Robinsons Savings Bank

January 7, 2009 BIR RULING [DA-(FIT-001) 003-09] 24 (B) (1); DA-064-02 Robinsons Savings Bank 17/F Galleria Corporate Center Edsa cor. Ortigas Avenue Quezon City Attention: Ms. Ma. Elizabeth P. Aquino Trust Officer/Vice President Gentlemen : This refers to your letter dated August 11, 2008 requesting for a clarification as to whether or not the interest income to be earned by the investors under the proposed Long Term Living Trust Agreement of Robinsons Savings Bank-Trust & Investment Group is exempt from the payment of 20% final tax imposed under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997. caEIDA The proposed Long-Term Living Trust Agreement has the following features, to wit: 1. Eligible investors shall be limited to individuals who are Filipino citizens or resident aliens and the agreement shall be non-negotiable and non-transferable; 2. Minimum amount of investment shall be One Million Pesos (P1,000,000.00); 3. The underlying instruments where the accounts shall be invested in will have a minimum tenor of five (5) years. Necessarily, the investor's minimum investment holding period is at least five (5) years; 4. The Long-Term Living Trust Agreement shall indicate that pursuant to Section 24 (B) (1) of R.A. No. 8424, interest income derived from investments in interest-bearing instruments ( e.g ., time deposits, government securities, loans and other debt instruments) which are otherwise subject to the 20% final tax shall be exempt from said final tax provided the investments are held for a period of at least five (5) years. Otherwise, interest income shall be subjected to a final tax which shall be deducted and withheld from the proceeds of the LT-IMA based on the following schedule: Holding Period Applicable Tax Rate Four (4) years to less than five (5) years 5% Three (3) years to less than four (4) years 12% Less than three (3) years 20% In reply thereto, please be informed that Section 24 (B) (1) of the Tax Code of 1997 provides: "(B) Rate of Tax on Certain Passive Income. (1) A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitute and from trust funds and similar arrangements; . . .: Provided, further , That interest income from long term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investment evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax, Provided, finally , That should the holder of the certificate preterminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years 5% Three (3) years to less than four (4) years 12% and Less than three (3) years 20%" Corollarily, Section 22 (FF) of the Tax Code of 1997 defines the term "long term deposit or investment certificate" as follows: "(FF) The term 'long term deposit or investment certificate' shall refer to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by non-bank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations may be prescribed by the BSP." A careful scrutiny of the above-cited sections disclosed that as long as the trust or fund is held by a bank for at least five years, and has complied with the requirements mentioned in BIR Ruling No. 031-01 dated July 24, 2002, to wit: CDISAc 1. Have a maturity of not less than five (5) years; 2. Be in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts or other forms which must be prescribed by the Bangko Sentral ng Pilipinas; 3. Be issued by banks only (not by non-bank financial intermediaries and finance companies); 4. Be issued to individual citizen or resident alien or non-resident alien engaged in trade or business within the Philippines only; 5. Be in denominations of Ten thousand pesos (P10,0000) * or other denominations as may be prescribed by the Bangko Sentral ng Pilipinas; and 6. Should not be pre-terminated by the holder before the fifth year. regardless of the term of the investment or maturity of the instrument in which it is subsequently invested, the interest income of the trust is exempt from income tax and, consequently, from the required withholding tax. The act of placing the funds in the Bank in the form of common or individual trust fund wherein the funds are locked-up with the Bank for a period of not less than 5 years already fulfills the intention of the law. In other words, the fact that the fund is invested in a trust fund and managed by a Bank and stays there for not less than five years, the same is already considered a long-term investment within the contemplation of Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997. SUCH BEING THE CASE, this Office holds that any interest income derived by the trust from the underlying instrument, whether long term or short term in which the trust funds are invested should properly be exempt from income tax and from the required withholding tax. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service