Question & AnswerQ&A (PRESIDENTIAL DECREE NO. 1738)
The purpose of Presidential Decree No. 1738 is to declare the banking industry as indispensable to the growth of the national economy and to provide certain fiscal incentives and regulatory measures to increase the resources and capitalization of banks to support industrial and agricultural development.
The Decree exempts gains realized from certain sales or exchanges of property involving banks, non-bank financial intermediaries, or finance companies from being subject to tax for a period of five years from the date of approval. These include mergers, stock exchanges, and investments in new capital stock under specified conditions.
The conditions include that the exchange of property is solely for stock in another bank or related financial entity, and that the shares of stock involved are not disposed of, transferred, assigned, or conveyed within five years from the date of issue, except in cases of death transmission.
Any bank or corporate official who causes such unlawful transfer shall be punished by a fine of not less than Five Thousand pesos and imprisonment of not less than two years.
The Decree mandates that the final scheduled income tax paid on gains from the disposition of real estate that corresponds to proceeds invested in new capital stock within six months shall be refunded by the Bureau of Internal Revenue within six months of payment, subject to compliance with the conditions of registration and holding of shares for five years.
A bank is every banking institution as defined in Section 2 of the General Banking Act (Republic Act No. 337), which may be a commercial bank, thrift bank, rural bank, or specialized government bank.
A non-bank financial intermediary is a financial intermediary authorized by the Central Bank of the Philippines to perform quasi-banking functions as defined in Section 2-D(c) of the General Banking Act, Republic Act No. 337.
Quasi-banking functions include borrowing funds for the borrower's own account through issuance or endorsement of debt instruments other than deposits, issuing participations, certificates of assignment, trust certificates, or repurchase agreements from twenty or more lenders to re-lend or purchase receivables, excluding non-financial companies borrowing only for their own needs.
Such a corporation must be registered and authorized by the Central Bank of the Philippines.
The shares of stock must not be disposed of, transferred, assigned, or conveyed within five years from the date of issue, except in transmission due to death. Violation triggers immediate tax payment on the gains realized.