2023 UP BOC Commercial Law Reviewer

FOR UP CANDIDATES ONLY

Table of Contents D. Unlawful Acts .................................................. 252

E. Powers of the President to Suspend or Prohibit
PARTNERSHIPS .........................................1 Transaction or Investment .................................. 253
A. General Provisions .............................................. 1 F. Investments by an Entity Controlled by or
B. Rights and Obligations of Partnership and Acting on Behalf of the Foreign Government, or
Partners ....................................................................... 8 Foreign State-owned Enterprises ....................... 253
C. DISSOLUTION AND WINDING UP ....... 15 G. Reciprocity Clause .......................................... 253
D. LIMITED PARTNERSHIP ........................... 22
INTELLECTUAL PROPERTY CODE . 255
CORPORATIONS ......................................31 I. Intellectual Property Code ................... 256
A. Definition of Corporation ................................ 32 A. In General ......................................................... 256
B. Classes of Corporations .................................... 33 B. Patents ............................................................... 257
C. Nationality of Corporations ............................. 35 C. Trademarks ....................................................... 265
D. Corporate Juridical Entity ................................ 38 D. Copyrights ........................................................ 277
E. Capital Structure ................................................. 42
F. Incorporation and Organization ...................... 50 ELECTRONIC COMMERCE ACT ....... 294
G. Corporate Powers .............................................. 65 I. Policy of the Law ........................................... 295
H. Stockholders and Members.............................. 79 II. Definition of terms ...................................... 295
I. Board of Directors and Trustees ...................... 99 III. Legal Recognition of Electronic Data
J. Capital Affairs .................................................... 109
Messages, Documents, and Signatures .......... 296
K. Dissolution and Liquidation .......................... 120
L. Other corporations........................................... 130 IV. Presumption Relating to Electronic
M. Merger and Consolidation ............................. 149 Signatures............................................................ 297
V. Admissibility and Evidential Weight of
BANKING LAWS .....................................154 Electronic Data Message or Electronic
A. NEW CENTRAL BANK ACT .................... 155 Document ........................................................... 298
B. GENERAL BANKING LAW OF 2000..... 162 VI. Obligation of Confidentiality .................... 298
C. SECRECY OF BANK DEPOSITS (R.A. No.
VII. Punishable Acts & Penalties.................... 298
1405, as amended, and R.A. No. 6426, as amended)
.................................................................................. 169 FOREIGN INVESTMENTS ACT .......... 300
D. ANTI-MONEY LAUNDERING ACT ..... 172 I. Declaration of Policy [Sec. 2]....................... 301
INSURANCE ............................................183 II. Definitions [Sec. 3] ...................................... 301
III. Inter-Agency Investment Promotion
I. Basic Concepts ..................................... 184 Coordination Committee (IIPCC) [Sec. 4] .... 303
A. Elements of an Insurance Contract .............. 186 IV. Registration of Investments of Non-
B. Characteristics/Nature of Insurance Contracts Philippine Nationals [Sec. 5] ............................ 304
.................................................................................. 187
C. Classes of Insurance ........................................ 189
V. Foreign Investments in Export Enterprises
D. When insurable interest should exist ............ 202 [Sec. 6] ................................................................. 305
E. Double Insurance and Over- insurance ....... 207 VI. Foreign Investments in Domestic
F. No Fault, Suicide, and Incontestability Clauses Enterprises [Sec. 7]............................................ 305
.................................................................................. 208 VII. Foreign Investment Negative List [Sec. 8]
.............................................................................. 305
II. Perfection of the Insurance Contract . 210
III. Rights and Obligations of Parties ..... 214
TAXATION 1 ........................................... 310
A. Insurer................................................................ 214 I. GENERAL PRINCIPLES OF
B. Insured ............................................................... 215 TAXATION ......................................... - 311 -
C. Beneficiary ......................................................... 216 A. POWER OF TAXATION AS
IV. Rescission of Insurance Contracts .... 216 DISTINGUISHED FROM POLICE POWER
AND EMINENT DOMAI ........................... - 311 -
TRANSPORTATION LAW .................... 225 B. INHERENT AND CONSTITUTIONAL
A. Common Carriers ............................................ 225 LIMITATIONS OF TAXATION .................... 312
B. Obligations and Liabilities .............................. 229 C. KINDS OF TAXES ....................................... 325
C. The Montreal Convention of 1999 ............... 243 D. DOCTRINES IN TAXATION................... 327
PUBLIC SERVICE ACT .......................... 248 II. NATIONAL TAXATION.................. 338

A. Critical Infrastructure ...................................... 249 A. TAXING AUTHORITY ............................... 338
B. Foreign State-Owned Enterprise ................... 249 a. Powers and Duties of the Bureau of Internal
C. Public Service as Public Utility....................... 249 Revenue [Sec. 2, NIRC] ....................................... 338
b. Interpreting Tax Laws and Deciding Tax Cases II. LOCAL TAXATION .......................... 454
.................................................................................. 338 A. Local Government Taxation.......................... 454
c. Non-retroactivity of rulings (Sec. 246, NIRC) B. Taxing Powers of Provinces........................... 457
.................................................................................. 338 C. Taxing Powers of Municipalities ................... 460
B. Income Tax ....................................................... 340 D. Taxing Powers of Cities ................................. 465
E. Taxing Powers of Barangays .......................... 465
TAXATION 2 ...........................................412
III. REAL PROPERTY TAXATION ..... 473
I. NATIONAL TAXATION .................... 413
A. Value – Added Tax (VAT) ............................. 413 IV. JUDICIAL REMEDIES.................... 488
B. Tax Remedies Under The NIRC ................... 439 A. Jurisdiction of The Court Of Tax Appeals .. 488
B. Procedures......................................................... 490
PARTNERSHIPS
COMMERCIAL LAW
PARTNERSHIPS COMMERCIAL LAW
Common Fund
The Civil Code requires the parties “bind
PARTNERSHIPS themselves to contribute” to a common fund.
The partnership may therefore exist even
before the common fund is created. The
A. General Provisions common fund may not even come from the
partners themselves but may be borrowed from
1. Definition, Elements, and third persons. The form of the common fund
may not even be cash or property; it can be in
Characteristics
the form of credit or industry [Lim Tong Lim v.
Philippine Fishing Gear, G.R. No. 136448
a. Definition (1999)].
By the contract of partnership: 2. Intention of dividing the profits among
1. Two or more persons bind themselves to themselves
contribute to a common fund:
a. Money, Intention to Divide Profits
b. property, or If the common fund’s work is “indispensable,
c. industry. beneficial and economically useful to the
2. With the intention of dividing the profits business” of the partners and the profit motive
among themselves. is the primordial reason to establish the
partnership, even if there are no actual profits,
Two or more persons may also form a then there is partnership [AFISCO v. CA, G.R.
partnership for the exercise of a profession No. 112675 (1999)].
[Art. 1767, Civil Code].
Note: There must be a valid contract.
b. Elements Additionally, a partnership contract must
comply with the necessary elements of a
1. Two or more persons bind themselves to contract under the Civil Code (cause, object,
contribute money, property, or industry to a and consideration).
common fund [Art. 1767, Civil Code].
c. Parties & Object
Money
Must be in legal tender. Checks, drafts,
1. Parties
promissory notes, and other mercantile
General Rule: Any person capacitated to
documents are not money. There is no
contract may enter into a contract of
contribution of money until they have been
partnership.
cashed [Art. 1249, Civil Code].
Exceptions: The capacity of the following
Property
persons to enter into a contract of partnership,
May be real, personal, corporeal, or
though capacitated to contract generally, are
incorporeal property. Hence, credit or even
limited.
goodwill may be contributed as property [De
Leon, supra].
The following persons cannot enter into a
contract of partnership:
Industry
1. Those suffering from civil interdiction;
Means the active cooperation, the work of the
2. Minors;
party associated, which may be either personal
3. Insane or demented persons;
manual efforts or intellectual, and for which he
4. Deaf-mutes who do not know how to write;
receives a share in the profits (not salary) of the
5. Incompetents who are under guardianship.
business [De Leon, supra].
6. Those who are prohibited from giving each
other any donation or advantage cannot
Page 1 of 494
UP Law Bar Operations Commission 2023
enter into a universal partnership [Art. time of the constitution of the
1782, Civil Code]. partnership.
c. A stipulation for the common
Void donations: enjoyment of any other profits may also
1. Those made between persons who were be made. However, the property which
guilty of adultery or concubinage at the the partners may acquire subsequently
time of the donation [Art. 739, Civil Code] by inheritance, legacy or donation
2. Those made between persons found guilty cannot be included in such stipulation,
of the same criminal offense, in except the fruits thereof [Art. 1779, Civil
consideration thereof [Art. 739, Civil Code] Code].
3. Those made to a public officer or his wife, 2. All the profits
descendants and ascendants, by reason of a. It comprises all that the partners may
his office [Article 739, Civil Code] acquire by their industry or work during
4. Every donation or grant of gratuitous the existence of the partnership.
advantage, direct or indirect, between the b. Only the usufruct over the property of
spouses during the marriage shall be void, the partners passes to the partnership
except moderate gifts, which the spouses [Art. 1780, Civil Code].
may give to each other on the occasion of
any family rejoicing. The prohibition shall When the articles of universal partnership do
also apply to persons living together as not specify its nature (all present property or all
husband and wife without a valid marriage the profits), the partnership will be considered
[Art. 87, Family Code]. as one only of all the profits [Art. 1781, Civil
5. A corporation cannot enter into a Code].
partnership in the absence of express
authorization by statute or charter Rule on After-Acquired Properties
[Mendiola v. CA, G.R. No. 159333 (2006)]. Aside from the contributed properties, only the
profits of the contributed common property (no
Under Sec. 35 of the Revised Corporation other profits) are included. Thus, should a
Code (RCC), every corporation incorporated partner subsequently acquire a property as
under the RCC has the power and capacity to remuneration for his work, such property and
enter into a partnership, joint venture, merger, its fruits are not to be enjoyed by the universal
consolidation, or any other commercial partnership of all present property [Paras, Civil
agreement with natural and juridical persons. Code of the Philippines Annotated, Vol. V
(2008)].
There is no prohibition against a partnership
being a partner in another partnership [De Properties subsequently acquired by
Leon, supra]. inheritance, legacy, or donation, cannot be
included in the stipulation but the fruits thereof
2. Object can be included in the stipulation.
A. In a Universal Partnership B. In a Particular Partnership
A universal partnership may refer to: A particular partnership has for its object:
1. All present property 1. Determinate things,
a. The partners contribute all the property 2. Their use or fruits, or
which belongs to them to a common 3. A specific undertaking, or
fund, with the intention of dividing the 4. The exercise of a profession or vocation
same among themselves, as well as [Art. 1783, Civil Code].
the profits they may acquire therewith
[Art. 1778, Civil Code]. C. Effect when the object is unlawful
b. The property contributed includes all
those belonging to the partners at the If the partnership has an unlawful object or
purpose:
Page 2 of 494
1. The contract is void ab initio [Art. 1409 (1), 4. Consensual – perfected by mere consent
Civil Code]; 5. Bilateral – entered by two or more persons
2. Once dissolved by judicial decree: 6. Onerous – contributions have to be made
a. The profits shall be confiscated by 7. Nominate – has a special designation in
favor of the State; law.
b. The instruments or tools and proceeds
of the crime shall also be forfeited in 2. Essential Attributes
favor of the State [Art. 1770, Civil
Code]; 1. Informal/Consensual and Weak Juridical
3. The contributions of partners shall not be Personality [Arts. 1771, 1785, 1830, Civil
confiscated unless they are instruments or Code]
tools of the crime [Art. 1411, Civil Code]. a. Generally, a partnership may be
constituted in any form;
d. Form b. The juridical personality of a
partnership is deemed weak since a
General Rule partnership may be dissolved without
No required form is necessary. need of going through a formal
dissolution process.
Exceptions: The contract is subject to the 2. Mutual Agency [Arts. 1803, 1818, Civil
provisions of Arts. 1771, 1772 and 1773, Civil Code]
Code and to the Statute of Frauds. a. All partners shall be considered agents
1. Where immovable property or real rights and whatever any one of them may do
are contributed to the partnership, a public alone shall bind the partnership;
instrument shall be necessary [Art. 1771, b. Every partner is an agent of the
Civil Code]. partnership for the purpose of its
a. An inventory of said property, signed business, and the act of every partner
by the parties, must be attached to the binds the partnership.
public instrument.
b. Otherwise, the contract of partnership 3. Delectus Personae (Selection of
is void [Art. 1773, Civil Code]. Persons)
2. Every contract of partnership having a
capital of Php 3,000 or more, in money or One selects his partners on the basis of their
property, shall appear in a public personal qualifications and qualities (e.g.
instrument solvency, ability, honesty, trustworthiness). It is
a. The instrument must be recorded in the for this reason that there is mutual
Office of the Securities and Exchange representation among the partners so that the
Commission. act of one is considered the act and
b. Failure to comply with these responsibility of the others as well [Bautista,
requirements shall not affect the Treatise on Philippine Partnership Law (2005)].
liability of the partnership and the
members thereof to third persons [Art. 4. Partners Burdened with Unlimited
1772, Civil Code]. Liability [Arts. 1816, 1817, Civil Code]
e. Characteristics All partners, including industrial ones, shall be

liable pro rata with all their property and after
1. Generally [De Leon, supra] all the partnership assets have been
exhausted, for the contracts which may be
1. Principal – does not depend on other entered into in the name and for the account of
contracts the partnership, under its signature and by a
2. Preparatory – entered as a means to an person authorized to act for the
end partnership [Art. 1816, Civil Code].
3. Commutative – undertaking of each one is
considered equal with others
Page 3 of 494
A stipulation among the partners against the 5. As the consideration for the sale of a
unlimited liability under Art. 1816 is void, goodwill of a business or other property by
except as among the partners [Art. 1817, Civil installments or otherwise.
Code].
3. Partnership Term
2. Rules to Determine Existence
Article 1784, Civil Code. A partnership begins from
When the intent of the parties is clear, such the moment of the execution of the contract, unless
intent shall govern. it is otherwise stipulated.
When the intent of parties does not clearly

As to period, a partnership may either be:
appear, the following rules apply [Art. 1769,
1. For a fixed term or particular
Civil Code]:
undertaking; or
1. Persons who are not partners to each other
2. At will, the formation and dissolution of
are not partners as to third persons, subject
which depend on the mutual desire and
to the provisions on partnership by
consent of the parties. Any one of the
estoppel.
partners may, at his sole pleasure, dictate
2. Co-ownership or co-possession does not
the dissolution of the partnership, even in
of itself establish a partnership, even when
bad faith, subject to liability for damages
there is sharing of profits in the use of the
[Ortega v. CA, G.R. No. 109248 (1995)].
property.
A partnership term may be extended by:
Exception: The co-ownership of inherited
1. Express renewal; or
properties is automatically converted into
2. Implied renewal, when these requisites
an unregistered partnership the moment
concur:
said common properties and/or the income
a. The partnership is for a fixed term or
derived therefrom are used as a common
particular undertaking;
fund with intent to produce profits for the
b. It is continued after the termination of
heirs in proportion to their respective
the fixed term or particular undertaking
shares in the inheritance as determined in
without any express agreement [Art.
a project partition [Oña v. CIR, G.R. L-
1785, Civil Code].
19342 (1972)].
Note: A continuation of the business by the
3. Sharing of gross returns does not of itself
partners or such of them as habitually acted
establish a partnership, even when the
therein during the term, without any settlement
parties have joint or common interest in any
or liquidation of the partnership affairs, is prima
property from which the returns are
facie evidence of a continuation of the
derived.
partnership [Art. 1785 (2), Civil Code].
4. The receipt by a person of a share in the
profits of a business is prima facie evidence
that he is a partner. 4. Partnership by Estoppel
Exception: No such inference is drawn if the a. Definition

profits are received in payment:
1. As a debt by installments or otherwise; Estoppel is a bar which precludes a person
2. As wages of an employee or rent to a from denying or asserting anything contrary to
landlord; that which has been established as the truth by
3. As an annuity to a widow or representative his own deed or representation, either express
of a deceased partner; or implied [De Leon, supra].
4. As interest on a loan, though the amount of
payment vary with the profits of the
business;
Page 4 of 494
b. Partner by Estoppel Representation Effect
A partner by estoppel is a person who, by or (2) with one or 1. To bind them to
words spoken or written or by conduct: (1) more persons not the same extent
represents himself as a partner or (2) consents actual partners and in the same
to another representing him to anyone as a manner, as
partner though he were a
1. In an existing partnership; or partner in fact
2. With one or more persons not actual 2. With respect to
partners [Art. 1825, Civil Code]. persons who rely
upon the
Liability of a Partner by Estoppel representation.
1. Personal Representation When all the A partnership act or

members of the obligation results
A partner by estoppel is liable to any such existing partnership
persons: consent to the
1. To whom such representation has been representation
made; and
2. Who has, on the faith of such In all other cases The representation is
representation, given credit to the actual or the joint obligation of
apparent partnership [Art. 1825 (1), Civil the person acting
Code]. and the persons
consenting to the
2. Public Representation representation
If he has made such representation or

Nature of Liability
consented to its being made in a public
A partner by estoppel is liable in the following
manner, whether the representation has or has
manner [Art. 1825, Civil Code]:
not been (personally) made or communicated
1. He is liable as though he were a partner
to such persons so giving credit by or with his
when:
knowledge:
1. When partnership liability results, he is a. There is an existing partnership;
b. All the partners consented to the
liable as though he were an actual member
of the partnership. representation; and
c. A partnership liability results.
2. When no partnership liability results, he is
liable pro rata with the other persons, if any, 2. He is liable jointly and pro rata (as though
he were a partner in fact) with those who
so consenting to the contract or
representation. consented to the representation when:
a. There is an existing partnership but not
3. When there are no such other persons, he
is separately liable [Art. 1825 (1), Civil all the partners consented; or
b. There is no existing partnership and all
Code].
those represented as partners
consented to the representation.
Effect on Existing Partnership or Other
Persons not Actual Partners [Art. 1825 (2), 3. He is liable separately when:
a. There is an existing partnership but
Civil Code]
none of the partners consented; or
Representation Effect b. There is no existing partnership and
not all of those represented as partners
When a person has He is an agent of the consented to the representation.
been represented to persons consenting
be a partner (1) in an to such Note: Art. 1825, Civil Code does not create a
existing partnership, representation: partnership as between the alleged partners.
The law only considers them as partners and
Page 5 of 494
the association as a partnership insofar as it is in their individual capacity computed on
favorable to third persons, pursuant to the their distributive shares of partnership
equitable principle of estoppel. Thus, profits [Tan v. Del Rosario, G.R. Nos.
partnership liability is created only in favor of 109289 and 109446 (1994)].
persons who have, on the faith of such
representation, given credit to the partnership 7. Management
[MacDonald vs. National City Bank of New
York, G.R. No. L-7991 (1956)]. a. In General
5. Partnership as Distinguished from The property rights of a partner are:

Joint Venture 1. His rights in specific partnership property;
2. His interest in the partnership; and
3. His right to participate in the management
Partnership Joint venture
Operates with firm Operates without firm
name and legal name and legal Management of the partnership is primarily
personality personality governed by the agreement of the partners in
the articles of partnership.
Generally relates to a Usually limited to a
continuing business single transaction It may be stipulated that the partnership will
of various be managed by:
transactions of a 1. All the partners; or
certain kind 2. A number of partners appointed as
managers which may be appointed
a. In the articles of partnership; or
A joint venture is an agreement between two b. After the constitution of the partnership.
parties to enter into a commercial undertaking.
It may fall under a partnership with a limited b. Scope of Powers of a Managing
purpose.
Partner
General Rule: The partner designated as
Under Philippine law, a joint venture is a form
manager in the articles may execute all acts of
of partnership and should thus be governed by
administration, despite opposition by the other
the laws of partnership [Aurbach v. Sanitary
partners.
Wares Manufacturing Corp., G.R. Nos. 75951,
75875, 75975-76 (1989)].
Exception: He cannot do so when he acts in
bad faith [Art. 1800, Civil Code].
6. Professional Partnership
c. Managing Partner’s Power to Revoke
Definition
Those formed by persons for the sole purpose
General Rule: Power is irrevocable without
of exercising their common profession, no part
just or lawful cause.
of the income of which is derived from
engaging in any trade or business [Sec. 22 (B),
The powers of the managing partner may be
National Internal Revenue Code].
revoked:
1. If appointed in the articles of partnership,
Distinguished from an Ordinary Partnership
when:
The distinction between a Partnership and a
General Professional Partnership (GPP) is
a. There is just or lawful cause for
revocation; and
material in taxation.
1. A GPP is not taxable as an entity. b. The partners representing the
2. The income tax is imposed not on the controlling interest revoke such power.
professional partnership, which is tax 2. If appointed after the constitution of the
exempt, but on the partners themselves partnership, at any time and for any cause
Page 6 of 494
Rationale: Such appointment is a mere 1. The concurrence of all is necessary for the
delegation of power, not founded on a change validity of the acts, and
of will on the part of the partners, the 2. The absence or disability of one cannot be
appointment not being a condition of the alleged.
contract.
Exception: Unless there is imminent danger of
It is merely a simple contract of agency, which grave or irreparable injury to the partnership
may be revoked at any time. The vote of [Art. 1802, Civil Code].
revocation, however, should also be done by
the partners having the controlling interest [De f. When Manner of Management was not
Leon, supra]. Agreed Upon
d. In case of Two or More Managing When there is no agreement as to the manner
Partners of management, the following rules apply:
1. All the partners are considered agents
When there are two or more managing (mutual agency). Whatever any one does
partners appointed: alone binds the partnership, unless there is
1. Each one may separately execute all acts a timely opposition to the act, under Art.
of administration. 1801, Civil Code.
2. If any of them opposes the acts of the 2. Any important alteration in the immovable
others, the decision of the majority prevails. property of the partnership, even if useful
3. In case of a tie, the partners owning the to the partnership, requires unanimity.
controlling interest will decide [Art. 1801,
Civil Code]. If the alteration is necessary for the
preservation of the property, however,
Requisites for Applicability of Art. 1801: consent of the others is not required. If the
1. Two or more partners have been appointed refusal is manifestly prejudicial to the
as managers; partnership, court intervention may be
2. There is no specification of their respective sought [Art. 1803, Civil Code].
duties; and
3. There is no stipulation that one of them The consent need not be express. It may be
shall not act without the consent of all the presumed from the fact of knowledge of the
others. alteration without interposing any objection [De
Leon, supra].
The right to oppose is not given to non-
managers because in appointing their other g. Mutual Agency
partners as managers, they have stripped
themselves of all participation in the In addition to the Art. 1801, Civil Code there is
administration [Paras, supra]. effectively a mutual agency in the following
cases:
The other managers, however, should make 1. Partners can dispose of partnership
the opposition before the acts produce legal property even when in partnership name
effects insofar as third persons are concerned. [Art. 1819, Civil Code].
2. An admission or representation made by
Note: Those who vote against the contract any partner concerning partnership affairs
shall prevail, the same having been entered is evidence against the partnership [Art.
into without authority [De Leon, supra]. 1820, Civil Code].
3. Notice to any partner of any matter relating
e. Stipulation of Unanimity to partnership affairs is notice to the
partnership [Art. 1821, Civil Code].
General Rule: In case there is a stipulation that 4. Wrongful act or omission of any partner
none of the managing partners shall act without acting for partnership affairs makes the
the consent of others, partnership liable [Art. 1822, Civil Code].
Page 7 of 494
5. Partnership is bound to make good the a. To warrant against eviction in the same
losses for wrongful acts or misapplications manner as a vendor; and
of partners [Art. 1823, Civil Code]. b. To deliver to the partnership the fruits
of the property promised to be
B. Rights and Obligations of contributed, from the time they should
have been delivered, without need of
Partnership and Partners demand [Art. 1786, Civil Code];
3. In case a sum of money is to be
1. Rights and Obligations of the contributed, or in case he took any amount
Partnership/Obligations of the from the partnership coffers: To indemnify
Partners to the Partnership the partnership for
a. Interest; and
a. Obligation to Contribute and to b. Damages from the time he should have
Warrant complied with his obligation, or from
the time he converted the amount to his
Art. 1786, Civil Code. Every partner is a debtor of own use, respectively [Art. 1788, Civil
the partnership for whatever he may have promised
Code].
to contribute.
4. To preserve the property with diligence of
He shall also be bound for warranty in case of a good father of a family pending delivery
eviction with regard to specific and determinate to the partnership [Art. 1163, Civil Code].
things which he may have contributed to the 5. To indemnify for any interest and damages
partnership, in the same cases and in the same caused by the retention of the property or
manner as the vendor is bound with respect to the
by delay in its obligation to contribute a sum
vendee. He shall also be liable for the fruits thereof
from the time they should have been delivered, of money [Arts. 1788 and 1170, Civil
without the need of any demand. Code].
2. Amount of Contribution
1. Contribution of Money or Property
With respect to contribution of money or General Rule: Partners are to contribute equal
property, a partner is obliged: shares to the capital of the partnership.
1. To contribute, at the beginning of the
partnership or at the stipulated time, the Exceptions:
money, property or industry which he 1. When there is an agreement to the
undertook to contribute; contrary, the contribution shall follow such
agreement [Art. 1790, Civil Code].
Effect of failure to contribute: Makes the 2. Industrial partners, unless he has
partner ipso jure a debtor of the partnership contributed capital pursuant to an
even in the absence of demand. The agreement to that effect.
remedy is not rescission but an action for
specific performance with damages and 3. Additional Capital Contribution
interest [Sancho v. Lizarraga, G.R. L-
33580 (1931)]. Any partner who refuses to contribute an
additional share to the capital, except an
Note: When contribution is in goods, the industrial partner, to save the venture shall be
amount thereof must be determined by obliged to sell his interest to the other partners,
proper appraisal of the value as prescribed unless there is an agreement to the contrary
in the contract of partnership, or in the [Art. 1791, Civil Code].
absence thereof, the current prices, at the
time of contribution [Art. 1787, Civil Code]. Requisites:
1. There is an imminent loss of the business
2. In case a specific and determinate thing is of the partnership;
to be contributed: 2. The majority of the capitalist partners are of
the opinion that an additional contribution
Page 8 of 494
to the common fund would save the c. Obligation to Compensate for
business; Damages
3. The capitalist partner refuses deliberately
(not because of financial inability) to Every partner is responsible to the partnership
contribute an additional share to the for damages suffered by it through his fault [Art.
capital; and 1794, Civil Code].
4. There is no agreement that even in case of
imminent loss of the business, the partners 1. Set-Off of Liability
are not obliged to contribute.
General Rule: The liability for damages cannot
4. Contribution of Industry be set-off or compensated by profits or benefits
which the partner may have earned for the
An industrial partner is obliged to contribute his partnership by his industry.
industry at the stipulated time.
Rationale: The partner has the obligation to
b. Obligation to Apply Sums Collected secure the benefits for the partnership. As
Pro Rata such, the requirement for compensation that
the partner be both a creditor and a debtor of
General Rule: A partner (a) authorized to the partnership at the same time, is not
manage, (b) who collects a demandable sum complied with [Art. 1278, Civil Code].
owed to him in his own name from a person
who also owes the partnership a demandable Exception: The court may equitably lessen the
sum, is obliged to apply the sum collected to liability if, through his extraordinary efforts in
both credits pro rata, even if he issued a receipt other activities of the partnership, unusual
for his own credit only [Art. 1792, Civil Code]. profits were realized [Art. 1794, Civil Code].
Note, however, that there is still no
Exceptions compensation in this case.
1. In case the receipt was issued for the
account of the partnership credit only, d. Obligation to Account and Act as
however, the sum shall be applied to the Trustee
partnership credit alone.
2. When the debtor declares, pursuant to Art. Every partner must
1252, Civil Code at the time of making the 1. Account to the partnership for any benefit;
payment, to which debt the sum must be and
applied, and if the personal credit of the 2. Hold as trustee for it any profits derived by
partner is more onerous to him, it shall be him without the consent of the other
so applied [Art. 1792, Civil Code]. partners:
a. From any transaction connected with
1. Requisites for Applicability of Art. 1792, the formation, conduct, or liquidation of
Civil Code the partnership; or
b. From any use by him of its property
1. There exist at least two (2) debts, one [Art. 1807, Civil Code].
where the collecting partner is creditor, and
the other, where the partnership is the General Rule: The partner cannot use or apply
creditor; exclusively to his own benefit partnership
2. Both debts are demandable; and assets or results of the knowledge or
3. The partner who collects is authorized to information gained by him as a partner to the
manage and actually manages the detriment of the partnership [Pang Lim &
partnership. Galvez vs. Lo Seng, G.R. No. 16318 (1921)].
Exception: If the taking by the partner is with

the consent of all other partners [Lim Tanhu v.
Ramolete, G.R. L-40098 (1975)].
Page 9 of 494
The duty to account continues until the b. Obligation not to Engage in Another
partnership relation is terminated [Art. 1829, Business
Civil Code].
1. Industrial Partners
This obligation exists even when he issued a
receipt for his share only [Art. 1793, Civil General Rule: An industrial partner cannot
Code]. engage in business for himself.
Rationale: In this case, the debt becomes a Should he do so, the capitalist partners, as well
bad debt. It would be unfair for the partner who as industrial partners may either:
already collected not to share in the loss of the 1. Exclude him from the firm; or
other partners. 2. Avail themselves of the benefit which he
may have obtained with a right to damages
Credit collected after dissolution: The [Art. 1789, Civil Code].
collecting partner need not bring the same to
the partnership capital. Art. 1793 presupposes Exception: He may engage in business for
that there exists partnership capital. Upon himself when the partnership expressly permits
dissolution of the partnership and the return to him to do so [Art. 1789, Civil Code].
each principal of what he contributed, the
community of interest between them Remedy of the other partners
disappears altogether [De Leon, supra; Espiritu The other partners have the remedy of either
and Sibal, op. cit., citing 11 Manresa 352-353]. excluding the erring partner from the firm or of
availing themselves of the benefits which he
2. Obligations of the Partners Among may have obtained.
Themselves
An action for specific performance to compel
a. Obligation to Render True and Full the partner to perform the promised work is not
Information available as a remedy because this will amount
to involuntary servitude [De Leon, supra].
Partners shall render on demand true and full
information of all things affecting the Rationale:
partnership to: 1. To prevent the industrial partner from
1. Any partner; exploiting his services for his own personal
2. The legal representative of any deceased benefit without the permission of the firm.
partner; or 2. To prevent conflict of interest and to ensure
3. The legal representative of any partner compliance by said partner with his
under legal disability [Art. 1806, Civil prestation.
Code].
2. Capitalist Partners
Even without demand, honesty demands the
giving of vital information, the refraining from all General Rule: For a capitalist partner, the
kinds of concealment [Paras, supra]. prohibition on engaging in another business
extends only to any operation which is of the
By “information”, it is meant that which can be same or similar kind of business in which the
used for partnership purposes, it is in the sense partnership is engaged
of a property which the partnership has a
valuable right [De Leon, supra]. Exception: Unless there is a stipulation to the
contrary.
If the capitalist partner violates this prohibition,

he shall:
1. Bring to the common funds any profits
accruing to him from his transactions; and
Page 10 of 494
2. Personally bear all the losses [Art. 1808, Note: But this does not exempt the industrial
Civil Code]. partner from liability insofar as third persons
are concerned. He may however, recover what
The test is the possibility of unfair he has given to third persons from the other
competition partners, for he is exempted by law from losses
A partner occupies a fiduciary position with [La Compania Maritima v. Muñoz, G.R. No. L-
respect to his co-partners imposing duties of 3704 (1907)].
utmost good faith and he may not carry on any
other business in rivalry with the business of 3. Obligations of the Partners to Third
the partnership, whether in his own name or for Persons
the account of another at the expense of the
partnership [De Leon, supra]. a. Liability for Partnership Debts
c. Obligation to Share in the The partnership is primarily liable for contracts

Profits/Losses entered into:
1. In its name and for its account;
1. Rules for Distribution of Profits and 2. Under its signature; and
Losses 3. By a person authorized to act for it.
1. They shall be distributed in conformity with Upon exhaustion of its assets, all partners are
the agreement. liable pro rata with all their property. Any
2. If only the share in profits has been partner may enter into a separate obligation to
stipulated, the share in the losses shall be perform a partnership contract [Art. 1816, Civil
in the same proportion. Code].
3. In the absence of any stipulation:
a. The share in the profits of the capitalist 1. Nature of Individual Subsidiary
partners shall be in proportion to their Liability
contributions.
b. The losses shall be borne by the General Rule: The partners are liable
capitalist partners, also in proportion to subsidiarily. It only arises upon exhaustion of
the contributions. partnership assets [La Compania Maritima v.
c. The share of the industrial partners in Muñoz, supra].
the profits is that share as may be just
and equitable. If he also contributed Exceptions:
capital, he will receive a share of the 1. A third person who transacted with the
profits in proportion to his contribution; partnership can hold the partners solidarily
and (rather than subsidiarily) liable for the
d. The industrial partner, who did not whole obligation if the case falls under Art.
contribute capital, is not liable for 1822 or 1823, Civil Code [Muñasque v. CA,
losses [Art. 1797, Civil Code]. G.R. L-39780 (1985)]. The provisions refer
to wrongful acts or omission and
2. Exclusion of Partner From Share misapplication of money or property by a
General Rule: A stipulation excluding one or partner in the ordinary course of business.
more partners from any share in the profits or 2. A person admitted as a partner into an
losses is void [Art. 1799, Civil Code]. existing partnership is liable for all the
obligations of the partnership arising before
Exception: A stipulation exempting an his admission, except that his liability shall
industrial partner from losses is valid, since, if be satisfied only out of partnership
the partnership fails to realize profits, he can no property, unless there is a stipulation to the
longer withdraw his work or labor [De Leon, contrary [Art. 1826, Civil Code]. In other
supra; 11 Manresa 377]. words, he is not personally liable.
Page 11 of 494
2. Pro Rata b. Liability of Partners for Partnership
Contracts
The partners are liable pro rata. This liability is
not increased even when a partner: 1. Acts apparently for the carrying on of
1. Has left the country and the payment of his usual business
share of the liability cannot be enforced
[Co-Pitco v. Yulo, G.R. No. L-3146 (1907)]; General Rule: The partnership is liable for any
or act of a partner which is apparently for the
2. His liability is condoned by the creditor carrying on of the usual business of the
[Island Sales v. United Pioneers, G.R. No. partnership, including the execution of any
L-22493 (1975)]. instrument in the partnership name.
Basis for Pro-rating Exception: The partnership is not bound when

Pro rata must be understood to mean equally the following concur:
or jointly and not its literal meaning. After all 1. The partner has in fact no authority to act;
partnership assets have been exhausted, pro- and
rating is based on the number of partners and 2. The person with whom he deals has
not on the amount of their contributions to the knowledge of such fact [Art. 1818 (1), Civil
common fund, subject to adjustment among Code].
the partners [De Leon, supra].
2. Acts not apparently for carrying on of
3. Liability of an Industrial Partner the usual business
An industrial partner, who is not liable for General Rule: Acts of a partner which is not
losses, is not exempt from this liability (for apparently for carrying on of the usual business
partnership debts). However, he can recover does not bind the partnership.
the amount he has paid from the capitalist
partners, unless there is a stipulation to the Exception: The partnership is bound if the
contrary [La Compania Maritima v. Muñoz, other partners authorized him to do the act [Art.
supra]. 1818 (2), Civil Code].
4. Stipulation against Individual Liability 3. Acts of strict dominion

Any stipulation against pro rata liability is void General Rule: One or some of the partners
against third persons but valid among the have no authority to do the following acts of
partners [Art. 1817, Civil Code]. strict dominion:
1. Assign the partnership property in trust for
A stipulation which excludes one or more creditors or on the assignee’s promise to
partners from any share in the profits or losses pay the debts of the partnership;
is void [Art. 1799, Civil Code]. 2. Dispose of the goodwill of the business;
3. Do any other act which makes it impossible
Note: The exemption of the industrial partner to to carry on the ordinary business of the
pay losses relates exclusively to the settlement partnership;
of the partnership affairs among the partners 4. Confess a judgment;
themselves, and has nothing to do with the 5. Enter into a compromise concerning a
liabilities of the parties to third persons. partnership claim or liability;
6. Submit a partnership claim or liability to
Art. 1816 refers to “liabilities” while Art. 1797 arbitration;
speaks of “losses.”. 7. Renounce a claim of the partnership.
There is therefore no conflict between the two
articles [Nachura]. Exceptions:
They may do so if:
1. Authorized by all the partners; or
Page 12 of 494
2. The other partners have abandoned the Where the title is in the name of one or more or
business [Art. 1818 (3), Civil Code]. all the partners, or in a third person in trust for
the partnership, a partner authorized to carry
4. Acts in contravention of a restriction on the usual business may convey equitable
Any act of a partner in contravention of a title in the partnership name or in his own name
restriction on authority does not bind the [Art. 1819 (4), Civil Code].
partnership to persons having knowledge of
the restriction [Art. 1818 (4), Civil Code]. Where the title is in the names of all the
partners, a conveyance executed by all of them
The partnership is not liable to third persons passes all the rights to the property [Art. 1819
having actual or presumptive knowledge of the (5), Civil Code].
restrictions, whether or not the acts are for
apparently carrying on in the usual business of c. Liability for Admission by a Partner
the partnership [De Leon, supra].
An admission or representation by any partner
Conveyance of Partnership Real Property may be used as evidence against the
partnership when:
1. Title in Partnership Name 1. It concerns partnership affairs; and
2. Such affairs are within the scope of his
Any partner may convey the real property in the authority [Art. 1820, Civil Code].
name of the partnership. The partnership can
recover it, except when: Instances Where Knowledge of a Partner is
1. The act of the partner binds the Considered Knowledge of the Partnership
partnership, when he has authority to carry 1. Knowledge of the partner acting in the
out the usual business of the partnership, particular matter
under Art. 1818 (1), Civil Code; or a. Acquired while a partner, or
2. If not so authorized, the property has been b. Then present to his mind;
conveyed by the grantee, or a person 2. Knowledge of any other partner who
claiming under him, to a holder for value reasonably could and should have
and without knowledge that the partner communicated it to the acting partner [Art.
exceeded his authority [Art. 1819 (1), Civil 1821, Civil Code].
Code].
d. Liability for Wrongful Acts of a
A partner authorized to carry out the usual Partner
business may convey, in his own name, the
equitable interest of the partnership [Art. 1819 The partnership is solidarily liable with the
(2), Civil Code]. partner who causes loss or injury to any person
not a partner, or incurs any penalty through any
2. Title in the Name of Other Persons wrongful act or omission:
1. In the ordinary course of the business of
Where the title is in the name of one or more the partnership, or
but not all the partners, and the record does not 2. Not in the ordinary course of business, but
disclose the right of the partnership: with the authority of his co-partners [Art.
1. The partners having title may convey title. 1822, Civil Code].
2. The partnership may recover it when the
partners conveying title have no authority e. Liability for Misapplication of Money
to carry on the usual business of the or Property
partnership, unless the purchaser or his
assignee is: The partnership is liable for losses suffered by
a. A holder for value; and a third person whose money or property was:
b. Without knowledge that the act 1. Received by a partner
exceeded authority [Art. 1819 (3), Civil a. Acting within the scope of his apparent
Code]. authority, and
Page 13 of 494
b. Misapplied it f. Liability in case of Partnership by
2. Received by the partnership Estoppel
a. In the course of its business, and
b. Misapplied by any partner while it is in Note: Refer to the discussion above on
the custody of the partnership [Art. Partnership by Estoppel.
1823, Civil Code].
g. Liability of an Incoming Partner
Solidary liability
All partners are solidarily liable with the A person admitted as a partner is liable for
partnership for its liabilities under Arts. 1822 obligations incurred subsequent to his
and 1823 [Art. 1824, Civil Code]. admission as the other partners are liable. This
is because he is already part of the partnership.
This is without prejudice to the guilty partner
being liable to the other partners. However, as The partner is liable for obligations incurred
far as third persons are concerned, the before his admission, but will be satisfied only
partnership is answerable [De Leon, supra]. out of the partnership property, unless
otherwise stipulated that he fully assumes such
Applicability of the Rule of Respondeat obligations [Art. 1826, Civil Code].
Superior
The rule of respondeat superior (also called the Rationale:
rule of vicarious liability) applies to the law of 1. The new partner partakes of the benefits of
partnership in the same manner as other rules the partnership property and an already
governing the agency relationship [De Leon, established business.
supra; Teller, op. cit., p. 61]. 2. He has every means of obtaining full
knowledge of the debts of the partnership
It is not only the partners who are liable in and remedies that amply protect his
solidum; it is also the partnership [Art. 1824, interest [De Leon, supra].
Civil Code].
Notice to or Knowledge of the Partnership
The injured party may proceed against the The following operate as notice to or
partnership or any partner [Paras, supra]. knowledge of the partnership:
1. Notice to any partner of any matter relating
The reason for the law’s imposition of wider to partnership affairs;
liability on the partnership with respect to torts 2. Knowledge of the partner acting in the
and breach of trust is based on public policy particular matter acquired while a partner;
[De Leon, supra]. 3. Knowledge of the partner acting in the
particular matter then present to his mind;
Criminal Liability for Criminal Acts or
A non-acting partner in a partnership engaged 4. Knowledge of any other partner who
in a lawful business is not criminally liable for reasonably could and should have
the criminal acts of another partner but he is communicated it to the acting partner.
criminally liable if the partnership is involved in
an unlawful enterprise with his knowledge or These do not apply in case of fraud on the
consent. partnership committed by or with the consent
of the partner [Art. 1821, Civil Code].
Partnership Liability
1. Does Not Extend to criminal liability Preference of Partnership Creditors in
where the wrongdoing is regarded as Partnership Property
individual in character (e.g. embezzlement) With respect to partnership assets, the
2. Extends to criminal liability where the partnership creditors are entitled to priority of
crime is statutory, especially where it payment. However, the private creditors of
involves fine or imprisonment [De Leon, each partner may ask for the attachment and
supra]. public sale of the share of the latter in the
Page 14 of 494
partnership assets as provided in Art. 1814, C. DISSOLUTION AND WINDING
Civil Code [Art. 1827, Civil Code].
UP
Property Preference:
1. Partnership Property – Partnership 1. Concepts
creditors are preferred
2. Partner’s Individual Property – Partner’s Dissolution is the change in the relation of the
individual creditors are preferred [Art. 1839 partners caused by any partner ceasing to be
(8), Civil Code]. associated in the carrying on of the business.
1. It is different from the winding-up of the
Remedy in Case of Insufficiency of Assets: business [Art. 1828, Civil Code].
1. Partnership Creditor – After exhaustion of 2. It does not terminate the partnership, which
partnership assets, the creditor may come continues until the winding up of
after the private property of the partners. partnership affairs is completed [Art. 1829,
2. Partner’s Individual Creditor – Ask for Civil Code].
attachment and public sale of the share of
the partner in the partnership assets [Arts. Note:
1827 and 1814, Civil Code]. 1. The dissolution of a partnership must not
be understood in the absolute and strict
h. Liability with Regard to Personal sense so that at the termination of the
Creditors of Partners object for which it was created, the
partnership is extinguished [Testate Estate
of Mota v. Serra, G.R. No. L-22825 (1925)].
Interest by Personal Creditors
2. The partnership, although dissolved,
General Rule: Partnership creditors are
continues to exist until its termination, at
preferred over the personal creditors of the
which time the winding up of its affairs
partners as regards partnership property.
should have been completed and the net
partnership assets are partitioned and
Exception: On due application by any
distributed to the partners [Emnace v. CA,
judgment creditor of a partner, a competent
G.R. No. 126334 (2001)].
court may:
1. Charge the interest of the partner for the
Winding up means the administration of the
satisfaction of the judgment debt;
assets of the partnership for the purpose of
2. Appoint a receiver of the share of the
terminating the business and discharging the
profits and of any other money due or to fall
obligations of the partnership [De Leon, supra].
due to the partner; and
3. Make all other orders, directions, accounts
Termination is the point in time when all
and inquiries, which the debtor partner
partnership affairs are completely wound up
might have made, or which the
and finally settled. It signifies the end of the
circumstances may require [Art. 1814 (1),
partnership life [De Leon, supra].
Civil Code].
The interest charged may be redeemed before 2. Causes of Dissolution

foreclosure or, in case of sale directed by the
court, may be purchased without causing a. Without Violation of the Agreement
dissolution: Between the Partners
1. With separate property, by one or more of
the partners; or 1. By the termination of the definite term or
2. With partnership property, by one or more particular undertaking specified in the
of the partners, with consent of all, except agreement;
the debtor partner [Art. 1814 (2), Civil 2. By the express will of any partner, who
Code]. must act in good faith, when no definite
term or particular is specified;
Page 15 of 494
3. By the express will of all the partners who 2. When a specific thing which a partner had
have not assigned their interests or promised to contribute, perishes before
suffered them to be charged for their delivery, or by the loss of the thing, only the
separate debts, either before or after the use or enjoyment of which has been
termination of any specified term or contributed; the loss of a specific thing,
particular undertaking; however, does not dissolve the corporation
4. By the expulsion of any partner from the after its ownership has already been
business bona fide in accordance with transferred to the partnership;
such a power conferred by the agreement 3. By the death of any partner;
between the partners [Art. 1830 (1), Civil 4. By the insolvency of any partner or of the
Code]. partnership;
5. If, after the expiration of the definite term or
particular undertaking, the partners Note: The insolvency of the partner or of
continue the partnership without making a the partnership must be adjudged by the
new agreement, the firm becomes a court [Sec. 32, The Insolvency Law (RA
partnership at will [Art. 1785, Civil Code]. 10142)].
6. Any one of the partners may, at his sole
pleasure, dictate the dissolution of the 5. By the civil interdiction of any partner;
partnership at will. He must, however, act
in good faith, not that the attendance of bad Civil interdiction deprives the offender
faith can prevent the dissolution of the during the time of his sentence of the right
partnership, but that it can result in a to manage his property and dispose of
liability for damages [Ortega v. CA, supra]. such property by any act or any
conveyance inter vivos [Art. 34, Revised
b. In Contravention of the Agreement Penal Code].
Between the Partners
Rationale: One who is without capacity to
Where circumstances do not permit dissolution manage his own property should not be
under any other provision of Art. 1830, Civil allowed to manage partnership property
Code, it may also be dissolved by the express [Arts. 1327 and 38, Civil Code].
will of any partner at any time.
d. By Decree of Court
Thus, even if there is a specified term, one
partner can cause its dissolution by expressly A partner may apply for dissolution in court
withdrawing even before the expiration of the when:
period, with or without justifiable cause. If the 1. A partner has been declared insane in any
cause is not justified or no cause was given, judicial proceeding or is shown to be of
the withdrawing partner is liable for damages, unsound mind;
but in no case can he be compelled to remain
in the firm [Rojas v. Maglana, G.R. No. 30616
Note: The partner may have been
(1990)].
previously declared insane in a judicial
proceeding; otherwise, his insanity must be
c. By Operation of Law duly proved. It must materially affect the
capacity of the partner to perform his
1. By any event which makes it unlawful for contractual duties as such [De Leon,
the business of the partnership to be supra].
carried on or for the members to carry it on
in partnership; 2. A partner becomes in any other way
incapable of performing his part of the
Note: If the business or object had been partnership contract;
unlawful from the very beginning, the firm
never had juridical personality [Paras,
supra].
Page 16 of 494
Note: The incapacity must be lasting, from 2. When any partner retires;
which the prospect of recovery is remote 3. When the other partners assign their rights
[De Leon, supra]. to the sole remaining partner;
4. When all the partners assign their rights in
3. A partner has been guilty of such conduct the partnership property to third persons
as tends to affect prejudicially the carrying [Art. 1840, Civil Code]
on of the business;
4. A partner willfully or persistently commits a 3. Effects of Dissolution
breach of the partnership agreement, or
otherwise so conducts himself in matters a. On Authority of the Partners
relating to the partnership business that it In general
is not reasonably practicable to carry on
the business in partnership with him; Upon dissolution, the authority of the partners
to represent the partnership is confined only to
Rationale: They defeat and materially acts necessary to:
affect and obstruct the purpose of the 1. Wind up partnership affairs; or
partnership [De Leon, supra]. 2. Complete transactions began but not then
finished [Art. 1832 (1), Civil Code].
5. The business of the partnership can only
be carried on at a loss; With respect to partners
The authority of partners to act for the
Note: A court is authorized to decree partnership is terminated, with respect to
dissolution, notwithstanding the partners:
partnership has been making profits, where 1. When the dissolution is not by the act,
it appears at the time of the application that insolvency or death of a partner, or
the business can only be carried on at a 2. When the dissolution is by such act,
loss [De Leon, supra]. insolvency or death, when the partner
acting for the partnership has knowledge or
6. Other circumstances render a dissolution notice of the cause [Art. 1832, Civil Code].
equitable.
In other cases, each partner is still liable for his
Reason for necessity of court decree: In share in the liability created by the partner
the instances mentioned in Art. 1831, the acting for the partnership [Art. 1833, Civil
facts may be so far open to dispute as to Code].
make necessary judicial determination as
to dissolution, rather than allow them to be With respect to third persons who are not
the occasion for automatic dissolution by partners
operation of law [De Leon, supra]. 1. After dissolution, a partner can bind the
partnership by any act appropriate for:
A person who acquires the interest of a a. Winding up partnership affairs; or
partner may likewise apply: b. Completing transactions unfinished at
1. After the termination of the specified term dissolution.
or particular undertaking; 2. He can also bind it by any transaction
2. At any time if the partnership was a which would bind the partnership as if
partnership at will when the interest was dissolution had not taken place, provided
assigned or when the charging order was the other party to the transaction:
issued. a. Had extended credit to the partnership
prior to dissolution and had no
e. Other Causes knowledge or notice thereof; or
b. Had not so extended credit but had
1. When a new partner is admitted into an known of the partnership prior to
existing partnership; dissolution, and having no knowledge
or notice of dissolution, the fact had not
Page 17 of 494
been advertised in a newspaper of b. Had not extended credit to the
general circulation in the place (or in partnership prior to dissolution and,
each place if more than one) at which having no knowledge or notice of his
the partnership business was regularly want of authority, the fact of his want of
carried on [Art. 1834, Civil Code]. authority has not been advertised [Art.
1834, Civil Code].
Note the character of the notice required:
1. As to persons who extended credit to the Art. 1834 does not affect the liability under Art.
partnership prior to dissolution, notice must 1825 of any person who, after dissolution,
be actual. represents himself or consents to another
2. As to persons who merely knew of the representing him as a partner in a partnership
existence of the partnership, publication in engaged in carrying on business [Art. 1834,
a newspaper of general circulation in the Civil Code].
place of business of the partnership is
sufficient. c. On Liability for Contracts after
Dissolution by Specific Causes [Art.
b. On Liability for Transactions after 1833, Civil Code]
Dissolution
Trigger: A contract
The liability of a partner, in general, is the same 1. Entered into by a partner acting for the
as in ordinary contracts (pro rata and partnership
subsidiary). 2. After dissolution by a partner’s:
a. act,
In the following cases, however, the liability b. death, or
shall be satisfied out of the partnership c. insolvency
assets alone (i.e., there is no subsidiary
liability): General Rule: Binds the other partners.
1. When the partner had been, prior to the
dissolution, unknown as a partner to the Exceptions:
person with whom the contract is made; 1. The dissolution being by act of any partner,
2. When the partner had been, prior to the the partner acting for the partnership had
dissolution, so far unknown or inactive in knowledge of the dissolution; or
partnership affairs that the business 2. The dissolution being by death or
reputation of the partnership could not be insolvency of a partner, the partner acting
said to have been in any degree due to his for the partnership had knowledge or notice
connection with it [Art. 1834, Civil Code]. of the death or insolvency.
Any act of a partner after dissolution in no d. On Existing Liability of Partners [Art.

case binds the partnership in the following
1835, Civil Code]
cases:
1. Where the partnership is dissolved General Rule: Dissolution does not of itself
because it is unlawful to carry on the
discharge the existing liability of any partner.
business, unless the act is appropriate for
winding up partnership affairs; Exception: A partner may be relieved when
2. Where the partner has become insolvent; there is an agreement to that effect between:
or 1. Himself;
3. Where the partner has no authority to wind 2. The partnership creditor; and
up partnership affairs, except by a
3. The person or partnership continuing the
transaction with one who:
business.
a. Had extended credit to the partnership
prior to dissolution and had no
Such agreement may be inferred from the
knowledge or notice of his want of course of dealing between:
authority; or
Page 18 of 494
1. The creditor having knowledge of the 2. The surplus applied in cash to the net
dissolution; and amount owing to the respective partners.
2. The person or partnership continuing the
business. This is a right as against his co-partners and all
partners claiming through them in respect of
In case of dissolution by death, the individual their interests in the partnership. It cannot be
property of a deceased partner is liable for availed if there is an agreement to the contrary
obligations of the partnership incurred while he [Art. 1837, Civil Code].
was a partner, after payment of his separate
debts. Note: When dissolution is caused by expulsion,
the expelled partner may be discharged from
4. Winding Up all partnership liability in the same manner as
above, but he shall receive in cash only the net
a. Who May Wind Up amount due him from the partnership [Art.
1835, Civil Code].
The following partners have the right to wind
up the partnership affairs: b. Dissolution in Contravention of the
1. Those designated in an agreement; Agreement
2. Those who have not wrongfully dissolved
the partnership; or 1. Partner who did not cause the
3. The legal representative of the last dissolution
surviving partner, who was not insolvent.
The partners who did not cause the dissolution
Any partner or his legal representative or wrongfully has the following rights:
assignee may obtain winding up by the court, 1. To demand the right under Art. 1837 (1),
upon cause shown [Art. 1836, Civil Code]. Civil Code
2. To be indemnified for damages for breach
b. Manner of Winding Up of the agreement against the partner who
caused the dissolution wrongfully [Art.
1. Extrajudicial, by the partners themselves; 1837 (1), Civil Code];
or 3. To continue the business:
2. Judicial, under the control and direction of a. In the same name,
the proper court. b. By themselves or jointly with others,
c. During the agreed term for the
The action for liquidation of the partnership is partnership.
personal. The fact that sale of assets, including
real property, is involved does not change its For the purpose of continuing the business, the
character, such sale being merely a necessary said partners may possess the partnership
incident of the liquidation of the partnership, property, provided:
which should precede and/or is part of its 1. They secure the payment by bond
process of dissolution [Claridades v. Mercader, approved by the court; or
G.R. No. L-20341 (1966)]. 2. They pay any partner, who has caused the
dissolution wrongfully, the value of his
5. Rights of Partners in Case of interest in the partnership, less any
Dissolution damages recoverable, and indemnity
against all present or future partnership
liabilities [Art. 1837, Civil Code].
a. Dissolution Without Violation of the
Agreement
2. Partner who caused the dissolution
Each partner may have:
The partner who caused the dissolution
1. The partnership property applied to
wrongfully has the following rights:
discharge the partnership liabilities; and
Page 19 of 494
1. If the business is not continued: All the of the prospects of enterprises or of value of
rights in Art. 1837 (1), Civil Code, subject the property which he has put into the firm as
to liability for damages; capital is not ground for dissolution [Pineda,
3. If the business is continued: The right, as Partnership, Agency and Trusts (2006)].
against his co-partners and all claiming
through them, to: 7. Settling of Accounts between
a. Ascertainment, without considering the Partners
value of the goodwill of the business,
and payment to him in cash the value Subject to any agreement to the contrary, the
of his partnership interest, less any following rules shall be observed in settling
damage, or have the payment secured accounts between partners after dissolution:
by a bond approved by the court; and
b. Be released from all existing liabilities a. Composition of Partnership Assets
of the partnership [Art. 1837 (3), Civil
Code]. 1. The partnership property; and
2. The contributions of the partners
The goodwill of a business may be defined to necessary for the payment of all the
be the advantage which it has from its liabilities [Art. 1839 (1), Civil Code].
establishment or from the patronage of its
customers, over and above the mere value of In accordance with the subsidiary liability of the
its property and capital. The goodwill (which partners, the partnership property shall be
includes the firm name) is part of the applied first to satisfy any liability of the
partnership assets and may be subject of a partnership [Art. 1839 (3), Civil Code].
sale [De Leon, supra].
b. Amount of Contribution for Liabilities
6. Rights of Partners in Case of
Rescission The rules for distribution of losses shall
determine the contributions of the partners [Art.
Rights 1839 (4), Civil Code]. As such:
A partner, who is induced by fraud or 1. The contribution shall be in conformity with
misrepresentation to become a partner, may the agreement.
rescind the contract. Without prejudice to any 2. If only the share in profits has been
other right, he is entitled: stipulated, the contribution shall be in the
1. To a lien on, or right of retention of, the same proportion.
surplus of the partnership property after 3. In the absence of any stipulation, the
satisfying the partnership liabilities to third contribution shall be in proportion to the
persons for any sum of money paid by him capital contribution [Art. 1797, Civil Code].
for the purchase of an interest in the
partnership and for any capital or advances c. Enforcement of Contribution
contributed by him;
2. To stand, after all liabilities to third persons The following persons have the right to enforce
have been satisfied, in the place of the the contributions:
creditors of the partnership for any 1. An assignee for the benefit of creditors;
payments made by him in respect of the 2. Any person appointed by the court; or
partnership liabilities; and 3. To the extent of the amount which he has
3. To be indemnified by the person guilty of paid in excess of his share of the
the fraud or making the representation partnership liability, any partner or his legal
against all debts and liabilities of the representative [Art. 1839 (5) & (6), Civil
partnership [Art. 1838, Civil Code]. Code].
Nature of Fraud or Deceit The individual property of a deceased partner

