Legal basis and relationship to prior rules
- Sections 244 and 245 of the National Internal Revenue Code of 1997 (NIRC), as amended, are the statutory basis for the issuance.
- The Regulations implement the tax provisions of Section 22 of Republic Act No. 9856 and align with the related tax framework under the NIRC.
- Section 7(b) provides that applications for confirmation of tax-free exchange under Section 40(C)(2) of the NIRC follow Revenue Regulations 18-01.
- Section 12 applies Section 2.57.2 of Revenue Regulations 2-98, as amended, only to the extent replaced by a new creditable withholding tax rule.
- Section 16 and Section 17 apply withdrawal/delisting consequences using the assessment and enforcement mechanisms under the NIRC.
Policy and purpose
- The Regulations are designed to supplement the SEC’s Implementing Rules and Regulations, revised in consultation with the BIR and the Department of Finance (DOF).
- The Regulations provide guidelines and conditions for:
- registration of Real Estate Investment Trusts (REITs),
- availment of tax incentives granted to REITs,
- availment of dividend tax exemption by an Overseas Filipino Investor, and
- withdrawal of tax incentives granted under the Act.
- The Regulations establish specific BIR monitoring and recording/annotation requirements for transfers and incentives.
Core definitions for REIT taxation
- “Act” means Republic Act No. 9856, titled “Real Estate Investment Trust Act of 2009.”
- “BIR” means the Bureau of Internal Revenue.
- “CAR” refers to the Certificate Authorizing Registration issued by the BIR to effect the transfer of ownership over real property.
- “SEC” or “Commission” means the Securities and Exchange Commission.
- “Constitutive Documents” means the articles of incorporation and by-laws of a REIT.
- “Distributable Income” means net income for the taxable year, adjusted under internationally accepted accounting standards, and excludes proceeds from sale of REIT assets that are reinvested in the REIT within 1 year from the sale date.
- “DST” means Documentary Stamp Tax.
- “Income-generating Real Estate” means real property held to generate a regular stream of income such as rentals, toll fees, user’s fees, and similar sources, as further defined by the SEC.
- “IRR” refers to the SEC’s implementing rules and regulations, as revised.
- “Investible Funds” are REIT funds that can be placed in other investment vehicles besides income-generating real estate (including real estate-related assets, managed funds, government securities, and cash/cash equivalents).
- “Investor” means the owner of investor securities or investor shares.
- “Investor Securities” or “Investor Shares” means shares of stock issued by a REIT or derivatives thereof.
- “LTRAD 3” means the Large Taxpayers Regular Audit Division 3 of the BIR in charge of audit of the real estate industry.
- “Overseas Filipino Investor” means an individual Filipino citizen working abroad, including one who retained/reacquired Philippine citizenship under Republic Act No. 9225.
- “Principal Stockholder” means a stockholder who is the beneficial owner of more than 10% of any class of investor securities of the REIT combined.
- “Public Company” means a listed company on an Exchange that has:
- at least 1,000 public shareholders, each owning at least 50 shares; and
- aggregate ownership of at least 40% of outstanding capital stock at the initial year,
- with minimum ownership increasing to 67% within 3 years from listing.
- “Public Shareholder” excludes specified non-public persons (including sponsor/promoter, directors/principal officers/principal shareholders of sponsor/promoter and of the REIT, associates, related corporations, and persons holding legal title for another to circumvent the Act).
- “REIT” means a stock corporation established under the Corporation Code and SEC rules, principally to own income-generating real estate assets; a corporation becomes a REIT when its REIT Plan is effective with the SEC and listing as a REIT is approved by the Exchange; the term “REIT” is used only descriptively and does not adopt the technical meaning of “trust.”
- “Real Property” follows the meaning of “Immovable Property” under Article 415 of the Civil Code; “real estate” means real property.
- “REIT Plan” refers to the plan registered with the SEC, including amendments.
- “Taxable Net Income” means gross income minus allowable deductions under the NIRC and minus dividends distributed out of distributable income, specifically dividends to owners of common shares and preferred shares as provided in the REIT’s articles.
- “Unlisted REIT” means a duly incorporated REIT that has not listed with the Exchange.
