Income of FCDU's Exempt from All Taxes

March 1, 1993 BIR RULING NO. 078-93 INCOME OF FCDU'S EXEMPT FROM ALL TAXES 24 (e) (3) 25 (a) (6) 000(b) 078-93 Siguion Reyna, Montecillo & Ongsiako 9th & 10th Floors, Philcom, Bldg., 8755 Paseo de Roxas, Makati, Metro Manila Attention: Atty . Jose Lis C . Leagogo This refers to your letter dated January 13, 1993 stating that your client, is a commercial bank authorized by the Central Bank to operate under the Foreign Currency Deposit System under P.D. 1035; that your client accepts foreign currency deposits and foreign currency "trust accounts" from residents and non-residents; that the "trust accounts" are managed by the FCDU Trust Department of your client with the end in view of generating income for its customers by investing in any of the allowed foreign currency transactions under Central Bank Circular No. 1312; that for managing the "trust accounts", your client derives income in the form of trust fees paid for by its customers and that the income from such investments are for the accounts of the customers of the bank. cdt In connection therewith, you now request confirmation of your opinion that "(a) Trust fees received by our client Bank's Trust Department, for managing its customers "trust accounts" are not subject to income tax; "(b) If the funds of the "trust accounts" are lent by our client Bank's Trust Department to a domestic enterprise pursuant to Section 76(b)(4) of the CB Circular No. 1318, the trust fees paid by the customer to our client Bank's Trust Department are also not subject to income tax." In reply thereto, I have the honor to inform you that Section 24(e)(3) of the Tax Code, on domestic corporation authorized by the Central Bank to operate under the expanded foreign currency deposit systems, provided that "(3) Tax on income derived under the Expanded Foreign Currency Deposit System . Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with non-residents, off-shore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Central Bank to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except taxable income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board to be subject to the usual income tax payable by banks; Provided that interest income from foreign currency loans granted by such depository banks under said expanded system to residents (other than off-shore banking units in the Philippines or other depository banks under the expanded system) shall be subject to a 10% tax. Any income of non-residents from transactions with depository banks under the expanded system shall be exempt from income tax." Moreover, Sec. 25(a)(6)(B) of the Tax Code, as amended on resident foreign corporations authorized by the Central Bank to operate under the expanded foreign currency deposit system provides that "(B) Income derived under the Expanded Foreign Currency Deposit System . Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with non-residents, off-shore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Central Bank of the Philippines to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes except taxable income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board to be subject to the usual income tax payable by banks: Provided, that interest income from foreign currency loans granted by such depository banks under said expanded system to residents (other than off-shore banking units in the Philippines or other depository banks under the expanded system) shall be subject to a 10% tax. Any income of non-residents from transactions with depository banks under the expanded system shall be exempt from income tax." Furthermore, under CB Circular Nos. 574 and 1318 implementing P.D. 1035, commercial banks which are authorized to operate under the expanded foreign currency deposit systems are allowed, among others, to engage in the following transactions in any acceptable foreign currency: (1) Accept deposits and trust accounts from residents and non-residents, Provided that deposits and trust accounts from residents shall not include foreign exchange required to be sold for pesos under Sec. 1 of the CB Circular No. 1318; and (2) Extend foreign currency loans to any domestic enterprise without the limitations prescribed in the first paragraph of Sec. 4, RA 6426 as amended by PD 1035 regarding maturity and marketability. Thus, all income derived by the FCDU for foreign currency transactions are exempt from all taxes, except taxable income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the usual income tax payable by banks. However, interest income from foreign currency loans granted by an FCDU to resident (other than off-shore banking units in the Philippines or other depository banks under the expanded system) shall be subject to the 10% tax. Considering that your client is authorized to operate under the Foreign Currency Deposit System under PD Nos. 1034 and 1035 engaged in a foreign currency transaction as specified in Sec. 76(b)(1) and (4) of CB Circular No. 1318 implementing PD 1034 and 1035, the trust fees received by it for managing its customers foreign currency trust accounts as well as the trust fees received by it when the fund of the foreign currency trust accounts are loaned to domestic enterprises are not taxable income. Since such transactions are not specified by the Secretary of Finance upon recommendation by the Monetary Board to be subject to the usual income tax payable by banks, said trust fees are exempt from income tax pursuant to Sec. 24(e)(3) and 25(a)(6)(B) of the Tax Code, as amended and as implemented by Revenue Regulations No. 10-76 and Revenue Memorandum Circular No. 46-77. JOSE U. ONG Commissioner of Internal Revenue