Profit-Sharing Retirement Plan for the Exclusive Benefit of Its Employees

August 12, 1960 BIR RULING NO. 378-60 Messrs. Sycip, Gorres, Velayo & Co. Certified Public Accountants P. O. Box 589, Manila Gentlemen : Reference is made to your letter dated April 25, 1960, stating that one of your clients is contemplating of setting up a Profit-Sharing Retirement Plan for the exclusive benefit of its employees. However, before the Plan is finally established, your client desires to secure the confirmation of this Office that the same qualifies under the exemption provided for in section 56(b) of the Tax Code, for which reason a copy of the proposed Plan has been submitted with your letter. In answer thereto, I have the honor to inform you that for an employees' trust to be exempt from the income tax, the following requisites must concur: 1. Said trust must be part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees; 2. Contributions are made to the trust by such employer, or employees, or both; 3. The contributions are made for the purpose of distributing to the employees both the earnings and principal of the fund accumulated by the trust; 4. The fund is accumulated by the trust in accordance with the plan of which the trust is part; 5. The trust instrument makes it impossible (in the taxable year or at any time thereafter prior to the satisfaction of all liabilities to employees covered by the trust) for any part of the trust corpus or income to be used for, or diverted to, purposes other than for the exclusive benefit of said employees. (BIR Ruling No. 65, s. 1960) An examination of the provisions of the proposed Plan discloses that the foregoing requisites are present. Accordingly, it is exempt from the income tax, pursuant to section 56(b) of the Tax Code, as amended by Republic Act No. 1933 (not Republic Act No. 1963). Needless to state, any amount actually distributed by the trust to any employee or distributee is taxable to him in the year in which the distribution took place to the extent that such amount exceeds that contributed by him. Should he not have contributed at all, then the amount distributed to him is taxable in full. Very truly yours, (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue