CORPORATIONS: TRAIN and CREATE Law

NOTES:

CORPORATION
-RA 11232 also known as the Revised Corporation Code (RCC) of the Philippines defined Corporation as an artificial being
created by operation of law, having the right of succession and the powers, attributes, and properties expressly
authorized by law or incidental to its existence.

-For taxation purposes, Corporation is defined under Section 22 of the Tax Code (RA 8424), as amended under RA 11534
or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) and RR 5-2021 as follows:

Corporation shall include:

1. One Person corporation – is a corporation with a single stockholder; Provided, That only a natural person,
trust, or an estate may form a one person corporation.
2. Partnerships, NO MATTER HOW CREATED OR ORGANIZED
3. Joint stock companies
4. Joint Accounts
5. Associations
6. Insurance companies

But does not include:

1. General Professional Partnerships
2. A joint ventures or consortiums formed for the purpose of undertaking:
a. Construction projects
b. Engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract with the government.

Classification of Corporate Taxpayers

1. Domestic Corporation (DC)

2. Resident Foreign Corporation (RFC)
3. Nonresident Foreign Corporation (NRFC)

Corporations may be classified further into:

1. Ordinary Corporation – subject to Regular Corporate Income Tax (RCIT) rate of:
TRAIN Law - 30%
CREATE Law – either 25% or 20%
2. Special Corporation – subject to income tax rate which are lower that the RCIT rate of 30%, 25% or 20%.

Special Corporation Tax Rate

a. Domestic Corporation TRAIN Law: 10%
- Proprietary educational institution and Hospitals CREATE Law:
- July 1, 2020 – June 2023 : 1%
- Beg July 1, 2023: 10%
b. Resident Foreign Corporation
- International Carriers - Generally, 2.5% of Gross Philippine Billings (GPB)
but may subject to lower rate or exempt under
certain condition
- Regional Operating Headquarters - TRAIN Law: 10% net income
ROHQ are no longer considered special corporations - CREATE:
beginning January 1, 2022 *Until December 31, 2021 : 10%
*Beg Jan 1, 2022: Subject to 25% RCIT; Taxable as
RFC
 CORPORATIONS: TRAIN and CREATE Law
c. Nonresident Foreign Corporation
- Non-resident CINEMATOGRAPHIC FILM owner, *25% of GROSS INCOME
lessor or distributor
- Non-resident Owner or lessor of VESSELS *4.5% of Gross Income
CHARTERED by Philippine National
- Non-resident Owner or Lessor of AIRCRAFT, *7.5% of Gross Income
MACHINERIES and OTHER EQUIPMENT

Government-owned or Controlled Corporations (GOCCs)

- CREATE Law provides that GOCCs, agencies and instrumentalities shall pay such rate of tax upon their
taxable income imposed upon corporations or associations engaged in a similar business, industry, or
activity, EXCEPT:
1. Government Service and Insurance System (GSIS)
2. Social Security System (SSS)
3. Home Development Mutual Fund (HDMF; also known as PAG-IBIG)
4. Philippine Health Insurance Corporation (PHIC)
5. Local Water Districts (RA 10026)

NOTE:
*PCSO is taxable beg Jan 1, 2018 or upon effectivity of the TRAIN Law
*HDMF or Pag-ibig is exempt only upon the effectivity of CREATE law (April 11, 2021)

Income Taxes of Corporation

Source Basis
Domestic Corporation Word Net Income
Resident Foreign Corporation Within the Philippines only Net Income
Nonresident Foreign Corporation Within the Philippines only Gross Income

Type of Income Applicable Tax

Regular or Ordinary Income * DCs and RFCs: RCIT
* NRFC: FWT
Passive Income *FWT
Capital Gains on
- Sale of shares of stock of Domestic corporation sold *Capital Gains Tax (applicable to all corporation)
directly to a buyer; and
- Sale of real property in the Philippine classified as *Capital Gains Tax (applicable inly to Domestic
capital asset corporations)

Regular Corporate Income Tax (RCIT)

CREATE law, published on March 27, 2021, took effect on April 11, 2021. There are certain provisions in the law
with specific effectivity dates which are earlier than April 11, 2021, such as the revised RCIT rates for DCs and
RFCs as well as the revised FWT rate for NFRCs.

Effectivity of the RCIT rates under CREATE; RR 5-2021

- For DC and RFC – Beginning July 1,2020

- For NRFC – Beginning January 1,2021
-
 CORPORATIONS: TRAIN and CREATE Law
TRAIN CREATE
DC (MSME) ** Other DCs; RFCs NRFC
Gross Income XX XX XX XX
Allowable (XX) (XX) (XX) (XX)
Deductions
Taxable Income XX XX XX XX
Rate 30% 20% 25% 25%***
RCIT/FWT XX XX XX XX

Starting July 1, 2020

** applicable RCIT rate of Domestic corporations with total assets of P100M and below AND net taxable income of P5M
and below (MSME, Micro Small and Medium Enterprises) was reduced to 20%. Total assets exclude the LAND on which
the particular business entity’s office, plant and equipment are situated during the taxable year for which the tax is
imposed.

