Taxability of the Deposit for Rental of Office Space/Building

April 18, 1988 BIR RULING NO. 144-88 50 (b) 48-80 144-88 Gentlemen : This refers to your letter dated December 17, 1987 requesting, in effect, for a ruling as to whether deposit for rental of office space/building is subject to withholding tax pursuant to Sec. 1(c) of Revenue Regulations No. 6-85, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations. It is represented that you applied the 5% expanded withholding tax on all your deposits for building rental; that deposit is a normal condition in Rental Contracts not only to answer for whatever damages that may occur but also for non-payment of any amount due; and that in most instances, it is a final payment made prior to transfer to another building upon termination of the previous contract. 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 obligation of the lessee, the lessor realizes no taxable income in the year the advance payment is received. However, 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 to that same extent. (Estate of George E. Baker, 13 BTA 562 cited in B.I.R. No. 011-69 dated October 3, 1969) cdta In view thereof, this Office is of the opinion as it hereby holds that the aforesaid deposits for building rental being in the nature of security deposits are not subject to the 5% expanded withholding tax prescribed under Section 1(c) of Revenue Regulations No. 6-85 implementing Section 50(b) of the Tax Code, as amended, provided, however, that if any part of such deposit is subsequently applied as rental, such payment is income to the lessor and therefore shall be subject to the 5% expanded withholding tax. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner