Rizal Commercial Banking Corporation

January 20, 2009 BIR RULING [DA-(TSF-002) 027-09] Sec. 24 (B) (1); 30-01; DA64-02; DA527-07; DA294-08 Rizal Commercial Banking Corporation RCBC Head Office Yuchengco Tower, RCBC Plaza Ayala Avenue, Makati City Attention: Ms. Lourdes M. Ferrer Senior Vice President Gentlemen : This refers to your letter dated September 5, 2008 requesting for confirmation that the interest income derived from the long term individual trust accounts and long term individual investment management accounts administered by the Trust and Investments Division of Rizal Commercial Banking Corporation, which accounts are marketed and denominated as Crest Fund Accounts (Long-Term Accounts), are exempt from income tax or any withholding tax pursuant to Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997. It is represented that the Rizal Commercial Banking Corporation (RCBC) is a banking corporation organized and existing under the laws of the Philippines with authority to perform trust and fiduciary functions through its Trust and Investments Division; that to address the demand of its individual clients for long-term investment products, RCBC intends to offer the Long Term Investment Management Agreement (LTIMA)-Crest Fund and Long Term Trust Agreement (LTTA)-Crest Fund pursuant to and in compliance with the requirements of the memorandum of the Bangko Sentral ng Pilipinas dated January 3, 2000; that the LTIMA and LTTA will carry the following general terms and conditions: a) Eligible investors shall be limited to individuals who are Filipino citizens or resident aliens; b) The amounts contributed to the accounts are to be held for at least five (5) years, in denominations of Ten thousand pesos (P10,000), and other denominations as may be prescribed by the BSP; c) Income, but not principal, may be withdrawn by or paid to the client or his/her beneficiary/ies, during the five (5) year holding period; d) If principal is withdrawn within the 5 year holding period, interest income shall be subject to final withholding tax at the rates specified under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code depending on the holding period to wit: DEICaA Holding Period Applicable Tax Rate Four years to less than 5 years 5% Three years to less than 4 years 12% Less than 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), supra 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. 030-01 dated July 24, 2002, to wit: CaESTA 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 (P10,000.00) 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) of the Tax Code of 1997. (BIR Ruling Nos. DA-527-07 dated October 4, 2007; DA-294-08 dated May 16, 2008) SUCH BEING THE CASE, this Office holds that any interest income derived by the LTIMA or LTTA from the underlying instrument, whether long term or short term, in which the trust funds are invested by RCBC 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