ITAD Ruling No. 171-02

October 2, 2002 ITAD RULING NO. 171-02 RP-Germany Art. 4 & 10 BIR Ruling No. DA-ITAD 109-02 Castillo Laman Tan Pantaleon & San Jose Law Offices The Valero Tower 122 Valero St. Salcedo Village, 1227 Makati City Attention: Atty. Ma. Victoria V. Sarmiento Atty. Arvin O. Geli Gentlemen : This refers to your application for relief from double taxation dated December 6, 2000, on behalf of your client, Merck, Inc., seeking the Bureau's opinion on the applicability of the RP-Germany tax treaty on the dividends to be remitted by Merck, Inc. to Merck AG. It is represented that Merck AG is incorporated in Zug, Switzerland and has its branch in Darmstadt, Germany; that Merck AG is a corporation duly registered and existing under the laws of both Switzerland and the Federal Republic of Germany; that Merck AG's seat of administration is at Postfach 4455, CH-6304, Zug, Switzerland; that Merck AG's seat of business is at Frankfurter Str. 250, 64293 Darmstadt, Germany; that the Finanzamt Darmstadt has confirmed in a Certificate dated 25 September 2000 the following: (1) That all business management of Merck AG functions are being carried out in Darmstadt, and the meetings of its Board of Directors are held only therein, as represented by Mr. Wolfman Gottschalle, the Secretary to the Board of Directors of Merck AG; (2) That Merck AG is a resident of Germany for tax purposes, as its place of management is in Darmstadt, and (3) That Merck AG is registered at the tax office of Darmstadt under the tax number 00723919117; that Merck AG is subject to unlimited taxation in Germany since January 1, 2000; that the Chancery of State of Canton of Zug, Switzerland has issued a confirmation that as a consequence of the Double Residency status of Merck AG in Switzerland and Germany, Merck AG can only take advantage of the double taxation agreements entered into by Germany; that Merck AG is not registered either as a partnership or as a corporation and has not been licensed to do business in the Philippines per Certificate of Non-Registration issued by the Securities and Exchange Commission dated December 19, 2000; that Merck, Inc. is a domestic corporation duly organized and existing under the laws of the Philippines; that Merck, Inc.'s principal business address is at 7/F Vernida IV Bldg., 128 Alfaro St., Salcedo Village, Makati, Metro Manila; that Merck, Inc. presently has an authorized capital stock of Php100,000,000.00 divided into 100,000 shares with a par value of Php1,000.00 per share; that of the said shares, 91,513 shares are beneficially owned by Merck AG which are fully paid and outstanding; that Merck, Inc. intends to remit cash dividend to Merck AG. In reply, please be informed that Article 4 and Article 10 of the RP-Germany tax treaty provide: "Article 4 "FISCAL DOMICILE "1. For the purposes of this Agreement, the term `resident of a Contracting State' means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. "xxx xxx xxx" "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. EcHAaS "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 the State, but the tax so charged shall not exceed: "a) 10 per cent 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 the dividends. "xxx xxx xxx" "4. The term `dividends' as used in this Article means income from shares, mining shares, founders' 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" Based on the foregoing provisions, the Philippines may tax the dividends paid to a company which is a resident of Germany and which owns directly at least 25 per cent of the capital of the company paying the dividends at a rate not exceeding 10 per cent of the gross amount of the dividends. Since Merck AG is deemed to be a resident of Germany for tax purposes, this Office is of the opinion and so holds that the provisions of the RP-Germany tax treaty applies to Merck AG. Accordingly, inasmuch as Merck AG owns 91.513% of the outstanding stock of Merck, Inc., the dividends to be remitted by Merck, Inc. to Merck AG are subject to Philippine withholding tax at the rate of 10% pursuant to Article 10 of the RP-Germany tax treaty. ( BIR Ruling No. DA-ITAD 109-02 dated May 30, 2002 ) It must be stressed, however, that, despite the effectivity of the RP-Switzerland tax treaty on January 1, 2002, Merck AG may only avail of the provisions of the RP-Germany tax treaty, as confirmed by the Chancery of State of Canton of Zug, Switzerland. This ruling is issued on the basis of the foregoing representations. 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