BIR Ruling [UN-042-94]

February 8, 1994 BIR RULING [UN-042-94] Atty. Mariano C. Ereso, Jr. 2100 A. Mabini Street Malate, Metro Manila S i r : This refers to your letter dated October 13, 1993 stating that your client, Carpa Realty Development Corporation (Lessor) owns the Gomez Mansions situated at 275-285 Menlo Road, Pasay City, Metro Manila; that its business consists of leasing apartment units within the Gomez Mansions; that when an apartment is rented, a Contract of Lease is executed and the lessee makes a security deposit as required in paragraph 7 of the Contract of Lease, to answer for damages and any other monetary obligations resulting from the lessee's violation of any of the provision of the contract including the nonpayment of rent; that the security deposit is not considered as a pre-payment of rent and upon the termination of the lease, the security deposit is returned without interest to the lessee, provided all the conditions of the lease have been met by the lessee. In connection therewith, you are requesting confirmation of your opinion that the security deposit does not constitute income as of the date of receipt and therefore not subject to the 5% expanded withholding tax prescribed in Section 1(c) of the Revenue Regulations No. 6-85 otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations. In reply, please be informed that your opinion is hereby confirmed. 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. Ruling No. 011-69 dated October 3, 1969) In view thereof, this Office is of the opinion as it hereby holds that the aforesaid deposits being in the nature of a 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. (BIR Ruling No. 144-88 dated April 18, 1988). Very truly yours, JAIME M. MAZA Assistant Commissioner (Legal Service)