Salvador & Associates

January 26, 2009 BIR RULING [DA-(TSF-003) 041-09] Sec. 24 (B) (1); 30-01; DA64-02; DA527-07; DA294-08 Salvador & Associates 815-816 Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Atty. Maria Rosario L. Bernardo and Atty. Rabiev Tobias M. Racho Gentlemen : This refers to your letter dated October 29, 2008 requesting for confirmation that the interest income earned by tax-exempt long-term individual trust accounts and investment management agreements offered by ING-Bank N.V. (Trust Department) to its individual clients who are citizens and/or resident aliens in the Philippines is exempt from income tax or any withholding tax pursuant to Sections 24 (B) (1) of the Tax Code. It is represented that in the course of its trust business, ING-Bank N.V. (Trust Department) offers long-term individual trust accounts and investment management agreements to Philippine citizens and/or aliens who are resident in the Philippines. Relevant Provisions of Revocable Living Trust Agreement The Revocable Living Trust Agreement provides, among others, that an individual (Trustor) who desires to create a trust for certain designated persons (Beneficiaries), shall entrust, deliver and remit to the Bank, specifically its Trust Department, as the designated Trustee, an initial contribution, consisting of money and/or property. The Trustor may from time to time make additional contributions to the trust. All such monies and other properties, including investments and reinvestments of proceeds and all earnings and profits, less authorized payments made by the Trustee, shall compromise the "Fund" of the trust. The following are among the relevant terms and conditions of the Revocable Living Trust Agreement: 1. Article II provides that for purposes of opening and operating the Fund, the Bank, as trustee, shall designate a specific trust account number. cCSDaI 2. Article VII provides that the interest income of the Fund from investments in interest-bearing instruments which are otherwise subject to the 20% final withholding tax shall be exempt from such tax, provided that the Trustee holds the Fund for at least five (5) years. If the Trustor withdraws the Fund before the 5-year period, the interest income of the Fund will be subject to a final tax which shall be deducted and withheld from the Fund based on stipulated schedule identical to the schedule contained in Sections 24 (B) (1) and 25 (A) (2), Tax Code. 3. Article VII also provides that the date that the Trustee shall clearly indicate the date of receipt of money or property, to serve as basis for determining the holding period. Relevant Provisions of Investment Management Agreement An Investment Management Agreement is a non-negotiable and non-transferable agreement between an individual and the bank's investment management department, in which the latter binds itself to manage the funds of the investor in a representative capacity resulting to a principal-agent relationship between the investor, as principal, and the investment manager-bank, as agent. Similar to a Revocable Living Trust Agreement, the funds being managed by the investment manager are invested in interest bearing instruments, the income from which is exempt from the 20% final income tax provided the funds are held under the Investment Management Agreement by the investment manager bank for at least five (5) years. If the investor withdraws his investment before the 5-year period, the interest income of his investment will be subject to a final withholding tax based on a stipulated schedule identical to the schedule contained in Sections 24 (B) (1) and 25 (A) (2), Tax Code. An Investment Management Agreement imposes a minimum amount of investment of P1 million. Based on the foregoing representations, you now request for confirmation of your opinion that 1. Interest income earned by citizens or resident aliens from the Recoverable Living Trust Agreement and/or the Investment Management Agreement is exempt from income tax and withholding taxes, including the 20% final withholding tax, provided that the 5-year holding period is observed; 2. The interest income remains exempt from income tax and withholding taxes, including the 20% final withholding tax, even if the Fund is invested in short-term investment instruments with original maturities of less than five (5) years; and 3. Individual investors in the Recoverable Living Trust Agreement and/or Investment Management Agreement may withdraw the income from the investment during the 5-year holding period. Furthermore, the interest income remains exempt from income tax and withholding taxes, including the 20% final withholding tax, notwithstanding such withdrawal of income during the 5-year holding period. TDCcAE 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%" Likewise, Section 25 (A) (2) infra provides "(2) . . . 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 investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate 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 investments 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% Less than three (3) years 20% Corollarily, Section 22 (FF), supra defines the term "long term deposit or investment certificate" as follows: EcHTDI "(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 as 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: 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) AEcIaH SUCH BEING THE CASE, this Office hereby confirms your opinion that 1. Interest income earned by citizens or resident aliens from the Recoverable Living Trust Agreement and/or the Investment Management Agreement is exempt from income tax and withholding taxes, including the 20% final withholding tax, provided that the 5-year holding period is observed; 2. The interest income remains exempt from income tax and withholding taxes, including the 20% final withholding tax, even if the Fund is invested in short-term investment instruments with original maturities of less than five (5) years; and 3. Individual investors in the Recoverable Living Trust Agreement and/or Investment Management Agreement may withdraw the income from the investment during the 5-year holding period. Furthermore, the interest income remains exempt from income tax and withholding taxes, including the 20% final withholding tax, notwithstanding such withdrawal of income during the 5-year holding period. 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