Coverage: registration and tax classification
- A REIT including its branches must register once with LTRAD 3 on or before commencement of business, under Chapter II of Title IX of the NIRC and its implementing revenue regulations.
- Upon registration, a REIT must submit:
- certified true copies of its constitutive documents and REIT Plan, and
- a list of shareholders showing their Tax Identification Number, number of shares held, and percentage holdings,
- along with other documents the Commissioner may require.
- For tax purposes, a REIT is treated as a taxpayer engaged in the real estate business, and its real properties are treated as ordinary assets.
Documentary stamp tax on real property transfers
- The transfer of real property to REITs (including sale/transfer of any and all security interest) is subject to 50% of the applicable DST under Title VII of the NIRC.
- For real property, the applicable reduced DST rate under Section 196 of the NIRC is P7.50 for every P1,000 or fractional part in excess of P1,000.00 of consideration/value.
- For shares representing interest in real property, the reduced DST rate under Section 175 of the NIRC is P0.375 on each P200.00 or fractional part of par value.
- For stock without par value, the DST is equivalent to 12 1/2% of the DST paid upon original issuance of the stock.
- For assignment of mortgage or pledge (unless exempt under Section 199(f) of the NIRC), DST is based on the outstanding balance of the original loan at transfer/arrangement with the following rates:
- (a) if not exceeding P5,000.00: P10.00
- (b) on each P5,000.00 or fractional part in excess of P5,000.00: additional tax of P5.00
- If sale/transfer to a REIT occurs prior to its listing, the REIT must:
- execute an undertaking to list within 2 years from the date of initial availment of the incentive; and
- place in escrow with an Authorized Agent Bank acceptable to the Bureau the 50% DST given as incentive.
- “Date of the initial availment of the incentive” is the date of execution of the transfer documents.
- The escrowed 50% DST is released only upon submission of proof of listing within the 2-year period; otherwise, it is released in favor of the government under Section 16 (subject to that Section’s rules).
- The 50% DST incentive becomes due and demandable with applicable surcharge, penalties, and interest from the date payment should have been made upon occurrence of any of these events:
- failure to list with an Exchange within 2 years from initial availment,
- failure to maintain public company status,
- failure to maintain listed status of investor securities on the Exchange and registration by the SEC, and/or
- failure to distribute at least 90% of distributable income required under the Act.
Taxation of REIT transfers and monitoring annotations
- The sale, exchange, or other disposition of real property (including security interest) to a REIT is subject to income tax/capital gains tax and VAT if applicable under the NIRC depending on whether the property is classified as a capital asset or ordinary asset, unless otherwise exempt.
- Transfers or exchanges of real property for shares of stock in a REIT falling under Section 40(C)(2) of the NIRC produce these tax consequences:
- Income tax: the transferor does not recognize any gain or loss and is not subject to capital gains tax, income tax, or creditable withholding tax; no loss may be recognized.
- VAT: the transferor is subject to VAT on transfers of property classified as ordinary asset based on fair market value.
- DST: the transfer in exchange for REIT shares is exempt from DST as provided under Section 199 of the NIRC.
- Applications for confirmation of tax-free exchange under Section 40(C)(2) of the NIRC are governed by Revenue Regulations 18-01.
- For monitoring, the acquisition of property by tax-free exchange must be annotated on the reverse side of:
- the Transfer Certificate of Title, Condominium Certificate of Title, or Certificate of Stock
- using the required statement referencing Section 40(C)(2) of the NIRC in relation to Republic Act No. 9856, and stating the substituted basis amount under Section 40(C)(5).
- For the DST incentive monitoring annotation, the annotation must be made on the reverse side of the transfer certificate/condominium certificate/certificate of stock using the required DST-incentive statement referencing Republic Act No. 9856 and the Deed of Sale/Assignment date.
- The annotators are:
- the Registrar of Deeds for real property titles, and
- the Corporate Secretary or equivalent officer of the investee corporation/partnership for transferred shares/units.
- Parties must submit to the concerned RDO copies of the new titles/certificates duly certified containing required information within 90 days from issuance of CAR/TCL; failure subjects parties to applicable penalties under the Act and the NIRC.
- An unlisted REIT must submit to the concerned RDO the original or certified true copy of the Listing Circular (or equivalent document) issued by the Exchange within 2 years from initial incentive availment; failure results in:
- release of escrow amount to the Bureau (representing payment for basic DST due), and
- liability for interest and penalties under the NIRC,
- without prejudice to administrative, civil, and criminal liabilities under the Act and the NIRC.
CAR issuance: requirements and qualification marks
- Parties availing of the DST incentive must submit to the Revenue District Office issuing the CAR/TCL:
- Two copies of a duly notarized Application for DST Incentive under RA9856 (prescribed format in Annexes A–D),
- Two certified true copies of the REIT constitutive documents,
- Two certified true copies of the REIT’s SEC listing proof with the Exchange for listed REITs, or an undertaking to list within 2 years plus the escrow agreement for unlisted REITs.
- The CAR/TCL must specify that the transaction is qualified for the DST incentive under the Act as implemented by these Regulations.
- Parties submit new certified copies to the RDO within 90 days from CAR/TCL issuance to complete monitoring documentation.
Investor securities: issuance and transfer taxes
- The original issuance of investor securities is subject to DST under Section 174 of the NIRC.
- Sales/barters/exchanges/other dispositions of listed investor securities through the Exchange (including block sales and trades executed through exchange trading systems) are subject to stock transaction tax under Section 127(a) of the NIRC.
- Sales/barters/exchanges/other dispositions of listed investor securities through the Exchange are exempt from DST.
- Sales/barters/exchanges/other dispositions of investor securities outside the Exchange are subject to capital gains tax under Sections 24(C), 25(3), 27(D)(2), 28(A)(C) and (B)(5)(C) of the NIRC.
- Initial public offering and secondary offering of investor securities are exempt from the tax imposed under Section 127(b) of the NIRC.
Income and dividends: rates, computation, and escrow
- A REIT is taxable on all income from sources within and without the Philippines at 30% on taxable net income as defined under these Regulations, using Section 27(A) of the NIRC.
- A REIT is not subject to minimum corporate income tax under Section 27(E) of the NIRC.
- The income tax due is computed using:
- Gross Income (as defined under Section 32 of the NIRC)
- minus Allowable Deductions (as provided under Section 34, itemized or optional standard deductions)
- minus Dividends Paid (as defined under these Regulations)
- then multiply the resulting Taxable net Income by 30%.
- Dividends allowed as deductions are dividends actually distributed out of the REIT’s distributable income after the close of the taxable year but not later than the last day of the fifth (5th) month from the close of the taxable year.
- Dividends distributed within that prescribed period are considered paid on the last day of the REIT’s taxable year.
- For the first and second years prior to attaining minimum 67% ownership, the REIT must escrow with an Authorized Agent Bank the income tax collectible from dividends declared and deducted from taxable income.
- The escrowed income tax amount is released to the REIT only upon proof of compliance increasing minimum ownership to 67% within 3 years from listing; otherwise it is released in favor of the government under Section 16.
- After the third year from listing, the REIT must maintain minimum public ownership of 67%; otherwise, dividend payment is not allowed as a deduction from taxable income.
- A REIT must submit to LTRAD 3 quarterly a sworn statement listing shareholders, their Tax Identification Number, shareholdings, and the percentage represented.
- Before declaring dividends to deduct them for tax purposes, the REIT must additionally submit a sworn statement that minimum ownership requirements were maintained at all times:
- 40% for the first 2 years, and
- 67% on or before the end of the third year and thereafter.
Conditions to qualify and withholding rules
- To qualify for tax incentives under Sections 5 and 10 of these Regulations, a REIT must:
- be a public company and maintain that status as defined,
- for DST incentives on transfer of real property: enlist with an Exchange within 2 years from initial availment and maintain listed investor securities status on the Exchange and SEC registration, and
- distribute at least 90% of distributable income required under the Act and its IRR.
- Failure to comply triggers a curing period of 30 days from the occurrence of the event.
- The SEC determines appropriate compliance within the curing period and communicates the result immediately to the BIR.
- Creditable withholding tax applies notwithstanding Section 2.57.2 of Revenue Regulations 2-98, as amended:
- income payments subject to expanded withholding tax received by a REIT are subject to a creditable withholding tax rate of 1%.