The fraud or deceit must be material or shall be liable for the contributions [Art. 1839
substantial. Mere exaggerations of one partner (7), Civil Code].
Page 20 of 494
d. Order of Application of Assets a. Admission of a new partner into the
existing partnership;
The partnership liabilities shall rank, in order of b. Retirement or death of any partner, and
payment, as follows: his rights to partnership property are
1. Those owing to creditors other than assigned to: [1] two or more of the
partners; partners, or [2] one or more of the
2. Those owing to partners other than for partners and one or more third
capital and profits; persons;
3. Those owing to partners in respect of c. Retirement of all but one (1) partner,
capital; and their rights to partnership property
4. Those owing to partners in respect of are assigned to the remaining partner,
profits [Art. 1839 (2), Civil Code]. who continues the business, either
alone or with others;
e. Doctrine of Marshaling of Assets d. Wrongful dissolution by any partner,
and the remaining partners continue
When partnership property and the individual the business, either alone or with
properties of the partners are in possession of others; or
a court for distribution: e. Expulsion of a partner, and the
1. Partnership creditors have priority on remaining partners continue the
partnership property; business, either alone or with others.
2. Separate creditors have priority on 2. When the cause of dissolution is the
individual property, saving the rights of lien retirement or death of any partner, and
of secured creditors; business is continued with the consent of
3. Anything left from either shall be applied to the retired partner or the representative of
the deceased partner, without assignment
satisfy the other [Art. 1839 (8), Civil Code].
of their rights to partnership property.
3. When the cause of dissolution is the
f. Distribution of Property of Insolvent
assignment by all the partners or their
Partner representatives of their rights in
partnership property to one or more
Trigger: Where
third persons who promise to pay the
1. A partner has become insolvent; or debts and who continue the business of the
2. His estate is insolvent,
partnership [Art. 1840 (1), Civil Code].
Rule: The claims against his separate property
b. Liability of A New Partner
shall rank in the following order:
1. Those owing to separate creditors;
The liability to the creditors of the dissolved
2. Those owing to partnership creditors;
partnership of a new partner in the partnership
3. Those owing to partners by way of
continuing the business shall be satisfied out of
contribution [Art. 1839 (9), Civil Code].
the partnership property alone. However, he
may, through agreement, assume individual
8. Rights of the Creditors of the liability [Art. 1840 (2), Civil Code].
Dissolved Partnership
c. Priority of Creditors of Dissolved
a. As Creditors of the New Partnership Partnership
In the following cases, creditors of the Creditors of the dissolved partnership have
dissolved partnership are also creditors of the prior right to any claim of the retired partner or
person or partnership continuing the business: the representative of the deceased partner
1. When the business is continued without against the person or partnership continuing
liquidation, and the cause of dissolution the business [Art. 1840 (3), Civil Code].
is:
Page 21 of 494
This is without prejudice to the right of creditors Exception: There is an agreement to the
to set aside any assignment on the ground of contrary [Art. 1842, Civil Code].
fraud [Art. 1840 (4), Civil Code].
D. LIMITED PARTNERSHIP
Rationale: Business will be hampered if
outside creditors are not given superior rights.
It will be risky for them to deal with 1. Definition
partnerships. Moreover, if partners enjoy
priority right, in the natural order of things, they 1. A partnership;
will prefer their own interests to that of the 2. Formed by two or more persons;
outside creditors. Such a state will make it easy 3. Having as members:
to defraud non-partner creditors [Pineda, a. One or more general partners; and
supra]. b. One or more limited partners [Art.
1843, Civil Code].
d. Rights of a Retired Partner or a
The limited partners as such shall not be bound
Representative of Deceased Partner
by the obligations of the partnership [Art. 1843,
Civil Code], except to the extent of their capital
Trigger:
contributions.
1. When any partner retires or dies, and
2. The business is continued without any
2. Characteristics
settlement of accounts as between him or
his estate and the person or partnership
1. A limited partnership is formed by
continuing the business
compliance with the statutory
requirements [Art. 1844, Civil Code].
General Rule: He or his legal representative,
2. The business is controlled or managed by
as against such person or partnership, subject
one or more general partners, who are
to the prior rights of creditors of the dissolved
personally liable to creditors [Arts. 1848 &
partnership:
1850, Civil Code].
1. May have the value of his interest at the
3. One or more limited partners contribute to
date of dissolution ascertained; and
the capital and share in the profits but do
2. Shall receive as an ordinary creditor: not manage the business and are not
a. An amount equal to the value of his personally liable for partnership obligations
interest in the dissolved partnership beyond their capital contributions [Arts.
with interest; or 1845, 1848, 1856, Civil Code].
b. At his option or at the option of his legal 4. Obligations or debts are paid out of the
representative, in lieu of interest, the partnership assets and the individual
profits attributable to the use of his right property of the general partners [Art. 1843,
in the property of the dissolved Civil Code].
partnership. 5. The limited partners may have their
contributions back subject to conditions
Exception: Unless otherwise agreed upon prescribed by law [Arts. 1844 and 1857,
[Art. 1841, Civil Code]. Civil Code].
6. A limited partnership has the following
9. Right to an account advantages:
a. For general partners, to secure
General Rule: The right to an account of his capital from others while retaining
interest shall accrue to any partner, or his control and supervision for the
legal representative at the date of dissolution, business (Sec. 17, Commissioners’
as against: Note, 8 Uniform Laws Annotated, pp.
1. The winding up partners; 2-5.);
2. The surviving partners; or b. For limited partners, to have a share
3. The person or partnership continuing the in the profits without risk of personal
business. liability (40 Am. Jur. 474.).
Page 22 of 494
3. General and Limited Partners General partner Limited partner
Distinguished
Firm name
General partner Limited partner Name may appear in Name must not
the firm name [Art. appear in the firm
Extent of liability
1815, Civil Code]. name (subject to
exceptions) [Art.
Personally, but Liable only to the
subsidiarily liable for extent of his capital 1846, Civil Code].
obligations of the contributions
Prohibition to engage in other business
partnership [Art. (subject to
1816, Civil Code]. exceptions) [Arts. Prohibited in any kind Not prohibited,
1845, 1848, 1856, of business if he is an unless he is also a
Civil Code]. industrial partner [Art. general partner [Art.
1789, Civil Code], or 1853, Civil Code].
Right to participate in management
in the same kind of
business in which the
Unless otherwise No right to
agreed upon, all participate in partnership is
engaged, if he is a
general partners have management [Art.
an equal right to 1848, Civil Code]. capitalist partner [Art.
1808, Civil Code].
manage the
partnership [Arts.
Effect of retirement, death, insanity or
1803 and 1810 (3),
insolvency
Civil Code].
Dissolves Does not dissolve
Nature of contribution
partnership [Art. partnership; rights
Cash, property or Cash or property 1860, 1830, 1831, transferred to
Civil Code]. executor or
industry [Art. 1767, only, not industry
Civil Code]. [Art. 1845, Civil administrator for
selling his estate
Code].
[Art. 1861, Civil
Proper party in proceedings by or Code].
against partnership
Assignability of interest
Proper party Not a proper party,
Not assignable Freely assignable
unless: (1) he is also
without the consent of [Art. 1859, Civil
a general partner
the other partners Code].
[Art. 1853, Civil
[Art. 1813, Civil
Code]; or (2) where
Code].
the object of the
proceedings is to
enforce his right
against or liability to
the partnership [Art.
1866, Civil Code].
Note: The limited

partner is a
necessary but not
an indispensable
party.
Page 23 of 494
4. General and Limited Partnership 5. Formation
Distinguished
a. General Requirements
General Limited Two or more persons desiring to form a limited
partnership partnership partnership shall:
1. Sign and swear to a certificate stating the
Creation
items in Art. 1844, Civil Code; and
May be constituted in Partners must: [1] 2. File, for record, the certificate in the SEC
any form, subject to sign and swear to a [Art. 1844, Civil Code].
exceptions certificate in
A limited partnership is formed if there is
compliance with Art.
substantial compliance in good faith with the
1844, Civil Code;
requirements [Art. 1844, Civil Code].
and [2] file the
certificate for record
in the SEC [Art. When there is failure to substantially comply
with the requirements:
1844, Civil Code].
1. In relation to third persons, the partnership
Composition is general, unless they recognize that the
firm is a limited partnership [Jo Chung
Only general One or more Cang v. Pacific com. Co., G.R. No. 19892
partners general, and one or (1923)]; and
more limited partners 2. As between the partners, the partnership
[Art. 1843, Civil remains limited, since they are bound by
Code]. their agreement [68 C.J.S. 1016; Hoefer
vs. Hall, 411 P.d. 230].
Firm name
b. Purpose of Filing
Must contain the Must include the
word “Company” word “Limited” [SEC 1. To give actual or constructive notice to
[SEC Memo. Circ. Memo. Circ. No. 14- potential creditors or persons dealing with
No. 14-00], except 00] the partnership; and
for professional 2. To acquaint them with its essential
partnerships. Must not include features, including the limited liability of
name of limited limited partners, so that they will not be
May or may not partners, unless: [1] misled or defrauded [De Leon, supra].
include the name of it is also the surname
one or more of the of a general partner, c. Firm Name
partners. or [2] prior to the time General Rule: The surname of a limited
when the limited partner shall not appear in the partnership
partner became name.
such, the business
has been carried on Exceptions:
under a name in 1. It is also the surname of a general partner;
which his surname or
appeared [Art. 1846, 2. Prior to the time when the limited partner
Civil Code] became such, the business had been
carried on under a name in which his
Rules governing dissolution
surname appeared.
Arts. 1828-1842, Arts. 1860-1863,
Civil Code Civil Code A limited partner whose surname appears in a
partnership name contrary to this prohibition
is liable as a general partner to partnership
Page 24 of 494
creditors who extend credit without actual A general partner shall have the rights and
knowledge that he is not a general partner [Art. powers and be subject to all restrictions and
1846, Civil Code]. liabilities of a partner in a partnership without
limited partners [Art. 1850, Civil Code]. Thus,
d. False Statement in the Certificate he has general authority over the business.
If the certificate contains a false statement, one Exception: If a limited partner takes part in the
who suffers loss by reliance thereon may hold control of the business, he becomes liable as a
liable any party to the certificate who knew the general partner [Art. 1848, Civil Code].
statement to be false.
However, written consent or ratification by
Requisites: all limited partners is necessary to
1. The partner knew the statement to be false: authorize the general partners to:
a. At the time he signed the certificate; or 1. Do any act in contravention of the
b. Subsequently, but having sufficient certificate;
time to cancel or amend it, or file a 2. Do any act which would make it impossible
petition for its cancellation or to carry on the ordinary business of the
amendment, and he failed to do so [Art. partnership;
1847, Civil Code]. 3. Confess a judgment against the
2. The person seeking to enforce liability has partnership;
relied upon the false statement in 4. Possess partnership property, or assign
transacting business with the partnership; their rights in specific property, for other
and than a partnership purpose;
3. The person suffered loss as a result of 5. Admit a person as a general partner;
reliance upon such false statement [Art. 6. Admit a person as a limited partner, unless
1847, Civil Code]. the right to do so is given in the certificate;
7. Continue the business with partnership
e. General and Limited Partner at the property on the:
Same Time a. Death;
b. Retirement;
c. Insanity;
A person may be a (1) general; and (2) limited
partner in the same partnership at the same d. Civil interdiction; or
e. Insolvency of a general partner, unless
time.
the right to do so is given in the
certificate [Art. 1850, Civil Code].
This fact must be stated in the certificate
provided for in Art. 1844.
7. Obligations of a Limited Partner
Such person shall have:
1. All the rights and powers of a general a. Obligations Related to Contribution
partner; and
2. Be subject to all the restrictions of a general The contributions of a limited partner may be
partner [Art. 1853, Civil Code]. cash or other property, but not services [Art.
1845, Civil Code].
Except that, in respect to his contribution
as a limited partner, he shall have the rights A limited partner is liable for partnership
against the other members which he would obligations when he contributes services
have had if he were not also a general partner instead of only money or property to the
[Art. 1855-1858, Civil Code]. partnership [De Leon, supra].
6. Management
General Rule: Only general partners have the

right to manage the partnership.
Page 25 of 494
A limited partner is liable to the 3. Whose name appears in the certificate as
partnership: a general partner, or who is not designated
1. For the difference between his actual as a limited partner,
contribution and that stated in the
certificate as having been made; and Rule: Is not personally liable as a general
2. For any unpaid contribution which he partner by reason of his exercise of the rights
agreed in the certificate to make in the of a limited partner, provided:
future, at the time and on the conditions 1. On ascertaining the mistake, he promptly
stated in the certificate [Art. 1858 (1), Civil renounces his interest in the profits of the
Code]. business or other compensation by way of
income [Art. 1852, Civil Code];
He holds as trustee for the partnership: 2. He does not participate in the management
1. Specific property stated in the certificate as of the business [Art. 1848, Civil Code]; and
contributed by him, but which was not 3. His surname does not appear in the
contributed or which has been wrongfully partnership name [Art. 1846, Civil Code].
returned; and
2. Money or other property wrongfully paid or b. Liability to Partnership Creditors
conveyed to him on account of his
contribution [Art. 1858 (2), Civil Code]. General Rule: A limited partner is not liable as
a general partner. His liability is limited to the
These liabilities can be waived or extent of his contributions [Art. 1843, Civil
compromised only by the consent of all Code].
members. Such waiver or compromise,
however, shall not affect the right to enforce Exceptions: The limited partner is liable as a
said liabilities of a creditor: general partner when:
1. Who extended credit; or 1. His surname appears in the partnership
2. Whose claim arose, after the filing or before name, with certain exceptions [Art. 1846
a cancellation or amendment of the (2), Civil Code].
certificate, to enforce such liabilities [Art. 2. He takes part in the control of the business
1858 (3), Civil Code]. [Art. 1848, Civil Code].
3. The certificate contains a false statement
Even after a limited partner has of which he knows and which was relied
rightfully received the return in whole or upon, resulting in loss [Art. 1847, Civil
Code].
in part of his capital contribution, he is
still liable to the partnership for any sum, not in
In cases (a) and (b), the limited partner is
excess of such return with interest, necessary
entitled to reimbursement by the general
to discharge its liabilities to all creditors:
partner/s [Art. 1863, Civil Code].
1. Who extended credit; or
2. Whose claims arose before such return
Rationale: The general partner/s may not have
[Art. 1858 (4), Civil Code].
been aware of the false statement in the
certificate.
A person designated as general partner
but who exercised the rights of a limited c. Liability to Separate Creditors
partner
Trigger: A person: On due application to a court of competent
1. Who has contributed capital to a jurisdiction by any separate creditor of a limited
partnership; partner, the court may:
2. Who erroneously believed that he has 1. Charge his interest with payment of the
become a limited partner [Art. 1852, Civil unsatisfied amount of such claim;
Code]; and 2. Appoint a receiver; and
Page 26 of 494
3. Make all other orders, directions and 1. Receive or hold as collateral security any
inquiries which the circumstances of the partnership property; or
case may require. 2. Receive any payment, conveyance, or
release from liability if it will prejudice the
The interest so charged may be redeemed with right of third persons [Art. 1854, Civil
the separate property of any general partner, Code].
but may not be redeemed with partnership
property [Art. 1862, Civil Code]. Violation of the prohibition is considered a
fraud on the creditors of the partnership [Art.
Note: In a general partnership, the interest may 1854 (2), Civil Code].
be redeemed with partnership property with the
consent of all the partners whose interests are c. Right to Share in Profits
not charged [Art. 1814, Civil Code].
A limited partner may receive from the
8. Rights of a Limited Partner partnership the share of the profits or the
compensation by way of income stipulated for
a. In General in the certificate.
A limited partner shall have the same rights This right is subject to the condition that
as a general partner to: partnership assets will still be in excess of
1. Require that the partnership books be kept partnership liabilities after such payment [Art.
at the principal place of business of the 1856, Civil Code]. The partnership liabilities
partnership; being referred to exclude the liabilities to the
2. To inspect and copy any of them at a limited and general partners.
reasonable hour;
3. To demand true and full information of all Rationale: Otherwise, he will receive a share
things affecting the partnership; to the prejudice of third-party creditors [Art.
4. To demand a formal account of partnership 1827, Civil Code].
affairs whenever circumstances render it
just and reasonable; d. Right to Return of Contribution
5. To ask for dissolution and winding up by
decree of court; A limited partner may have his
6. To receive a share of the profits or other contributions withdrawn or reduced when:
compensation by way of income; and 1. All the liabilities of the partnership, except
7. To receive the return of his contribution liabilities to general partners and to limited
provided the partnership assets are in partners on account of their contributions,
excess of all its liabilities [Art. 1851, Civil have been paid or there remains property
Code]. of the partnership sufficient to pay them;
2. The consent of all members is had, unless
b. Right to Transact Business with the the return may be demanded as a matter of
Partnership right; and
3. The certificate is cancelled or so amended
A limited partner may: as to set forth the withdrawal or reduction
1. Loan money to the partnership; [Art. 1857 (1), Civil Code].
2. Transact other business with the
partnership; and Note: Once withdrawal has been approved by
3. Receive a pro rata share of the partnership the SEC and registered, the partnership may
assets with general creditors if he is not no longer recover the limited partner’s
also a general partner [Art. 1854 (1), Civil contributions.
Code].
The return of his contributions may be
Limitations: A limited partner, with respect to demanded, as a matter of right (i.e., even
his transactions with the partnership, cannot: when not all the other partners consent):
Page 27 of 494
1. On the dissolution of the partnership; 2. He has all the rights and powers, and is
2. Upon the arrival of the date specified in the subject to all the restrictions and liabilities
certificate for the return; or of his assignor, except those liabilities
3. After the expiration of a 6-month notice in which:
writing given by him to the other partners, if a. The assignee was ignorant of; and
no time is fixed in the certificate for: b. Cannot be ascertained from the
a. The return of the contribution; or certificate [Art. 1859 (2) and (6), Civil
b. The dissolution of the partnership [Art. Code].
1857 (2), Civil Code].
Assignee
Return of Contribution in the Form of 1. An assignee is only entitled to receive the
Cash share of the profits or other compensation
General Rule: A limited partner, irrespective of by way of income, or the return of
the nature of his contribution, has only the right contribution, to which the assignor would
to demand and receive cash in return for his otherwise be entitled. He has no right:
contribution. a. To require any information or account of
the partnership transactions;
Exceptions: He may receive his contribution in b. To inspect the partnership books [Art. 1859
a form other than cash when: (3), Civil Code].
1. There is a statement in the certificate to the 2. An assignee has the right to become a
contrary; or substituted limited partner if:
2. All the members of the partnership consent a. All the partners consent thereto; or
[Art. 1857 (3), Civil Code]. b. The assignor, being empowered to do so
by the certificate, gives him that right [Art.
e. Preference of Limited Partners 1859 (4), Civil Code].
3. An assignee becomes a substituted limited
General Rule: The limited partners stand on partner when the certificate is appropriately
amended [Art. 1859 (5), Civil Code].
equal footing.
Exception: By an agreement of all the partners g. Right to Ask for Dissolution

(general and limited) stated in the certificate, A limited partner may have the partnership
priority or preference may be given to some dissolved and its affairs wound up when:
limited partners over others with respect to: 1. He rightfully but unsuccessfully demands
1. The return of contributions; the return of his contribution; or
2. Their compensation by way of income; or 2. He has a right to contribution but his
3. Any other matter [Art. 1855, Civil Code]. contribution is not paid because the
partnership property is insufficient to pay its
Note: Such an agreement shall be stated in the liabilities [Art. 1857, Civil Code].
certificate.
9. Dissolution
f. Right to Assign Interest
A limited partnership is dissolved in much the
The interest of a limited partner is assignable. same way and causes as an ordinary
partnership [68 C.J.S. 1042.; Arts. 1860, 1864,
The assignee may become: 1844, Civil Code]
1. A substituted limited partner; or
2. A mere assignee. General Rule: The retirement, death,
insolvency, insanity or civil interdiction of a
Substituted limited partner general partner dissolves the partnership.
1. He is a person admitted to all the rights of
a limited partner who has died or has Exception: It is not so dissolved when the
assigned his interest in a partnership. business is continued by the remaining general
partners:
Page 28 of 494
1. Under a right to do so stated in the proportion of their contribution [Art. 1863, Civil
certificate; or Code].
2. With the consent of all members [Art. 1860,
Civil Code]. Exceptions: Unless
1. There is a statement in the certificate as to
Upon the death of a limited partner, his their share in the profits; or
executor or administrator shall have: 2. There is a subsequent agreement fixing
1. All the rights of a limited partner for the their share [Art. 1863, Civil Code].
purpose of settling his estate; and
2. The power to constitute an assignee as a 11. Amendment or Cancellation of
substituted limited partner, if the deceased Certificate
was so empowered in the certificate.
a. Cancellation of Certificate
The estate of a deceased limited partner shall
be liable for all his liabilities as a limited partner The certificate shall be canceled when:
[Art. 1861, Civil Code]. 1. The partnership is dissolved; or
2. All limited partners cease to be such limited
10. Settlement of Accounts partners [Art. 1864, Civil Code].
a. Order of Payment b. Amendment of Certificate

In settling accounts after dissolution, the A certificate shall be amended when:
liabilities of the partnership shall be entitled to 1. There is a change in the name of the
payment in the following order: partnership or in the amount or character
1. Those to creditors, including limited of the contribution of any limited partner;
partners except those on account of their 2. A person is substituted as a limited
contributions, and excluding general partner;
partners, in the order of priority as provided 3. An additional limited partner is admitted;
by law; 4. A person is admitted as a general
2. Those to limited partners in respect to their partner;
share of the profits and other 5. A general partner retires, dies, becomes
compensation by way of income in their insolvent or insane, or is sentenced to
contributions; civil interdiction and the business is
3. Those to limited partners in respect to the continued;
capital of their contributions; 6. There is a change in the character of the
4. Those to general partners other than for business of the partnership;
capital and profits; 7. There is a false or erroneous statement
5. Those to general partners in respect to in the certificate;
profits; 8. There is a change in the time as stated in
6. Those to general partners in respect to the certificate for the dissolution of the
capital [Art. 1863 (1), Civil Code]. partnership or for the return of a
contribution;
Note: In settling accounts of a general 9. A time is fixed for the dissolution of the
partnership, those owing to partners in respect partnership, or the return of a contribution,
to capital enjoy preference over those in no time having been specified in the
respect to profits [Art. 1863 (3) and (4), Civil certificate; or
Code]. 10. The members desire to make a change in
any other statement in the certificate in
b. Share in the Partnership Assets order that it shall accurately represent the
General Rule: The share of limited partners in agreement among them [Art. 1864, Civil
respect to their claims for capital, profits, or for Code].
compensation by way of income, is in
Page 29 of 494
c. Requirements for Amendment or partners’ contributions [Art. 1867, Civil
Cancellation Code]
To amend or cancel a certificate:
1. The amendment or cancellation must be in
writing;
2. It must be signed and sworn to by all the
members including the new members, and
the assigning limited partner in case of
substitution or addition of a limited or
general partner; and
3. The writing to amend (with the certificate,
as amended) or to cancel must be filed, for
record, in the SEC [Art. 1865, Civil Code].
(1) In case of refusal to execute the

writing [Art. 1865, Civil Code].
Trigger: If any person, who is designated in

Art. 1865 as a person who must execute the
writing, refuses to do so
Rule: A person desiring the cancellation or

amendment of a certificate may petition the
court to order a cancellation or amendment
thereof.
Action of the court: The court shall order the

SEC to record the cancellation or amendment
if it finds that the petitioner has a right to have
the writing executed. From the moment the
amended certificate/writing or a certified copy
of a court order granting the petition for
amendment has been filed, such amended
certificate shall thereafter be the certificate of
partnership [Art. 1865, Civil Code].
12. Limited Partnerships Formed Prior

to the Effectivity of the Civil Code
Limited partnerships formed under the law

prior to the Civil Code may:
1. Continue to be governed by the provisions
of the old law; or
2. Become a limited partnership under the
Civil Code by compliance with Art. 1844,
provided that the certificate states:
a. The amount of the original contribution
of each limited partner and the time it
was made; and
b. That the partnership assets exceed its
liabilities to third persons by an amount
greater than the sum of all limited
Page 30 of 494
CORPORATIONS
COMMERCIAL LAW
CORPORATIONS COMMERCIAL LAW
A corporation comes into existence upon the
issuance of the certificate of incorporation.
CORPORATIONS Then, and only then, will it acquire juridical
personality to sue and be sued, enter
contracts, hold or convey property or perform
A. Definition of Corporation any legal act in its own name.
Revised Corporation Code (RA 11232) c. Has the Right of Succession

Section 2. A corporation is an artificial being
created by operation of law, having the right of Since one of the attributes of a corporation is
succession and the powers, attributes, and that it is an artificial being with a distinct
properties expressly authorized by law or incident to personality, the corporation’s existence is
its existence unaffected by a change in the composition of
stockholders. Its existence is limited only by the
Articles of Incorporation (AOI), may be subject
1. Attributes of a Corporation
to Quo Warranto proceedings (Rule 66 of the
Rules of Court), and may be shortened by
a. An Artificial Being dissolution (Title XIV))
A corporation is a juridical entity that exists d. Has the Powers, Attributes, and
apart from its stockholders. It has its own set of
Properties Expressly Authorized by
rights and obligations as provided for by law.
Law or Incident to Its Existence
Technically, it has no physical existence
although it occupies a principal place of
A corporation has no power except those
business.
expressly conferred on it by the Revised
Corporation Code and by its articles of
Being only a juridical entity, the physical acts of
incorporation, those which may be incidental to
the corporation, like the signing of documents,
such conferred powers, those that are implied
can be performed only by natural persons duly
from its existence, and those reasonably
authorized for such purpose by corporate by-
necessary to accomplish its purposes. In turn,
laws or by a special act of the Board of
a corporation exercises said powers through its
Directors (BOD) [Swedish Match Philippines,
BOD and/or its duly authorized officers and
Inc. v. Treasurer of the City of Manila, G.R. No.
agents [Monfort Hermanos Agricultural Dev.
181277 (2013)].
Corp. v. Monfort III, G.R. No. 152542 (2004)].
A corporation, upon coming into existence, is
Being a creature of the law, its powers are
invested by law with a personality separate and
limited by:
distinct from those persons composing it as
1. The law (see Sec. 35 for general powers
well as from any other legal entity to which it
and Secs. 36 to 43 for specific powers);
may be related [Yutivo Sons Hardware v. CTA,
G.R. No. L-13203 (1961)]
2. By the express terms of its AOI as well
those essential or necessary to carry out its
b. Created by Operation of Law purpose or purposes under such Articles (see
Sec. 35, last par.); and
Mere consent of the parties to form a
corporation is not sufficient. The State must 3. By those necessary or incidental to its
give its consent either through a special law (in powers so conferred (see Sec. 44)
case of government corporations) or a general
law (i.e., Revised Corporation Code in case of
private corporations).
Page 32 of 494
B. Classes of Corporations Stock Non-Stock
1. Stock Corporations Have capital No part of its

stock divided income is
into shares distributable
Stock corporations – corporations which have
[Sec. 3] as dividends
capital stock divided into shares AND are
to its
authorized to distribute to the holders of such members,
shares, dividends, or allotments of the surplus trustees, or
profits based on shares held [Sec. 3]. It is officers [Sec.
organized for profit. 86]
The governing body of a stock corporation is

usually the BOD (except in certain instances,
e.g. one person corporations, close
Distribution Are Any profit
corporations).
of Profits authorized may obtain
to distribute as an incident
Note: A corporation is considered a stock
to the to its
corporation if they have the power to declare
holders of operations
dividends. So long as the corporation has
such shares, shall, when
capital stock and unrestricted retained
dividends or necessary or
earnings and there is no prohibition in its
allotments of proper, be
Articles of Incorporation or in its by-laws for it
surplus used for the
to declare dividends, such corporation is a
profits on furtherance
stock corporation [Sec. 42].
the basis of of its purpose
the shares or purposes
2. Non-stock Corporations held [Sec. 3] [Sec. 86]
All other corporations are non-stock Composition Composed Composed of
corporations [Sec. 3]. of members
stockholders
Non-stock corporations – One where no part of
the income is distributable as dividends to its Profit It is for profit It is not for
members, trustees, or officers, subject to the profit [Sec.
provisions of the Code on dissolution [Sec. 86]. 87]
It is not organized for profit.
Its governing body is usually the Board of Other distinctions

Trustees (BoT). However, non-stock
corporations may, through their articles of Stock Non-Stock
incorporation or their by-laws, designate their
governing boards by any name other than as Cumulative Cumulative Cumulative
board of trustees [Sec. 174]. Voting voting in voting in
election of election of
directors is trustees is
provided by only
law [Sec. 23] available if
provided in
AOI or BL
[Sec. 23]
Page 33 of 494
Stock Non-Stock Stock Non-Stock
Number of Maximum of May be more the right to

Board 15 directors than 15 vote.
Members except in [Secs. 13(f) &
merger or 91] Transfer of There is free Transfer of
consolidation Membership transfer of membership
of banks shares. cannot be
[Sec. 13(f)] Membership made without
is not consent of
Term Term of Maximum personal to the
director is 1 term of a the corporation
year [Sec. 22] trustee is 3 stockholder. [Sec. 89]
years [Sec. Note: Subject Membership
91] to provisions is personal.
on close
Place of Stockholders’ May be corporations
Meetings meetings anywhere
must be in the within Proxy Vote May always Vote by
principal Philippine vote by proxy proxy can be
office as set territory as [Sec. 57] denied in the
forth in the provided by AOI or BL
AOI or, if not BL [Sec. 92] [Sec. 88]
practicable,
in the city or Termination Upon transfer Membership
municipality of share, may be
where the seller is no terminated
principal longer part of according to
office is corporation. causes
located [Sec. Transfer may provided in
50] only be the AOI or BL
subject to [Sec. 90].
Election of BOe D elects BOT elects restrictions
Officers officers [Sec. officers, but noted down
24 they may in AOI, BL,
also be and stock
directly certificate,
elected by and must not
members be more
[Sec. 91] onerous than
the right of
Voting One class of Right to vote first refusal
Rights shares must of members [Sec. 97].
always have of any class Note:
complete may be Transfer
voting rights denied in the restrictions
[Sec. 6]. AOI or BL imposed in a
There are [Sec. 88] Shareholders
specific Agreement
instances may be
where even binding upon
non-voting the
shares have stockholders
Page 34 of 494
Under the “liberal” Control Test, there is no
Stock Non-Stock
need to further trace the ownership of the 60%
who are (or more) Filipino stockholdings of the Investing
parties Corporation since a corporation which is at
thereto, since least 60% Filipino-owned is considered as
they are Filipino [Narra Nickel Mining & Development
chargeable Corp. v. Redmont Consolidated Mines Corp.,
with notice, G.R. No. 195580 (2014)].
unless
palpably Absent any doubt, the Control Test shall be
unreasonable used in determining the nationality of a
under the corporation specially in cases where foreign
circumstance ownership restrictions apply [SEC OGC
s (SEC Opinion No. 16-19].
Opinion,
[June 8, Control Test is applied in the following:
1995]) 1. Exploitation of natural resources - Only
Filipino citizens or corporations whose capital
Distribution Residual Generally, stock is at least 60% owned by Filipinos can
of Assets assets are to members are qualify to exploit natural resources [Sec. 2, Art.
be distributed not allowed XII, Const.]
to the to participate
stockholders in distribution 2. Public Utilities - No franchise,
upon of assets. certificate or any other form of authorization for
dissolution, Assets are to the operation of a public utility shall be granted,
after payment be distributed except to citizens of the Philippines or to
of creditors. to such corporations or associations organized under
Dissolution is persons, the laws of the Philippines at least 60% of
effected societies, whose capital is owned by such citizens [Sec.
through the organization 11, Art. XII, Const.].
methods s , or
provided in corporations 3. Mass Media [Note: Control test DOES NOT
the Code as may be apply to Mass Media. Grandfather Rule
[Sec. 139]. specified in a applies]
plan of
distribution 4. Advertising industry (70%) – “Only Filipino
[Sec. 93]. citizens or corporations or associations at least
seventy per centum of the capital of which is
owned by such citizens shall be allowed to
C. Nationality of Corporations engage in the advertising industry” [Sec. 11,
Art. XVI, Const.]
The nationality of a corporation serves as a
legal basis for subjecting an enterprise or its 5. Any industry or activity where foreign
activities to the laws, the economic and fiscal ownership is prohibited or restricted under the
powers, and the various social and financial Foreign Investment Negative List.
policies of the State to which it is supposed to
belong [SEC OGC Opinion No. 22-07]. The "control test" is still the prevailing mode of
determining whether or not a corporation is a
1. Control Test Filipino corporation, within the ambit of Sec. 2,
The nationality of the private corporation is Art. XII of the 1987 Constitution, entitled to
determined by the citizenship of the controlling undertake the exploration, development and
stockholders. utilization of the natural resources of the
Philippines. When in the mind of the Court,
Page 35 of 494
there is doubt, based on the attendant facts 2017 Gamboa Ruling (Roy III v.
and circumstances of the case, in the 60-40 Herbosa)
Filipino equity ownership in the corporation,
then it may apply the "grandfather rule" [Narra However, in 2017, the Supreme Court
Nickel Mining & Development Corp. v. explained its ruling in the 2012 Gamboa
Redmont Consolidated Mines Corp., G.R. No. decision. It stated that the resolution of the
195580 (2014)]. 2012 Gamboa resolution, specifically its
dispositive portion, did not modify the 2011
The Gamboa Rulings Gamboa decision.
2011 Gamboa Ruling The Supreme Court clarified that the Gamboa
Decision already held, in no uncertain terms,
The term "capital" in Sec. 11, Article XII of the that what the Constitution requires is full and
1987 Constitution refers only to shares of stock legal beneficial ownership of 60% of the
entitled to vote in the election of directors, and outstanding capital stock, coupled with 60% of
thus in the present case only to common the voting rights must rest in the hands of
shares, and not to the total outstanding capital Filipino nationals. Thus, for purposes of
stock [common and non-voting preferred determining compliance with the constitutional
shares]. or statutory ownership, the required
percentage of Filipino ownership shall be
For stocks to be deemed owned and held by applied to both the (a) total number of
Philippine citizens or Philippine nationals, mere outstanding shares of stock entitled to vote in
legal title is not enough to meet the required the election of directors; and (b) the total
Filipino equity. Full beneficial ownership of the number of outstanding shares of stock,
stocks, coupled with appropriate voting rights whether entitled to vote or not [Jose M. Roy III
is essential. Thus, stocks, the voting rights of v. Chairperson Teresita Herbosa, G.R. No.
which have been assigned or transferred to 207246 (2017)].
aliens, cannot be considered held by Philippine
citizens or Philippine nationals [Gamboa v. The Supreme Court further said that the
Teves, G.R. No. 176579 (2011)]. statement in Gamboa that the 60% ownership
percentage must be computed on to BOTH
classes of common and preferred shares is
2012 Gamboa Ruling
OBITER.
In 2012, the Supreme Court modified its ruling,
SEC Memorandum Circular No. 8 dated
stating now that:
The term “capital” is not limited to voting shares 20 May 2013
since the constitutional requirement of at least
60% Filipino ownership applies not only to All corporations engaged in identified areas of
voting control of the corporation, but also to the activities or enterprises specifically reserved,
beneficial ownership of the corporation. It is wholly or partly, to Philippine Nationals by the
therefore imperative that such requirement Constitution, the FIA, and other existing laws,
apply uniformly and across the board to all shall, at all times, observe the constitutional or
classes of shares, regardless of nomenclature statutory ownership requirement. For purposes
and category, comprising the capital of a of determining compliance therewith, the
corporation. required percentage of Filipino ownership shall
be applied to both:
Preferred shares, denied the right to vote in the
election of directors, are still entitled to vote on 1. The total number of outstanding shares of
the eight specific corporate matters under Sec. stock entitled to vote in the election of
6. of the Corporation Code [Note: Still Sec. 6 directors; AND
under the RCC] [Gamboa v. Teves, G.R. No. 2. The total number of outstanding shares of
176579 (2012)]. stock, whether or not entitled to vote in the
Page 36 of 494
election of directors [Sec. 1-2, SEC MC No. 1. That the foreign investors provide
8]. practically all the funds for the joint
investment undertaken by these Filipino
Note: This was the SEC Memorandum that businessmen and their foreign partner;
was put in question in the Roy III v. Herbosa
case, and subsequently upheld by the Court as 2. That the foreign investors undertake to
constitutional. Thus, the 60% Filipino provide practically all the technological
ownership requirement is NOT needed for support for the joint venture;
EACH AND EVERY CLASS (i.e., common and
preferred) of shares. 3. That the foreign investors, while being
minority stockholders, manage the
2. Grandfather Rule company and prepare all economic viability
studies [Narra Nickel Mining and Dev. Corp
The Grandfather Rule is a method of v. Redmont Consolidated Mines Corp., G.R.
determining the nationality of a corporation, No. 195580 (2014)].
which is owned in part by another corporation,
by breaking down the equity structure of the The Grandfather Rule applies: (i) in enterprises
shareholder corporation [De Leon]. where the Filipino ownership requirement is
100% (mass media) or (ii) in other instances,
The Grandfather Rule is applied if doubt exists when the 60-40 Filipino foreign equity
as to the locus of the “beneficial ownership” ownership is in doubt (i.e. in cases where the
and “control” of a corporation, even if the 60-40 joint venture corporation with Filipino and
Filipino to foreign equity ratio is apparently met foreign stockholders with less than 60%
by the subject or investee corporation [Narra Filipino stockholdings [or 59%] invests in
Nickel Mining & Development Corp. v. another joint venture corporation, which is
Redmont Consolidated Mines Corp., G.R. No. either 60-40% Filipino-alien or the 59% less
195580 (2014)]. Filipino) [Narra Nickel Mining and Dev. Corp v.
Redmont Consolidated Mines Corp., G.R. No.
It involves the computation of Filipino 195580 (2014)].
ownership of a corporation in which another
corporation, of partly Filipino and partly-foreign Successive Application of the Tests
equity, owns capital stock. The percentage of
shares held by the second corporation in the The Control Test can be applied jointly with the
first is multiplied by the latter’s own Filipino Grandfather Rule to determine the observance
equity, and the product of these percentages is of foreign ownership restriction in nationalized
determined to be the ultimate Filipino economic activities. They are not incompatible
ownership of the subsidiary corporation. ownership-determinant methods that can only
be applied alternatively to each other.
The Grandfather Rule must be applied to
accurately determine the actual participation, The Grandfather Rule, standing alone, should
both direct and indirect, of foreigners in a NOT be used to determine Filipino ownership
corporation engaged in a nationalized activity and control in a corporation, as it could result
or business [SEC Opinion re: Silahis Int’l Hotel in an otherwise foreign corporation rendered
(1987)]. qualified to perform nationalized or partly
nationalized activities.
“Doubt”
"Doubt" refers to various indicia that the Hence, it is only when there is doubt, based on
"beneficial ownership" and "control" of the the Control Test, that the Grandfather Rule is
corporation do not in fact reside in Filipino applied.
shareholders, but in foreign stakeholders. The
following are indicators of doubt: If the subject corporation’s Filipino equity falls
below the threshold 60%, the corporation is
immediately considered foreign-owned, in
Page 37 of 494
which case, the need to resort to the General Rule: Due to the corporation’s
Grandfather Rule disappears. separate juridical personality, a stockholder
may not be made to answer for acts or liabilities
If a corporation that complies with the 60-40 of said corporation, and vice-versa [Land Bank
Filipino to foreign equity requirement, it can be of the Philippines v. CA, G.R. No. 127181
considered a Filipino corporation, and if there (2001)].
is no doubt as to who has the “beneficial
ownership” and “control” of the corporation, Exceptions: The corporation’s separate
there is no need for the application of the juridical personality cannot be invoked to
Grandfather Rule. escape liability when:
However, if there is doubt as to who has the 1. This legal fiction is used for ends
“beneficial ownership” and “control” of the subversive to the policy and purpose
corporation (e.g. the Filipino-Owned behind its creation or which could not
corporation subscribed to 60% of the capital have been intended by law to which it
and the foreign corporation subscribed to 40%, owes its being (i.e. to defeat public
but the subscription of the former is only convenience, justify wrong, protect
nominally paid-up and such corporation fraud, defend crime, confuse legitimate
entered into a financial assistance agreement legal or judicial issues, used as a
with the foreign- owned corporation), the vehicle for the evasion of an existing
application of the grandfather rule is necessary obligation, perpetrate deception or
[Narra Nickel Mining and Dev. Corp v. otherwise circumvent the law).
Redmont Consolidated Mines Corp., G.R. No.
195580 (2015)]. 2. The corporate entity is a mere alter
ego, adjunct, or business conduit for
D. Corporate Juridical Entity the sole benefit of the stockholders or
of another corporate entity [Land Bank
A private corporation organized under the RCC of the Philippines v. CA, G.R. No.
commences its corporate existence and 127181 (2001)]. The corporation is
juridical personality from the date the SEC merely a farce, as it is so organized and
issues the certificate of incorporation under its controlled, and its affairs are so
official seal [Sec. 18]. conducted, as to make it merely an
instrumentality, agency, conduit or
Persons desiring to incorporate must submit to adjunct of another corporation [Lanuza
the SEC: et al v. BF Corporation, et al, G.R. No.
a. The intended corporate name for 174938 (2014)].
verification, and
b. The articles of incorporation and Property
bylaws [Sec. 18].
Corporate property is owned by the corporation
Note: One-person corporations are not as a juridical person, and the stockholders
required to submit and file bylaws [Sec. 119]. have no claim on corporate property as
owners. The latter only have a mere
1. Doctrine of Separate Juridical expectancy or inchoate right to the same upon
Personality dissolution of the corporation and after all
corporate creditors have been paid. Such right
is limited only to their equity interest.
Concept
Although a stockholder’s interest in the
A corporation has a personality separate and corporation may be attached by his personal
distinct from that of its stockholders and creditor, corporate property cannot be used to
members and is not affected by the personal satisfy his claim [Wise and Co. v. Man
rights, obligations, and transactions of the SunLung, G.R. No. 46997 (1940)].
latter.
Page 38 of 494
A stockholder cannot bring an action for b. Recovery of Moral Damages
replevin to recover property of the corporation.
The corporation, as an artificial person, must General Rule: A corporation, being an artificial
purchase, hold, grant, sell, and convey the person, has no feelings, emotions nor senses;
corporate property, and do business, sue and therefore, it cannot experience physical
be sued, plead and be impleaded, for corporate suffering and mental anguish, which are bases
purposes, in its corporate name [Button v. for moral damages under Art. 2217 of Civil
Hoffman, 61 Wis. 20 (1884)]. Code [Manila Electric Co. v. Nordec
Philippines, 861 SCRA 515 (2018)].
Corporations are entitled to due process and
equal protection, but subject to the police Exception: The only exception to this rule is
power of the state. insofar as their properties when the corporation has a reputation that is
are concerned [Smith, Bell & Co. v. Natividad, debased, resulting in its humiliation in the
40 Phil. 144 (1920)]. They are also entitled to business realm. But in such a case, it is
protection against unreasonable searches and imperative for the claimant to present proof to
seizures [Bache & Co. v. Ruiz, 37 SCRA 823 justify the award. It is essential to prove the
(1971)]. They are not, however, entitled to the existence of the factual basis of the damage
privilege against self-incrimination [Bataan and its causal relation to the petitioner's acts
Shipyard & Engineering v. PCGG, 150 SCRA [Manila Electric Company v. T.E.A.M
181 (1987)]. Electronics Corporation, G.R. No. 131723
(2007), as quoted in Manila Electric Co. v.
a. Liability of Tort and Crime Nordec Philippines].
Being an entity with a separate juridical 2. Doctrine of Piercing the Corporate

personality, a corporation can be held liable for Veil
torts committed by its officers under express
direction from the stockholders or directors, A corporation will be looked upon as a legal
acting as a body [PNB v. CA G.R. No. L-27155 entity as a general rule, and until sufficient
(1978)]. reason to the contrary appears but when the
notion of legal entity is used to defeat public
The corporation itself cannot be arrested and convenience, justify wrong, protect fraud or
imprisoned; thus, it cannot be penalized for a defend crime, the law will regard the
crime punishable by imprisonment. However, a corporation as an association of persons.
corporation may be charged and prosecuted
for a crime if the imposable penalty is a fine Piercing the veil of corporate entity is an
[Ching v. Secretary of Justice, G ̧ .R. No. equitable remedy developed to address
164317 (2006)]. situations where the separate corporate
personality of a corporation is abused or used
Note: Sec. 170 of the RCC provides that for for wrongful purposes [PNB v. Ritratto Group,
violations of the Code, if it is committed by a G.R. No. 142616 (2001)].
corporation, the same may, after notice and
hearing, be dissolved in appropriate Note: Doctrine of Limited Liability and Piercing
proceedings before the Commission. the Corporate Veil also applies to a One
Person Corporation. Single stockholder must
Since a corporation as a person is a mere legal prove that the property of the One Person
fiction, it cannot be proceeded against Corporation is independent of the stockholder's
criminally because it cannot commit a crime in personal property, otherwise the stockholder
which personal violence or malicious intent is shall be jointly and severally liable for the debts
required. Criminal action is limited to the and other liabilities of the One Person
corporate agents guilty of an act amounting to Corporation [Sec. 130].
a crime and never against the corporation itself
[Time Inc. v. Reyes, G.R. No. L-28882 (1971)].
Page 39 of 494
Effect of Piercing the Corporate Veil a. Grounds for Application of Doctrine
The corporation will be considered as a mere The veil of separate corporate personality may
association of persons. Thus, the liability will be lifted/pierced:
directly attach to the stockholders or to the 1. When such personality is used to
other corporation [China Banking v. Dyne- defeat public convenience, to justify
Sem, G.R. No. 149237 (2006)]. wrong, to protect fraud or defend crime,
or as a shield to confuse the legitimate
For the juridical personality of a corporation to issues;
be disregarded, the wrongdoing must be 2. When the corporation is merely an
clearly and convincingly established, and adjunct, a business conduit or an alter
cannot be presumed [Del Rosario v. NLRC, ego of another corporation; or
G.R. No. 85416 (1990)]. 3. Where the corporation is so organized
and controlled and its affairs are so
Procedural Considerations conducted as to make it merely an
instrumentality, agency, conduit or
One cannot pierce the veil to acquire adjunct of another corporation; or
jurisdiction over a party [Pacific Rehouse Corp. 4. When the corporation is used as a
v. CA, G.R. No. 199687 (2014)]. cloak or cover for fraud or illegality, or
to work injustice, or
General Rule 5. Where necessary to achieve equity or
1. Both the individual sought to be held for the protection of the creditors
liable and the corporation must be [China Banking v. Dyne-Sem, G.R. No.
impleaded at the first instance; 149237 (2006)].
2. The court must first acquire jurisdiction
over the corporation or corporations Note: Aside from this general guideline, no
involved before its or their separate hard and fast rule can be laid down to cover all
personalities are disregarded; and cases where the corporate entity theory cannot
3. The doctrine of piercing the veil of be availed of, and each case will have to be
corporate entity can only be raised considered on its merits [Campos].
during a full-blown trial over a cause of
action duly commenced involving The Court has pierced the veil of corporate
parties duly brought under the authority fiction when it was used:
of the court by way of service of
summons or what passes as such 1. To defraud the government of taxes
service [Kukan v. Reyes, G.R. No. due it;
182729 (2010)]. 2. To evade payment of civil liability;
3. By a corporation which is merely a
Exception: When an aggrieved laborer is conduit or alter ego of another
unable to attach the properties of the Corporation;
corporation, the Labor Arbiter may thereafter 4. To evade compliance with contractual
“amend” its decision by ordering that the obligations;
individuals responsible be impleaded and their 5. To evade financial obligation to its
properties levied. Provided that such employees;
individuals were impleaded and had the 6. To ward off a judgment credit;
opportunity to be heard [Guillermo v. Uson, 7. To avoid inclusion of corporate assets
G.R. No. 198967 (2016)]. as part of the estate of the decedent;
and
A sheriff may not pierce the corporate veil, 8. To cover up an otherwise blatant
because such power only belongs to the court violation of the prohibition against
[Cruz v. Dalisay, A.M. No. R-181-P (1987)]. forum shopping.
Page 40 of 494
Only in these and similar instances may the veil transaction attacked so that the
be pierced and disregarded [PNB v. Andrada corporate entity as to this transaction
Electric and Engineering Co., G.R. No. 142936 had at the time no separate mind, will
(2002)]. or existence of its own;
2. Such control must have been used by
b. Test in Determining Applicability the defendant to commit fraud or
wrong, to perpetuate the violation of a
The doctrine has been applied in the following statutory or other positive legal duty, or
contexts: dishonest and unjust act in
contravention of plaintiffs’ legal rights;
a. When the liability belongs to the and
corporations, but the plaintiff seeks to 3. The aforesaid control and breach of
hold the individual liable. duty must proximately cause the injury
or unjust loss complained of [WPM
Mere controlling interest is not enough. There International v. Labayen, G.R. No.
must be a clear showing that the corporate 182770 (2014)].
fiction is used to defeat public convenience,
justify wrong, protect fraud, or defend crime Circumstances rendering a subsidiary an
[Koppel Phil v. Yatco, G.R. No. L-47673 instrumentality:
(1946)]. 1. The parent corporation owns all or
most of the subsidiary’s capital stock;
Note the following badges of fraud: 2. The parent and subsidiary corporations
1. Used as a shield to further an end have common directors or officers;
subversive of justice; or 3. The parent corporation finances the
2. For purposes that could not have been subsidiary
intended by the law that created it; or 4. The parent corporation subscribes to
3. To defeat public convenience; all the capital stock of the subsidiary or
4. Justify wrong; otherwise causes its incorporation;
5. Protect fraud; or 5. The subsidiary has grossly inadequate
6. Defend crime; or capital;
7. To perpetuate fraud or confuse 6. The parent corporation pays the
legitimate issues; or salaries and other expenses or losses
8. To circumvent the law or perpetuate of the subsidiary;
deception 7. The subsidiary has substantially no
business except with the parent
corporation or no assets except those
b. Where the liability is personal to the
conveyed to or by the parent
individual and he seeks to evade it by
corporation;
hiding behind a corporate vehicle. 8. In the papers of the parent corporation
or in the statements of its officers, the
The veil of corporate fiction must be pierced subsidiary is described as a
where the main purpose in forming the department or division of the parent
corporation was to evade the incorporator’s corporation or its business or financial
subsidiary civil liability resulting from the responsibility is referred to as the
conviction of one of his employees [Palacio v. parent corporation’s own;
Fely Transportation, G.R. No. L-15121 (1962)]. 9. The parent corporation uses the
property of the subsidiary as its own;
c. The instrumentality or alter ego rule. 10. The directors or executives of the
subsidiary do not act independently in
The elements of this modality are the interest of the subsidiary but take
1. Control, not mere majority or complete their orders from the parent corporation
stock control, but complete domination, in the latter’s interest; and
not only of finances but of policy and
business practice in respect to the
Page 41 of 494
11. The formal ledger requirements of the In stock sales, which takes place at the
subsidiary are not observed [PNB v. shareholder level, the rule is that –
Ritratto Group, G.R. No. 142616 1. A shift in the composition of its
(2001)] shareholders will not affect its
existence and continuity because the
d. Successor corporation rule corporation possesses a personality
separate and distinct from that of its
Where a corporation feigns dissolution or shareholders
cessation but really continues in existence 2. The corporation continues to be the
organized under another name. employer of its people and continues to
be liable for the payment of their just
The application of the rule figures prominently claims.
in labor cases where the prior entity seeks to 3. The corporation or its new majority
evade its obligations to its laborers. Some shareholders are not entitled to lawfully
telltale signs exhibited in Claparols v. CIR [G.R. dismiss corporate employees absent a
No. L-30822 (1975)] include: just or authorized cause
Consecutive date of cessation and Note: This overturns the ruling in Manlimos v.
commencement of subsequent entity; NLRC (1995) allowing for the defense of good
1. Ownership and control by former faith in stock sales.
controlling stockholder;
2. Turnover of assets. Note: Existence of interlocking directors,
corporate officers and shareholders is also not
On the other hand, in Livesey v. Binswanger enough justification to pierce the veil of
[G.R. No. 177493 (2014)], the court pointed to corporate fiction in the absence of fraud or
the following: other public policy considerations [PNB v.
1. Same officers; Hydro Resources Contractors Corp., G.R. No.
2. Same office; and 16570 (2013)].
3. Continuation of the business.
E. Capital Structure
Note: SME v. De Guzman, G.R. No. 184517
(2013) allows for the defense of good faith in
1. Number and Qualifications of
case of assets sales between a predecessor
and successor corporation: Incorporators
In asset sales or when the assets of the Number: Not more than fifteen [Sec. 10]
selling corporation are transferred to another a. The Revised Corporation Code
removed the prescribed minimum
entity, the rule is that –
number of incorporators. Previously,
the incorporators must be no less than
1. The seller in good faith is authorized
five except for special corporations.
to dismiss the affected employees, [Herbosa, 2019]
but is liable for the payment of b. A corporation with a single stockholder
separation pay under the law is considered a One Person
Corporation
2. The buyer in good faith is not obliged
to absorb the employees affected by Qualifications
the sale, nor is it liable for the 1. Any person, natural or juridical, may
payment of their claims. The most organize a corporation [Sec. 10]
that it may do, for reasons of public a. Juridical entities (partnership,
policy and social justice, is to give association or corporation, singly or
preference to the qualified separated jointly with others) are now permitted
personnel of the selling firm. to be incorporators, and not merely
Page 42 of 494
initial subscribers under the Old shares which correspond to the amount not
Code. paid.
b. The following are NOT allowed to
organize as a corporation, except as Nevertheless, holders of subscribed shares not
provided under special laws: fully paid, which are not delinquent, shall have
1. Natural persons who are all the rights of a stockholder. [Sec. 71]
licensed to practice a
profession SEC has opined that the entire subscription,
2. Partnerships or associations although not yet fully paid, may be transferred
organized for the purpose of to a single transferee, who as a result of the
practicing a profession transfer must assume the unpaid balance.
2. Natural persons must be of legal age [SEC Opinion, 9 Oct. 1995]
3. Each incorporator must subscribe to at
least one share of the capital stock It is necessary, however, to secure the consent
of the corporation because such transfer
Note: The RCC removed the Philippine contemplates a novation which under Art. 1293
residency requirement for the majority of the (NCC) cannot be made without consent of the
incorporators. creditor.
2. Subscription Requirements Characteristics
No minimum capital requirement There can be a subscription only with reference

