Introduction to Donor’s Tax

Donation
 Donation is the gratuitous transfer of property from one living person (donor) to another (donee).

Essential Requisites of Donation

1. Capacity of the donor
2. Intention to donate
3. Donative act or delivery
4. Acceptance by the donee

Formal Requisites of Donation

Property Required formality
Real property Public instrument*
Tangible personal property
Amount exceeding P5,000 Written
Amount not exceeding P5,000 Oral
Intangible personal property Public instrument

*Art. 749, New Civil Code; a public instrument is a written document annotated
by a lawyer.

Types of Inter-Vivos Donation

1. Direct donation
A direct donation is one made by the donor directly to the donee

2. Indirect donation
An indirect donation involves transfer of property by the donor in favor of the donee but under the supervision of
another party. This is called donation in trust.

The designation of a donation in trust may either be:

a. Revocable- this is not a completed donation and is not taxable.
b. Irrevocable- this is a completed donation; hence, taxable.

Types of Donors
A. Resident or citizen- taxable on global donations, such as
1. resident citizen
2. non-resident citizen
3. resident alien

B. Non-resident alien- taxable only on Philippine donations, except intangible personal property subject to
reciprocity conditions.

Under TRAIN Law, donation to any donee is now subject to a flat 6% tax.

Summary of rules on taxable donation

Residents or Citizens NRA without reciprocity NRA with reciprocity
Property location Within Abroad Within Abroad Within Abroad
 Real properties ⁄ ⁄ ⁄ x ⁄ x
Personal properties
⁄ ⁄ ⁄ ⁄
Tangible x x
⁄ ⁄ ⁄ x
Intangible x x

Illustration 1
Mr. Rallo donated the following properties:

Philippines Abroad Total

Real properties 1,000,000 800,000 1,800,000
Tangible personal properties 400,000 300,000 700,000
Intangible personal properties 200,000 100,000 300,000
Total 1,600,000 1,200,000 2,800,000

The following shall be the taxable donation in each of the following cases:
If Rallo is a The taxable donation is
Resident or citizen donor 2,800,000
Non-resident alien
With reciprocity exemption 1,400,000
Without reciprocity exemption 1,600,000

Donor’s Tax
 Donor’s tax is a tax upon the gratuitous transfer of property between two or more living persons at the time
of transfer whether the transfer is direct or in trust and without regard to the type of property transferred.

Nature of Donor’s Tax

1. Privilege tax
2 Proportional tax
3. Annual tax
4. Ad valorem
5. National tax
6. Revenue or fiscal tax

Rationale of Donor’s Taxation

1. To control tax evasion of the estate tax
2. To control tax evasion on income tax

Illustration
Mr. Lex had an art collection item with a fair value of P4,000,000 which he previously acquired for P2,000,000. Mr.
Lex sold the collector’s item for only P2,500,000.

Fair market value P4,000,000 1,500,000- donation

Selling Price 2,500,000
Cost or tax basis 2,000,000 500,000- income

3. To recoup future loss of income tax expense

Exempt Gifts
The following are exempt donations:
1. Donations to exempt donees under the NIRC and special laws
2. Donations for election campaign
3. Transfers for insufficient consideration involving real property classified as capital assets
4. General renunciations of inheritance
5. Donations with reserved powers
6. Donation to the government for public use
7. Donation to accredited non-profit institution
8. Quasi-transfers
9. Void donations
10. Foreign donations of non-resident alien donors
11. Donations of property exempt under reciprocity

Donation to certain exempt donees under the NIRC and special laws
Donations to the following donee entities are exempt:

1. Aquaculture Department of the Southeast Asian Fisheries Development Center

2. Aurora Pacific Economic Zone and Freeport Authority
3. Development Academy of the Philippines
4. Girl Scouts of the Philippines
5. Integrated Bar of the Philippines
6. International Rice Research Institute
7. National Commission for Culture and the Arts
8. National Social Action Council
9. National Water Quality Management Fund
10. People’s Television Network, Incorporated
11. People’s Survival Fund
12. Philippine-American Cultural Foundation
13. Philippine Normal University
14. Philippine Investors Commission
15. Philippine Red Cross
16. Ramon Magsaysay Award Foundation
17. Rural Farm School
18. Task Force on Human Settlements
19. Tubbataha Reefs Natural Park
20. University of the Philippines
The list of exempt donees herein is non-exhaustive. There may be other exempt donees under special laws.

Donations for election campaign

Any contribution in cash or in kind to any candidate, political party, or coalition of parties for campaign purposes shall
be governed by the Election Code.

Transfers for insufficient consideration involving real property classified as capital assets
Not subject to donor’s tax.
Hence, the exemption does not extend to
a. Sale of real properties classified as ordinary asset
b. Sale of personal or movable property

Illustration
A corporation sold the following properties:
 Fair value Selling Price
Vacant and unused lot 2,000,000 1,000,000
Building 4,000,000 2,500,000
Investment in shares of stocks 1,000,000 400,000
Equipment 400,000 200,000

The donation and the donor's tax shall be computed as:

Building (4M-2.5M) 1,500,000
Investment in stocks ( 1M-400K) 600,000
Equipment (400K-200K) 200,000
Net taxable gifts 2,300,000
Less: Exempt donation 250,000
Excess 2,050,000
Multiply by: Donor's tax rate 6%
Donor's tax 123,000

Insufficient consideration on transfer of other properties

In the absence of the donative intent, the same shall be exempt.

Illustration 1
Mr. Greg had a car with a fair value of P4M. His brother Pablo is interested to buy the car but could only offer P2.5M.
Another friend offered P3.8M for the car but Greg preferred to sell the car to Pablo.

The P1.5M discount is a taxable gift. The donation is clearly intentional since despite the presence of willing buyers
at almost fair value, Mr. Greg decided to give the car to his brother.

Illustration 2
Leon Manalo is having a business liquidity problem. Faced with an imminently maturing debt which he could not
repay, he sold his truck with a second hand value of P3M for only P1M.

The P2M discount is not a taxable gift there being total lack of donative intent since the sale is forced by a
circumstance beyond the Leon Manalo’s control.

General Renunciation of Inheritance

A general renunciation of inheritance occurs when an heir or the surviving spouse renounces his or her share in the
hereditary estate of a decedent in favor of no particular coheir. A general renunciation is a repudiation of inheritance
which cannot be imputed as a donation.

Illustration
Don Pablo died with a net distributable estate of P1.2M for his children Mari, Lea, and Mario as heirs. Mario
renounces his P400K share in the net estate in favor of no particular assignee. Thus, Mario’s P400K is reallocated as
P200K each to Mari and Lea.

The renunciation made by Mario is a general renunciation. This is exempt from donor’s tax.

Important point to consider

To be exempt, the renunciation of inheritance must not be done categorically in favor of an identified heir to the
exclusion of other heirs.
Illustration 1: Specific renunciation in cases of more than two heirs
Don Pablo died with a net distributable estate of P1.2M for heirs: Mari, Lea and Mario. Mario renounced his P400K
share in favor of Lea to the exclusion of Mari.

This is called specific renunciation. This is subject to the donor’s tax.

Illustration 2: Specific renunciation in the case of only two heirs

Don Pablo died with a net distributable estate of P800K for his two heirs: Lea and Mario. Mario renounced his P400K
share in the net distributable estate.

In this case, even if the renunciation is specific, it is not construed as a donation. Hence, it is exempt from donor’s
tax.

Renunciation by the surviving spouse of his/her share in the hereditary estate of the decedent will be subject to the
aforementioned rules.

However, the renunciation by the surviving spouse of his/her share in the conjugal or communal properties upon
dissolution of the marriage is a taxable donation regardless of whether it is specific or general.

Summary of rules on renunciation

Type of renunciation General Specific
Renunciation with more than two heirs Exempt Taxable
Renunciation with only 2 heirs Exempt Exempt
Renunciation by the surviving spouse of his
share in the common properties Taxable Taxable

Donation with reserved powers (Incomplete transfers)

This pertains to transfers of property wherein ownership will transfer only upon the happening of a future event which
is specified by the donor, such as:
1. Conditional donation
2. Revocable transfers

Donation to the government for public use

Gifts made to or for the national government or any entity created by any of its agencies which are not conducted for
profit or to any political subdivision of the said government are exempt from donor’s tax.

Illustration
Mr. Leonard donated P200K worth of goods to the Land Bank of the Philippines and P200K to the Dep-Ed.

The donation to Dep-Ed is exempt being a government agency. The donation to Land Bank which is a government-
owned and controlled corporation is subject to tax.

Donation to accredited non-profit organization

Gifts in favor of an educational and or charitable, religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust, or philanthropic organization or institution are exempt from donor’s tax.

Requisite for exemption

1. Not more than 30% of said gift shall be used by such donee for administrative purposes.
2. The donee entity must be organized as a non-stock entity.
3. The donee entity does not pay dividends.
4. The donee entity’s board of trustees earns no compensation.
5. The donee entity must devote all its income, donations, subsidies, or other forms of philanthropy to the
accomplishment and promotion of its purposes in its Articles of Incorporation.

Accrediting Agencies
1. Department of Social Welfare and Development
2. Department of Science and Technology
3. Philippine Sports Commission
4. National Council for Culture and Arts
5. Commission on Higher Education

Illustration 1-Donation to an accredited NPOs

Mr. Rafael donated P500K to ALDO, a non-profit cultural organization established in the Cordilleras.

If ALDO is a donee cultural organization accredited by the appropriate accrediting agency (i.e., the National Council
for Culture and Sports), the donation shall be exempt. The net gift shall be nil.

If ALDO is a non-accredited donee organization, the donation shall be taxable. The net gift shall be P500K.

Illustration 2- Direct donation to beneficiaries of aids

Don Richie was so touched by a TV ad which is sponsored by Sagip Kapamilya Foundation regarding a parent who
is seeking financial assistance for the medication of his son who is under terminal illness. Mr. Richie proceeded to the
hospital and donated P2M to the parent.

The P2M donation shall be subject to donor’s tax. In order to be exempt, the donation must be given to an accredited
non-profit organization like Sagip Kapamilya Foundation in our example. The non-profit organization shall in turn
release the same to the beneficiary.

Gratuitous Donations to Associations

Associations do not qualify as exempt donee institutions. Hence, endowments or gifts received by associations are
not exempt from donor’s tax. All donations to associations for tax purposes must be covered by a donor’s tax return.

Quasi-transfers
Quasi-transfers involve delivery of property to another person but will never results in transfer of ownership thereto.
These are not subject to donor’s tax.

Examples:
1. Merger of the usufruct in the owner of the naked title during the lifetime of the usufructuary.
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary
during the lifetime of the fiduciary heir.
3. The transmission from the first heir, legatee, or donee during his lifetime in favor of another beneficiary, in
accordance with the desire of the predecessor.

Void donations
Void donations are invalid donations.

Prohibited donation under the Civil Code

1. Donation between spouses, except minor gifts
2. Donations between persons who were guilty of adultery or concubinage at the time of donation.
3. Donations between persons found guilty of the same criminal offense, in consideration thereof
4. Donations to a public officer or his wife, descendants or ascendants by reason of his office.
5. Donations to incapacitated persons
6. Donations of future property

Donation with defects at execution

1. Donation by a person who has no legal title to the property
2. Oral or written donation of real property or intangible personal property
3. Donation refused by the donee

Foreign donations of non-resident alien donors

Donations of property situated in a foreign country by non-resident alien donors are not subject to donor’s tax.

Donation of property exempt under reciprocity

-NRA, reciprocity rule

Diminution of Gift as Specified by the Donor

The donor may specify that a portion of the donation will be given to another person other than the donee.
Diminution is not exempt from donor’s tax. It is merely a deduction against the original donation but it is in itself
another form of donation from the same donor which may be subject to donor’s tax.

Illustration
Gregorio donated P600K cash to his older sister subject to the condition that she will give P200K to her nephew.

There are two donations in this case :

Sister Nephew
Gross gift 600K 200K
Less: Diminution of gift 200K -
Net gift 400K 200K

Gregorio’s donor’s tax due shall be computed as follows:

Gross gift 600K
Less: Exempt donation 250K
Excess 350K
Multiply by: 6%
Donor’s tax due 21K

Taxable Donation
Examples of taxable donations:
1. Direct donation of property
a. Transfer of property to the name of another person
b. Transfer of personal property coupled with delivery of the same
2. Donation in trust, if irrevocable
3. Specific renunciation of inheritance, unless there are only two heirs.
4. Renunciation by the surviving spouse of his share in the conjugal or community property
5. Transfer inter-vivos for insufficient consideration of any property other than real property capital asset.