BIR Ruling No. 420-2022

BUREAU OF INTERNAL REVENUE REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE

Section 27 (A) and (D)(1) of the Tax Code of 1997, as

BIR Ruling No. 179-2022: BIR Ruling No. 323-2019 amended OT- 5420 - 2 0 2 2 UCT 0 7 Z022

968 Marconi St., Lahug Cebu City, 6000 FIVE BRAD DRAGONS FOOD FRANCHISE CORPORATION

Attention: Robin G. Robins III CEO/President

Gentlemen:

Company") from its franchising activities are considered as ordinary income subject to normal corporate income tax under Section 27 (A) of the National Internal Revenue Code (Tax Code) other fees received by Five Brad Dragons Food Franchise Corporation ("5BDFFC" or "the of 1997, as amended. This refers to your request for confirmation that the franchise fees, royalty income and

under the laws of the Philippines. It was primarily established to administer in the conduct of the franchise transactions. It is represented that 5BDFFC is a domestic corporation duly organized and existing

Brads Hot Wings" restaurant must apply for a franchise, subject to the approval of the "Wingers Unlimited"" and "New York Buffalo Brads Hot Wings"" and authorized the Company to operate and carry on its franchise operations. The Company, as Franchisor, grants qualified persons (Franchisee) to set up and operate "Wingers Unlimited" and/or "New York Buffalo Brads Hot Wings" restaurants, which utilize 5BDFFC's System and Marks. A Franchisee who desires to use the marks and to operate a "Wingers Unlimited" and/or "New York Buffalo Franchisor. The Company caused the registration of the trade name, trademark and service mark

Marks. The Franchisees, on the other hand, undertook the obligation to operate the Franchised Facility and to use it solely in connection with the System, as may be changed or updated from time to time. the Franchisees the right, license and privilege to set up and operate "Wingers Unlimited and/or "New York Buffalo Brads Hot Wings" restaurant using the registered System and In 2022, the Company entered into several Franchising Agreements whereby it granted

Franchisor the following: In consideration for the franchise granted to the them, the Franchisees shall pay to the

Five Brad Dragons Food Franchise Corporation OT- : 420 -2022 OCT 0 7 2022

1. Franchise fee, which represents payment for the right and privilege to operate a franchise under the name "Wingers Unlimited" and/or and Marks; "New York Buffalo Brads Hot Wings", using the registered System

2. Set-up fee, which represents payment for the cost and expenses costs, general administrative expenses, and"other related expenses; incurred by the Franchisor in assisting the Franchisee in setting up the Franchised Facility, such as, but not limited to, site evaluation costs, initial marketing expenses, training costs, opening assistance

3 Continuing Services Fee of two percent (2%) of the Franchised

of the Franchise Agreement (i.e. Franchisor's Operations Facility's Gross Sales/Revenues. This refers to the payment for the Assistance); and continuing services rendered by the Franchisor under Paragraph XV

4. Royalty Fee of one percent (1%) of the Franchised Facility's Gross Sales/revenues. This refers to payment for the continuous use of the registered System and Marks.

defines the general corporate income tax rates, viz: In reply, please be informed that Section 27 (A) of the Tax Code of 1997, as amended.

"SEC. 27. Rates of Income tax on Domestic Corporations.

taxable under this Title as a corporation, organized in, or existing income tax rate of twenty-five percent (25%) effective July 1, 2020, is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by under the laws of the Philippines. (A) In General. - Except as otherwise provided in this Code, an every corporation, as defined in Section 22(B) of this Code and

XXX xxxxx "

In contrast, Section 27 (D) (1) of the Tax Code of 1997, as amended, provides:

"SEC. 27. Rates of Income tax on Domestic Corporations.

XXX XXX XXX

(D) Rates of Tax on Certain Passive Incomes.

from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on deposit substitutes and from trust funds and similar arrangements (1) Interest from Deposits and Yield or any other Monetary Benefit currency bank deposit and yield or any other monetary benefit from

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Five Brad Dragons Food Franchise Corporation O1-i: 4 20 -2.022 OCT"g 7 2022

sources within the Philippines . received by domestic corporations, and royalties, derived from

No. DA-501-20042, defined passive income by stating what it is not: Honorable Executive Secretary Alberto Romulo, et al.1, the Supreme Court, citing BIR Ruling In the case of Chamber of Real Estate and Builders Associations, Inc. vs. The

of the corporation's primary purposes, the same is not passive income... "...if the income is generated in the active pursuit and performance

received from its franchising activities is income generated in the active pursuit and performance of its primary purpose, the same is clearly not passive income subject to the 20% trade or business is considered ordinary business income subject to the 25% regular corporate income tax. Stated differently, the royalty fees received by the Company is in the nature of administer in the conduct of the franchise transactions as provided in its Articles of passive income as defined in Section 42 (A) (4) of the Tax Code of 1997, as amended. Since the income derived by the Company from its franchise fees, royalty income and other fees ordinary business income because the aforesaid income was derived or generated from activities that are in accordance with the primary purpose of the Company which is to final tax. Consequently, the payments received by the Company from the active conduct of Incorporation. To be subject to the 20% final withholding tax, the royaities must be in the nature of

by the Company in the conduct of its franchising activities shall form part of its ordinary income subject to the 25% regular corporate income tax. In view of the foregoing, the franchise fees, royalty fees and other fees directly derived

if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. This ruling is being issued on the basis of the foregoing facts as represented. However.

Very truly yours,

Commissioner of Internal Revenue LILIA CATRIS GUILLERMO uul l Gnil

K-1 001892

2 Dated September 24, 2004 1 G.R. No. 160756 dated March 9, 2010

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