Tax Planning

From soup to nuts: revising tax treaties for tax planning

(First of 2 parts)

In the area of ​​cross-border investments, the location of the holding company that will hold shares in a Filipino company is an essential aspect in planning the business structure. Generally, income payments from domestic corporations to non-resident overseas corporations are taxed at a final withholding tax (FWT) of 25 percent, unless the holding company is located in a country that has a tax treaty with the Philippines. In the latter case, the non-resident foreign companies can take advantage of preferential tariffs, provided that the contractual conditions and the administrative regulations for the use of the contractual advantages are complied with.

However, not all double taxation treaties have the same advantages as there are double taxation treaties that offer a lower tax rate compared to others.

For example, the tax impact on passive income (dividends, interest and royalties) will vary depending on the applicable tax treaty during the holding period.

In the case of dividends, the double taxation agreement (DTA) between the Philippines, the Netherlands, Israel, Japan and the United Arab Emirates provides a preferred FWT rate of 10 to 15 percent, compared to the FWT of 15 to 25 percent in other tax treaties. When comparing these contracts with the DTA Philippines-Germany, the DTA Philippines-Germany offers a cheaper FWT of five percent for dividends, provided the beneficial owner is a company (other than a partnership) that directly holds at least 70 percent of the company’s capital who pays the dividends.

On the other hand, for interest and royalties, there are tax treaties that allow 10 percent as the lowest FWT rate, but there are those that have the lowest FWT rate of 15 percent.

Another example is the tax implications of the sale of stakes in the Filipino company. One exit strategy for non-resident foreign companies is to sell their shares in the Filipino company to a third party.

Under the tax code, the sale of unlisted shares is subject to a capital gains tax (CGT) of 15 percent based on capital gains and a documentary stamp tax (DST) of 0.75 percent based on the total face value of the shares sold. There may also be tax implications for the giver if the shares are sold below their fair market value (FMV).

However, if the seller is a resident of a country that has a tax treaty with the Philippines, the CGT exemption may be claimed provided the contractual terms and administrative requirements for obtaining the treaty benefits are met.

Most tax treaties provide that the assets of the Filipino company whose shares are being sold or transferred should generally not be real estate or real estate as a condition for CGT exemption. According to the Revenue Regulations (RR) 04-86 of April 2, 1986, the term “mainly existing” is defined as more than 50 percent of the total assets in terms of value. RR 04-86 provides that the following assets are considered real estate or real estate:

1. Land, buildings, roads and structures of all kinds that are glued to the ground.

2. Trees, plants and growing fruits, as long as they are connected to the property or form an integral part of a property.

3. Anything firmly attached to an immovable thing so that it cannot be separated from it without breaking the material or worsening the thing.

4. Statues, reliefs, paintings or other decorative objects that the owner of the property places in buildings or on property in such a way that the intention is to permanently connect them to the apartment buildings.

5. Machine containers, instruments or devices that are intended by the owner of the apartment building for an industry or a plant, which can be carried out in a building or on a property and which serve directly to meet the needs of this industry or this plant.

6. Animal houses, pigeon houses, beehives, fish ponds or breeding grounds of a similar type, if their owner has set up or maintained them with the intention of permanently connecting them to the property and forming a permanent part of it; the animals in these places are included.

7. Fertilizer that is actually used on a piece of land.

8. Mines, quarries and slag heaps, as long as their material is part of the bed, as well as flowing or standing water.

9. Docks and structures which, although floating, are designed by their nature and purpose to remain in a fixed location on a river, lake or coast.

10. Contracts for public works and easements and other real rights to immovable property, including mortgage liens, retention of title, antichrists, usufruct and tenants of property.

11. Accessories for the above goods, such as B. agricultural and forestry livestock and implements, rights to which the provisions of general property law apply, usufruct of immovable property and rights to variable or fixed payments in return for labor, or the right to labor, mineral resources, wells and others natural resources.

Mary Karen Quizon-Sakkam is a partner and Hanna Karen Almario is a senior manager of the steering group of KPMG RG Manabat & Co. (KPMG RGM & Co.), The Philippine member firm of KPMG International. KPMG RGM & Co. has been recognized by the International Tax Review as a tier 1 tax practice and tier 1 transfer pricing practice.

This article is for general informational purposes only and should not be construed as professional advice on any particular subject or organization. The views and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of KPMG International or KPMG RGM & Co. For comments or inquiries, please send an email to ph-inquiry@kpmg.com.

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