to unissued shares of the Authorized Capital
Under the Old Corporation Code (CC), at least Stock (ACS), in the following cases:
25% of the authorized capital stock as stated in 1. The original issuance of the ACS at the
the AOI must be subscribed at the time of time of incorporation.
incorporation, and at least 25% of the total 2. The opening, during the life of the
subscription must be paid upon subscription corporation, of the portion of the
[Sec 13, CC]. original ACS previously unissued; or
3. The increase in ACS achieved through
Section 13 has been removed in the Revised a formal amendment of the Articles and
Corporation Code, thus removing such registration thereof with the SEC
minimum capital requirements [Sec 12]. [Villanueva]
However, the increase in capital remains
subject to the 25% subscription and 25% Status as Shareholder
payment of subscription rule [Sec. 37].
One may become a stockholder in a
Subscription Agreements corporation in either of two ways:
1. By SUBSCRIPTION to shares before
Any contract for the acquisition of unissued or after incorporation
stock in an existing corporation or a corporation a. becomes a stockholder upon
still to be formed shall be deemed a acceptance of the corporation
subscription contract. This is notwithstanding of his offer to subscribe
the fact that the parties may refer to it as a whether the consideration is
purchase or some other contract. [Sec. 59] fully paid or not
2. By acquisition of already issued shares
Nature of Subscription Contracts a. from an existing stockholder
b. purchase of TREASURY
A subscription contract is indivisible. SHARES from the corporation
Consequently, where stocks were subscribed
and part of the subscription contract price was
not paid, the whole subscription shall be
considered delinquent, and not only the
Page 43 of 494
Types of Subscription Contracts A corporation already existing upon effectivity
of the RCC may opt out of the rule on perpetual
1. Pre-incorporation subscription - It is a existence by:
subscription for shares of stock of a a. Obtaining the vote of its stockholders
corporation still to be formed. representing majority of the
2. Post-incorporation subscription - Outstanding Capital Stock, without
Entered into after incorporation. prejudice to the appraisal right of
[Sundiang Sr. & Aquino, 2009] dissenting stockholders
b. Notifying the Commission that it elects
Rules on Pre-Incorporation Subscription to retain its specific corporate term, as
provided in its AOI. [Herbosa, 2019]
General Rule: A pre-incorporation
subscription is IRREVOCABLE: It is presumed that shareholders, when they
incorporated, assented to the perpetual
A. For a period of at least 6 months from character of their contract. Their corporate
the date of subscription; relations will only end upon agreement
between or among the prescribed number of
Exceptions: shareholders or involuntarily upon the court’s
1. All of the other subscribers or the SEC’s determination.
consent to the revocation, or
2. The incorporation fails to Extending or shortening the corporate
materialize within 6 months or term
within a longer period as may
be stipulated in the contract of
General Rule: If a corporation wishes to
subscription extend its corporate term, it may amend its AOI
at least 3 years prior to the expiration of its
B. After the submission of the Articles of term. Previously, such change should be made
Incorporation to the SEC. [Sec. 60]
at least 5 years prior to the expiration. [Sec. 11]
Interest on Unpaid Subscription
Exception: When there exists justifiable
reasons for an earlier extension, to be
General Rule: A stockholder is NOT liable to determined by the SEC.
pay interest on his unpaid subscription. He is
not considered a corporate debtor for the Requisites: A private corporation may extend
unpaid amount of his subscription. [Herbosa,
or shorten its term as stated in the articles of
2019] incorporation when –
Exception: If expressly stipulated in the
1. Approved by a majority vote of the
subscription contract. [Sec 65] board of directors or trustees, and
2. Ratified at a meeting by the
3. Corporate Term stockholders or members representing
at least two-thirds (2/3) of the
Perpetual existence outstanding capital stock or of its
members
General Rule: The Revised Corporation Code
provides that a corporation shall have Note: In case of extension of corporate term, a
perpetual existence. The AOIs of existing dissenting stockholder may exercise the right
corporations shall be deemed amended to of appraisal [Sec. 36]
reflect their perpetual term
Revival of Corporate Existence
Exception: The AOIs of corporations created
under the effectivity of this Code provide for a Corporations with an expired term upon the
specific period. [Sec 11] effectivity of the RCC, may apply with the SEC
for revival of its corporate existence.
Page 44 of 494
Upon approval by the SEC, it will then issue a
XPN: There are justifiable
certificate of revival giving it perpetual
reasons for an earlier
existence, with all its rights and privileges, and
extension
subject to all its duties, debts and liabilities prior
to revival, unless it requests for a limited term.
[Sec. 11] 4. Classification of Shares
This benefit does not extend to corporations Nature of Shares of Stock

whose dissolution was decreed by the SEC or
the courts. Shares of stock are units into which the capital
stock is divided. A share of stock represents
Should the controlling stockholders or interest of the holder thereof to participate in
members wish to file the application, they must the management of the corporation, to share
represent the prescribed number of proportionally in the profits of the business and,
stockholders or members the application for upon liquidation, to obtain an aliquot part of
voluntary dissolution (i.e. at least 2/3 of corporate assets after all corporate debts have
OCS/membership). Dissenting stockholders been paid [Campos].
may not exercise their appraisal right.
[Herbosa, 2019] Classes of Shares of Stock
Summary of changes [Herbosa, 2019] The shares in stock corporations may be

divided into classes or series of shares, or both.
For newly GR: Automatic perpetual The rights, privileges, or restrictions, and the
established term stated par value of the class or series of shares
corporations must be indicated in the Articles of
XPN: AOI provides a Incorporation [Sec. 6]
specific corporate term
General Rule: No share may be deprived of
For existing GR: AOI shall be deemed voting rights [Sec. 6].
corporations amended to reflect a
perpetual term Exceptions:
1. Preferred non-voting shares
XPN: The corporation 2. Redeemable shares,
opts out and elects to 3. Provided by the Code (e.g. Treasury shares)
retain their existing term;
Requires majority vote of There shall always be a class/series of shares
shareholders/members which have COMPLETE VOTING RIGHTS
[Sec. 6].
For GR: May apply with the
corporations SEC for the revival of the Doctrine of Equality Shares
with expired corporation. Upon Each share shall be EQUAL in ALL respects to
terms approval, they will have a every other share, except as otherwise
perpetual term provided in the Articles of Incorporation and
stated in the certificate of stock [Sec. 6].
XPN: Their application
indicates a fixed term Classes of shares of stock
For GR: May file an

Classification of shares:
corporations application for extension
1. Preferred Shares vs. Common Shares
with a limited of such term 3 years prior
2. Scope of Voting Rights Subject to
term to the expiration of the
Classification
term
3. Founders’ Shares
4. Redeemable Shares
Page 45 of 494
5. Treasury Shares Cumulative vs. Non-cumulative
6. Par value shares vs. No-par value a. Cumulative - regardless of lack of
shares profits in any given year, and lack of
declaration of dividends, the arrears for
1. Preferred Shares vs. Common such year must be paid to the preferred
Shares stocks in a subsequent year (once
profits are made) before any dividends
Preferred Shares can be paid to the common stocks.
Stocks which are given, by the issuing b. Non-Cumulative – entitlement to
corporation: receipt of dividends essentially
a. Preference in dividends depends on declaration of such; types:
b. Preference in the distribution of assets 1. Discretionary – right to dividends in
of the corporation in case of liquidation, a particular year depends on the
or discretion of the board, even if the
c. Preference in both dividends and corporation has profits.
distribution, or 2. Mandatory – a positive duty is
d. Such other preferences as may be imposed to declare preferred
stated in the Articles of Incorporation dividends every year that
which do not violate the Corporation unrestricted retained earnings are
Code. available.
3. Earned cumulative or dividend
Note: Preferred shares may be issued only with credit – board has discretion not to
a stated par value [Sec. 6]. declare dividends, however, once
the board decides that dividends
Unless the right to vote is clearly withheld, a will be declared, the preferred
preferred stockholder would have such right as stockholders have a right to arrears
it is an incident to stock ownership. The Board in dividends for the years when
of Directors may fix the terms and conditions there were unrestricted retained
only when so authorized by the Articles of earnings are available but no
Incorporation and such terms and conditions dividend was declared.
shall be effective upon filing a certificate
thereof with the SEC [Sec. 6]. Participating and Non-participating
Unless otherwise provided, preferred stocks
Kinds of Preferred Shares are non-participating.
a. Preferred Shares as to Assets vs. a. Participating - those which, after
Preferred Shares as to Dividends getting their fixed dividend preference,
b. Cumulative vs. Non-Cumulative share with common stocks the rest of
c. Participating vs. Non-participating the dividends
b. Non-participating – those which, after
Preferred Shares as to Assets vs. Preferred getting their fixed dividend preference,
Shares as to Dividends have no more right to share in the
a. Preferred shares as to assets –gives remaining dividends with the common
the holder preference in the distribution stocks.
of the assets of the corporation in case
of liquidation. Common shares
b. Preferred shares as to dividends -
entitled to receive dividends on said A common stock represents the residual
share to the extent agreed upon before ownership interest in the corporation. It is a
any dividends at all are paid to the basic class of stock ordinarily and usually
holders of common stock. issued without extraordinary rights or privileges
and entitles the shareholder to a pro rata
division of profits” [CIR v. CA, 301 SCRA 152
(1999)].
Page 46 of 494
The owners thereof are entitled to otherwise provided in the Revised Corporation
management (via exclusive right to vote) of the Code.
corporation and to equal pro-rata division of
profits. General Rule: Non-Voting Shares are not
entitled to vote. The law only authorizes the
Comparison denial of voting rights in the case of
redeemable shares or preferred shares,
provided that there shall always be a class or
Common Preferred
series of shares which have complete voting
Definition Stock which Stock which rights [Sec. 6].
entitles the entitles the
owner to an holder to Exception: Shares whose voting rights are
equal pro some denied, shall nevertheless be entitled to vote
rata division preference, on the following fundamental matters:
of profits either in the a. Amendment of the Articles of
dividends, or Incorporation;
in the b. Adoption and amendment of by-laws;
distribution c. Sale, lease, exchange, other
of assets, or disposition of all or substantially all of
both the corporate property;
d. Incurring, creating or increasing
Value Depends if it Stated par bonded indebtedness;
is a par or value [Sec. e. Increase or decrease of capital stock;
no-par value 6] f. Merger and consolidation;
share g. Investment of corporate funds in
another corporation or business;
Voting Usually May be h. Dissolution of the corporation
Rights vested with deprived of
the exclusive voting rights 3. Founders’ Shares
right to vote except for
the instances Founders’ Shares are shares classified as
provided in such in the AOI, which are given certain rights
Section 6 and privileges not enjoyed by the owners of
[Sec. 6] other stocks. These may be given special
preference in voting rights and dividend
Preference No May have payments.
upon advantage, first crack at
Liquidation priority or dividends/pr Where exclusive right to vote and be voted for
preference ofits/ in the election of directors is granted, such right
over any distribution must be for a limited period not to exceed 5
other of assets years, subject to approval by SEC The 5-year
stockholder depending period shall commence from date of approval
in the same on the by SEC.
class features of
the shares Founder’s shares given the exclusive right to
vote and be voted for are not allowed to
exercise that right in violation of the
2. Scope of Voting Rights Subject to AntiDummy Law and the Foreign Investment
Classification Act [Sec. 7].
Only preferred and redeemable shares may be

deprived of the right to vote [Sec. 6], except as
Page 47 of 494
4. Redeemable Shares b. Optional - the corporation is not
mandated to redeem the shares.
Redeemable Shares are shares which may be
purchased by the corporation from the holders 5. Treasury Shares
of such shares upon the expiration of a fixed
period, regardless of the existence of Treasury Shares are shares which have been
unrestricted retained earnings in the books of issued and fully paid for, but subsequently
the corporation. reacquired by the issuing corporation by
purchase, redemption, donation or through
The RCC made the redemption subject to the some other lawful means. Such shares may
rules and regulations that may be issued by again be disposed of for a reasonable price
SEC, in addition to what may be stipulated in fixed by the BOD [Sec. 9].
the AOI and Certificate of Stock [Sec. 8].
Shares may be reacquired without impairing
Limitations the corporate trust fund. Reacquisition of
a. Redeemable shares may be issued shares is allowed, provided the corporation will
only when expressly provided for in the use assets up to the extent of its unrestricted
AOI [Sec. 8]. retained earnings [SEC Rules Governing
b. The terms and conditions affecting said Redeemable and Treasury Shares, Sec 3, par
shares must be stated both in the AOI (1)(a)].
and in the certificate of stock [Sec. 8].
c. Redeemable or preferred shares may It should be recalled that corporate earnings
be deprived of voting rights in the AOI are not part of the corporate trust fund
[Sec. 6]. [Herbosa, 2019]. They are excluded from the
d. The corporation is required to maintain definition of outstanding capital stock.
a sinking fund to answer for redemption
price if the corporation is required to Pre-emptive right of stockholders in close
redeem [SEC-OGC Opinion No. 07- corporations shall extend to reissuance of
03]. treasury shares, unless otherwise provided in
e. The redeemable shares are deemed the AOI [Sec. 101].
retired upon redemption, unless
otherwise provided in the AOI (i.e., if Delinquent stocks, which are stocks that have
the AOI allows for reissuance of such not been fully paid, may become treasury
shares) [SEC Rules Governing stocks upon bid of the corporation in absence
Redeemable and Treasury Shares, 26 of other bidders [Sec. 67].
April 1982].
f. Unrestricted retained earnings are Limitations on treasury shares
NOT necessary before shares can be a. They may be re-issued or sold again as
redeemed, but there must be sufficient long as it is for a reasonable price fixed
assets to pay the creditors and to by the BOD.
answer for operations [Republic b. Cannot participate in dividends.
Planters Banks v. Agana, G.R. No. c. It has no voting right as long as such
51765 (1997)] See also Sec. 8. shares remain in the Treasury [Sec.
g. Redemption cannot be made if such 56].
redemption will result in insolvency or d. It cannot be represented during
inability of the corporation to meet its stockholder’s meetings.
obligations [SEC Opinion, 24 Aug e. The amount of URE equivalent to the
1987] cost of treasury shares being held shall
be restricted from being declared and
Kinds of redeemable shares issued as dividends.
a. Compulsory - the corporation is
required to redeem the shares. Note: When treasury shares are sold below its
par or issued value, there can be no watering
Page 48 of 494
of stock because such watering of stock 6. Par Value Shares vs. No-Par Value
contemplates an original issuance of shares. Shares
For both stock corporations and close Par value shares
corporations, the pre-emptive right of
stockholders extends to the re-issuance or sale These are shares with a stated or fixed value
treasury shares, unless the articles of set out in the Articles of Incorporation, which
incorporation provide otherwise [Sec. 38 and remains the same regardless of the profitability
101; SEC Opinion, 14 January 1993]. of the corporation. This gives rise to financial
stability, and is the reason why banks, trust
Treasury Shares are not Retired Shares corporations, insurance companies and
building and loan associations must always be
Treasury shares do not revert to the unissued organized with par value shares.
shares of the corporation, but are regarded as
property acquired by the corporation, which Par value is minimum issue price of such share
may be reissued or resold at a price to be fixed in the Articles of Incorporation which must be
by the Board of Directors [SEC Rules stated in the certificate [Sec 61].
Governing Redeemable and Treasury Shares,
CCP No. 1-1982]. No par value shares
Note: Under the SEC Rules, the redemption of These are shares without a stated value in the
redeemable shares does not necessarily make AOI. They are without nominal value. They
them as treasury shares. Instead, it leads to may be issued for the amount stipulated in the
their automatic retirement or cancellation, AOI or fixed by the Board [Sec 61].
unless the contrary is specifically stipulated.
The articles thus provide advance notice to Limitations on no par value shares [Sec. 6]
ordinary shareholders that the board may, at its a. Cannot have an issue price of less than
own discretion, reissue redeemable shares P5.00 per share;
with the same features. b. Once issued, they shall be deemed
fully paid and non-assessable, and the
Treasury shares distributed by way of holders of such shares shall not be
dividends liable to the corporation or to its
creditors in respect thereto;
Treasury shares may also be distributed as c. Entire consideration received by the
property dividends. In order for treasury shares corporation shall be treated as capital
to be distributed as property dividends, the and shall not be available for
amount of the retained earnings previously distribution as dividends;
used to support their acquisition must not have d. The AOI must state the fact that the
been impaired by losses. Further, such corporation issues no-par shares and
retained earnings must not be used to justify the number of shares;
the distribution of treasury shares as property e. Cannot be issued as preferred stock;
dividends. They may only be distributed out of f. Cannot be issued by banks, insurance
the other earnings of the corporation [SEC- companies, public utilities and building
OGC Opinion No. 12-06, dated April 20, 2012]. and loan associations;
g. Cannot be issued by all corporations
Note: Treasury shares are treated as assets of authorized to obtain or access funds
the corporation [Herbosa, 2019]. Since a from the “public”.
treasury share is a fully paid share re-acquired
by the corporation, it is not outstanding and Note: A new addition in the Revised
may be re-issued and resold. It cannot receive Corporation Code is the prohibition on the
dividends before the resale because the issuance of no-par shares being imposed on all
corporation cannot grant dividends to itself corporations authorized to obtain or access
[CIR v. Manning]. funds from the “public.” This prohibition is not
Page 49 of 494
anymore limited to banks, insurance bind it. [Cagayan Fishing Development Co.,
companies, public utilities and building and Inc. v. Sandiko, G.R. No. L-43350 (1937)]
loan associations.
Exceptions: A corporation may be bound by
the contract if it makes the contract its own by:
F. Incorporation and a. Adoption or ratification of the ENTIRE
Organization contract after incorporation.
b. Novation or the intent to novate the
1. Promoter original contract is required to adopt or
ratify the pre-incorporation contract.
Promoters – persons who, acting alone or with [Campos]
others, take initiative in founding and c. The Court’s ruling in Cagayan Fishing
organizing the business or enterprise of the v. Teodoro Sandiko, that “a corporation
issuer and receives consideration therefor. should have a full and complete
[Sec. 3.10, RA 8799, The Securities Regulation organization and existence as an entity
Code] before it can enter into any kind of a
contract or transact any business”, is
Promoter’s Contracts not absolute. One of the exceptions
recognized by American courts is that
Promoter’s contracts are those types of “a contract made by the promoters
contracts entered into in behalf of a corporation of a corporation on its behalf may be
which is in the process of organization and adopted, accepted or ratified by the
incorporation, and such fact is acknowledged corporation when organized”. [Rizal
as an essential ingredient in the process of Light v. PSC and Morong Electric
perfection. [Villanueva] (1968)]
d. Acceptance of benefits under the
a. Liability of Promoter contract with knowledge of the terms
thereof.
General rule: The promoter binds himself e. Performance of its obligation under the
personally and assumes the responsibility of contract.
looking to the proposed corporation for
reimbursement. The contract must of course be one which is
● The promoter binds himself to ensure within the powers of the corporation to enter.
that the corporation, once formed, will [Builders’ Duntile Co. v. Dunn Mfg. Co. (1929)]
ratify the contract entered into in its The corporation adopts the entire contract, not
name. only parts which are beneficial. [Campos]
● Otherwise, he becomes personally
liable for such contract in the event that 2. Subscription Contract
corporation does not ratify.
A subscription contract is any contract for the
Exceptions: acquisition of unissued stock in an existing
1. Express or implied agreement to the corporation, or corporation still to be formed.
contrary
2. Novation, not merely adoption or Notwithstanding the fact that the parties refer
ratification, of the contract to the contract as a purchase or some other
contract, it shall be deemed a subscription as
b. Liability of Corporation for long as it involves the acquisition of unissued
Promoter’s Contracts stock in an existing corporation or a corporation
still to be formed. [Sec. 59]
General rule: A corporation is NOT bound by
the contract. A corporation, until organized, has
no life and no legal existence. It could not have
had an agent [the promoter] who could legally
Page 50 of 494
3.Pre-Incorporation Subscription b. b. Necessary or convenient for its
Agreements use and lawful purposes
c. At a fair valuation equal to the par
A pre-incorporation subscription or issued value of the stock issued;
agreement is a type of promoter’s contract for 3. Labor performed for or services
the acquisition of unissued stock in a actually rendered to the corporation
corporation still to be formed. 4. Previously incurred indebtedness of
the corporation;
Subscription for shares of stock of a 5. Amounts transferred from unrestricted
corporation still to be formed shall be retained earnings to stated capital;
irrevocable for a period of at least six (6) 6. Outstanding shares exchanged for
months from the date of subscription, stocks in the event of reclassification or
UNLESS: conversion;
1. All of the other subscribers consent to 7. Shares of stock in another corporation;
the revocation; or and/or
2. The corporation fails to incorporate 8. Other generally accepted form of
within the same period or within a consideration [Sec. 61].
longer period stipulated in the contract
of subscription. Invalid Consideration
No pre-incorporation subscription may be The following cannot be exchanged for the

revoked after the articles of incorporation is issuance of shares of stock [Sec. 61]:
submitted to the Commission. [Sec. 60] 1. Promissory notes
2. Future service
The rule on irrevocability of a pre-incorporation
subscription agreement embodied in the RCC In case a subscription contract contemplates
is a combination of the features of two theories: unlawful consideration exchanged for shares of
● Contract Theory: Subscription stock:
agreement among several persons to 1. The subscription contract would be
take shares in a proposed corporation valid and binding on both the
becomes a binding contract and is corporation and subscriber
irrevocable from the time of 2. But the provision on such unlawful
subscription unless cancelled by all consideration is deemed void, such
parties before acceptance of that the subscription agreement would
corporation. be construed to be for cash, and the
● Offer Theory: Subscription agreement unpaid amount treated as part of
is only a continuing offer to a proposed subscription receivables.
corporation, offer does not ripen into a
contract until accepted by the It would not be in consonance with the trust
corporation when organized. fund doctrine to consider the subscription
[Villanueva] contract void [Villanueva].
4. Consideration for Stocks Valuation of Consideration
Where the consideration is other than actual

Stocks shall not be issued for a consideration
cash, or consists of intangible property, the
less than the par or issued price thereof.
valuation thereof shall initially be determined
Consideration for the issuance of stock may
by the stockholders or the board of directors,
be:
subject to the approval of the Commission
1. Actual cash paid to the corporation;
[Sec. 61].
2. Property, tangible or intangible, which
must be:
a. Actually received by the
corporation; and
Page 51 of 494
5. Articles of Incorporation Corporate Name
The AOI is a basic contract document, defining See 6. Corporate Name; Limitations on Use
the charter of the corporation, and serves as of Corporate Name
the basis by which to judge whether it exists for
legal purposes. Purpose Clause
The charter of the corporation is a contract A corporation only has such powers as are
between 3 parties: expressly granted by law and the AOI. The
a. between the State and the corporation; purpose clause confers and limits the powers
b. between the stockholders and the that a corporation may exercise.
State;
c. between the corporation and its Must indicate the specific PRIMARY and
stockholders. [Villanueva] SECONDARY purposes if there are more than
d. among the stockholders [Campos] one purpose; a non-stock corporation may not
include a purpose which would contradict or
The AOI must be filed with the SEC for the change its nature as such. [Sec. 13 (b)]
issuance of the Certificate of Incorporation.
The AOI and its amendments can be filed Must not be patently unconstitutional, illegal,
electronically. [Sec. 13] immoral, and contrary to government rules and
regulations. [Sec. 16 (b)]
a. Contents
Must not be for the purpose of practicing a
profession. [Sec. 10]
The Articles of Incorporation must contain:
1. Corporate Name;
Prohibited Purposes and Activities
2. Purpose Clause;
3. Principal Office;
A corporation may not be formed for the
4. Corporate Term if the corporation has
purpose of practicing a profession like law,
not elected perpetual existence;
medicine or accountancy. [Sec. 10]
5. Incorporators;
6. Trustees/Directors;
Under the present state of our law and
7. For stock corporations:
jurisprudence, a corporation cannot be
a. The authorized capital stock,
organized for or engage in the practice of law
b. Number of shares into which it is
in this country.
divided,
c. The par value of each share,
This cannot be subverted by employing some
d. Names, nationalities, and
so-called paralegals supposedly rendering the
residence addresses of the
alleged support services.
original subscribers,
e. Amount subscribed and paid by
The remedy for the apparent breach of this
each on the subscription, and
prohibition is the concern and province of the
f. A statement that some or all of the
Solicitor General who can institute the
shares are without par value, if
corresponding quo warranto action. [Ulep v.
applicable
The Legal Clinic, B.M. No. 553 (1993)]
8. For nonstock corporations:
a. Amount of its capital,
The RCC prohibits to foreign corporations from
b. The names, nationalities, and
giving donations in aid of any political party or
c. Residence addresses of the
candidate or for purposes of partisan political
contributors, and activity”. [Sec. 35(i)]
d. Amount contributed by each
9. Other matters (including arbitration Reasons for requiring purpose clause: (a)
agreement pursuant to Sec. 181). [Sec.
investor will know what line of business he will
13]
Page 52 of 494
be risking his money on; (b) Ultra vires Thus, the proper venue is not the actual
doctrine; (c) third persons dealing with principal office but that stated in its Articles of
corporation can determine if the corporation Incorporation.
can enter into a transaction. [Campos]
A corporation has no residence in the same
Principal Office sense in which the term is applied to a natural
person. [Hyatt Elevators v. Goldstar Elevators,
The principal office establishes the residence G.R. No. 161026 (2005)].
of a corporation, which is important in
determining the venue in an action by or Corporate Term
against the corporation or the province where
a chattel mortgage of shares should be See 3. Corporate Term under E. Capital
registered. [Chua Guan vs. Samahang Structure
Magsasaka, G.R. No. L-42091 (1935)]
Number, Names, Citizenship and
1. Must be within the Philippines [Sec. 13 Residences of the Incorporators
(c)];
2. Articles of Incorporation must specify See 1. Number and Qualification of
both province or city or town where it is Incorporators under E. Capital Structure
located;
3. All corporations and partnerships Number, Names, Citizenship and
applying for registration with the SEC Residences of the Directors/Trustees
should state in their Articles of
Incorporation or Articles of Partnership The minimum number of directors/trustees has
the following: been repealed. [Sec. 13]
a. Specific address of their
principal office, which shall Note: Ordinary corporations can have a
include, if feasible, the street minimum of two (2) directors, since only OPCs
number, street name, can have one (1) director.
barangay, city or municipality,
and if applicable, the name of Stock corporations: directors, not more than
the building, number of the 15
building, and name or number
of the room or unit; and Non-stock corporations: trustees
b. Specific residence address of 1. Non-stock corporations whose articles
each incorporator, stockholder, or by-laws may provide for more than
director, trustee or partner. 15 trustees. [Sec. 91]
[SEC Memorandum Circular 2. Banks may have up to 21 directors for
No. 6, s. 2016, Sec. 1] cases of mergers and consolidation.
4. For foreign corporations, the principal [Sec. 17, General Banking Act]
office address in the country of
incorporation, the specific address of For educational non-stock corporations:
the resident agent, the present 1. Trustees may not be less than 5 nor
directors and officers, and the exceed 15;
specific location where it will hold office 2. Number of trustees shall be in multiples
in the Philippines, shall be indicated. of 5. [Sec. 106]
[SEC Memorandum Circular No. 6, s.
2016, Sec. 2] Nationalized or Partially-Nationalized
Industries:
The residence of a corporation is the place Aliens may be directors but only in such
where its principal office is located, as stated in number as may be proportional to their
its Articles of Incorporation. allowable ownership of shares.
Page 53 of 494
Capital/Capital Stock what the law disqualifies is the corporation from
owning land [J.G. Summit Holdings, Inc. v. CA,
“Outstanding capital stock” is the total shares G.R. No. 124293 (2005)
of stock issued under binding subscription
contracts to subscribers or stockholders, Contents Comments
whether fully or partially paid, except treasury of AOI
shares. [Sec. 173]
Corporate Under the RCC, incorporators
If STOCK corporation: name undertake to change the name of
Authorized capital stock (ACS) in lawful money the corporation immediately upon
of the Philippines receipt of notice from SEC that
a. The number of shares into which the another corporation, partnership or
ACS is divided person has acquired a prior right
b. If with par value shares, the par value to its use, that the name has been
of each share [Sec. 13[h], Sec. 14[7]] declared not distinguishable from
c. Names, citizenship, residences of a name already registered or
original subscribers reserved for the use of another
d. Amount subscribed and paid on each corporation, or that it is contrary to
subscription law, public morals, good customs
e. Fact that some or all shares are without or public policy. [Sec. 14(11)] See
par value also SEC Memorandum Circular
No. 13, s. 2019
If NON-STOCK:
a. Amount of capital Purpose A corporation can only have one
b. Names, nationalities and residences of clause (1) primary purpose. However, it
contributors can have several secondary
c. Amount contributed by each purposes.
Other Matters Included in the AOI A corporation has only such