*** Revised FWT rate of 25% for NRFC beginning Jan 1, 2021

Minimum Corporate Income Tax (MCIT)

*2% of the Gross Income as of the end of taxable year is imposed upon any domestic corporation and resident
corporations beginning on the 4th taxable year immediately following the taxable year in which such corporation
commenced its business operation, when MCIT is greater than RCIT, Provided that effective July 1, 2021 until June 30,
2023, the rate shall be 1%

*Shall imposed whenever:

- The corporation has zero taxable income

- The corporation has negative taxable income
- Whenever the amount of MCIT is greater than RCIT due from such corporation. Hence, MCIT is always computed and
compared to RCIT starting on the fourth year of operations.

*MCIT shall be computed not only on a yearly basis but also in the computation of quarterly income tax due.

*MCIT Rate

Period MCIT Rates

On or before June 30, 2020 2%
July 1, 2020 – June 30, 2023 1%
Beginning July 1, 2023 2%

*Any excess of the MCIT over RCIT shall be carried forward and credited against the RCIT for the 3 immediately
succeeding taxable years.

Corporations exempt from MCIT

1. Special Corporations such as:

a. Proprietary Educational Institutions and hospitals
b. International carrier
c. ROHQ (up to Dec 31, 2021 only)
2. NRFC
3. Corporation that are exempt under the law such as Regional or Area Headquarters
4. Firms that are taxed under special tax regime
 CORPORATIONS: TRAIN and CREATE Law
Net Operating Loss Carry-over (NOLCO)
Taxable Year NOL was incurred Deductible as NOLCO within
Prior to 2020 3 consecutive years
2020-2021 5 consecutive years*
Beginning 2022 3 consecutive years
* Under RA 11494, also known as Bayanihan Act II. The NOL for said taxable years may be carried over as a deduction
event after the expiration of RA 11494, provided that the same are claimed within the next 5 consecutive taxable years
immediately following the year of such loss
- For corporation adopting FISCAL YEAR period, taxable year 2020 and 2021 shall include all those corporations with
fiscal years ending on or before June 30, 2021 and June 30, 2022, respectively.

Optional Corporate Income Tax also known as Gross Income Tax of 15%
*TRAIN Law: 15% Gross Income
*CREATE Law: DELETED, no longer allowed

The higher between RCIT and MCIT

TYPE of Corporation Regular Minimum
Rate Effectivity Rate Effectivity
Domestic Corporations
Domestic Corporations, in general 25% July 1, 2020 1% July 1, 2020 to
June 30, 2023

2% July 1, 2023

Domestic Corporations (MSME) 20% July 1, 2020 1% July 1, 2020 to

June 30, 2023

2% July 1, 2023

Proprietary Educational Institutions and Hospitals 1% July 1, 2020 to Not applicable

June 30, 2023
July 1, 2023
10%
Foreign Corporation (on taxable income derived from all sources within the Philippines
Resident Foreign Corporation 25% July 1, 2020 1% July 1, 2020 to
June 30, 2023

2% July 1, 2023

Offshore Banking Units (OBUs) 25% Upon effectivity of 1% Upon effectivity

(Note: OBUs shall now be taxed as a resident foreign CREATE Law of CREATE until
corporation upon effectivity of CREATE Law June 30, 2023
2% July 1, 2023
ROHQ 25% January 1, 2022 1% July 1, 2020 to
June 30, 2023
 CORPORATIONS: TRAIN and CREATE Law
2% July 1, 2023
Nonresident Corporation 25% January 1, 2021 Not Applicable

Final withholding Tax (FWT) on “CERTAIN” Passive Income derived from Philippine Source
 CORPORATIONS: TRAIN and CREATE Law
Capital Gains Tax

Improperly Accumulated Earnings Tax (IAET)

CREATE Law: NO LONGER ALLOWED

IAET prior CREATE law is applicable only to Domestic Corporations which are classified as closely-held corporations.

Special Corporations: Applicable Income tax on Educational Institution in the Philippines

 CORPORATIONS: TRAIN and CREATE Law
Special Corporations: Applicable Income tax on Hospitals in the Philippines

Offshore Banking Units (OBU)

Under CREATE Law, OBUs are now taxable just like an ordinary resident foreign corporation. They are now subject to the
revised RCIT rate 25% as well as final tax on certain passive income and capital gains tax on sale of shares of a closely-
held domestic corporation.
 CORPORATIONS: TRAIN and CREATE Law
Branch Profit Remittances Tax (BPRT) of RFCs