BIR updates requirements on availing Income Tax exemptions of foreign sourced Dividends received by a Foreign Corporation

The Bureau of Internal Revenue (BIR) explains the new requirements needed to avail Income Tax Exemptions of Foreign Sourced Dividends that are received by a Foreign Corporation.

The BIR implemented new requirements on availing Income Tax Exemptions of Foreign Sourced Dividends that can be received by Foreign Corporations in their Revenue Regulation (RR) 5-2023 issued on May 5, 2023. It should be noted that these reduced requirements are an amendment to Section 5 of RR No.5-2021.

The regulation clarified the conditions in which foreign-sourced dividends received by domestic corporations can be exempted from Income Tax. These include:

  1. The dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time the foreign-sourced dividends were received or remitted;
  2. The dividends received shall be used to find the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructure projects;
  3. The domestic corporation holds directly at least twenty percent (20%) in value of the outstanding shares of the foreign corporation and has held the shareholdings uninterruptedly for a minimum of two (2) years at the time of the dividends distribution. In case the foreign corporation has been in existence for less than two (2) years at the time of dividends distribution, then the domestic corporation must have continuously held directly at least twenty percent (20%) in value of the foreign corporation's outstanding shares during the entire existence of the corporation.

Note that if all these conditions are absent, the foreign-sourced dividends will be considered as taxable income of the Domestic Corporation in the year of actual receipt or remittance, subject to surcharge, interest, and penalties, as applicable.

How can Domestic Corporations avail of the Income Tax Exemption?

The RR clarifies that for Domestic Corporations to avail of the Income Tax Exemption, they must fulfil the following requirements:

  1. Attach a "Sworn Statement", following the template provided in these Regulations (Annex A) , to the Annual Income Tax Return (AITR) pertaining to the taxable year in which the foreign-sourced dividends were received; and
  2. Attach to the AITR pertaining to the year immediately following the year of receipt of the foreign-sourced dividends a "Sworn Declaration" using template provided herein (Annex B).

It is also stated that compliance with the above requirements is sufficient to avail of the Income Tax exemption. However, in case of partial or non-utilization of the foreign-sourced dividends, the domestic corporation shall pay the corresponding Income Tax due thereon, inclusive of surcharge, interest and penalties, by amending the AITR filed for the particular period. In the event that the amendment is already prohibited due to the existence of audit, the Income Tax shall be paid using payment form (BIR Form 0605).

Additionally, the RR explains that for income tax purposes, no credit or deduction under Section 34(C) of the Tax Code shall be allowed for any taxes of foreign countries paid or incurred by the Domestic Corporation in relation to the exempt foreign-sourced dividends.

The last portion of the RR explains that any taxes of foreign countries paid or incurred by the domestic corporation in relation to the exempt foreign-sourced dividends shall be disregarded in computing the limitations on foreign tax credits provided under Section 34(C)(4) of the Tax Code.