ITAD Ruling No. 109-02

May 30, 2002 ITAD RULING NO. 109-02 RP-Germany Article 10 & 12 BIR Ruling No. 559-88 & ITAD 68-00 Fine Beauty Care Company, Inc. Unit 103 First Midland Condominium Gamboa St., Legaspi Village Makati City 1229 Attention: Mr. Jose F. Montao Finance Manager Gentlemen : This refers to your letter dated August 01, 2001, requesting confirmation that the royalties and dividends to be remitted by Fine Beauty Care Co., (Fine) to Wella Aktiengesellschaft FAWECO GmbH (Wella) are both subject to 10% withholding tax pursuant to the RP-Germany tax treaty. It is represented that Wella is a corporation duly organized and existing under the laws of Germany with principal office at Berliner Allee 65, 6100 Darmstadt, Federal Republic of Germany; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated April 16, 2001; that Fine is a corporation organized and existing under the laws of the Philippines with principal office address at Unit 103 First Midland Condominium, Gamboa Street, Legaspi Village, Makati City; that Fine and Wella entered into an Amended License Agreement which states as follows: a) that Wella hereby grants Fine the sole and exclusive right and license during the term of this Agreement to manufacture Wella's hair care and hair cosmetics products (Products), as far as they bear the trademark "WELLA" either alone or in addition to other trademarks in the Philippines, b) that Fine shall manufacture and sell the Products as principal and not as Wella's agent, c) that Fine may sell the Products outside the Philippines provided there is no legal impediment to said export; that in consideration for such grant, Fine shall pay Wella a royalty of two per cent (2%) of net sales; that the Agreement was duly registered with the Bureau of Patents, Trademarks and Technology Transfer on March 9, 1992 under Certificate of Registration No. 1318; that during the regular meeting of Fine's Board of Directors held on March 30, 2000, it was resolved that the portion of the 1999 unrestricted retained earnings amounting to Ten Million Pesos (P10,000,000.00) be declared as cash dividends to all stockholders of record as of December 31, 1999; that the subscribed and paid-up capital of Fine since its incorporation on December 12, 1991 consists of 200,000 shares with a par value of One Hundred Pesos (P100.00) per share, and is wholly owned by Wella. In reply, as regards the issue on royalties, please be informed that Article 12 of the RP-Germany tax treaty provides, viz : "Article 12 "ROYALTIES "1. Royalties arising in a Contracting State and paid to a resident of the other Contracting may be taxed in that other State. "2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed: a) 15 per cent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. "3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. "xxx xxx xxx' Inasmuch as the royalty payments of Fine to Wella are in consideration of the grant of the sole and exclusive right and license to manufacture and sell hair care and hair cosmetic products, as far as they bear the trademark "WELLA", and considering further that the subject Amended License Agreement complies with the requirements of the Technology Transfer Registry as certified by the Bureau of Patents, Trademarks and Technology Transfer, this Office is of the opinion and so holds that the royalty remittances by Fine to Wella shall be subject to the preferential tax rate of 10% based on the gross amount of royalties. (BIR Ruling ITAD No. 68-00 dated April 7, 2000) As regards the issue on dividends, Article 10 of the RP-Germany tax treaty provides, viz : "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 percent 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, mining shares, founder's 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" Accordingly, inasmuch as Wella owns 100% of the outstanding stock of Fine, this Office hereby confirms your opinion that the dividends to be remitted by Fine to Wella are subject to Philippine withholding tax at the rate of 10% pursuant to Article 10 of the RP-Germany tax treaty. (BIR Ruling No. 559-88 dated November 24, 1988) 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