow a stock broker to maintain the required minimum net capital by entering into a subordinated loan agreement; that the proceeds of the subordinated loan agreement will form part of the brokers capital without increasing its aggregate indebtedness for purposes of the Net Capital Rule. In reply, please be informed that Article 11 of the RP-France tax treaty provides that: "Article 11 "Interest "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 15 per cent of the amount of the interest. "xxx xxx xxx "4. The term 'interest' as used in this Article means income from debt claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article." The definition of the term "interest" covers practically all kinds of income regarded as interest in the various domestic laws. The term designates, in general, income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in profits. Based on the foregoing, interest arising in the Philippines and paid to a resident of France may be subject to Philippine tax at the rate not to exceed fifteen percent (15%) of the amount of the interest, if the recipient is the beneficial owner of the interest. Therefore, the interest paid by IWCSP to CIA, who is the beneficial owner thereof, shall be subject to a tax of fifteen percent (15%) of the amount of interest pursuant to Article 11(2) of the RP-France tax treaty. (BIR ITAD 40-99) The subordinated loan agreement executed by them shall also be subject documentary stamp tax imposed under section 180 of the Tax Code of 1997. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service