powers as are expressly granted
1. Classes of shares, as well as to it by law & by its articles of
preferences or restrictions on any such incorporation, those which may be
class [Sec. 6]. incidental to such conferred
2. Denial or restriction of pre-emptive powers, those reasonably
right [Sec. 38] necessary to accomplish its
3. Prohibition against transfer of stock purposes & those which may be
which would reduce stock ownership to incident to its existence.
less than the required minimum in the
case of a nationalized business or Corporation may not be formed for
activity [Sec. 14(11)] the purpose of practicing a
4. Arbitration agreement [Sec. 13; 181] profession like law, medicine or
accountancy.
No transfer clause Principal ● Must be within the
office Philippines
If the foreign shareholdings of a landholding ● Must contain specific
corporation exceed 40%, it is not the foreign address of their principal
stockholders’ ownership of the shares which is office, which shall include,
adversely affected but the capacity of the if feasible, the street
corporation to own land – that is, the number, street name,
corporation becomes disqualified to own land. barangay, city or
No law disqualifies a person from purchasing municipality, and if
shares in a landholding corporation even if the applicable, the name of
latter will exceed the allowed foreign equity, the building, number of
Page 54 of 494
Contents Comments Contents Comments

of AOI of AOI
the building, and name or Capital ● Amount of its authorized

number of the room or stock capital stock in lawful
unit money of the Philippines
● Important in determining ● Number of shares into
venue in an action by or which it is divided
against the corp., or on ● In case the shares are par
determining the province value shares, the par
where a chattel mortgage value of each,
of shares should be ● Names, nationalities and
registered residences of the original
subscribers, and the
Term of ● A corporation shall now amount subscribed and
existence have perpetual existence paid by each on his
unless its AOI provides subscription, and if some
otherwise. [Sec. 11] or all of the shares are
without par value, such
Incorporat ● Names, nationalities & fact must be stated
ors and residences of the ● For a non-stock
Directors/T incorporators; corporation, the amount of
rustees ● Names, nationalities & its capital, the names,
residences of the nationalities and
directors or trustees who residences of the
will act as such until the contributors and the
first regular directors or amount contributed by
trustees are elected; each
● Treasurer who has been ● The provision on
chosen by the pre- minimum subscribed and
incorporation paid up capital has been
subscribers/members to repealed.
receive on behalf of the
corporation, all Other ● Classes of shares into
subscriptions matters which the shares of stock
/contributions paid by have been divided;
them See SEC preferences of &
Memorandum Circular restrictions on any such
No. 26, s. 2019 class; and any denial or
restriction of the pre-
emptive right of
stockholders should also
be expressly stated in
said articles.
● If the corporation is
engaged in a wholly or
partially nationalized
business or activity, the
AOI must contain a
prohibition against a
transfer of stock which
would reduce the Filipino
ownership of its stock to
Page 55 of 494
Contents Comments provisions required by law to be set out

of AOI in the articles
5. If the corporation is governed by a
less than the required special law, the amended articles must
minimum. be accompanied by a favorable
● Transfer restrictions recommendation of the appropriate
● Arbitration agreement government agency to the effect that
such amendment is in accordance with
law. [Lopez]
b. Non-amenable Items
6. Will take effect only:
a. Upon their approval by the SEC by
The following items are amendable under Sec.
the issuance of a certificate of
15:
filing of amended articles; OR
1. Change of name of the Corporation;
b. From the date of filing with the
adding business name
SEC if not acted upon within 6
2. Adding to or changing the purpose/s
months from the date of filing for a
3. Change of principal office
cause not attributable to the
4. Change in the number of directors or
corporation
trustees
5. Increase or decrease in authorized
Procedure
capital stock [subject to Sec. 37]; re-
a. The original and amended articles
classifying shares in the authorized
together shall contain all provisions
capital stock;
required by law to be set out in the
6. Adding or revising transfer restrictions
articles of incorporation
b. The articles, as amended shall be
Requirements for Making Amendments to
indicated by underscoring the change
AOI
or changes made
1. By a majority vote of the BOD or
c. A copy shall be submitted to the SEC
trustees; and
1. Duly certified under oath by the
2. The vote or written assent of
corporate secretary and a
a. 2/3 of the outstanding capital
majority of the directors or
stock, without prejudice to the
trustees
appraisal right of dissenting
2. Stating the fact that the
stockholders in accordance
amendment or amendments
with the provisions of this
have been duly approved by
Code,
the required vote of the
b. 2/3 of the members if it be a
directors or trustees and
non-stock corporation. [Sec.
stockholders or members
15]
3. unless the AOI provides for higher
Non-Amendable Items
voting requirements
The following items state accomplished facts
(fait accompli), therefore, cannot be
Limitations
amended:
1. The names, nationalities and residences of
Requirements imposed by the Code or by
the incorporators.
special laws
1. Must be for a legitimate purpose
To allow an amendment would mean going
2. Must be approved by the
against the definition of “incorporators” in
directors/trustees and the
Sec. 5
stockholders/members through the
vote requirement
2. Treasurer-in-trust
3. Appraisal Right (in specified cases)
3. First set of directors or trustees
4. Both the original and the amended
articles together must contain all the
Page 56 of 494
4. Original stock subscriptions and paid-in a. Not distinguishable from that already
capital reserved or registered for the use of
5. Place and date of execution another corporation, or
6. Witnesses [De Leon] b. Already protected by law, or
c. Used contrary to existing law, rules and
6. Corporate Name and Limitations regulations. [Sec. 17]
on its Use
A name is not distinguishable even if it
contains one or more of the following:
The name of a corporation is essential not only
for its existence as a juridical person, but also a. The word “corporation”, “company”,
“incorporated”, “limited”, “limited
in the manner of dealing with it, and it cannot
be changed except in the manner provided for liability”, or an abbreviation of one of
such words; and
by law. [Villanueva]
b. Punctuations, articles, conjunctions,
SEC Memorandum Circular No. 13 s. 2019 contractions, prepositions,
abbreviations, different tenses,
1. The corporate name shall contain the
word "Corporation" or "Incorporated," spacing, or number of the same word
or phrase. [Sec. 17]
or the abbreviations "Corp." or "Inc."
respectively;
Note: Instead of being distinguishable, the old
2. In the case of a One Person
Corporation, the corporate name shall criteria under the Sec. 18 of the OLD
Corporation Code to determine whether or not
contain the word "OPC" either below or
at the end of its corporate name; a corporate name should be allowed is whether
it is “identical or deceptively or confusingly
3. The partnership name shall bear the
word "Company" or "Co." and if it is a similar” to that of any existing corporation or
which is “patently deceptive or patently
limited partnership, the word "Limited"
or "Ltd.". confusing”.
4. A professional partnership name
may bear the word "Company," If the SEC determines that a corporation’s
name is not allowed, it may:
"Associates," or "Partners," or other
a. Summarily order the corporation to
similar descriptions;
5. The corporate name of a foundation immediately cease and desist from
using a non-distinguishable name and
shall use the word "Foundation";
6. The corporate name of all non-stock, require it to register a new one,
b. Cause the removal of all visible
non-profit corporations, including
non-governmental organizations and signages, marks, advertisements,
labels, prints and other effects bearing
foundations, engaging in micro finance
activities shall use the word such corporate name. [Sec. 17]
"Microfinance" or "Microfinancing"
a. Provided that said corporations Business or trade name which is different from
the corporate or partnership name shall be
shall state in the purpose
clause of their AOI that they indicated in the articles of incorporation or
partnership. A company may have more than
shall conduct microfinance
operations pursuant to one business or trade name. [SEC
Memorandum Circular No. 13 s. 2019]
Republic Act No. 8425 or the
Social Reform and Poverty
Change of Corporate Name
Alleviation Act.
Criteria for Allowable Corporate Names A change of corporate name requires the
amendment of the Articles of Incorporation
Under present law, no corporate name shall be which must be approved by:
a. Majority vote of the board; and
allowed by the Commission if it is:
Page 57 of 494
b. The vote or written assent of AOIs do not become binding as the charter of
stockholders holding 2/3 of the the corporation unless they have been filed and
outstanding capital stock. [Sec. 16] registered with, and certified by the SEC.
Unless the Articles of Incorporation provides DOCUMENTS TO BE FILED WITH SEC:

for a higher voting requirement. a. Articles of Incorporation, and By-Laws
(if crafted prior to incorporation)
Amendment of a corporation’s Articles of b. Certification concerning the amount of
Incorporation to change its corporate name capital stock subscribed and/or paid
does not extinguish the personality of the
original corporation. It is the same corporation Note: Sec. 15 of the OLD Corporation
with a different name, and its character is not Code requiring that at least 25% of amount
changed. Consequently, the “new” corporation subscribed be paid, and a minimum paid-
is still liable for the debts and obligations of the up capital upon incorporation, was
“old” corporation. [Republic Planters Bank v. removed under the RCC.
CA, G.R. No. 93073 (1992)]
Note: SEC Resolution No. 0331 dated July
Use of Corporate Names of Dissolved 20, 2012 no longer requires a bank
Corporations certificate of deposit covering the paid-up
capital if payment for shares is made in
The name of a corporation or partnership that cash; where the capital stock is paid by a
has been dissolved or whose registration has combination of cash and property, only the
been revoked shall not be used by another portion paid by way of property will require
corporation or partnership: the submission of supporting documents.
a. Within five years from the approval of
the dissolution; or c. Undertaking to change the corporate
b. Within five (5) years from the date of name in case there is another person
revocation, unless its use has been or entity with same or similar name that
allowed at the time of the dissolution or was previously registered (unless
revocation by the stockholders, already incorporated in the Articles of
members or partners who represent a Incorporation)
majority of the outstanding capital
stock or membership of the dissolved d. Favorable recommendation from the
corporation or partnership, as the case appropriate government agency that
may be. [SEC Memo Circ. No. 13, s. the AOI or amendments thereto of
2019] banks, banking and quasi-banking
institutions, preneed, insurance and
7. Registration, Incorporation, and trust companies, NSSLAS,
Commencement of Corporate pawnshops, and other financial
Existence intermediaries, is in accordance with
law. [Sundiang and Aquino; Sec. 16]
A private corporation organized under the RCC
Issuance of Certificate of Incorporation By
commences its corporate existence and
Sec
juridical personality from the date the SEC
Effect: Commencement of corporate existence
issues the certificate of incorporation under its
and juridical personality. [Sec. 18]
official seal. [Sec. 18]
Ground for revocation of certificate of
Thereupon, the incorporators, stockholders or
incorporation: If, after due notice and hearing,
members, and their successors constitute a
the Commission finds that any provision of this
body politic and corporate under the name
Code, rules or regulations, or any of the
stated in the AOI, for the period of time
Commission’s orders has been violated
mentioned therein. [Sec. 18]
Page 58 of 494
Depending on the extent of participation, Steps Comments
nature, effects, frequency and seriousness of
the violation. [Sec. 158]
Drafting [See e. Articles of
GROUNDS FOR DISAPPROVING THE Articles of Incorporation under 6.
ARTICLES OF INCORPORATION: Incorporation Incorporation and
(see Sec. 13) Organization]
a. Does not substantially comply with ● Arbitration agreements
form prescribed may now be provided in
b. Purpose is patently unconstitutional, the AOI (see Sec. 181).
illegal, immoral, contrary to ● The AOI and
government rules and regulations applications for
c. The certification concerning the amendments may be
amount of capital stock subscribed filed in an electronic
and/or paid is false document
d. Required percentage of ownership of
Filing of ● AOI must be filed w/ the
Filipino citizens has not been complied
Articles; SEC & the
with when required by existing laws or
Payment of corresponding fees
the Constitution. [Sec. 16]
Fees paid
● Failure to file the AOI
SEC shall give the incorporators reasonable
will prevent due
time to correct or modify objectionable portions
incorporation of the
of the articles or amendment. [Sec. 16]
proposed corporation
and will not give rise to
Steps in Incorporation
its juridical personality.
It will not even be a de
Steps Comments facto corporation.
● Under present SEC
Promotional Promoter: rules, the AOI once
Stage ● Brings together filed, will be published
persons who become in the SEC Weekly
interested in the Bulletin at the expense
enterprise of the corporation [SEC
● Aids in procuring Circular # 4, 1982].
subscriptions and sets For corporations governed by
in motion the special laws (banks, insurance
machinery which leads companies, public utilities and
to the formation of the educational institutions) the AOI
corporation itself must be accompanied by a
● Formulates the favorable recommendation from
necessary initial the appropriate government
business and financial agency.
plan and, if necessary,
buys the rights and
property which the
business may need,
with the understanding
that the corporation,
when formed, shall
take over the same
Page 59 of 494
Steps Comments Steps Comments
Examination Process: Issuance of Certificate of Incorporation

of Articles; a. SEC shall examine Certificate of will be issued if:
Approval or them in order to Incorporation a. SEC is satisfied that all
Rejection by determine whether they legal requirements
SEC are in conformity with have been complied
law with; AND
b. If it is not, the SEC b. There are no reasons
must give the for rejecting or
incorporators a disapproving the AOI.
reasonable time within
which to correct or It is only upon such issuance
modify the that the corporation acquires
objectionable portions. juridical personality. [Sec. 18]
Grounds for rejection or Should it be subsequently found

disapproval of AOI: [Sec. 16] that the incorporators were
a. AOI/amendment not guilty of fraud in procuring the
substantially in certificate of incorporation, the
accordance with the same may be revoked by the
form prescribed SEC, after proper notice and
b. Purpose/s are patently hearing.
unconstitutional, illegal,
immoral, or contrary to 8. Election of Directors or Trustees
government rules and
regulations
When Elections are Held
c. The certification
concerning the amount
The time for holding the annual election of
of capital stock
directors of trustees and the mode or manner
subscribed and/or paid
of giving notice thereof are provided in the by-
is false
laws. [Sec. 49]
d. Required percentage
of ownership has not
Nomination
been complied with
General Rule: Each stockholder or member
Favorable recommendation
shall have the right to nominate any director or
from the appropriate
trustee who possesses all of the qualifications
government agency did not
and none of the disqualifications set forth in this
accompany the AOI or
Code.
amendments thereto of banks,
banking and quasi-banking
Exception: When the exclusive right to
institutions, preneed, insurance
nominate directors or trustees is reserved for
and trust companies, NSSLAS,
holders of founders’ shares under Section 7 of
pawnshops, and other financial
the RCC. [Sec. 23]
intermediaries, is in
accordance with law.
Required Participation
At all elections of directors or trustees, there
must be present, either in person or through a
representative authorized to act by written
proxy:
Page 60 of 494
Stock Corporations: The owners of majority of c. distribute them on the same principle
the outstanding capital stock among as many candidates as may be
seen fit: Provided, That –
Non-Stock Corporations: A majority of the a. The total number of votes cast
members entitled to vote. [Sec. 23] shall not exceed the number of
shares owned by the
Voting via Remote Communication/In stockholders as shown in the
Absentia books of the corporation
multiplied by the whole number
The stockholders or members may also vote of directors to be elected
through remote communication or in absentia: b. No delinquent stock shall be
a. By a resolution of the majority of the voted. [Sec. 23]
board of directors; Provided, That the
resolution shall only be applicable for a Nominees for directors receiving the highest
particular meeting. number of votes shall be declared elected.
b. Notwithstanding the absence of a They shall perform their duties as prescribed
provision in the bylaws of the by law, rules of good corporate governance,
corporation [SEC Memorandum and bylaws of the corporation. [Sec. 23]
Circular No. 6, s. 20]
Voting in Non-Stock Corporations
The right to vote through such modes may be
exercised in corporations vested with public General Rule: Members of nonstock
interest, notwithstanding the absence of a corporations may cast as many votes as there
provision in the bylaws of such corporations. are trustees to be elected but may not cast
[Sec. 23] more than one (1) vote for one (1) candidate.
A stockholder or member who participates Exception: Unless otherwise provided in the

through remote communication or in absentia, articles of incorporation or in the bylaws. [Sec.
shall be deemed present for purposes of 23]
quorum.
Nominees for trustees receiving the highest
The election must be by ballot if requested by number of votes shall be declared elected.
any voting stockholder or member. They shall perform their duties as prescribed
by law, rules of good corporate governance,
Voting in Stock Corporations and bylaws of the corporation. [Sec. 23]
Stockholders entitled to vote shall have the Report to SEC

right to vote the number of shares of stock
standing in their own names in the stock books Within thirty (30) days after the election of the
of the corporation at the time fixed in the directors, trustees and officers of the
bylaws, or where the bylaws are silent, at the corporation, the secretary, or any other officer
time of the election. of the corporation, shall submit to the
Commission, the elected trustees’ and
The said stockholder may: officers’:
a. vote such number of shares for as i. Names
many persons as there are directors to ii. Nationalities
be elected; iii. Shareholdings, and
b. cumulate said shares and give one (1) iv. Residence addresses [Sec. 25]
candidate as many votes as the
number of directors to be elected All corporations shall file with the Commission
multiplied by the number of the shares their GIS within 30 calendar days from the date
owned; or of actual annual stockholders'/members'
meeting. [SEC MC No. 09 s. of 2022]
Page 61 of 494
When No Election is Held Election of Officers
The meeting may be adjourned if: Immediately after the election of directors, the
a. If no election is held; or directors must formally organize by electing the
b. The owners of majority of the corporate officers. They are tasked to carry out
outstanding capital stock or majority of the policies laid down by the Board, the AOI
the members entitled to vote are not and the by- laws. [Sec. 24]
present in person, by proxy, or through
remote communication or not voting in Who are the Corporate Officers
absentia at the meeting. 1. President – must be a director;
2. Treasurer – may or may not be a
Report to SEC director; must be a resident
3. Secretary – need not be a director
After such adjournment, the non-holding of unless required by the by-laws; must
elections and the reasons therefor shall be be a citizen and resident of the
reported to the Commission within thirty (30) Philippines; and
days from the date of the scheduled election. 4. Other officers as may be provided in
[Sec. 25] the by-laws.
5. Compliance officer – only for
The report shall specify a new date for the corporations vested with public
election, which shall not be later than sixty (60) interest. [Sec. 24]
days from the scheduled date.
Note: Any 2 or more positions may be held
SEC Order to Hold Election concurrently by the same person, EXCEPT
that no one shall act as president and secretary
If no new date has been designated, or if the or as president and treasurer at the same time,
rescheduled election is likewise not held: unless otherwise allowed in the Code. [Sec 24]
1. The Commission may summarily order
that an election be held. The number of officers is not limited to those
a. Upon the application of a three enumerated in Sec. 24. A corporation
stockholder, member, director may have such other officers as may be
or trustee; and provided for by its by-laws. [Garcia v. Eastern
b. After verification of the Telecommunications Philippines, Inc., G.R.
unjustified non-holding of the No. 173115 (2009)].
election
2. The Commission shall have the power Qualifications of Corporate Officers
to issue such orders as may be
appropriate, including orders directing President Secretary Treasurer
the issuance of a notice stating the:
a. Time and place of the election,
b. Designated presiding officer, Director YES NO NO
and
c. The record date or dates for the Filipino NO YES NO
determination of stockholders Citizen*
or members entitled to vote.
[Sec. 25] Residency NO YES YES
The shares of stock or membership
represented at such meeting and entitled to Prohibited Secretary President President
vote shall constitute a quorum for purposes of concurrent or
conducting an election under this section. positions Treasurer
Notwithstanding any provision of the articles of

*Subject to rule if corporation is engaged in a
incorporation or bylaws to the contrary.
nationalized or partially-nationalized industry.
Page 62 of 494
Additional qualifications of officers may be REQUISITES OF VALID BY-LAWS
provided for in the by-laws. [Sec. 46(f)]
Approval requirement: Must be approved by
9. Adoption of By-Laws the affirmative vote of the stockholders
representing at least a MAJORITY of the
By-laws are regulations, ordinances, rules or outstanding capital stock, or majority of
laws adopted by an association or corporation members. [Sec. 45]
for its internal governance, including rules for
routine matters such as calling meetings. [SMC If filed pre-incorporation: Must be approved
v. Mandaue, G.R. No. 152356 (2005)] and signed by all incorporators.
May be done either: Record-Keeping: Must be kept in the principal

