D.

PASSIVE INCOME
4. DIVIDENDS

Sec.32 (A) Gross Income. General Definition. Except when otherwise provided in this Title, gross
(7), NIRC:
income means all income derived from whatever source, including (but not limited to) the
following items:
xxx
(7) Dividends;
xxx
Sec. 58 and
71, 250-253,
Revenue
Regulations
No. 2:
Revenue
Memorandum
No. 31-90
Sec. 73 (C, Distribution of dividends or Assets by Corporations.
D), NIRC
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any
distribution made to the shareholders or members of a corporation shall be deemed to
have been made form 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.

(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The

taxable income declared by a partnership for a taxable year which is subject to tax under
Section 27 (A) of this Code, after deducting the corporate income tax imposed therein,
shall be deemed to have been actually or constructively received by the partners in the
same taxable year and shall be taxed to them in their individual capacity, whether actually
distributed or not.

MAMALATEO: Dividends are included in the gross income of the stockholder, unless:
o they are exempt from tax, or
o subject to final tax at preferential rate under 1997 Tax Code

Dividends comprise any distribution whether in cash or other property in the

ordinary course of business, even though extraordinary in amount made by a
domestic corporation, joint stock company, partnership, joint account, association,
or insurance company to the shareholders or members out of its earnings or profits.

Dividend a corporate profit, set aside, declared and ordered by the directors to be
paid to the stockholders on demand or at a fixed time.

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.
- Cash dividend or property dividend paid by a domestic corporation or from a
joint stock company, insurance or mutual fund company, 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 a partner, or on
the share of an individual in the net income after tax of an association, joint
account, joint venture or consortium taxable as a corporation of which he is a
member or co-venturer, out of its earnings or profits in 1998 or succeeding
years is generally subject to the following final withholding tax rates:

o 6% beginning 01 Jan. 1998;

o 8% beginning 01 Jan. 1999;
o 10% beginning 01 Jan. 2000;
 - The appropriate tax rate 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 citizen, non-resident alien not engaged in trade or business in the

Philippines.
- Cash and/or property dividends shall be subject to the final withholding tax
rate of 25%

Recipient is a domestic corporation or a resident foreign corporation.

- Dividends from a domestic corporation or resident foreign corporation from a
domestic corporation (inter-corporate dividend) shall not be subject to tax.

Recipient is a non-resident foreign corporation.

- Dividends 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 non-resident foreign corporation is domiciled, shall
allow a credit against eh tax due from the non-resident foreign corporation
taxes deemed to have been paid in the Philippines equivalent to:
o 20% for 1997,
o 19% for 1998,
o 18% for 1999,
o 17% for 2000, and thereafter,

which represents the difference between the regular income tax of:
o 35% in 1997,
o 34% in 1998,
o 33% in 1999, and
o 32% in 2000, and thereafter
and the 15% tax on dividends as provided for in this paragraph.

- 01 Nov. 2005 the corporate income tax rate was increased to 35% under
RA 9337, which reduced the corporate income tax rate to 30% beginning 01
Jan. 2009.

(2) Dividend is paid by a foreign corporation

Recipient is a resident citizen or a domestic corporation

- f

5. ANNUITIES AND INSURANCE PROCEEDS

Annuities, Proceeds from life insurance or other types of insurance:
1) Annuities are installment payments received for life insurance sold by insurance
companies.
2) The aleatory contract of life annuity binds the debtor to pay an annual pension or income
during the life of one or more determinate persons in consideration of a capital consisting
of money or other property, whose ownership is transferred to him at once with the burden
of the income. [Art. 2021, New Civil Code]
3) The annuity payments represent a part that is taxable and not taxable. If part of annuity
payment represents interest, then it is a taxable income. If the annuity is a return of
premium, it is not taxable.

6. PRIZES/WINNINGS/AWARDS/REWARDS
Sec.32 (A) Gross Income. General Definition. Except when otherwise provided in this Title, gross
(9), NIRC:
income means all income derived from whatever source, including (but not limited to) the
following items:
xxx
(9) Prizes and winnings;
xxx
MAMALATEO: - Prizes (except those amounting to P10,000 or less) and other winnings (except
PCSO and lotto winnings) from sources within the Philippines shall be subject to 20%
withholding tax, if received by a citizen, resident alien or non-resident alien engaged
in trade or business in the Philippines.

