ITAD Ruling No. 182-03

November 29, 2003 ITAD RULING NO. 182-03 RP-Japan, Article 10 BIR Ruling No. ITAD 35-02; BIR Ruling No. ITAD 147-03 Shindengen Development Inc . 120 Excellence Avenue, cor Quality Drive SEPZ, CIP Canlubang, Laguna Attention: Mr. Gregorio L. Viado Finance Department Manager Gentlemen : This refers to your letter dated September 29, 2003, requesting confirmation of your opinion that the dividends to be paid and remitted by Shindengen Development Inc. (SDI) to Shindengen Electric Manufacturing Company Ltd. (SEMCL), shall be subject to the preferential tax rate of ten percent (10%) pursuant to the RP-Japan tax treaty. It is represented that SEMCL is a corporation organized and existing under the laws of Japan with business address at New Ohtemachi Bldg., 2-1 Ohtemachi 2-chome, Chiyoda-ku, Tokyo, Japan; that SEMCL is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated September 10, 2003 issued by the Securities and Exchange Commission; that SDI is a corporation organized and existing under the laws of the Philippines; that as of December 31, 2000 SEMCL owns 40% of the issued and outstanding shares of stocks of SDI equivalent to 46,148 shares amounting to Four Million Six Hundred Fourteen Thousand Eight Hundred Pesos (P4,614,800); that SEMCL's holdings in SDI as of March 15, 2003 remains unchanged; that on May 3, 2001 and March 19, 2003, SDI's Board of Directors declared a cash dividend of P1.98 and P2.77 per share of stock, respectively, to be paid to stockholders of record as of December 31, 2000 payable on or before July 31, 2001 with a total amount of P22,849.00, part of which is payable to SEMCL amounting to Ninety One Thousand Three Hundred Seventy Three and 04/100 pesos (P91,373.04), and to the stockholders of record as of March 15, 2003 payable on or before March 25, 2003 with a total amount of P319,658 part of which is payable to SEMCL amounting to One Hundred Twenty Seven Thousand Eight Hundred Twenty Nine and 96/100 Pesos (P127,829.96) as evidenced by the Minutes of the Special Meeting of the Board of Directors and the Corporate Secretary's Certificate of SDI. In reply, please be informed that Article 10 of the RP-Japan tax treaty provides as follows: "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; cDTaSH b) 25 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx" Based on the above, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10 percent if the latter is the beneficial owner which holds directly at least 25 percent either of the voting shares or of the total shares of the former for a period of six months immediately preceding the date of payment of the dividends. Considering that SEMCL is the beneficial owner which holds forty per cent (40%) of the capital stock of SDI during the period of six months immediately preceding the date of payment of dividends, the dividends to be paid and remitted by SDI to SEMCL are subject to the ten percent (10%) preferential tax rate pursuant to Article 10(2)(a) of the RP-Japan tax treaty, which shall apply to future declaration of dividends under similar conditions. ( BIR Ruling No. ITAD 147-03 dated October 2, 2003; BIR Ruling No. ITAD 35-02 dated March 27, 2002 ) 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 Group