Taxability of Cash or Property Dividends

December 16, 1999 BIR RULING NO. 203-99 Sycip Gorres Velayo & Co 6760 Ayala Avenue 1226 Makati City Attention: Joel L . Tan-Torres Tax Partner Gentlemen : This refers to your letter dated August 5, 1999 requesting for a ruling that cash or property dividends coming from retained earnings as of December 31. 1997 which are declared pursuant to a board resolution specifying this arrangement, and distributed by domestic corporations to individual stockholders who are residents of the Philippines shall not be subject to income tax. It is your belief that notwithstanding Section 73 of the Tax Code, the provision in Section 24(B)(2) shall still apply on the declaration and distribution of cash or property dividends by domestic corporations to individual stockholders who are residents of the Philippines where such declaration is covered by a Board Resolution providing that the dividends to be distributed shall come from retained earnings as of December 31, 1997. Hence, under this circumstance, dividends coming from retained earnings as of December 31, 1997 shall not be subject to income tax if paid by domestic corporations to individuals residing in the Philippines. Section 24(B)(2) of the Tax Code provides as follows: "(2) Cash and or property dividends . A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint-stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium of which he is a member or a co-venturer: Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; and Ten percent (10%) beginning January 1, 2000. Provided, however, that the tax on dividends shall apply only to income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or January 1, 1998 be subject to this tax." (Emphasis supplied) On the other hand. Section 73(C) of the same code provides: "Any distribution made to the shareholders or members of a corporation shall be deemed to have been made from most recently accumulated profits or surplus and shall constitute a part of the annual income of the distributee for the year in which received." In reply, please note that prior to the amendments introduced into the Tax Code by R.A. 8424, which became effective on January 1, 1998, corporate dividend distribution was, in general, exempt from income tax. Beginning on the said date, dividend became subject to final withholding tax provided, however, "that the tax on dividends shall apply on income earned on or after January 1, 1998 . Income forming part of retained earnings as of December 31, 1997 shall not even if declared or distributed on or after January 1, 1998 be subject to this tax ." (Sec. 24 (B)(2), NIRC, as amended by R.A. 8424). The old provision of the NIRC on source of dividend distribution provides that "Any distribution made to the shareholders or members of a corporation shall be deemed to have been made from the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received ." (Sec. 73(C), NIRC) This proviso originated from the original Code of 1939, pursuant to C.A. No. 466, during which time, dividend was taxable. Hence, to reconcile the old and existing law on source of the dividend distribution with that of the proviso of Sec. 24 (B)(2) of the Tax Code of 1997, this Office is of the opinion that if a corporation had accumulated profits as of December 31, 1997, its distribution of dividends beginning 1998 and thereafter must come from the accumulated profits as of December 31, 1997. After full distribution thereof, Sec. 73 (C) of the Tax Code of 1997 will apply. Hence, for the prior years' accumulated profits, the rule shall be the "first in-first out" system. It follows that Sec. 73 (C) shall not yet apply. Thereafter, the "last in-first out" system shall be used. Accordingly, cash and property dividends declared and distributed by domestic corporations to individual stockholders who are resident of the Philippines on or after January 1, 1998, but forming part of retained earnings as of December 31, 1997, as shown by a Board Resolution stating said dividends as such and as established by the corporation's books of account, shall not be subject to income tax pursuant to Section 24 (B)(2) of the Tax Code. cdll 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. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue