BIR Ruling No. 048-80

October 27, 1980 BIR RULING NO. 048-80 053-f 000-00 48-80 Equatorial Realty Development, Inc. BPI Condominium Building Plaza Cervantes, Manila Attention : Miss Helen D . Wee Gentlemen : This refers to your letter dated March 20, 1980 requesting a ruling as to whether or not tenant's deposit or additional tenants' deposit under your Lease Contract, the terms and conditions of which are quoted hereunder as follows is subject to the 5% expanded withholding tax, viz: cdt " DEPOSIT Upon execution of this Contract, the LESSEE shall deposit in cash with the LESSOR an amount equivalent to two (2) months' rental of the leased premises, to answer for any of its obligations under this contract, subject to be returned at the termination of this lease, less whatever account which the said LESSEE might then be owing to the LESSOR; it is understood that the existence of the deposit shall not be a reason for non-payment of any rent on its due date. It is further agreed than an increase in rental shall mean a corresponding increase in said deposit." In reply, please be informed that if the advance payment made pursuant to a Lease Contract is in the nature of a security deposit for the faithful performance of certain obligations of the lessee, the lessor realizes no taxable income in the year the advance payment is received. But, if the advance payment is a security deposit and the conditions which make the security deposit the property of the lessor occur, then the lessor realizes a taxable income to the extent of the security deposit and the lessee is entitled to a deduction of that same extent. (Estate of George E. Baker, 13 BTA 562 cited in B.I.R. Ruling No. 011-69 dated October 3, 1969) In view thereof, and considering that the said two months cash deposit to be made by your tenants does not actually form part of the rental payment per Contract of Lease, this Office is of the opinion as it hereby holds that it is not subject to the 5% withholding tax prescribed by Revenue Regulations No. 13-78 and 6-79 implementing Presidential Decree No. 1351, provided however, that if any part of the deposit is subsequently applied as rental, such payment is income to the lessor and therefore shall be subject to the withholding tax. Very truly yours, ROMULO M. VILLA Acting Commissioner