ITAD Ruling No. 191-00

December 7, 2000 ITAD RULING NO. 191-00 Article 11 RP-Denmark ITAD 122-00 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty . George Lavadia Principal Tax Services Department Gentlemen : This refers to your letter dated May 26, 2000, requesting for a ruling to the effect that interest on various loans extended by Danfoss A/S (DAS) to Danfoss Inc.(DI) shall be subjected to the preferential tax treaty rate of 10% pursuant to the RP-Denmark Tax Treaty. It is represented that DAS is a non-resident foreign corporation organized and existing under the laws of Denmark with principal office address at Nordborgvej 81, 6430 Nordborg Denmark; that DAS is not licensed to do business in the Philippines per certification dated July 26, 2000, issued by the Securities and Exchange Commission; that DI is a corporation organized and existing under the laws of the Philippines with principal office address at Km. 18 East Service Road, South Superhighway, Sucat, Paraaque City, and is engaged in the business of assembling, manufacturing, servicing, selling on wholesale, marketing, importing and exporting automatic controlled products, hydraulic products, actuators and other related products; that during the period of 1997-1999, DAS and DI executed three loan agreements covering the aggregate amount of US$ 1,050,000.00; that DAS is the beneficial owner of the interest income which ranges from 6 to 6.5 per cent per annum. In reply, please be informed that Article 11 of the RP-Denmark Tax Treaty provides as follows: "Article 11 " INTEREST "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. "2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the interest. SDIaCT The competent authorities of the Contracting Sales may by mutual agreement settle the mode of application of this limitation. "3. . . . "4. The term "interest" as used in this Article means income from debt-claims of every kind whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article "xxx xxx xxx" Based on the foregoing, interest arising in the Philippines and paid to a resident of Denmark may be subject to Philippine tax at the rate not to exceed ten percent (10%) of the amount of the interest, if the recipient is the beneficial owner of thereof. Therefore, the interest payment by DI to DAS, who is the beneficial owner thereof, shall be subject to a tax of ten percent (10%) of the gross amount of the interest. Moreover, the loan agreement executed by them is subject to documentary stamp tax pursuant to Section 180 of the Tax Code of 1997. (ITAD 122-00) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be rendered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group