DIVIDEND INCOME

Corporate profit set aside, declared, and ordered by the

directors to be paid to the stockholders on demand or at a fixed
time. Until the cash or property dividend is declared, the
corporate profits belong to the corporation and not to the
stockholders, and are liable for the payment of the debts of the
corporation
Generally, it is included in the gross income of the stockholder,
unless they are exempt from tax or subject to final tax at
preferential rate under the 1997 Tax Code
Cash Dividend and Property dividend are subject to income
tax, whereas stock dividend is generally exempt from income
tax. However, any type of dividend must come from the
unappropriated retained earnings of the corporation. Property
dividend is a dividend payable in property which may be
investments in shares of stocks of a corporation, or real
property, or some other property owned by a corporation.
Stock Dividend is a dividend payable in the shares of stock of
the corporation declaring such stock dividend. Being one
payable in capital stock, cannot be declared out of outstanding
corporate stock, but only from retained earnings. However, a
liquidating dividend, is not truly dividend as contemplated
under the income tax law.

RULES ON TAXATION OF DIVIDENDS

1. Dividend is paid by a domestic corporation
Recipient is a citizen, resident alien, or non-resident alien engaged in
trade or business in the Philippines
Up to Dec 31, 1997, cash dividend or property dividend paid by a
domestic corporation was exempt from income tax pursuant to Tax Code, as
amended. From January 1, 1998, it is generally subject to the following
withholding tax rates:
6% - beginning January 1, 1998;
8% - beginning January 1, 1999; or
10% - beginning January 1, 2000

However, the tax dividend shall apply only 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 of this
tax. The appropriate tax to be deducted and withheld on the
cash dividend by the paying corporation shall be the rate
prescribed in the year of receipt of such dividend (not the rate
in the year of declaration of such dividend).

Recipient is a non-resident alien not engaged in trade or business in

the Philippines cash and property dividends subject to final withholding
tax rate of 25%
Recipient is a domestic corporation or a resident foreign corporation
Dividends received by a domestic corporation shall not be
subject to tax
Dividend exclusion is a device to reduce double taxation on
the same income a device for reducing extra or double
taxation. Since a corporation cannot deduct from its gross
income the amount of dividends distributed to its corporation
shareholders during the taxable year, any distributed earnings
are necessarily taxed twice; initially at the corporate level when
they are included in the corporations taxable income and
again at the corporations shareholder level when they are
received as dividend.
Recipient is a non-resident foreign corporation
Dividends received by a non-resident foreign corporation from
a domestic corporation is subject to the 15% final withholding
tax, subject to the condition that the country in which the nonresident foreign corporation is a domicile, shall allow a credit
against the tax due from a non-resident foreign corporation
RA 9337, corporate income tax rate was increased to 35%
Country Residence of foreign corporation does not impose income tax
While it is true that claims for refunds are construed strictly
against the claimant, the fact that Switzerland does not impose
any tax on the dividends received from a domestic corporation
should be considered as full satisfaction of the condition that
the 20% (now 15% = 30% -15%) differential is deemed
credited by the Swiss government (as against the
Commissioners contention that the tax-sparing credit should
apply only if the foreign country allows foreign credit). The
court observed that to deny private respondent the privilege to
withhold only 15% provided for under Presidential Decree No.

