Chato & Vinzons-Chato Law Offices

December 8, 2008 BIR RULING [DA-(TSF-012) 508-08] Section 24 (B) (1); DA-279-2006 dtd. 4/25/06 Chato & Vinzons-Chato Law Offices 8th Floor, Strata 2000, F. Ortigas Jr. Road Ortigas Center, Pasig City Attention: Atty. Esther R. Ibaez Consultant Gentlemen : This refers to your letter dated January 28, 2008, in behalf of your client, CHINA BANKING CORPORATION, requesting in effect exemption from the 20% final tax imposed under Section 24 (B) (1) of the Tax Code of 1997, on the interest income from long-term trust arrangement to be earned by investors under the proposed long-term trust arrangement. It is represented that the proposed long-term trust arrangement shall have the following basic features: 1. Eligible trustors shall be limited to individuals who are Filipino citizens or resident aliens; 2. Minimum investment holding period is at least five (5) years; 3. Investment in the long-term trust shall be evidenced by pre-printed agreements in such form as prescribed by the Bangko Sentral ng Pilipinas and clearly indicating the following information: CTAIDE a) Trustors are limited to individuals who are Filipino citizens or aliens and that the investment is non-negotiable and non-transferable; b) Date of investment to determine compliance with the required holding period; c) The Trust Agreement shall indicate that pursuant to Section 24 (B) (1) of R.A. 8424, "interest income of the trust account in interest-bearing instruments ( e.g. , time deposits, government securities, loans and other debt instruments) which are otherwise subject to the 20% final tax provided that the trust account is 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 based on the following schedule: 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 15% that necessarily, the underlying instruments where the accounts shall be invested in will also have a minimum of five (5) years. ETaSDc In reply, please be informed Section 24 (B) (1) of the Tax Code of 1997 provides that "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% Less than three (3) years 20% Such being the case, the interest income to be derived by the Investors of the China Banking Corporation through its Trust and Investment Division is exempt from final withholding tax provided that the fund is held by the trustee-bank for at least five (5) years. However, if the participation is for a period of less than 5 years, the interest income shall be subject to a final withholding tax which shall be deducted and withheld from the proceeds of said investment and which shall be computed in accordance with the pre-terminated rate schedule under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997. (BIR Ruling No. DA-064-02 dated April 3, 2002) 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. SHIcDT Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service