ITAD Ruling No. 113-02

May 30, 2002 ITAD RULING NO. 113-02 Sec. 32 (B) (7) (a) (ii) of the 1997 Tax Code BIR Ruling DA-319-2000 H & Q Philippine Venture II Inc. 22nd Floor, Equitable PCIBank Tower 2 Makati Avenue, Makati City Attention: Ms. Mel Evangelista Gentlemen : This refers to your application for relief from double taxation in your letters dated November 21, 2000 and March 23, 2001, requesting confirmation of your opinion that the cash dividends to be remitted by H & Q Philippine Venture II, Inc. ("H&QII") to Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden, N.V. (a.k.a. the Netherlands Development Finance Company or FMO) ("FMO") are exempt from Philippine tax pursuant to Section 32(B)(7)(a)(ii) of the Tax Code of 1997. It is represented that FMO is a financial institution owned, controlled and financed by the State of the Netherlands; that it is organized for the purpose of providing financial assistance to the private sector in developing countries, inter alia, by subscribing to share capital, by granting loans and providing subsidies; that FMO is not engaged in trade or business in the Philippines as certified by the Securities and Exchange Commission per certification dated March 27, 2001; that FMO's authorized capital stock is 50 Million Dutch Guilders (NLG) divided into 510,000 A shares of NLG50 each, which may be held only by the State of the Netherlands, and 490,000 B shares of NLG50 each, which may be held by private investors; that the State of the Netherlands owns 51% or 204,000 shares out of the total 400,000 issued and outstanding shares of FMO and that FMO operates partly with funds drawn directly from budget appropriations for the Development Fund and partly with borrowings on the Dutch capital market. It is further represented that as of October 31, 2000, FMO owns 23,786 common shares of H&QII, a corporation organized and existing under the laws of the Republic of the Philippines with business address at 22nd Floor Equitable PCIBank Tower 2, Makati Ave., Makati City; that the Board of Directors of H&QII declared cash dividend in the amount of Eighty Million Pesos (P80,000,000.00) or P326.5306122 per share in favor of common stockholders of record as of October 31, 2000 in proportion to their respective common shareholdings as of said record date, payable on or before December 5, 2000; and that the Board of Directors of H&QII declared another cash dividend in the amount of Thirty Three Million Five Hundred Fifty Eight Thousand Two Hundred Fifty Nine Pesos (P33,558,259.00) or P67,116.518 per share in favor of all common stockholders and P109.5779886 per share in favor of all redeemable preferred stockholders of record as of March 15, 2001 in proportion to their respective common or redeemable preferred shareholdings as of said record date, payable on or before April 15, 2001. In reply, please be informed that Section 32(B)(7)(a) of the Tax Code of 1997 provides that income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financial institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments shall not be included in gross income and shall be exempt from taxation. Such being the case, since FMO has been represented to be a financial institution owned, controlled and financed by the Royal Netherlands Government as contemplated under Section 32(B)(7)(a)(ii) of the Tax Code of 1997, this Office is of the opinion and so holds that the cash dividends issued by H&QII to FMO are exempt from Philippine income tax and consequently from withholding tax. (DA-319-2000 dated August 22, 2000) 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