PASSIVE INCOME

An income is considered passive if the taxpayer merely waits for it to be realized. For citizens and resident aliens, passive
income is subject to final tax and no longer included in the ITR taxable income. Examples of passive income are:
1. Yield from deposit substitutes and trust fund – treated as interest income
Deposit substitute – debt instrument issued by the bank to borrow money from the public
Trust fund – any estate, esp. stock, securities or money which is held in trust by a person in behalf of another person
2. Interest income – an earning derived from depositing money, goods or credits
Tax Exempt
1) By members from a duly-registered cooperative
2) BSP prescribed form of investments maturing more than 5 years
3) Expanded foreign currency deposit system by nonresident citizen/aliens
4) A tenant who paid a landowner on the price of land under a tenant-purchaser agreement as part of CARP
Subject to Final Withholding Tax
1) On deposits made in banking institutions 20%
2) Not BSP prescribed form investments 5%, 12%, 20%
3) Expanded foreign currency deposit system earned by resident 15% (previously 7.5%; RFC 7.5%)
Subject to Normal Tax
1) Lending is the main course of business
2) Incidental interest earnings not subject to final tax
Long-term Deposit or investment - nontaxable only if:
a) Evidence by certificates conforming to the Bangko Sentral ng Pilipinas (BSP)
b) Maturity period of not less than five (5) years
c) In denominations of P10,000 or other denominations as may be approved by BSP issued by banks
Pretermination before the 5th year (Final Tax)
a) 4 years to less than 5 years 5%
b) 3 years to less than 4 years 12%
c) Less than 3 years 20%
3. Royalty Income (Final Tax)
1) Derived from natural resources or products 20%
2) Derived from books, literary works and musical composition 10%
4. Prizes (reward for a contest/competition) and winnings (reward for an event depending on chance)
Prizes amounting to P10,000 or less subject to normal tax
Prizes amounting to more than P10,000 20%
Winnings (except Philippine Charity Sweepstakes and Lotto amounting to P10,000 or less) 20%
5. Dividend Income (Cash and Property Dividends – 10%)
Tax Exempt
1) Received from a Domestic Corporation by: a) another domestic corp. b) resident foreign corp.
2) Received from a Cooperative
3) Pure stock dividend
4) Pure liquidating dividend (return of capital)
Subject to Final Tax
Received from a Domestic Corporation by a:
1) Citizen or resident alien 10%
2) NRAetb 20%
3) NRAnetb 25%
4) Nonresident Foreign Corporation 15%
Subject to Normal Tax
1) Not included as tax-exempt dividends
2) Not subject to final tax
3) Distributive shares of partner in professional partnership
Forms and Valuations of Dividend Income
1) Cash Dividend – amount received
2) Property Dividend – fair market value of the property received at the time of declaration
3) Stock Dividend – nontaxable if pure stock dividends
4) Script Dividend – issued in the form of promissory note taxable to the extent of its fair market value
5) Indirect Dividend – other dividends representing payments or rights received
6) Liquidating Dividend – return of stockholders investment; excess amount over cost of shares surrendered is taxable
6. Capital Gains (Sale of Shares of Stock not traded in the Stock Exchange-15%; Sale of Real Property in the Phils.-6%)
 Individual Taxpayers Corporations
PASSIVE INCOME Source
RC NRC RA NRA etb NRA netb DC RFC NRFC
1. Interest income on bank deposit, Within 20% 20% 20% 20% 25% 20% 20% 30%
deposit substitute, trust fund, etc. Outside other income - - - - other income - -
2. Interest income on bank deposit Within 15% - 15% - - 15% 7.5% -
under Expanded Foreign Currency Outside other income - - - - other income - -
3. Royalty income (books, literary Within 10% 10% 10% 10% 25% 10% 10% 30%
works and compositions Outside other income other income
4. Royalty income (natural resources Within 20% 20% 20% 20% 25% 20% 20% 30%
and others) Outside other income - - - - other income - -
5. Prizes above P10,000 Within 20% 20% 20% 20% 25% - - -
Outside other income - - - - - - -
7. Prizes P10,000 and below Within other income other income other income other income 25% - - -
Outside other income - - - - - - -
8. Winnings (except PCSO & LOTTO Within 20% 20% 20% 20% 25% - - -
P10,000 or less) Outside other income - - - - - - -
9. Cash and Property Dividend from a Within 10% 10% 10% 20% 25% exempt exempt 30%/15%
domestic corporation Outside other income - - - - other income - -
SAMPLE PROBLEMS

Problem 1: Problem 2:
Records of income earned: Records of income earned:
Interest income from BDO bank P 90,000 Interest income from MBTC P 150,000
Interest income from EFC 60,000 Interest income from EFC 50,000
Royalty income as author (USA) 100,000 Royalty income as author (USA) 80,000
Royalty income from invention (Philippines) 200,000 Royalty income from gold mine (Philippines) 400,000
Cash dividend from domestic corporation 75,000
Dividend income from nonresident foreign corporation 50,000 Cash dividend from resident foreign corporation 50,000
Philippine lotto winnings 1,000,000 Property dividend from domestic corporation 100,000
Prize from “Minute to Win It” (Philippines) 100,000

1. Compute the total income subject to final withholding tax if the taxpayer is: 1. Compute the total income subject to final withholding tax if the taxpayer is:
a. Resident Citizen d. NRA etb a. Domestic Corporation
b. Nonresident Citizen e. NRA netb b. Resident Foreign Corporation
c. Resident Alien c. Nonresident Foreign Corporation
2. Compute the total final withholding tax if the taxpayer is: 2. Compute the total final withholding tax if the taxpayer is:
a. Resident Citizen d. NRA etb a. Domestic Corporation
b. Nonresident Citizen e. NRA netb b. Resident Foreign Corporation
c. Resident Alien c. Nonresident Foreign Corporation