69 would run counter to the very spirit and intent of said law
and definitely will adversely affect foreign corporations interest
and discourage them from investing capital in our country
(Commissioner vs Wander Philippines, Inc). The same rule
applies to Hongkong, which country does not impose income
tax on dividends paid by Philippine companies.
-Tax-Sparing Credit - Tax reduced by the Philippines should be
fully applied or credited to the tax on dividend
income received by the non-resident foreign
corporation imposed by the country of its domicile. This serves
as an incentive by reducing their tax liability in the Philippines
and in their residence countries.
Ex. Domestic corporation paid cash dividend to non-resident
foreign corporation (NRFC) organized in Brazil. This shall form
part of NRFCs income therefore taxable also in Brazil. The
dividend received shall only be taxed at 15% in the Phils
(instead of 35%) if Brazil will reduce/credit at least 20% of the
tax imposed in the Phils. from its tax imposed in Brazil. [See
Section 28(5)(b)]
If Brazil will credit/reduce less than 20% or will not credit any
amount, then the Phils will tax the dividend at 35% (ordinary
income tax).
Phils. cannot give more than 15% tax credit
because the law only allows such.
Dividend paid to foreign head office of a Philippine branch
The Supreme Court ruled that a single corporate entity cannot
be both a resident and a non-resident corporation depending
on the nature of the particular transaction involved.
Accordingly, where the dividends are paid directly to the head
office or coursed through its local branch is of no moment for
after all, the head office and the office branch constitute but
one corporate entity, the Marubeni Corporation, under both
Philippine tax and corporate laws, is a resident foreign
corporation because it is transacting business in the
Philippines
The Court explained that the 25% tax rate under the tax treaty
with Japan could not be imposed, as the treaty provides that
the rate of tax shall not exceed 25%. In other words, the 25%
would apply only if the tax imposed under the tax codeexceeds
25% limitation. In this connection, Section 24 (b)(1)(iii) of the
Tax Code provides that dividends received by a non-resident
foreign corporation would be taxed at 15%if its state of
domicile shall allow a credit against tax deemed paid in the

Philippines equivalent to 10% thereof. (Marubeni Corporation

vs Commissioner and CTA)
2. Dividend is paid by a foreign corporation
Recipient is a resident citizen or domestic corporation
The dividend income is subject to Philippine income tax, since
a resident citizen and a domestic corporation are liable to
income tax on its/his worldwide income. Generally, the tax rate
applied is the graduated income tax rates (if the recipient is a
domestic corporation) or 32% (if the recipient is a domestic
corporation), unless a lower rate of tax is allowed under an
effective tax treaty.
Dividends being remitted to National Development Corporation
(NDC) are taxable under the tax treaty. NDC, as government
owned and controlled corporation, is subject to tax in the
Philippines from worldwide income
Dividends received by resident individual stockholders from the
Philam First Asia Equity Fund shall be subject to tax rates of
3% to 30% (now 5% to 32%), while dividends received by
domestic corporate stockholders shall be subject to 35% (now
30%)
Recipient is a non-resident citizen or an alien, or a foreign corporation
Dividend income received from a foreign corporation not doing
business in the Philippines shall be treated as income from
foreign sources; hence, exempt from Philippine income tax if
received by a non-resident citizen, an alien, or a foreign
corporation
Dividends of a domestic corporation which are delivered in
cash to foreign corporations as stockholders are subject to the
payment of income tax, the exemption clause in the charter of
the paying corporation notwithstanding. What is being taxed
here is the dividend income of the foreign corporate
stockholder, the income tax of which is required to be withheld
by the paying corporation and remitted to the BIR.
The same rule applies to dividend income paid by a domestic
corporation, registered with PEZA and enjoying income tax
holiday, to its foreign parent company. Branch profits remitted
by a Philippine branch of a foreign corporation registered with
PEZA are exempt from the branch profit remittance tax by
express provision of the law.