- Withholding agents must remit creditable taxes withheld by filing BIR Form No. 1601-E (Monthly Remittance Return of Creditable Income Taxes Withheld) in triplicate, with Monthly Alpha list of Payees, tax base, and withheld amount, upon filing with authorized agent banks under the jurisdiction of the withholding agent’s Revenue District Office.
Dividend tax treatment and VAT treatment
- Cash or property dividends paid by a REIT are generally subject to a final tax of 10%.
- Dividend final tax does not apply (or dividends are exempt) when dividends are:
- received by a non-resident alien individual or non-resident foreign corporation entitled to a preferential treaty withholding rate,
- received by a domestic corporation or resident foreign corporation, which are exempt from dividends tax under the applicable NIRC provisions (Section 27(D)(4) and Section 28(A)(7)(d)), or
- received by an Overseas Filipino Investor, which are exempt from dividends tax for 7 years from the effectivity of these Regulations.
- A REIT is subject to VAT on:
- gross sales from disposal of real property, and
- gross receipts from rental of real property,
under Sections 106 and 108 of the NIRC.
- A REIT is not considered as a dealer in securities and is not subject to VAT on sale, exchange, or transfer of securities forming part of its real estate-related assets.
Withdrawal of incentives and delisting consequences
- A REIT becomes subject to applicable taxes plus interest and surcharges under the NIRC upon occurrence of any of these events (subject to curing period where applicable):
- failure to maintain public company status,
- failure to maintain listed status of investor securities and SEC registration,
- failure to distribute at least 90% of distributable income,
- failure to list with an Exchange within the 2-year period from initial DST incentive availment, and/or
- revocation or cancellation of REIT security registration.
- Deficiency income tax recovery:
- LTRAD 3 issues an assessment against the REIT in accordance with Section 228 of the NIRC and its implementing revenue regulations.
- Deficiency income tax is computed using gross income under Section 32 less deductions under Section 34.
- Dividends distributed are not allowed as deductions.
- The income tax escrowed for the first and second years is released to the government and applied against deficiency income tax computation.
- Deficiency DST recovery:
- the deficiency DST equivalent to 50% of the applicable DST, plus applicable interest, surcharges, and penalties, becomes due and demandable without need of assessment,
- based on the date of initial DST incentive availment,
- with LTRAD 3 issuing a Formal Letter of Demand showing tax details, and collection enforced under the NIRC enforcement framework.
- Delisting:
- If a REIT is delisted whether voluntarily or involuntarily, tax incentives are ipso facto revoked and withdrawn as of the date the delisting becomes final and executory.
- Tax incentives availed after delisting must be refunded to the government with applicable interests and surcharges under the NIRC and Section 19 of the Act.
- An assessment notice is prepared to recover deficiency income tax and DST; deficiency taxes become due and demandable and are enforced under the NIRC.
Reporting, penalties for filing failures, and other rules
- A REIT must submit to LTRAD 3 additional documents and reports:
- SEC certification that minimum public ownership is complied with,
- schedule of dividend payments showing investor name, address, amount of investment, classification of shares, amount of dividends, and final tax due,
- passport or recognition certificate under Republic Act No. 9225 of the Overseas Filipino Investor,
- Overseas Filipino Investor employment contract,
- contracts between the REIT and:
- fund manager, and
- property manager,
- quarterly written report on performance of REIT funds and properties,
- amendment to the REIT Plan as approved by the SEC,
- copy of the valuation report prepared by the REIT-appointed property valuer.
- Failure to comply with recording/reportorial requirements:
- upon notice and demand by the Commissioner, the responsible person must pay PHP 1,000 for each failure to file an information return/statement/list, keep records, or supply required information by the prescribed date,
- unless the person shows the failure is due to reasonable cause and not willful neglect,
- with an aggregate annual cap of PHP 25,000 for all such failures during a calendar year.
- A REIT that avails of tax incentives under the Act cannot avail of incentives for the same types of taxes available under special laws.
Incorporation, repeals, and operational effect
- Existing rules, regulations, rulings, orders, or parts thereof not inconsistent with these Regulations are adopted and incorporated as part of these Regulations (incorporation clause).
- Existing inconsistent rules and regulations or parts thereof are revoked (repealing clause).