August 26, 1998
BIR RULING [DA-392-98]
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
Makati City
Attention: Atty. Fides A. Balili
Gentlemen :
This refers to your letter dated May 25, 1998, requesting on behalf of your
client, Hollandsche Aanneming Maatschappij B. V . Philippines ("HAM BV"), for a
ruling that the rental income to be derived by a Dutch company, Nederlandsche
Overzee Baggermaatschappij B. V . ("NOB BV"), is not subject to income tax
pursuant to Articles 5 and 7 of the RP-Netherlands Tax Treaty. cdt
It is represented that HAM BV and Jan de Nul N.V. formed a joint venture
with principal office address at Excelsior Building, 161 Roxas Blvd., Parañaque,
Metro-Manila, to perform sub-contracted work in connection with the Construction of
the Cebu South Reclamation Project (OECF Loan No. PH-PI57) for the Cebu City
Government; that to fulfill the contract, the joint venture intends to lease a dredging
vessel (without a crew) from NOB BV, under a bareboat charter agreement; that NOB
BV is a corporation duly existing and organized under the laws of the Netherlands
and is engaged in the business of leasing dredging vessels and other dredging
equipment; and that NOB BV is not engaged in trade or business in the Philippines
and does not maintain any branch office or any other place of business in the
Philippines.
In reply, please be informed that Article 7 of the RP-Netherlands Tax Treaty
provides as follows:
"ARTICLE 7
Business Profits
(1) The profits of an enterprise of one of the States shall be taxable
only in that State, unless the enterprise carries on business in the other State
through a permanent establishment situated therein. If the enterprise carries on
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business as aforesaid, the profits of the enterprise may be taxed in the other
State but only so much of them as is attributable to that permanent
establishment. . . ."
Moreover, Article 5(1) and (2) of the RP-Netherlands Tax Treaty, provides,
viz:
"ARTICLE 5
Permanent Establishment
(1) For the purposes of this Convention, the term 'permanent
establishment' means a fixed place of business in which the business of the
enterprise is wholly or partly carried on.
(2) The term "permanent establishment" includes especially:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, quarry or other place of exploration or extraction of
natural resources;
(g) a building site or construction or assembly project or
supervisory activities in connection therewith, where such site, project
or activity continues for a period of more than 183 days;
(h) the furnishing of services including consultancy services by
an enterprise through an employee or other personnel which activities of
that nature continue (for the same or a connected project) for a period or
periods exceeding in the aggregate 183 days within any twelve month
period. . . ."
Considering that NOB BV will lease a dredging vessel under a bareboat
charter agreement (without a crew), and that it does not have a permanent
establishment in the Philippines to which its business profits/income are attributable,
rental payments received by it from the HAM BV and Jan de Nul N.V. joint venture
are not subject to Philippine income tax and consequently to the withholding tax
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prescribed under Section 28(B)(3) in relation to Section 57(A) of the Tax Code of
1997. (BIR Ruling No. 022-89 dated February 15, 1989; BIR Ruling No. 174-92).
However, gross receipts derived by Nederlandsche Overzee
Baggermaatschappij B.V. from the lease of the dredging vessel shall be subject to the
10% VAT to be withheld and remitted by the HAM BV and Jan de Nul N.V. joint
venture pursuant to Section 108 (A) in relation to Section 114 of the Tax Code of
1997.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation it will be ascertained that the facts are different, then
this ruling shall be considered null and void. cdasia
Very truly yours,
(SGD.) SIXTO S. ESQUIVIAS IV
Deputy Commissioner
(Legal and Enforcement Group)
Bureau of Internal Revenue
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