BIR Ruling [DA-134-02]

August 21, 2002 BIR RULING [DA-134-02] Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, CITIBank Tower CITIBANK Plaza Paseo de Roxas Makati City Attention: Atty. Reynaldo G. Geronimo Gentlemen : This refers to your letter dated June 17, 2002 requesting for confirmation as to whether or not the changes made on the Living Trust Agreement, which was approved by the Bureau of Internal Revenue (BIR) as a tax-exempt instrument in its BIR Ruling No. 063-2000 dated November 29, 2000, will not affect its qualification under Section 24(B)(1) of the Tax Code of 1997. It appears that Banco de Oro Universal Bank decided to further enhance the attractiveness of its trust product by making changes on certain provisions designed to make the relationship fall squarely and indubitably under the classification of "Living Trust" as the term is defined under the regulations of the Bangko Sentral ng Pilipinas (BSP); and that in order to be classified as a Living Trust under the BSP's chart of accounts for trust departments, a Living Trust must fall under this description: "Living Trust This is a trust created by Agreement. It becomes operational during the lifetime of the trustor as soon as the agreement is accomplished. Under a living trust, the trustor (also known as settlor) conveys property or a sum of money to be managed by the trustee, as the agreement dictates, for the benefit of the trustor and third person(s) or third person(s) only. However, the trustor cannot create a trust with himself as the sole beneficiary. The functions and authorities of the trustee as defined in the agreement shall include: (1) the purpose or intention of the trust; (2) the nature and value of the property or sum of money that comprise the trust; (3) the trustee's investment powers; (4) the name(s) of the beneficiaries; and (5) the terms and conditions under which the income and/or principal of the trust is to be paid or to be disposed of during the lifetime and ultimately, upon the death of the trustor or upon the occurrence of a specified event(s). A living trust may either be revocable or irrevocable." Here is the table of the changes that were made: Section Affected Substance of the Change 1. Opening paragraph Indicates clearly that the trust is established within the context of an estate plan created for the trustor(s) and his/her/their beneficiaries. 2. Clause 1 Provides for a specific statement of the initial amount that shall constitute the trust fund 3. Clause 3 Clearly requires the Trustee, in fulfilling its investment functions, to take into account the objectives of the trust, thereby reiterating that the trust is to be administered in consonance with the client's estate plan. 4. Clause 4 States the overriding purpose that is to determine how the investment powers of the trustee are to be exercised, i.e., to preserve capital and maximize income consistent with the needs of the beneficiaries 5. Clause 5 Sets the tenor of how the trust funds are to be availed of by the beneficiaries, i.e., as a supplemental source of money for their support and maintenance and stipulates when and to whom the trust fund is to be eventually distributed 6. Clause 12 This is a new provision that clearly provides for the disposition of the income and principal of the trust In reply thereto, please be informed that, after a careful review of the aforementioned Living Trust Agreement, this Office is of the opinion and so holds that the changes made therein are not substantial as to affect the qualification of the long term trust agreement under Section 24(B)(1) of the Tax Code of 1997. Accordingly, this Office reiterates BIR Ruling No. 063-2000 dated November 29, 2000 that the interest income derived by individual depositors, who may be resident citizens, resident aliens, non-resident aliens engaged in trade or business within the Philippines with the only exception of alien individual not engaged in trade or business within the Philippines, shall be exempt from the 20% final tax imposed under Section 24(B)(1) of the Tax Code of 1997 provided, however, that if a participant therein pre-terminates his long term investment before 5 years from issue date of the certificate of participation, Banco de Oro, as Trustee, shall withhold and deduct from the proceeds of said investment a final tax on the interest income thereon which shall be computed in accordance with the schedule provided in Section 24(B)(1) of the said Code. This ruling is being 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service