1. Prior to incorporation - approved and office of the corporation, subject to inspection
signed by all the incorporators and by any director, trustee, stockholder or member
submitted to SEC together with Articles of the corporation in person or by a
of Incorporation; or representative at reasonable hours on
2. After incorporation - The requirement business days. [Sec. 45]
of adoption of by-laws one (1) month
after receipt of the notice of issuance of Filing with SEC: A copy of the by-laws duly
certificate of incorporation has been certified by a majority of the directors or
deleted in the RCC. [Sec. 45] trustees and countersigned by the secretary of
the corporation, shall be filed with the
Nature: It is a product of agreement of the Commission and attached to the original
stockholders or members. [Campos] articles of incorporation. [Sec. 45]
Function: It establishes the rules for internal No provision of the by-laws can be adopted if it
government of the corporation [Campos]. It is contrary to law. Since the provision in
also regulates the affairs and relationship question is contrary to law, the fact that for
between and among stockholders, BOD and fifteen years it has not been questioned or
corporation. [Lopez] challenged but, on the contrary, appears to
have been implemented by the members of the
Note: OPCs are not required to have by-laws. association cannot forestall a later challenge to
its validity. [Grace Christian High School v. CA,
EFFECT OF FAILURE TO FILE THE BY- G.R. No. 108905 (1997)]
LAWS
a. Contents of By-Laws
Does not imply the "demise" of the
corporation. By-laws may be required by law Matters Usually Found in By-Laws
for an orderly governance and management of a. The time, place and manner of calling
corporations but they are not essential to and conducting regular or special
corporate birth. Nonetheless, failure to file meetings of the directors or trustees;
them within the period required by law by no b. The time and manner of calling and
means tolls the automatic dissolution of a conducting regular or special meetings
corporation. [Loyola Grand Villas Homeowners and mode of notifying the stockholders
Association v. CA G.R. No. 117188 (1997)] or members thereof;
c. The required quorum in meetings of
Note: Sec. 21 on the effect of failure to formally stockholders or members and the
organize within 5 years from incorporation, the manner of voting therein;
corporation’s corporate powers cease and the d. The modes by which a stockholder,
corporation is deemed dissolved. Organization member, director, or trustee may
includes: the filing and approval of by-laws with attend meetings and cast their votes;
the SEC and the election of directors and
officers. [Campos]
Page 63 of 494
e. The form for proxies of stockholders 7. Corporate Name
and members and the manner of voting 8. Denial of pre-emptive rights
them; [Villanueva]
f. The directors’ or trustees’
qualifications, duties and b. Binding Effects
responsibilities, the guidelines for
setting the compensation of directors When Binding: ONLY from date of issuance
or trustees and officers, and the of SEC of a certification that the by-laws are not
maximum number of other board inconsistent with the Code [Sec. 45] Pending
representations that an independent such approval, they cannot bind stockholders
director or trustee may have which or corporation.
shall, in no case, be more than the
number prescribed by the Commission; Effect on third parties: Mere internal rules
g. The time for holding the annual election among stockholders cannot affect or prejudice
of directors or trustees and the mode or 3rd persons who deal with the corporation
manner of giving notice thereof; unless they have knowledge of the same
h. The manner of election or appointment [China Banking Corp v CA G.R. No. 117604
and the term of office of all officers (1997)].
other than directors or trustees;
i. The penalties for violation of the c. Amendments
bylaws;
j. In the case of stock corporations, the Effected by: majority vote of the members of
manner of issuing stock certificates; the board and majority vote of owners of the
and Outstanding Capital Stock or members, in a
k. Such other matters as may be meeting duly called for the purpose. [Sec. 47]
necessary for the proper or convenient Unless a higher requirement is provided in the
transaction of its corporate affairs for by-laws
the promotion of good governance and
anti-graft and corruption measures. Delegation to BOD of power to amend
l. An arbitration agreement may be
provided in the bylaws pursuant to By vote of stockholders representing 2/3 of the
Section 181 of RCC. [Sec. 46] Outstanding Capital Stock or 2/3 of the
members. [Sec. 47]
Note: In close corporations - restrictions on
the right to transfer shares must appear in both Delegation to BOD may be revoked
the articles of incorporation and in the by-laws
as well as in the certificate of stock; otherwise, Any power delegated to the BOD or trustees to
restriction shall not be binding on any amend or repeal any by-laws or adopt new by-
purchases of good faith. [Sec. 97] laws shall be considered as revoked whenever
stockholders owning or representing a majority
Matters That Cannot Be Provided for in the of the outstanding capital stock or a majority of
By-laws (must be in the AOI) the members in non-stock corporations, shall
1. Classification of shares of stock so vote at a regular or special meeting. [Sec.
and preferences granted to 47]
preferred shares
2. Provisions on founder’s shares Filing with SEC
3. Providing for redeemable shares
4. Provisions on the purposes of the Whenever the bylaws are amended or new
corporation bylaws are adopted, the corporation shall file
5. Providing for the corporate term of with the Commission:
existence a. Such amended or new bylaws; and,
6. Capitalization of stock b. If applicable, the stockholders’ or
corporations members’ resolution authorizing the
Page 64 of 494
delegation of the power to amend G. Corporate Powers
and/or adopt new bylaws, duly certified
under oath by the corporate secretary
and a majority of the directors or Powers Exercised By the
trustees. [Sec. 47] Shareholders or Members
Effectivity of Amended By-Laws Corporate Acts Requiring All (Voting and
The amended or new bylaws shall only be Non-Voting) Shareholders’ Approval
effective upon the issuance by the Commission
of a certification that the same is in accordance General Rule: Vote necessary to approve a
with this Code and other relevant laws. [Sec. particular corporate act as provided in this
47] Code shall be deemed to refer only to stocks
with voting rights [Sec. 6].
10. Effects of Non-Use of Corporate
Charter Exceptions [Sec. 6]:
Voting and non-voting shares shall be entitled
Failure to Organize to vote in the following cases:
1. Amendment of Articles of Incorporation
If a corporation does not formally organize and [Sec. 15]
commence its business within five (5) years 2. Adoption, Amendment and Repeal of
from the date of its incorporation, its certificate By-Laws [Sec. 47]
of incorporation shall be deemed revoked as 3. Sale, Lease, Mortgage or Other
of the day following the end of the five (5) year Disposition of Substantially all
period. [Sec. 21] corporate assets [Sec. 39]
4. Incurring, Creating or Increasing
Continuous Inoperation Bonded Indebtedness [Sec. 37]
If a corporation has commenced its business 5. Increase or Decrease of Capital Stock
but subsequently becomes inoperative for a [Sec. 37]
period of at least five (5) consecutive years, the 6. Merger and Consolidation [Sec. 76-79]
Commission may, after due notice and hearing, 7. Investment of funds in another
place the corporation under delinquent corporation or business or for any
status. [Sec. 21] purpose other than the primary
purpose for which it was organized
A delinquent corporation shall have a period of [Sec. 41]
two (2) years to resume operations and comply 8. Dissolution of the Corporation [Secs.
with all requirements that the Commission shall 133-138]
prescribe.
Some Corporate Acts Requiring Voting
Upon compliance by the corporation, the Shareholders’ Approval
Commission shall issue an order lifting the 1. Declaration of Stock Dividends [Sec.
delinquent status. 42]
2. Management Contracts [Sec. 43]
Failure to comply with the requirements and 3. Fixing the Consideration of No-Par
resume operations within the period given by shares [Sec. 61]
the Commission shall cause the revocation of 4. Fixing the Compensation of Directors
the corporation’s certificate of incorporation. [Sec. 29]
[Sec. 21] 5. Under certain conditions, instances
involving contracts with Directors, or
Officers or contracts between
corporations with interlocking directors
[Secs 31 & 32]
Page 65 of 494
6. Under certain conditions, material 5. To adopt bylaws, and to amend or
contracts entered by corporations repeal the same in accordance with
vested with public interest [Sec. 31]. this Code;
a. Must not contrary to law,
Powers Exercised by the Board of Directors morals or public policy
6. In case of stock corporations: To issue
Unless otherwise provided in this Code, the or sell stocks to subscribers and to
board of directors or trustees shall exercise the sell treasury stocks in accordance with
corporate powers, conduct all business, and the provisions of this Code; and In case
control all properties of the corporation [Sec. of non-stock corporations: To admit
22]. members to the corporation;
7. To purchase, receive, take or grant,
Majority vote of the Board is needed in the hold, convey, sell, lease, pledge,
exercise of the ff. powers: mortgage, and otherwise deal with
1. Filling of vacancies in the board, except such real and personal property,
when it is due to removal by the including securities and bonds of other
stockholders/members or by expiration corporations;
of term a. As the transaction of the lawful
2. Extension or shortening of the business of the corporation
corporate term may reasonably and
3. Increase or decrease of capital stock or necessarily require
the creation of bonded indebtedness b. Subject to the limitations
4. Sale or other disposition of all or prescribed by law and the
substantially all assets Constitution
5. Acquisition of its own shares 8. To enter, with natural and juridical
6. Investment of corporate funds in any persons, into a:
corporation or business or for any a. Partnership, (Note: New in the
purpose other than its primary purpose RCC)
7. Declaration of cash, property, and b. Joint venture, (Note: New in
stock dividends the RCC)
8. Entering into management contracts c. Merger,
9. Amendment of AOI d. Consolidation, or
10. Amendment of the by-laws e. Any other commercial
11. Approval of the plan of merger or agreement
consolidation 9. To make reasonable donations,
12. Dissolution of the corporation including those for the public welfare or
for hospital, charitable, cultural,
scientific, civic, or similar purposes:
1. General Powers; Theory of General
a. Provided, That no foreign
Capacity corporation shall give
donations in aid of any political
General Powers party or candidate or for
Every corporation has the power and capacity: purposes of partisan political
1. To sue and be sued in its corporate activity;
name; b. Note: Under OLD Corporation
2. To have perpetual existence; Code, both domestic and
a. Unless the certificate of foreign corporations were
incorporation provides prohibited from giving
otherwise donations in aid of any political
3. To adopt and use a corporate seal; party or candidate or for
4. To amend its articles of purposes of partisan political
incorporation in accordance with the activity.
provisions of this Code;
Page 66 of 494
10. To establish pension, retirement, increase bonded indebtedness [Sec.
and other plans for the benefit of its 37]
directors, trustees, officers, and c. Power to deny pre-emptive rights
employees; and [Sec. 38]
11. To exercise such other powers as d. Power to sell or dispose corporate
may be essential or necessary to assets [Sec. 39]
carry out its purpose or purposes as e. Power to acquire own shares [Sec.
stated in the articles of incorporation. 40]
[Sec. 35] f. Power to invest corporate funds in
another corporation or business, or for
A corporation has: any other purpose [Sec. 41]
a. Express Powers – such powers as are g. Power to declare dividends [Sec. 42]
expressly granted by law and its h. Power to enter into management
articles of incorporation; contract [Sec. 43]
b. Implied Powers – those reasonably i. Power to amend AOI [Sec. 15]
necessary to accomplish its purposes,
as stated in its articles of incorporation; 3. Power to Extend or Shorten
and Corporate Term
Note: Such implied powers are deemed to exist A private corporation may extend or shorten its
because of the following provisions – term as stated in the articles of incorporation.
● “Except such as are necessary or [Sec. 36]
incidental to the exercise of the powers
so conferred” [Sec. 44] Perpetual existence under the RCC applies to
● “Such powers as are essential or existing corporations. AOIs shall be deemed
necessary to carry out its purpose or amended to reflect its perpetual term, unless
purposes as stated in the Articles of the corporation elects to retain its limited term
Incorporation” – catch-all phrase. [Herbosa, 2019].
[Sec. 35(k)]
When Exercised
c. Incidental Powers – those which may Period to extend the corporate term has been
be incident to its existence as a juridical reduced by the RCC to three years before
entity [Pilipinas Loan v. SEC, 356 expiration.
SCRA 193 (2001)]
When the term expires, it is not ipso facto
The Theory of General Capacity states that a dissolved but may apply for a revival of its
corporation is said to hold such powers as are corporate existence. [Divina, 2020]
not prohibited or withheld from it by general
law. Requirements
1. Approval by majority vote of the
2. Specific Powers; Theory of Specific board of directors or trustees, and
Capacity 2. Ratification at a meeting by the
stockholders or members representing
The Theory of Specific Capacity states that at least two-thirds (2/3) of the
the corporation cannot exercise powers except outstanding capital stock or of its
those expressly/impliedly given. members.
Under the Theory of Specific Capacity, the 3. Notice Requirement – Written notice
specific powers of a corporation are as of the proposed action and the time and
follows: place of the meeting shall be:
a. Power to extend or shorten a. Sent to stockholders or
corporate term [Sec. 36] members at their respective
b. Power to increase or decrease place of residence as shown in
capital stock, or incur, create,
Page 67 of 494
the books of the corporation, articles of incorporation must also be complied
and with. [Villanueva]
b. Either:
1. Deposited to the Power to Incur, Create, or Increase Bonded
addressee in the post Indebtedness
office with postage
prepaid, served “Bonded indebtedness” are long term debts of
personally, OR the corporation, secured by mortgage on real
2. Sent electronically in or personal property of the corporation, which
accordance with the are:
rules and regulations of 1. Structured in denominated units of
the Commission on the indebtedness
use of electronic data 2. Intended to eventually circulate within
messages, when the investing public as securities,
allowed in the by-laws representing units of investment
or done with the Thus, the power to incur, create, or increase
consent of the bonded indebtedness is a form of distributing
stockholder. [Sec. 36] liability securities to the public, and constitutes
an aspect of the inherent power of every
Exercise of Appraisal Right corporation to borrow or to incur loan
obligations. [Villanueva]
In case of extension of corporate term, a
dissenting stockholder may exercise the right Requirements [Sec. 37]
of appraisal under the conditions provided in 1. Approval by a majority vote of the
this Code. [Sec. 36] board of directors or trustees
2. Approval by two-thirds (2/3) of the
An extension of corporate term actually outstanding capital stock or at least
novates the corporate contract with each two-thirds (2/3) of the members at a
shareholder by extending the corporate stockholders’ meeting duly called for
relationship beyond the original term. the purpose
Shortening the corporate term DOES NOT 3. Notice Requirement – Written notice
trigger the right of appraisal because there of the time and place of the
would be no violation of the original stockholders’ meeting and the purpose
contractual intent, since shortening would for said meeting must be:
mean the early realization of the value of the a. Sent to the stockholders at
shares of a dissenting stockholder with the their places of residence as
dissolution of the corporation. [Villanueva] shown in the books of the
corporation and
4. Power to Increase or Decrease b. Served on the stockholders
Capital Stock or Incur, Create, personally, OR through
Increase Bonded Indebtedness electronic means recognized in
the corporation’s bylaws and/or
the Commission’s rules as a
Power to Increase or Decrease Capital
valid mode for service of
Stock
notices.
4. Certification Requirement – A
An increase or decrease of the capital stock
certificate must be signed by a majority
amends the underlying contractual
of the directors of the corporation and
relationships between and among members of
countersigned by the chairperson and
the corporation.
secretary of the stockholders’ meeting,
setting forth:
Aside from the requisites in Sec. 37, when the
capital stock is increased or decreased, the
provisions of Sec. 15 on the amendment of the
Page 68 of 494
a. That the requirements of this within six (6) months from the date of
section have been complied approval of the board of directors and
with; stockholders, which period may be
b. The amount of the increase or extended for justifiable reasons.
decrease of the capital stock; 13. Prior PCC Approval – Where
c. In case of an increase of the appropriate, prior approval of the
capital stock: Philippine Competition Commission is
d. The amount of capital stock or required for any increase or decrease
number of shares of no-par in the capital stock or the incurring,
stock thereof actually creating or increasing of any bonded
subscribed, indebtedness
e. The names, nationalities and 14. SEC Registration – Applicable only to
addresses of the persons bonds issued by a corporation.
subscribing,
f. The amount of capital stock or After approval and the issuance by the
number of no-par stock Commission of its certificate of filing:
subscribed by each, and 1. The capital stock shall be deemed
g. The amount paid by each on increased or decreased; and
the subscription in cash or 2. The incurring, creating or increasing of
property, or the amount of any bonded indebtedness authorized,
capital stock or number of as the certificate of filing may declare
shares of no-par stock allotted
to each stockholder, if such Provided, That:
increase is for the purpose of 1. The Commission shall not accept for
making effective stock dividend filing any certificate of increase of
therefor authorized; capital stock unless accompanied by a
5. Any bonded indebtedness to be sworn statement of the treasurer (with
incurred, created or increased; the abovementioned contents)
6. The amount of stock represented at the 2. No decrease in capital stock shall be
meeting; and approved by the Commission if its
7. The vote authorizing the increase or effect shall prejudice the rights of
decrease of the capital stock, or the corporate creditors. [Sec. 37]
incurring, creating or increasing of any
bonded indebtedness. Copies of the certificate of the
8. Sworn Statement of the Treasurer – increase/decrease in capital shall:
A sworn statement of the corporation’s 1. Be kept on file in the office of the
treasurer must accompany the filing of corporation and
the certificate, and it must show that: 2. Filed with the Commission and
9. At least twenty-five percent (25%) of 3. Attached to the original articles of
the increase in capital stock has been incorporation. [Sec. 37]
subscribed; and
10. At least twenty-five percent (25%) of Exercise of Appraisal Right
the amount subscribed has been paid
in actual cash to the corporation or In Cases of Increase or Decrease of Capital
that property, the valuation of which is Sock
equal to twenty-five percent (25%) of The right of appraisal can be exercised in
the subscription, has been cases of increase of capital stock because it
transferred to the corporation has the potential effect of diluting the
11. Note: A treasurer’s affidavit is required proportionate interest of a stockholder in the
in an increase of capital stock, not in a corporation.
decrease in capital stock.
12. Prior SEC Approval – The application Even with the existence of the pre-emptive
with the Commission shall be made right, there is no guaranty that the stockholder
Page 69 of 494
can preserve his proportional interest since he For close corporations, the pre-emptive rights
might not have the financial resources to extend to all stock to be issued, including
exercise his pre-emptive right on the increase. reissuance of treasury shares, whether for
money, property or personal services, or in
The right of appraisal CANNOT be exercised in payment of corporate debts, unless the AOI
cases of decrease in capital stock since the provides otherwise. [Sec. 101]
decrease would result in returning part of the
investments of the stockholders, including Pre-emptive right can only be exercised to the
dissenting stockholders. [Villanueva] same class of shares issued or disposed with
that owned by the stockholder (Share-a-like
In Cases of Incurring, Creating or Increasing basis).
Bonded Indebtedness
The appraisal right CANNOT be exercised by Requirements
dissenting stockholders when the corporation 1. Approval by majority vote of the
validly incurs, creates, or increases bonded board of directors, and
indebtedness. 2. Ratification at a meeting by the
To allow them to do so would drain the financial at least two-thirds (2/3) of the
resources of the corporation, which is contrary outstanding capital stock.
to the purpose for which the power is 3. Notice Requirement – Written notice
exercised, which is to raise funds for corporate of the proposed action and the time and
affairs. [Villanueva] place of the meeting shall be:
a. Sent to stockholders at their
5. Power to Deny Pre-Emptive Rights respective place of residence
as shown in the books of the
Preemptive right corporation, and
4. Either:
The preferential right of shareholders to a. Deposited to the addressee in
subscribe to all issues or disposition of shares the post office with postage
of any class in proportion to their present prepaid, served personally, OR
shareholdings. [Sec 38] The purpose of pre- b. Sent electronically in
emptive right is to enable the shareholder to accordance with the rules and
retain his proportionate control in the regulations of the Commission
corporation and to retain his equity in the on the use of electronic data
surplus. messages, when allowed in the
by-laws or done with the
General Rule: All shareholders of a stock consent of the stockholder.
corporation have the preemptive right to
subscribe to all issues or disposition of shares Denial of preemptive right
of any class, in proportion to their respective The AOI may deny pre-emptive right. It may
shareholdings. also be denied when circumstances call for its
Exception: If such right is denied by the AOI denial, specifically when:
or an amendment thereto. [Sec. 38] 1. Shares to be issued are to comply with
“All issues” of shares extends to BOTH laws requiring stock offerings or
issuances of: minimum stock ownership by the
1. New shares resulting in an increase in public; [Sec. 38]
capital stock, and 2. Shares to be issued are in good faith
2. Previously unsubscribed shares which with the approval of the stockholders
formed part of the existing capital representing 2/3 of the OCS in
stock. [Herbosa, 2019; SEC Opinion exchange for property needed for
No. 5-03] corporate purposes; [Sec. 38]
Page 70 of 494
3. Shares to be issued are issued in Sale of all or substantially all of corporate
payment of previously contracted assets
debts; [Sec. 38]
4. In case the right is denied in the AOI; A corporation may sell all or substantially all of
5. Waiver of the right by the stockholder. the its properties and assets, including its
goodwill. [Sec. 39]
Note: The validity of issuance of additional
shares may be questioned if done in breach of To determine whether a sale or other
trust by the controlling stockholders disposition shall be deemed to cover all or
notwithstanding the non-existence of the pre- substantially all the corporate property and
emptive right, (i.e. when controlling assets:
stockholders’ primary purpose is to perpetuate 1. Make a computation based on the
or shift control of the corporation or to “freeze corporation’s net asset value, as
out” the minority interest). shown in its latest financial statements.
2. Assess whether the corporation would
Amendment of the Articles of Incorporation be rendered incapable of continuing
to deny pre-emptive right the business or accomplishing the
purpose for which it was incorporated.
Such amendment to the AOI to deny pre- [Sec. 39]
emptive right may trigger the exercise of a
dissenting stockholder of his appraisal right. The exercise of this power does not render the
This is because such amendment prevents the corporation empty, since it is still left with
dissenting stockholder from maintaining his assets received in exchange. It always
equity interest in the corporation. The test is receives something of equal value to what has
whether the company controllers initiated the been disposed. [Villanueva]
questioned amendment. [Herbosa, 2019]
Requirements
6. Power to Sell or Dispose Corporate 1. Vote of the stockholders
Assets representing at least two- thirds
(2/3) of the outstanding capital
stock, or at least two-thirds (2/3) of
A corporation may sell, lease, exchange,
the members, in a stockholders’ or
mortgage, pledge, or otherwise dispose of its
members’ meeting duly called for the
property and assets:
purpose; OR
1. For such consideration as its board of
2. Vote of at least a majority of the
directors or trustees may deem
trustees in office in nonstock
expedient, which may be:
corporations, where there are no
a. Money
members with voting rights
b. Stocks
3. Notice Requirement – Written notice
c. Bonds, or
of the proposed action and of the time
2. Other instruments for the payment of
and place for the meeting shall be:
money or
a. Addressed to stockholders or
3. Other property or consideration
members at their places of
4. Subject to the provisions of Republic
residence as shown in the
Act No. 10667, otherwise known as
books of the corporation; and
“Philippine Competition Act”, and other
b. Deposited to the addressee in
related laws.
the post office with postage
prepaid, served personally, OR
Requisite: A majority vote of its board of
sent electronically, when
directors or trustees [Sec. 39]
allowed by the by-laws or done
with the consent of the
stockholder. [Sec. 39]
Page 71 of 494
Abandonment of Sale/Lease/Mortgage De facto Merger – Continuity-of-business
enterprise requirement
After obtaining the authorization or approval
by the stockholders or members, the board of There is a de facto merger when a corporation
directors or trustees may abandon such sale, (transferring corporation) exchanges all or
lease, exchange, mortgage, pledge, or other substantially all of its assets for the shares of
disposition of property and assets. another (transferee corporation). The
transferring corporation may later on be
However, this is subject to the rights of third dissolved, where the shares of the transferee
parties under any contract relating thereto, corporation will be distributed by way of
without further action or approval by the liquidating dividends to the shareholders of the
stockholders or members. [Sec. 39] transferring corporation.
Where only the approval of a quorum of the The continuity-of-business enterprise

BOD/T is required requirement is what differentiates a de facto
Corporation is not restricted in its power to sell merger from a voluntary dissolution of a
or dispose of its assets without the corporation. [Herbosa, 2019]
authorization of shareholders or members:
1. If the same is necessary in the usual 7. Power to Acquire Own Shares
and regular course of business of
the corporation or The power of a corporation to acquire its
2. If the proceeds of the sale will be
own shares
appropriated for the conduct of its
remaining business
A stock corporation shall have the power to
3. If the transaction does not cover all or purchase or acquire its own shares for a
substantially all of the assets. [Sec. 39]
legitimate corporate purpose or purposes.
Exercise of Appraisal Right
This corporate power does not need
shareholder’s approval. Discretion solely rests
Any stockholder who disagrees from the sale,
on the board, subject to the existence of
lease, exchange, mortgage, pledge and any
unrestricted retained earnings (“URE”) and
other disposition may exercise his appraisal for a legitimate corporate purpose/s. [Sec.
right. [Sec. 39]
40]
The transfer should not prejudice the
Unrestricted Retained Earnings
creditors of the assignor This is defined as the amount which is:
The accumulated profits and gains realized out
The only way the transfer can proceed without of the normal and continuous operations of the
prejudice to the creditors is to hold the
company AFTER deducting therefrom:
assignee liable for the obligations of the 1. Distributions to stockholders and
assignor. The acquisition by the assignee of all
2. Transfers to capital stock or other
or substantially all of the assets of the assignor accounts, and
necessarily includes the assumption of the
3. NOT appropriated by its Board of
assignor’s liabilities, unless the creditors who Directors for corporate expansion
did not consent to the transfer choose to
projects or programs:
rescind the transfer on the ground of fraud. 4. NOT covered by a restriction for
[Caltex (Phils.) Inc. v. PNOC Shipping and
dividend declaration under a loan
Transport Corp, G.R. No. 150711 (2006)]
agreement; and
5. NOT required to be retained under
special circumstances obtaining in the
corporation such as when there is a
need for a special reserve for probable
contingencies. [SEC Memorandum
Page 72 of 494
Circular No. 11-08, (December 5, 8. Power to Invest Corporate Funds in
2008)] Another Corporation or Business
General Rule: The corporation may only General Rule: The corporation is not allowed
acquire its own stocks in the presence of URE.
to engage in a business different from those
[Sec. 40] enumerated in its AOI.
Rationale: Existence of URE is required before Exception: The purpose will be amended to
a corporation acquires its own shares because:
include the desired business activity among its
1. The repurchase of shares is a method secondary purpose.
of distribution or withdrawal of assets,
and is subject to abuse, as creditors Rules in case a corporation wants to invest
have a right to assume that so long as
in an undertaking
there are debts and liabilities, the
1. Investment of a corporation in a
Board will not use corporate assets to business which is in line with its
purchase its own stock; and
primary purpose requires only the
2. Treasury shares may be availed of to approval of the board.
perpetrate control of the enterprise
2. Investment of assets for any of its
without the expensive requisite of a secondary purposes requires the prior
majority voting stock. [Villanueva]
approval of its shareholders/members
3. If the investment is outside the
Exceptions:
purpose/s for which the corporation
1. Redeemable shares may be acquired was organized, Articles of
even without surplus profit for as long
Incorporation must be amended first,
as it will not result to the insolvency of otherwise it will be an Ultra Vires act.
the Corporation;
Requirements
2. In cases that the corporation conveys 1. Approval by majority vote of the
its stocks in payment of a Debt;
board of directors or trustees, and
3. In a Close corporation, a stockholder 2. Ratification at a meeting by the
may demand the payment of the fair
value of shares regardless of existence
at least two-thirds (2/3) of the
of retained earnings for as long as it will outstanding capital stock or of its
not result to the insolvency of the
members.
corporation. 3. Notice Requirement – Written notice
of the proposed action and the time and
Legitimate Corporate Purposes [Sec. 40] place of the meeting shall be:
Legitimate corporate purposes include, but is
a. Sent to stockholders or
not limited to the following: members at their respective
1. To eliminate fractional shares arising
place of residence as shown in
out of stock dividends the books of the corporation,
2. To collect or compromise an
and
indebtedness to the corporation, 4. Either:
arising out of unpaid subscription, in a
a. Deposited to the addressee in
delinquency sale, and to purchase the post office with postage
delinquent shares sold during said
prepaid, served personally, OR
sale; and b. Sent electronically in
3. To pay dissenting or withdrawing accordance with the rules and
stockholders. regulations of the Commission
on the use of electronic data
messages, when allowed in the
by-laws or done with the
consent of the stockholder
Page 73 of 494
Exercise of Appraisal Right and such consent has not yet been
secured;
Any stockholder who disagrees from the 3. When it can be clearly shown that such
investment of corporate funds in another retention is necessary under special
corporation or business may exercise his circumstances obtaining in the
appraisal right. corporation.
9. Power to Declare Dividends Note: In case a corporation unjustifiably retains

surplus profits in excess of one hundred
Requirements (100%) percent of the paid-in accumulated
1. Must be distributed out of URE capital, it will be liable for Improperly
2. Payable in cash, in property, or in stock Accumulated Earnings Tax (IAET) equal to
to all shareholders on the basis of 10% of the improperly accumulated taxable
outstanding stock held by them income. [Sec. 29 (A), NIRC] Moreover, it will
3. Resolution by the Board also be liable to pay a penalty imposed by the
SEC. [SEC Memo. Circ. No. 6, s. 2005]
Additional requirement for stock dividend
Forms of dividends
Approved by 2/3 of shareholders representing 1. Cash - Any cash dividend due on
the outstanding capital stock at a delinquent stock shall first be applied to
regular/special meeting called for that purpose the unpaid balance on the subscription
plus cost and expenses. [Sec. 42]
Note: The approval requirement for the 2. Stock - Stock dividends shall be
declaration of stock dividends underscores that withheld from the delinquent
the payment of dividends to a stockholder is not stockholder until his unpaid
a matter of right but a matter of consensus. subscription is fully paid; Stock
[Republic Planters Bank v. Agana, 269 SCRA dividends cannot be issued to a person
1 (1997)] who is not a stockholder in payment of
services rendered.
A corporation must have also a sufficient 3. Property - Stockholders are entitled
number of authorized unissued shares for to dividends pro-rata based on the
distribution to stockholders (if ACS is total number of shares and not on the
insufficient, corporation must apply for increase amount paid on shares.
in capital stock).
Cash Dividends vs. Stock Dividends
Source of dividends
Cash Stock
Dividends may only be declared out of actual Dividends Dividends
and bona fide unrestricted retained earnings.
Voting Board of Board of
Prohibition imposed by law on UREs of a requirements Directors Directors + 2/3 of
stock corporation for issuance stockholders
Stock corporations are prohibited from Effect on Shall be Shall be withheld

retaining surplus profits in excess of 100% of delinquent applied to from the
their paid-in capital stock, except: stock the unpaid delinquent
1. When justified by definite corporate balance on stockholder until
expansion projects or programs the his unpaid
approved by the BOD; subscription subscription is
2. When the corporation is prohibited plus cost paid
under any loan agreement with any and
financial institution or creditor from expenses
declaring dividends without its consent,
Page 74 of 494
Cash Stock 10. Power to Enter into Management

Dividends Dividends Contract
Can this be No [Sec. 34] No, since this General Rule: No management contract shall
issued by requires be entered into for a period longer than 5 years
Executive stockholders’ for any one term.
Committee? approval [Sec.
34] Exception: Service contracts or operating
agreements which relate to exploration,
Rule on shares of stock issued to pay for development, exploitation or utilization of
services natural resources may be entered into for such
periods as may be provided in the pertinent
A corporation may legally issue shares of stock laws and regulations.
in consideration of services rendered to it by a
person not a stockholder, or in payment of its Requirements
indebtedness. But a share of stock thus issued 1. Approval by majority vote of the BOD
should be part of: of both the managing and the managed
1. The original capital stock of the corporation
corporation upon its organization; or 2. Approval by shareholders owning at
2. The stocks issued when the least the majority of the outstanding
increase of the capitalization of a capital stock or at least a majority of
corporation is properly authorized. the members of both the managing and
the managed corporation
In other words, it is the shares of stock that
are ORIGINALLY ISSUED by the However, the contract must be approved by 2/3
corporation and FORMING PART OF THE of stockholders owning outstanding capital
CAPITAL that can be exchanged for cash or stock/members of the managed corporation
services rendered, or property; that is, if the when:
corporation has original shares of stock unsold 1. Stockholders representing the same
or unsubscribed, either coming from the interest of both the managing and
original capitalization or from the increased managed corporations own more than
capitalization. STOCK DIVIDENDS are issued 1/3 of the total outstanding capital
only to stockholders because only stockholders stock entitled to vote of the managing
are entitled to dividends. [Nielson and Co. v. corporation (Interlocking stockholders);
Lepanto Consolidated Mining, G.R. No. L- or
21601., (1968)]. 2. A majority of the members of the BOD
of the managing corporation also
Rule on the receipt of dividends in case of constitute a majority of the BOD of the
mortgaged or pledged shares managed corporation (Interlocking
directors).
General Rule: The mortgagor or the pledgor
has the right to receive the dividends. For the managed corporation: There is a
need for such ratification as such contract is a
Exception: When the mortgagor or pledgor deviation from the principle that corporate
defaults and the mortgagee or pledgee affairs shall be managed by the BOD.
acquires the pledged stocks and the transfer is
recorded in the books of the corporation, the For the managing corporation: There is a
mortgagee or pledgee is entitled to receive the need for such ratification as such contract is a
dividends. deviation from the principle that the BOD would
devote their time and resources for the affairs
of the corporation. [Villanueva]
Page 75 of 494
11. Doctrine of Individuality of 13. Ultra Vires Doctrine
Subscription
Ultra Vires Acts
The Doctrine of Individuality of Subscription
states that a subscription is one entire and Those acts which a corporation is not
indivisible whole contract. It cannot be empowered to do or perform because they are
divided into portions. outside or beyond the express and implied
powers conferred by its Articles of
Consequently, where stocks were subscribed Incorporation or by the Revised Corporation
and part of the subscription contract price was Code, or not necessary or incidental to the
not paid, the whole subscription shall be exercise of the powers so conferred [Sec. 44].
considered delinquent, and not only the
shares which correspond to the amount not Types of Ultra Vires Acts
paid. 1. Acts done beyond the powers of the
corporation as provided in the law or its
Nevertheless, holders of subscribed shares not articles of incorporation;
fully paid, which are not delinquent, shall have 2. Ultra Vires acts of officers and not of
all the rights of a stockholder. [Sec. 71] the corporation
1. SEC has opined that the entire 3. Acts or contracts, which are per se
subscription, although not yet fully illegal as being contrary to law
paid, may be transferred to a single [Villanueva].
transferee, who as a result of the
transfer must assume the unpaid Kinds of Ultra Vires acts by reason
balance. [SEC Opinion, 9 Oct. 1995] 1. By reason of Lack of Authority (ultra
2. It is necessary, however, to secure the vires acts)
consent of the corporation because 2. By reason of Illegality (illegal acts)
such transfer contemplates a novation
which under Art. 1293 (NCC) cannot be Basis Ultra Vires Illegal Acts
made without consent of the creditor. Acts
12. Doctrine of Equality of Shares Lawfulness Lack of Illegality;

