Metropolitan Bank & Trust Company

September 9, 2009 BIR RULING [DA-(FIT-017) 509-09] 24 (B) (1); DA-064-02, DA-(FIT-04)117-09 Metropolitan Bank & Trust Company Metrobank Plaza, Sen. Gil Puyat Avenue Makati City Attention: Ms. Josefina E. Sulit Executive Vice-President and Group Head Gentlemen : This refers to your letter dated August 12, 2009 requesting in behalf of your company, Metropolitan Bank & Trust Company for confirmation of your opinion that the interest income earned by an individual when investing in long-term living trust (LLT), including long-term trust product called "Abundance" and/or long term investment management account (LIMA) for a period of at least five (5) years, is exempt from income tax, and consequently to withholding taxes, regardless of the term of the underlying instruments in which the fund is subsequently invested into. Metropolitan Bank & Trust Company ("MBTC") is a domestic banking corporation duly registered and licensed in accordance with the laws of the Republic of the Philippines and is authorized to engage in the trust and other fiduciary business. MBTC through its Trust banking Group ("MBTC Trust"), is offering to its clients the establishment of Long-Term Investment Management Agreement (LIMA) in accordance with the purpose and intent of long-term individual trusts and investment management accounts under Sections 24 (B) (1) and 25 (A) (2) of the National Internal Revenue Code of 1997 and the implementing Memorandum issued by the Bangko Sentral ng Pilipinas. The funds are created upon the execution of long-term living trust (LLT), Abundance Trust Agreement and long-term investment management agreements (LIMA) between the individuals and MBTC, and takes effect from the date of signing thereof. Under the LLT and the "Abundance", the individual trustor assigns, transfers and sets-over to MBTC, as the trustee, a specific amount of money, including the income, increments, proceeds of investment and re-investment thereof, referred to as "trust funds". By virtue of the Living Trust Agreement or the Abundance Trust Agreement, the trustee shall hold, manage, administer, invest and re-invest the trust funds in accordance with the terms and conditions contained in the LLT/Abundance agreements. The relationship of the bank with that of its client is that of a trustor-trustee relationship. In the case of Abundance Trust Agreement, MBTC requires a minimum amount of Five Million Pesos (Php5,000,000.00) to be put in the fund. DCcSHE Under the investment management agreement, the principal assigns, transfers and delivers to MBTC, as the investment manager, a specific amount of money or "fund". The principal may also deliver to the investment manager additional funds from time to time. By virtue of the investment management agreement, the investment manager, is conferred certain powers to manage, invest and reinvest such funds. These funds, as well as the proceeds, interest, dividends, profits and income realized from the management, investment and re-investment thereof shall constitute the managed funds referred to as "fund". Legal title to all the funds and properties in the Portfolio shall be retained with the principal. The relationship of the bank with that of its client is that of a principal-agent relationship. In all the LLT, "Abundance" and LIMA, the Bank shall invest and re-invest the fund, without distinctions as to principal and income, in any instruments, derivatives, structured notes, security lending and other similar products, and those issued or negotiated by any money market dealer or financial intermediary or institution accredited by the trustee, or form and/or issued by, underwritten by, or otherwise originated by the trustee's commercial banking end or any of its affiliates or subsidiaries. These underlying instruments to which the funds are invested or reinvested into may be long-term instruments with a tenor of at least 5 years and/or short-term instruments with a tenor of less than 5 years. In reply, please be informed that this Office has, on several occasions, ruled that interest income derived by individual citizens and individual resident aliens, as well as non-resident aliens engaged in trade or business in the Philippines from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under Sections 24 (B) (1) and 25 (A) (2), both of the Tax Code, as amended. (BIR Ruling No. 101-98 dated June 29, 1998; BIR Ruling No. 63-00 dated Nov. 20, 2000; BIR Ruling No. 03-05 dated July 22, 2005) Section 22 (FF) of the Tax Code of 1997 defines the term "long term deposit or investment certificate" as follows: "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 denominations of Ten thousand pesos (P10,000) and other denominations may be prescribed by the BSP." IcESDA In relation to this, Sections 24 (B) (1) and 25 (A) (2), both of the Tax Code, as amended, provide that interest income derived by individual citizens and individual resident aliens, as well as non-resident aliens engaged in trade or business in the Philippines, from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under Subsections: 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%" In view thereof, and considering that your proposed Long-Term Living Trust (LLT) and Long Term Investment Management Agreement (LIMA) as described above are in full compliance with the requisites of "long-term deposit or investment certificate" as defined under Section 22 (FF) of the Tax Code, as amended, the interest income to be derived therein by your individual clients, who are Filipino citizens, resident aliens, as well as non-resident aliens engaged in trade or business within the Philippines, shall be exempt from the 20% final withholding tax under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997, as amended, and the 2% withholding tax under Revenue Regulations No. 2-98 as amended, regardless of the term of the underlying instrument. A meticulous study of the above-cited section disclosed further that there is nothing which would prohibit your individual clients who are holders of the certificates to pre-terminate the deposit or investment before the fifth (5th) year period. However, the withdrawal of the principal deposit/investment before the 5th would subject the said entire earnings to a final withholding tax depending on the holding period of the instrument as stated above. Finally, for better monitoring purposes, the bank shall have to set up a separate numbering system in its books for these proposed Long-Term Living Trust (LLT) and Long Term Investment Management Agreement (LIMA) you will now be offering to your individual clients. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service