ITAD Ruling No. 123-03

August 11, 2003 ITAD RULING NO. 123-03 Article 10, RP-Netherlands tax treaty BIR Ruling No. DA-ITAD-178-02 Asian Insights, Incorporated 408, Ferros Bel-Air Tower 30 Polaris cor. Durban Streets Bel-Air, Makati City Attention: Atty. Arnold M. Caga Gentlemen : This refers to your letter request dated February 7, 2003 for a preferential rate of ten percent (10%) final withholding tax on the dividend payments by Kalayaan Power Management Corporation (KPMC) to IMPSA Construction Services B.V. (IMPSA) and Edison Mission Operation & Maintenance Services B.V. (EDISON) pursuant to the RP-Netherlands tax treaty. It is represented that IMPSA and EDISON are non-resident foreign corporations duly organized and existing under the laws of the Netherlands with principal address at Blaak 16, 3011 TA, Rottedam and Croeselaan 18, 3521 CB Utrecht, respectively; that they are not registered either as corporations or as partnerships doing business in the Philippines as certified by the Securities and Exchange Commission dated June 24, 2003; that KPMC is a corporation duly organized and existing under the laws of the Philippines with principal address at 29/F, LKG Tower, 6801 Ayala Avenue, Makati City; that for the period covering January 2002 to December 31, 2002, IMPSA and EDISON respectively own on record 49,247 shares of the 98,500 outstanding shares of stock of KPMC; and that at the Organizational Meeting of the Board of Directors held on February 4, 2003, the Board of Directors of KPMC passed and approved the declaration of cash dividends in the amount of P17,330,519 payable in US dollars to all of its stockholders on record as of December 31, 2002 payable on or before February 28, 2003 at the exchange rate applicable as of the date of payment of the dividends. In reply, please be informed that Article 10 of the RP-Netherlands tax treaty provides as follows: "Article 10 "Dividends "1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. "2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that 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 recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying dividends; b) 15 per cent of the gross amount of the dividends in all other cases. "3. . . . "4. . . . "5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. "xxx xxx xxx" Based on the aforequoted provisions, dividends paid by a Philippine corporation to a resident of the Netherlands may be taxed at a rate not exceeding 10 percent of the gross amount of the dividends if the recipient is a company which holds directly at least 10 percent of the capital of the Philippine corporation. Such being the case, this Office is of the opinion and so holds that since IMPSA and EDISON respectively own more than 10 percent of the outstanding capital stock of KPMC, the cash dividends to be paid by KPMC to IMPSA and EDISON are subject to 10 percent final withholding tax pursuant to Article 10 of the RP-Netherlands tax treaty. ( BIR Ruling No. DA-ITAD-178-02 dated October 14, 2002 ) 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 without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assist Commissioner Legal Service