ITAD Ruling No. 193-00

December 7, 2000 ITAD RULING NO. 193-00 RP-Japan Article 1 ITAD 49-00 Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue 1226 Makati City Attention: Mr . George J . Lavadia Principal Tax Services Department Gentlemen : This refers to your letter dated March 16, 2000 on behalf of Kawasho Corporation (Kawasho) and Kasei Industry Co., Ltd. (Kasei), requesting for a ruling that K & K Molding, Inc.'s (K & K) dividend payments to Kasei and Kawasho are subject to the preferential tax rate of ten percent (10%) pursuant to the RP-Japan Tax Treaty. It is represented that Kasei is a non-resident foreign corporation, duly organized and existing under the laws of Japan with principal office address at 181-1 Kamigou, Ebina, Kamagawa, Japan; that it is not registered as a corporation/partnership licensed to do business in the Philippines per certification dated October 18, 1999 issued by the Securities and Exchange Commission; that Kawasho is a non-resident foreign corporation, duly organized and existing under the laws of Japan with principal office address at 7-1 Olemachi 2-Chome, Chiyoda-Ku, Tokyo 100-8070 Japan; that Kawasho has a duly registered branch in the Philippines, as per certification issued by Securities and Exchange Commission dated December 09, 1974, located at Villanueva, Misamis Oriental; that the branch had no participation in Kawasho's investment in the capital stock of K & K as it is limited to engage in the construction of a sintering plant, importing equipment, machineries and materials not locally available for the sintering plant, and exporting the finished steel making materials produced by the sintering plant; that K & K is a domestic corporation with business address at Lima Technology Center, Special Economic Zone, Malvar, Batangas; that Kasei and Kawasho respectively own 51% and 49% of the outstanding capital stock of K & K; that on February 11, 2000, the Board of Directors of K & K passed and approved the declaration of cash dividends in the total amount of Forty Four Million Pesos (P44,000,000.00) to its stockholders of record as of said date; and that the said dividends shall be taken out of K & K 's unrestricted retained earnings as of December 31, 1999. ADHCSE 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; b) 25 percent of the gross amount of the dividends in all other cases The provisions of this paragraph shall not affect the taxation of 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. "5. To be entitled to the application of the 10% preferential tax rate on dividend the recipient who is the beneficial owner of the shares of stocks shall hold directly at least 25% of the voting shares or the total shares issued by the company issuing the dividend and such shares must be held for the period of at least six (6) months immediately preceding the date of payment of the dividend." The 10% preferential tax rate on dividend applies whenever the beneficial owner/recipient of the dividends owns at least 25% of the outstanding voting shares of the paying company and has been holding the said shares for a period of at least six months immediately preceding the date of payment of the dividends. ISCTcH Since Kasei and Kawasho respectively own 51% and 49% of the total outstanding stocks of K & K as of record date being the holder thereof from May 07, 1998 to February 11, 2000, the cash dividends payable by K & K to Kasei and Kawasho are entitled to the 10% preferential tax rate under Article 10(2)(a) of the RP-Japan Tax Treaty.(BIR Ruling No. ITAD 49-00) 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 considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group