ITAD Ruling No. 158-02

September 23, 2002 ITAD RULING NO. 158-02 RP-Japan Tax Treaty Art. 10 BIR Ruling No. DA-ITAD-80-02 TES Philippines, Inc. EDSA MRT Depot North Avenue corner EDSA Quezon City Attention: Mr. Tetsugo Kanemura President Gentlemen : This refers to your application for relief from double taxation dated August 15, 2001 requesting for a ruling that the cash dividends to be remitted by TES Philippines, Inc. (TES) to Ryoju Transportation Equipment Engineering & Services, Ltd. (RTEE) are subject to the preferential tax rate of 10% pursuant to the RP-Japan tax treaty. It is represented that RTEE is a non-resident foreign corporation duly organized and existing under the laws of Japan with business address at 16-20 Hinode 2-Chome Kawasaki-ku, Kawasaki City, Kanagawa 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 as evidenced by a certification issued by the Securities and Exchange Commission dated November 5, 2001; that TES is a corporation duly organized and existing under the laws of the Philippines with business address at EDSA MRT Depot, North Avenue corner EDSA, Quezon City; that TES has a subscribed capital stock of 100,000 shares in the amount of P10,000,000.00; that out of 100,000 shares, RTEE owns 99,995 shares amounting to P9,999,500.00 per TES Secretary's Certificate as of the date of stockholders meeting dated August 5, 2002; and that on May 3, 2001 during the Meeting of the Board of Directors of TES, the Directors resolved and approved the declaration of cash dividends in the amount of P2,000,000.00 or P20.00 per share to stockholders of record as of April 26, 2001 payable on or before July 31, 2001 subject to availability of funds. In reply, please be informed that Article 10 of the RP-Japan tax treaty provides as follows: ACcHIa "Article 10 "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 dividends in all other cases. "The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. "3. . . . "4. The term 'dividends' as used in this Article means income from 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 laws of the Contracting State of which the company making the distribution is a resident. "xxx xxx xxx" Based on the abovequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10 per cent if the latter holds directly at least 25 per cent either of the voting shares or of the total shares of the former for a period of six (6) months immediately preceding the date of payment of the dividends. (BIR Ruling No. DA-ITAD 80-02 dated May 2, 2002) Such being the case, and since RTEE holds directly 99.99% of the voting shares of TES for a period of six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that the cash dividends to be remitted by TES to RTEE are subject to the 10% preferential tax rate pursuant to Article 10(2)(a) of the RP-Japan tax treaty. 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