- If the winner is a non-resident alien not engaged in trade or business in the

Philippines, he shall be subject to 25% final withholding tax.

- If the winner is a corporation (domestic or foreign), the prizes and other winnings
are added to the corporations operating income and the net income is subject to
20% corporate income tax.

- Prizes/awards in recognition of religious, charitable, scientific, educational, artistic,

literary or civic achievement are excluded from gross income, only if:
1) The recipient was selected without any action on his part to enter the
contest or proceeding;
2) The recipient is not required to render substantial future services as a
condition to receiving the prize or award.

- Prizes/awards granted to athletes in local and international sports competitions and

tournaments whether held in the Philippines or abroad are also excluded from gross
income.

7. OTHER TYPES OF PASSIVE INCOME

Income from any source whatever: Inclusion of all income not expressly exempted within the
class of taxanle income under the laws irrespective of the voluntary or involuntary action of the
taxpayer in producing the gains, and whether derived from legal or illegal sources.

Forgiveness of indebtedness: The cancellation or forgiveness of indebtedness may have any of

three possible consequences:
a. It may amount to payment of income. If, for example, an individual performs
services to or for a creditor, who, in consideration thereof, cancels the debt, income
in that amount is realized by the debtor as compensation for personal services.
b. It may amount to a gift. If a creditor wishes merely to benefit the debtor, and
without any consideration therefore, cancels the debt, the amount of the debt is a
gift to the debtor and need not be included in the latters report of income.
c. It may amount to a capital transaction. If a corporation to which a stockholder is
indebted forgives the debt, the transaction has the effect of a payment of dividend.

E. GAINS DERIVED FROM DEALINGS IN PROPERTY

- There are 3 General Types of Capital Assets:

1) Shares of Stock of a Domestic Corporation
In transactions involving sale or exchange of shares of stock of a domestic
corporation, the tax status of the seller or transferor (whether individual, citizen or
alien, or a corporation, domestic or foreign) is not material.

Whoever is the seller or transferor of the shares of stock of a domestic corporation,

the transaction is either subject to:
The of 1% stock transaction tax, if the sale of the listed shares takes place
through a stock broker of a local stock exchange; or
5%/10% capital gains tax, if the shares are unlisted or they are listed shares
but traded outside of the local stock exchange.

Rules on sale / exchange of shares of stock of a domestic corporation:

Seller or transferor dealer in securities: the shares of stock shall be treated as
ordinary assets and the ordinary gain, if any, from the sale / transfer shall be
 subject to the graduated income tax rates (individual) or to the normal
corporate income tax (corporation).

Seller or transferor not a dealer in securities: the shares of stock are regarded
as capital assets. There is a need to determine if the shares of stock are listed
in the PSE:

o If listed and traded in the local stock exchange: the transaction is

exempt from income tax, regardless of the nature of business of the
seller / transferor.

o If not listed or they are listed but not traded in the local stock
exchange: the net capital gains realized during the year, if any, shall
be subject to the final capital gains tax equivalent to 5% of the net
capital gains not exceeding P100,000, and 10% on any amount in
excess of P100,000/

2) Real Property (of individuals) or land/or building (of corporations)

(Rules)
Seller or transferor is a real estate dealer: the real property sold is an ordinary asset,
and the gain, if any, is subject to the graduated income tax (individual) or to the
normal corporate income tax (corporation). Non-resident foreign corporations are
taxed on their gross income from sources within the Philippines.

Seller or transferor no a real estate dealer: determine whether the real property sold /
transferred is
Used in the taxpayers trade, business or profession
Treated as a fixed asset used in his trade, business or profession, subject to
depreciation.

3) Other type of assets, including shares of stock of a foreign corporation

All other properties, except shares of stocks of a domestic corporation and real
property in the Philippines, shall be subject to income tax at the graduated income
tax rates, or at 30% corporate income tax (if seller is a corporation).

But!
50% of long-term capital gains are recognized as subject to income tax
(individual taxpayer),
100% of the capital gains are subject to tax if derived by an individual
taxpayer from short-term capital asset transactions.