A Lending Investor is Subject to 5% Tax on Its Gross Income and is Subject to Income Tax on Said Interest Income

June 9, 1987 BIR RULING NO. 159-87 27 000-00 159-87 Gentlemen : This refers to your letter dated January 27, 1987, requesting confirmation of your opinion to the effect that Tulay sa Pag-unlad, Inc. (TSPI) is not considered a lending investor under Section 157 (u) of the Tax Code; and that interest income from loans granted by it is exempt from income tax. It appears the TSPI was granted an exemption on February 23, 1984 from the payment of income tax and the filing of the corresponding income tax return under Section 27(g) of the Tax Code as a social welfare organization; that under TSPI Small Enterprises Development Program TSPI grants to qualified entrepreneurs (selected on the basis of their character, integrity and record of service to the community) financial assistance by way of loans bearing reasonable interest rates; and that the interest earned from loans granted to small entrepreneurs is used by TSPI to finance its operations. In reply, I have the honor to inform you that TSPI under the foregoing facts, makes a practice of lending money at interest; hence it is a lending investor [Sec. 157(u), Tax Code], subject to the 5% tax on its gross income under Section 175 of the Tax Code. Moreover, TSPI is subject to income tax on said interest income, pursuant to Section 24(a) of the Tax Code. It may be stated that, TSPI's exemptions from income tax covers only the income derived by it in pursuance of its purpose as a social welfare organization. Its income from lending investor constitutes income derived from an activity conducted for profit which is subject to internal revenue taxes, regardless of the disposition of said income , i.e., to be used by TSPI to finance its operations as a social welfare organization. (See last paragraph of Section 27, Tax Code) Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner