Resident entities are taxed on their worldwide income earned from within and outside the Philippines.

“Resident foreign companies”, i.e., foreign companies engaged in trade or business within the Philippines are taxed only on income sourced from the Philippines.

Dividends

Dividend income received by a resident company from a “resident foreign company” is considered as income sourced from the Philippines, and is therefore exempt from corporate tax, provided that more than 50% of the gross income of the “resident foreign company” has been derived from sources within the Philippines in the 3 preceding years. If this condition is not met, the dividend income is treated as foreign-sourced dividend.

Effective 12 April 2021, foreign-sourced dividends, i.e., dividends received from a non-resident company, are also exempt from corporate tax if the following conditions are met:

The dividends actually received or remitted into the Philippines are reinvested in the business operations within the next taxable year;
The dividends received are used only to fund working capital requirements, capital expenditure, dividend payments, investment in domestic subsidiaries, and infrastructure projects; and
The domestic company holds directly at least 20% in value of the outstanding shares of the foreign company for a minimum uninterrupted period of 2 years at the time of the dividend distribution, or during the entire existence of the foreign company if it is less than 2 years.

If any of the conditions is not met, the foreign-source dividends are subject to tax as ordinary income in the year of actual receipt or remittance.

Capital Gains

Capital gains arise on the sale or disposal of capital assets and a separate capital gains tax is levied on such capital assets. ‘Capital assets’ are assets or property held by the taxpayer, whether or not used in the business, excluding the following:

Inventories or property held primarily for sale to customers in the ordinary course of business;
Real property or depreciable property used in trade or business; and
Stock in trade or property of a kind that would be included in the inventory of the taxpayer if on hand at the close of the taxable year.

Capital gains from the sale of bonds, debentures, or other certificates of indebtedness with a maturity of more than five years are exempt from capital gains tax. Capital losses can be set off only against capital gains.

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