Philippines: Distributions on depository receipts taxed as interest, not dividends

International Tax Affairs Division of the Bureau of Internal Revenue

Taxed as interest, not dividends

The International Tax Affairs Division of the Bureau of Internal Revenue (ITAD-BIR) ruled that cash distributions on Philippine Depository Receipts (PDRs) issued by a domestic corporation to a non-resident foreign corporation were not considered dividends subject to a 15% tax rate under Section 28 B)(5)(b) of the Tax Code, but were interest subject to a 30% tax rate under Section 28(B) of the Tax Code.

The ITAD-BIR found that the non-resident foreign corporation holder of the PDRs was not a shareholder of the issuing domestic corporation under Section 22(M) of the Tax Code because although the PDRs provided the non-resident foreign corporation an option to purchase shares of stock of the domestic corporation, the domestic corporation was engaged in an industry whose ownership is reserved by the Constitution fully to Filipino citizens and the non-resident foreign corporation was thus prohibited from legally exercising that option.

The Court of Tax Appeals reached a similar conclusion in the case of Rappler Holdings Corp.

Those decisions are consistent with Section 5 of Revenue Memorandum Order (RMO) No. 46-2020 which provides that in order for a PDR holder to be entitled to the reduced tax rate on dividends, the PDR must include a right to purchase the underlying shares that can be legally exercised.

Read a June 2023 report prepared by the KPMG member firm in the Philippines



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