Punongbayan & Araullo

December 8, 2008 BIR RULING [DA-(TSF-011) 507-08] 24 (B) (1); DA-064-02; DA-294-2008 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated August 20, 2008 requesting on behalf of your Client, Security Bank Corporation ("SBC") for confirmation of your opinion that the interest income earned by an individual trustor investing in a Long Term Revocable Living Trust ("trust fund") for a period of at least five (5) years, or in such other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas, wherein the term of the investment if for a period of not less than five years, is exempt from income tax regardless of whether the underlying investment of the trust fund or the original investment is composed of several short term investments. It is represented that Security Bank Corporation ("SBC") is a universal banking corporation duly organized and existing in accordance with the laws of the Republic of the Philippines and is authorized to perform trust and fiduciary functions through its Trust Division. Pursuant to said authority, SBC through its Trust Division ("SBC Trust"), is offering to its clients the establishment and management of non-negotiable and non-transferable Long Term Revocable Living Trust in accordance with the purpose and intent of Sections 24 (B) (1) and 25 (A) (2) of the National Internal Revenue Code of 1997 (Tax Code) and the implementing Memorandum issued by the Bangko Sentral ng Pilipinas. The trust fund is created upon the execution of the trust agreement between the trustor-investor and SBC, and takes effect upon the actual delivery of the fund to SBC. It shall continue to be in full force and effect until revoked in writing by the investor during his lifetime or upon the final distribution of the trust fund to the beneficiary pursuant to the terms of agreement. cIHSTC Under the trust agreement, the trust fund created is intended to be held by the trustee bank for a period of at least five (5) years wherein the trustor-investor assigns, transfers and delivers to SBC, as the trustee, a specific sum of money for the purpose of placing the same either in a form of short term or long term investments including deposits and deposit substitute instruments. By virtue of the trust created, the trustee shall have revocable legal title to and full and complete possession, management, administration, operation and control over the trust fund within the parameters laid down by law and the terms and conditions of the trust agreement. In addition to the Long Term Revocable Living Trust offered by SBC to its clients, the Bank likewise plans to offer other long term deposits or investments, which has a term of at least 5 years. 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: SEDaAH "(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, 2001, 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); aCTHDA 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) 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