ITAD Ruling No. 118-03

August 4, 2003 ITAD RULING NO. 118-03 Art. 10, RP-Japan BIR Ruling No. DA-ITAD 08-03 Luis Caete & Company 3F Oftana Bldg., Jasmin cor. Don Mariano Cui Streets, Cebu City Attention: Luis A. Caete Gentlemen : This refers to your request dated May 21, 2003 for a preferential tax rate of ten per cent pursuant to Article 10(2)(a) of the RP-Japan tax treaty on the dividends received by Tsuneishi Shipbuilding Co., Ltd. (TSCO) from Tsuneishi Heavy Industries (Cebu) Inc. (THICI). It is represented that TSCO is a non-resident foreign corporation duly organized and existing under the laws of Japan, with principal office at 1083 Tsuneishi, Numakuma-Cho, Numakuma-Gun, Hiroshima Prefecture, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per Certificate of Non-Registration dated August 22, 2002 issued by the Securities and Exchange Commission; that THICI is a domestic corporation organized and existing under the laws of the Philippines with principal address located in West Cebu Industrial Park-Special Economic Zone, Balamban, Cebu; that TSCO is the beneficial owner of 158,999,995 shares of stock of THICI with a par value of P1.00 per share representing 52.99% of the total outstanding capital stock of THICI; that on March 21, 2003, the Board of Directors of THICI declared and authorized the payment of cash dividends in favor of its stockholders in the amount of Fifteen Million Pesos (P15,000,000.00) from its unrestricted retained earnings as of December 31, 2002 payable on April 15, 2003. In reply, please be informed that Article 10 of the RP-Japan tax treaty provides: "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 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; b) 25 per cent of the gross amount of the dividend s in all other cases." "xxx xxx xxx" Based on the aforequoted provisions, dividends paid by a Philippine corporation to a resident of Japan may be taxed at a rate not exceeding 10 per cent of the gross amount of dividends if the recipient is a company which holds directly at least 25 per cent of the voting shares of the Philippine corporation or the total shares issued by the company during the period of six months immediately preceding the date of payment of dividends. IEcaHS In view thereof, since TSCO is the beneficial owner of the dividends and directly holds more than 25% of the total shares issued by THICI during a period of six (6) months immediately preceding the date of payment of said dividends, this Office is of the opinion and so holds that the dividends to be received by TSCO from THICI are subject to 10% preferential tax rate pursuant to Article 10(2)(a) of the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD 08-03 dated January 16, 2003 ) 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service