Cash Dividend vs Stock Dividend

A stock dividend is a dividend payable in reserve or increase of
additional stock of the corporation. A cash dividend is a
disbursement to the stockholder of the accumulated earnings,
and the corporation parts irrevocably with all interests therein.
A stock dividend involves no disbursement, and the corporation
parts with nothing to the stockholders who receive, not an
actual dividend but a certificate of stock. When the cash
dividend is declared and paid to the stockholders and such
cash becomes the absolute property of the stockholders and
cannot be reached by creditors of the corporation in the
absence of fraud. A stock dividend, however, still being the
property of the corporation and not of the stockholder, may be
reached by an execution against the corporation and may be
sold as a part of the corporate property
Dividends is distinguished from profits, for profits in the hands
of a corporation do not become dividends until they have been
set apart, or at least declared, as dividends and transferred to
the separate property of the stockholder.
Stock Dividends are generally exempt from tax
A stock dividend which represents the transfer of surplus to a
capital account is not subject to income tax. However, a
dividend in stock may constitute taxable income to the
recipients thereof, notwithstanding the fact that the officers or
directors of the corporation choose to call such distribution as a
stock dividend
A stock dividend constitutes, if it gives the shareholder, an
interest different from that which his former stockholdings
represented. A stock dividend does not constitute income, if the
new shares confer no different rights or interests than did the
old the new certificates plus the old representing the same
proportionate interest in the net assets of the corporation as
the old.
Stock dividends cannot be issued to a non-stockholder in
payment of services rendered to the corporation for being
violative of the provisions of Section 16 of the Corporation
Code
If a corporation cancels or redeems stock issued as a dividend
at such time and in such manner as to make the distribution or
cancellation, in whole or in part, essentially equivalent to the
distribution of taxable dividend.

TREASURY SHARES
Stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other
means
May be re-issued and sold again as long as they are held by
the corporation as such
Treasury stocks distributed as stock dividends by a corporation
to its stockholders are not taxable to the recipients upon
receipt thereof, because out income tax law adopted the
change in the proportionate interests as the test in the
taxability of stock dividends.
Stockholders may realize income only upon their subsequent
sale
ROYALTY INCOME
Software is a program or series of programs containing
instructions for a computer required either for the operational
processes of the computer itself (operational software) or the
accomplishment of other tasks (application software).
Royalties is a payment of any kind received as a
consideration for the use of or the right to use, any copyright of
literary, artistic or scientific work
It covers both payments made under a license and
compensation which a person would be obliged to pay for
fraudulently copying or infringing the copyright over software.
Transactions involving software:
a. A (full or partial) transfer of a copyright right in software
b. A transfer of copy of the software
c. A provision of services for the development or
modification of the software
d. The provision of know-how relating to software
programming techniques.
* Any transaction involving software which consists of more than
one of the transactions above shall be treated as a separate action.
Characterization of Transactions
a. Transfer of copyright rights
i. The right to make copies of the software for purposes of
distribution to the public by sale or other transfer of ownership, or
by rental, lease or lending
ii. The right to make derivative computer programs based
upon the copyrighted software
iii. The right to make a public performance of the software
iv. The right to publicly display the computer program or

v. Any rights of the copyright owner, the exercise of which

by another without his authority shall constitute infringement of said
copyright.
- when only copyright rights are transferred, payments
made in consideration therefore are royalties. On the other hand,
when copyright ownership is transferred, payments made in
consideration therefor are business income
b. Transfer of copyrighted articles
- a copyrighted article incorporating a software includes a
copy of a software from which the work can be perceived,
reproduced or otherwise communicated.
- If a person acquires a copy of the software but does not
acquire any of the rights described above, and the transaction does
not involve the provision of services or of know-how, the transfer of
the copy of the software is classified solely as transfer of a
copyrighted article and payments for which constitute business
income.
c. After sales service
- contracts for the use of software are often accompanied
with the provision of services by personnel of the relevant foreign
licensor/owner or of the relevant local industry, reseller, and
distributor.
- the parts of the payment representing the use of the
software will be treated as royalties and taxable as such.
- if, however one part of what is being provided constitutes
by far the principal purpose of the contract and the other parts
stipulated therein are only ancillary and largely unimportant
character, then the treatment applicable to the principal part should
be applied to the whole amount of consideration
d.
Site
License/Enterprise
License/Network
License
Arrangements
- software house or computer programmer agrees to
supply information about the ideas and principles underlying the
program such as logic, algorithms, or programming languages and
techniques
- payments are considered as royalties
f. Transfer of Ownership
- where a consideration is paid for the transfer of full or
partial ownership of the rights in the copyright, the payments made
therefor are not royalties but business income or capital gains.