authority; Unlawful;
The doctrine of equality of shares states that all Not against law,
stocks issued by the corporation are presumed necessarily morals,
equal with the same privileges and liabilities, unlawful, public policy,
provided that the Articles of Incorporation is but outside and public
silent on such differences [Sec. 6]. the powers order
of the
There is a presumption of equality of the rights corporation
and features of shares when nothing is
expressly provided to the contrary.
Ratification Can be Cannot be
1. Although a corporation has the power ratified ratified
to classify its shares of stock, provide
for preferences and other conditions,
no presumption should exist to
distinguish one share from another. Binding power Can bind Cannot bind
2. Sec. 6 of the RCC now requires that the the parties the parties
distinguishing features be stated also if wholly or Void and
in the Certificate of Stock. partially cannot be
executed validated
Page 76 of 494
of the corporation’s business, incident to the
Basis Ultra Vires Illegal Acts
express powers and reasonably necessary to
Acts
their exercise. If so, the corporation has the
Enforceability Voidable, Void and power to do it; otherwise, not [Montelibano v.
and may be cannot be Bacolod-Murcia Milling Co., Inc., G.R. No. L-
enforced validated 15092 (1962)].
by Acts or
performanc contracts, Consequences of Ultra Vires Acts
e, which are per
ratification, se illegal as Ultra vires acts, which are per se illegal are
or estoppel being generally void.
contrary to
law. While ultra vires acts which are not illegal but
are within the scope of the articles of
Examples 1.Acts \\Acts or incorporation, are merely voidable and may
done contracts, become binding and enforceable when ratified
beyond the which are per by stockholders [Montelibano v. Bacolod-
powers of se illegal as Murcia Milling Co., Inc., G.R. No. L-15092
the being (1962)].
corporation contrary to
as provided law. Consequences of Ultra Vires Acts with
in the law respect to contracts:
or its 1. Executed contract – courts will not set
articles aside or interfere with such contracts;
incorporati 2. Executory contracts – no enforcement
on; even at the suit of either party (void and
2. Ultra unenforceable);
Vires acts 3. Partly executed and partly executory –
of officers principle of “no unjust enrichment at
and not of expense of another” shall apply;
the 4. Executory contracts apparently
corporation authorized but Ultra Vires – the
principle of estoppel shall apply.
Applicability of the Ultra Vires Doctrine Remedies in case of Ultra Vires Acts
1. State
The application of the Ultra Vires Doctrine is a a. Dissolution of the corporation
question, in each case, of the logical relation of thru a quo warranto proceeding
the act to the corporate purpose expressed in b. Injunction
the charter. c. Suspension or revocation of
the certificate of registration by
It may fairly be considered within the charter the SEC
powers if: 2. Stockholders
1. The act is one which is lawful in itself, a. Injunction
and not otherwise prohibited; b. Derivative suit
2. The act is done for the purpose of c. Ratification (except when a 3rd
serving corporate ends; AND party is prejudiced or the act is
3. The act reasonably tributary to the illegal)
promotion of those ends, in a 3. Creditors - Nullification of contract in
substantial, and not in a remote and a. fraud of creditors
fanciful sense.
The test to be applied is whether the act in

question is in direct and immediate furtherance
Page 77 of 494
14. Trust Fund Doctrine Note: Rescission of a subscription agreement
is not one of the instances when distribution of
The Trust Fund Doctrine states that the capital capital assets and property of the corporation
stock, properties, and other assets of a is allowed (Ibid).
corporation are regarded as equity in trust for
the payment of corporate creditors. Exceptions to the Trust Fund Doctrine ---
When Distribution of Corporate Capital is
All funds received by the corporation in Allowed
payment of the shares of stock shall be held in
trust for the corporate creditors and other The Trust Fund Doctrine, first enunciated by
stockholders of the corporation. this Court in the 1923 case of Philippine Trust
Co. v. Rivera is the underlying principle in the
No fund shall be used to buy back the issued procedure for the distribution of capital assets,
shares of stock except only in instances embodied in Corporation Code, which allows
specifically allowed by the Corporation Code the distribution of corporate capital only in three
[Boman Environmental Development instances:
Corporation v. CA, G.R. No. 77860 (1988)]. 1. Amendment of the AOI to reduce the
authorized capital stock,
Effects of the trust fund doctrine 2. Purchase of redeemable shares by the
corporation, regardless of the
Dividends must never impair the subscribed existence of unrestricted retained
capital stock and must only be declared out of earnings, and
unrestricted retained earnings (URE) 3. Dissolution and eventual liquidation of
[Philippine Trust Co. v. Rivera, G.R. No. L- the corporation.
19761 (1923)].
The creditors of a corporation have the right to
Subscription commitments cannot be assume that so long as there are debts and
condoned or remitted. liabilities, the BOD will not use corporate
assets to purchase its own shares of stock or
General Rule: The corporation cannot buy its to declare dividends to its stockholders when
own shares using the subscribed capital as the the corporation is insolvent [Steinberg v.
consideration therefore [NTC v. CA. G.R. No. Velasco, G.R. No. L-30460 (1929)].
127937 (1999)].
Scope of the Trust Fund Doctrine
Exceptions:
1. Redeemable shares may be acquired The trust fund doctrine is NOT limited to
even without surplus profit for as long reaching the stockholder’s unpaid
as it will not result to the insolvency of subscriptions.
the Corporation;
2. In cases that the corporation conveys A corporation has no legal capacity to release
its stocks in payment of a Debt; or an original subscriber to its capital stock from
3. In a Close corporation, a stockholder the obligation of paying for his shares, in whole
4. may demand the payment of the fair or in part, without a valuable consideration, or
value of shares regardless of existence fraudulently, to the prejudice of creditors.
of retained earnings for as long as it will
not result to the insolvency of the The creditor is allowed to maintain an action
corporation upon any unpaid subscriptions and thereby
5. Rescission of a subscription steps into the shoes of the corporation for the
agreement is not allowed since it will satisfaction of its debt.
effectively result in the unauthorized
distribution of the capital assets and The scope of the doctrine when the corporation
property of the corporation [Ong Yong is insolvent also encompasses other property
v. Tiu, G.R. No. 144476 (2003)].
Page 78 of 494
and assets generally regarded in equity as a Nature of the Rights of Members
trust fund for the payment of corporate debts.
The eleemosynary nature (i.e. charitable) of
All assets and property belonging to the every non-stock corporation defines the
corporation held in trust for the benefit of characteristic of membership therein as being
creditors that were distributed or in the essentially personal in character and therefore
possession of the stockholders, regardless of essentially non-transferable in nature.
full payment of their subscriptions, may be [Villanueva]
reached by the creditor in satisfaction of its
claim. Sec. 88 of the Revised Corporation Code
specifically provides that in a non-stock
To make out a prima facie case in a suit against corporation, the right of members of any class
stockholders of an insolvent corporation to or classes to vote “may be limited, broadened
compel them to contribute to the payment of its or denied to the extent specified in the articles
debts by making good unpaid balances upon of incorporation or the by-laws.”
their subscriptions, it is only necessary to
establish that the stockholders have not in Political Rights
good faith paid the issue price of the stocks of
the corporation [Donnina Halley v. Printwell, Shareholders have a right to:
Inc., G.R. No. 157549 (2011)]. 1. Requisitions and/or attend meetings
2. Elect and be elected as directors
H. Stockholders and Members 3. Approve the exercise of special
corporate powers
4. Access basic corporate information
1. Fundamental Rights of a
Stockholder Economic Rights
1. Direct or indirect participation in
management [Sec. 6] Shareholders individually have a right to:
2. Voting rights [Sec. 6] 1. Dividends
3. Right to remove directors [Sec. 27] 2. Transfer shares
4. Proprietary rights 3. Right to receive residual assets,
(a) Right to dividends [Sec. 42 and following the corporation's partial or full
70] liquidation
(b) Appraisal rights [Sec. 80]
(c) Right to issuance of stock Affiliation Rights
certificate for fully paid shares
[Sec. 63] As a rule, a corporation issues shares to
(d) Proportionate participation in the investors without regard to their personal
distribution of assets in liquidation circumstances. Similarly, shareholders may
[Sec. 139] transfer shares to investors without consent or
(e) Right to transfer of stocks in over the objection of the other shareholders.
corporate books [Sec. 62]
(f) Pre-emptive right [Sec. 38] Right to Institute Court Action
5. Right to inspect books and records
[Sec. 73] Shareholders or members may institute a court
6. Right to be furnished with the most action to protect, and seek redress for violation
recent financial statements/reports of their rights. (See Remedial Rights)
[Sec. 73]
7. Right to recover stocks unlawfully sold
for delinquent payment of subscription
[Sec. 68]
8. Right to file individual suit,
representative suit and derivative suits
Page 79 of 494
2. Participation in Management concerns the validation of such
secured and submitted proxies;
a. Proxy 2. The SEC’s power to pass upon the
validity of proxies in relation to election
controversies has effectively been
Stockholders and members may vote in person
withdrawn, tied as it is to its abrogated
or by proxy in all meetings [Sec. 57].
quasi-judicial powers, and has been
transferred to the RTC Special
The word “proxy” may be understood in two
Commercial Courts pursuant to the
ways:
terms of Sec. 5.2 of the Securities
Regulation Code;
1. First, it may refer to the person duly
authorized by a stockholder to vote in
Note: The SEC has the power to impose or
his behalf in a stockholder’s meeting
recommend new modes by which a
2. Secondly, it may refer to the document
stockholder, member, director, or trustee may
which evidences this authority
attend meetings or cast their votes, as
[Campos].
technology may allow, taking into account the
company’s scale, number of shareholders or
Right to Issue a Proxy
members, structure, and other factors
consistent with the basic right of corporate
The right to issue a proxy is vested with public
suffrage [Sec. 179].
interest when it comes to stock corporations.
The fact that the jurisdiction of the RTC Special
1. Although it may be regulated under the
Commercial Courts is confined to the voting on
by-laws, it cannot be denied, since it is
election of officers, and not all matters which
an aspect of ownership interest of
may be voted upon by stockholders, elucidates
stockholders.
that the power of the SEC to regulate proxies
2. However, the right of members to vote
remains extant and could very well be
by proxy may be denied under the
exercised when stockholders vote on matters
articles of incorporation or bylaws of a
other than the election of directors [GSIS v.
non-stock corporation [Sec. 88;
C.A., G.R. No. 183905 (2009)].
Campos].
Requisites for a Valid and Enforceable b. Voting Trust

Proxy:
1. It must be in writing; Voting Trust
2. Signed by the stockholder or member
of record; and An arrangement created by one or more
3. Filed with the corporation before th stockholders:
scheduled meeting with the Corporate 1. For the purpose of conferring upon a
Secretary [Sec. 57]. trustee or trustees the right to vote and
other rights pertaining to the shares;
Period of Effectivity 2. For a period not exceeding 5 years at
any time [Sec. 58].
Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is Under a voting trust agreement, a stockholder
intended. No proxy shall be valid and effective of a stock corporation parts with the naked or
for a period longer than five (5) years at any legal title, including the power to vote, of the
one time [Sec. 57]. shares and only retains the beneficial
ownership of the stock.
Procedural Matters Relating to Proxies:
1. Proxy solicitation” involves the
securing and submission of
proxies,while “proxy validation”
Page 80 of 494
Voting trustee 3. Anti-competitive mergers and
acquisitions;
A share owner vested with colorable and naked 4. Violations of nationality and capital
title of the shares covered for the primary requirements; or
purpose of voting upon stocks that he does not 5. Fraud [Sec. 58].
own.
c. Cases When Stockholders’ Actions is
A voting trust agreement shall be ineffective Required
and unenforceable unless:
1. It is in writing and notarized; Right to Vote in Stock Corporations
2. It specifies the terms and conditions General Rule: Each share of stock is entitled
thereof; and to vote [Sec. 6].
3. A certified copy of such agreement is
filed with the corporation and with the 1. The stockholder of record has the right
SEC [Sec. 58]. to participate and to vote [Villanueva].
Period of Effectivity 2. Executors, administrators, receivers,
and other legal representatives duly
General Rule: Voting trust agreements shall appointed by the court may attend or
not exceed five (5) years at any one time. vote in behalf of stockholders without
need of any written proxy [Sec. 54].
Exception: Voting trust agreements may be for
a period exceeding five (5) years if it is Exception: Unless otherwise provided in the
specifically required as a condition in a loan articles of incorporation or declared delinquent
agreement. under Sec. 66 [Sec. 6].
This envisions a situation where a corporation Note: “Outstanding capital stock” means stocks
obtains a loan from a bank, but as a condition entitled to VOTE.
of the loan, the majority stockholders would be
required to execute voting trust agreements to Nevertheless, ALL stockholders, regardless of
ensure that the lending institution would have a classification as voting or non-voting, are
controlling interest in the corporate votes to be entitled to vote in the following matters:
taken that may affect the ability of the
borrowing corporation to pay. The voting trust 1. Amendment of the articles of
agreement therefore constitutes further incorporation;
security to the lending institution [Villanueva]. 2. Adoption and amendment of by-laws;
3. Sale, lease, exchange,
Such voting trust agreement conditioned upon mortgage,pledge, or other disposition
a loan agreement, however, shall automatically of all or substantially all of the corporate
expire upon full payment of the loan [Sec. 58]. property;
4. Incurring, creating, or increasing
Unless the agreement is expressly renewed, all bonded indebtedness;
rights granted in the agreement shall 5. Increase or decrease of capital stock;
automatically expire at the end of the agreed 6. Merger or consolidation;
period [Sec. 58]. 7. Investment of corporate funds in
another corporation or business; and
Limitation of a Voting Trust Agreement Dissolution of the corporation [Sec. 6].
No voting trust agreement shall be entered into
for the purposes of circumventing the laws Right to Vote in Non-Stock Corporations
against:
In non-stock corporations, the voting rights
1. Anti-competitive agreements; attach to membership. Members vote as
2. Abuse of dominant position; persons, in accordance with the law and the by-
laws of the corporation.
Page 81 of 494
General Rule: Each member shall be entitled 1. Majority of the BOD/BOT ; and
to one vote [Sec. 88]. 2. Stockholders owning at least the
majority of the outstanding capital
Executors, administrators, receivers, and other stock/majority of members. Includes all
legal representatives duly appointed by the stockholders with or without voting
court may attend or vote in behalf of rights.
stockholders without need of any written proxy
[Sec. 54]. c. Revocation of delegation to the BOD of
the power to amend or repeal or adopt by-
Exception: Unless the right to vote is limited, laws [Sec. 47]
broadened, or denied in the articles of Requires approval by stockholders owning at
incorporation or by-laws. least the majority of the outstanding capital
stock/majority of members.
When the principle for determining the quorum
for stock corporations is applied by analogy to d. Granting compensation other than per
non-stock corporations, only those who are diems to directors [Sec. 29]
actual members with voting rights should be Compensation other than per diems may be
counted [Sec. 88]. granted to directors by the vote of the
stockholders representing at least a majority of
d. Manner of Voting the outstanding capital stock.
1. By a majority vote e. Fixing the consideration for no-par

shares [Sec. 61]
a. Power to enter into management When the Articles of Incorporation or the BOD
contracts [Sec. 43] does not provide for the value of no-par shares,
the value of such shares shall be determined
General Rule: Requires approval by — by the stockholders representing at least
1. Majority of the BOD/BOT ; and majority of the outstanding capital stock.
2. Stockholders owning at least the
majority of the outstanding capital f. Voluntary dissolution of a corporation
stock/majority of members of both the where no creditors are affected [Sec. 134]
managing and the managed If dissolution of a corporation DOES NOT
corporation. prejudice the rights of any creditor having a
claim against it, the dissolution may be effected
Exceptions: In the ff. cases, at least 2/3 votes by:
of the outstanding capital stock/membership of 1. Majority vote of the BOD/BOT ; and
the managed corporation are required. BUT 2. A resolution adopted by the affirmative
only majority vote is required for the managing vote of the stockholders owning at least
corporation: majority of the outstanding capital
stock/membership.
1. Where a stockholder/s representing
the same interest of both the managing g. Revocation of Delegation to the Board
and the managed corporations own or of the Power to Amend/Repeal/Adopt By-
control more than one-third (1/3) of the laws [Sec. 47]
total outstanding capital stock entitled Any power delegated to the board of directors
to vote of the managing corporation; or or trustees to amend or repeal the by-laws or
2. Where a majority of the members of the to adopt new by-laws shall be considered
managing corporation’s BOD also revoked when stockholders representing a
constitute a majority of the managed majority of the outstanding capital stock, or a
corporation’s BOD. majority of the members shall so vote at a
regular or special meeting.
b. Amendments to by-laws [Sec. 47]
Requires approval by:
Page 82 of 494
h. Calling a Meeting to Remove Directors Amendment of Articles of Incorporation of
or Trustees [Sec. 27] close corporations [Sec. 102]
A special meeting for the purpose of removing An affirmative vote of at least two-thirds (2/3) of
any director or trustee must be called: the outstanding capital stock, whether with or
1. By the secretary on order of the without voting rights, at a meeting duly called
president; or for the purpose is required to make any
2. Upon written demand of stockholders amendment to the AOI which seeks to:
representing or holding at least a 1. Delete or remove any provision; or
majority of the outstanding capital 2. Reduce a quorum of the voting
stock, or a majority of the members requirement stated in the articles shall
entitled to vote [Sec. 27]. require.
2. By a two-thirds vote c. Delegating the power to amend or

repeal by-laws or adopt new by-laws [Sec.
a. Removal of directors or trustees [Sec. 47]
27]
Delegation to the BOD/BOT of the power to
Any director or trustee of a corporation may be amend or repeal by-laws or adopt new by-laws
removed from office by a vote of — requires approval by at least 2/3 of the
1. The stockholders holding or outstanding capital stock/membership.
representing at least two-thirds (2/3) of
the outstanding capital stock; or Note: Revocation of the delegation requires
2. At least two-thirds (2/3) of the only majority vote of the outstanding capital
members entitled to vote in a non- stock/membership.
stock corporation.
d. Extending/shortening corporate term
Note: Such removal shall take place — [Sec. 36]
1. Either at a regular meeting of the
corporation or at a special meeting 1. Requires approval by a majority vote of
called for the purpose; and the BOD/BOT and approval by at least
2. In either case, after previous notice to 2/3 of the outstanding capital
stockholders or members of the stock/membership.
corporation of the intention to propose 2. Includes all stockholders with or
such removal at the meeting. without voting rights.
b. Amendment of AOI [Sec. 15] e. Increasing/decreasing capital stock

[Sec. 37]
Amendment of the AOI may be made by:
1. 1. A majority vote of the BOD/BOT; and Requires approval by:
2. The vote or written assent of the 1. A majority vote of the BOD; and
stockholders representing at least two- 2. At least 2/3 of the outstanding capital
thirds (2/3) of the outstanding capital stock.
stock, or by the vote or written assent Includes all stockholders with or without voting
of at least two-thirds (2/3) of the rights.
members.
f. Incurring, creating, increasing bonded
Note: Includes all stockholders with or without indebtedness [Sec. 37]
voting rights.
1. Requires approval by a majority vote of
the BOD and approval by at least 2/3 of
the outstanding capital stock.
Page 83 of 494
2. Includes all stockholders with or k. Power to enter into management
without voting rights. contracts [Sec. 43]
g. Issuance of shares not subject to pre- General Rule: Requires approval by —

emptive right [Sec. 38] 1. Majority of the BOD/BOT ; and
2. Stockholders owning at least the
Shares in good faith in exchange for property majority of the outstanding capital
or previously incurred indebtedness with the stock/majority of members of both the
approval of the stockholders representing 2/3 managing and the managed
of the outstanding capital stock are not subject corporation.
to pre-emptive rights.
Exceptions: In the ff. cases, at least 2/3 votes
h. Sale/disposition of all or substantially of the outstanding capital stock/membership of
all corporate assets [Sec. 39] the managed corporation are required. BUT
only majority vote is required for the managing
A sale of all or substantially all the corporation’s corporation:
properties and assets, including its goodwill 1. Where a stockholder/s representing
must be authorized by the vote of: the same interest of both the managing
1. The stockholders representing at least and the managed corporations own or
2/3 of the outstanding capital stock; or control more than one-third (1/3) of the
2. At least 2/3 of the members, in a total outstanding capital stock entitled
stockholders’ or members’ meeting to vote of the managing corporation; or
duly called for the purpose. 2. Where a majority of the members of the
managing corporation’s BOD also
Note: In non-stock corporations where there constitute a majority of the managed
are no members with voting rights, the vote of corporation’s BOD.
at least a majority of the trustees in office will
be sufficient authorization. l. Ratifying contracts with respect to
dealings with directors/trustees [Sec. 31]
i. Investment of funds in another A contract of the corporation with one or more
business [Sec. 41] of its directors is voidable, at the option of such
Requires approval by: corporation, unless all of the following
1. A majority vote of the BOD/BOT; and 2. conditions are present:
At least 2/3 of the outstanding capital 1. The presence of such director/trustee
stock/membership. in the board meeting in which the
contract was approved was not
Includes all stockholders with or without voting necessary to constitute a quorum for
rights. such meeting;
2. The vote of such director or trustee was
However, where the investment by the not necessary for the approval of the
corporation is reasonably necessary to contract;
accomplish its primary purpose as stated in the 3. The contract is fair and reasonable
articles of incorporation, the approval of the under the circumstances;
stockholders or members shall not be
necessary. In case of corporations vested with public
interest, material contracts are approved by at
j. Stock Dividend declaration [Sec. 42] least two-thirds (2/3) of the entire membership
Requires approval by: of the board, with at least majority of the
1. A majority vote of the BOD; and independent directors voting to approve the
2. At least 2/3 of the outstanding capital material contract; and
stock. In case of an officer, the contract has been
Note: Declaration of cash and property previously authorized by the BOD.
dividends only requires BOD/BOT approval.
Page 84 of 494
Note: Where any of the first 3 conditions in the p. Incorporation of a religious society
preceding paragraph is absent, in the case of a [Sec. 114]
contract with a director/trustee, the contract
may be ratified by the vote of the stockholders General Rule: Any religious society or
representing 2/3 of the outstanding capital religious order, or any diocese, synod, or
stock or at least 2/3 of the members in a district organization of any religious
meeting called for that purpose. denomination, sect, or church, may incorporate
Full disclosure of the adverse interest of the Upon written consent and/or by an affirmative
directors/trustees involved is made at such vote at a meeting called for the purpose of at
meeting and the contract is fair and reasonable least 2/3 of its membership;
under the circumstances [Sec 31]. For the administration of its temporalities or for
the management of its affairs, properties, and
m. Ratifying acts of disloyalty of a estate
director [Sec. 33]
General Rule: Where a director, by virtue of Exception: Unless forbidden by the
such office, acquires a business opportunity, Constitution, rules, regulations or discipline of
which should belong to the corporation, the religious denomination, sect, or church of
thereby obtaining profits to the prejudice of which it is a part, or by competent authority.
such corporation, the director must account for
and refund to the latter all such profits. q. Voluntary dissolution of a corporation
where creditors are affected [Sec. 135]
Exception: His act may be ratified by a vote of
the stockholders owning or representing at If dissolution of a corporation may prejudice the
least 2/3 of the outstanding capital stock. rights of any creditor having a claim against it,
the dissolution may be effected by:
n. Plan of merger or consolidation [Sec. 1. Majority vote of the BOD/BOT ; and
76] 2. A resolution adopted by the affirmative
Requires approval by: vote of the stockholders representing
1. Majority of each of the BOD/BOT of the at least 2/3 of the outstanding capital
constituent corporations of the plan of stock/membership.
merger or consolidation; and
2. At least 2/3 of the outstanding capital 3. By cumulative voting
stock/membership of each corporation
at separate corporate meetings duly Election of Directors or Trustees [Sec. 23]
called. Stockholders entitled to vote may:
a. Vote such number of shares for as
Amendments to the plan of the merger or many persons as there are directors to
consolidation also requires approval by be elected [Straight Voting];
majority vote of each of the BOD and 2/3 vote b. Cumulate said shares and give 1
of the outstanding capital stock/membership of candidate as many votes as the
each corporation voting separately. number of directors to be elected
Includes all stockholders with or without voting multiplied by the number of the shares
rights. owned [Cumulative Voting for 1
Candidate]; or
o. Plan of distribution of assets in non- c. Distribute them on the same principle
stock corporations [Sec. 94] among as many candidates as may be
seen fit [Cumulative Voting by
The BOT shall, by majority vote, adopt a Distribution].
resolution recommending a plan of distribution
which shall be approved by at least 2/3 of the Note: No delinquent stock shall be voted [Sec.
members with voting rights. 23].
Page 85 of 494
Members of a non-stock corporation may cast 3. Such declaration is essentially within
as many votes as there are trustees to be the business judgment of the board
elected but may not cast more than 1 vote for of directors.
1 candidate. 4. The fact that profits have accrued in the
prosecution of the corporate business
Nominees for directors or trustees receiving does not necessarily impose upon the
the highest number of votes shall be declared directors the duty to declare them as
elected dividends [Villanueva].
Upon written consent and/or by an affirmative Exception: Stock corporations are prohibited
vote at a meeting called for the purpose of at from retaining surplus profits in excess of 100%
least 2/3 of its membership; of their paid-in capital stock.
For the administration of its temporalities or for
the management of its affairs, properties, and Exception to the exception: Stock
estate corporations may retain surplus profits in
excess of 100% of their paid-in capital stock:
3. Proprietary rights 1. When justified by definite corporate
expansion projects or programs
a. Rights to Dividends approved by the board of directors; or
2. When the corporation is prohibited
Concept of Dividends under any loan agreement with
A dividend is — financial institutions or creditors,
1. That portion of the profits of the whether local or foreign, from declaring
corporation set aside, declared and dividends without their consent, and
ordered by the directors to be paid such consent has not yet been
ratably to the stockholders on demand secured; or
or at a fixed time. 3. When it can be clearly shown that such
2. Payment to the stockholders as a retention is necessary under special
return upon their investment circumstances obtaining in the
[Villanueva] corporation, such as when there is
need for special reserve for probable
Discretion of Board to Declare Dividends contingencies [Sec. 42].
General Rule: The board of directors of a stock Note: Right to dividends vests upon declaration
corporation may declare dividends out of the so whoever owns the stock at the record date
unrestricted retained earnings to all fixed by the board owns the dividends.
stockholders on the basis of outstanding stock Subsequent transfer of stock would not carry
held by them [Sec. 42]. with it the right to dividends UNLESS agreed
upon by the parties
Upon lawful declaration of dividends by the
BOD, dividends become a debt owing to the Unrestricted Retained Earnings
shareholders. No revocation can be made. The board of directors of a stock corporation
may declare dividends out of the unrestricted
Exceptions: retained earnings [Sec. 42]
1. Dividends are revocable if NOT yet
announced or communicated to the Retained Earnings
stockholders.
2. Stock dividends, even if already
declared, may be revoked prior to Represents the accumulation of net profits
actual issuance since these are not of the corporation over the years and
distributions but merely likewise losses sustained, as well as
representations of changes in the deductions made upon previous dividends
capital structure. declared.
Page 86 of 494
2. Extension of the term of corporate
Restricted Unrestricted
existence [Sec. 80], including
Retained Earnings Retained Earnings
Voluntary Dissolution (by Petition or by
Represents the That portion which is shortening corporate term); [Secs. 134-
accumulation of net free and can be 136]
profits of the declared as 3. Extension and shortening of corporate
corporation over the dividends to term, which is an error carried over
years and likewise stockholders. from the old Corporation Code.
losses sustained, as 4. Sale, lease, exchange, transfer,
well as deductions mortgage, pledge or other disposition
made upon previous of all or substantially all of the corporate
dividends declared. property and assets [Sec. 80];
5. Merger or consolidation [Sec. 80];
6. Investment of corporate funds for any
In case of no-par value shares, the entire purpose other than the primary
consideration received by the corporation for purpose of the corporation [Sec. 80];
its no-par value shares shall be treated as 7. Increasing or decreasing capital stock.
capital and shall not be available for distribution Note: Can be exercised only if the
as dividends [Sec. 6]. increase of capital stock results in or
has the effect of changing or restricting
b. Appraisal Right the rights of any stockholder or class of
shares, or of authorizing preferences in
Appraisal Right — The right to withdraw from any respect superior to those of
the corporation and demand payment of the outstanding shares of any class [Sec.
fair value of the shares after dissenting from 80(a)].
certain corporate acts involving fundamental
changes in corporate structure [Sec. 80]. Manner of Exercise of Right
Who is Entitled to Exercise Requirements for Exercise of Appraisal

A prejudiced stockholder who dissented in the Right [Secs. 81 & 85]
meeting where the proposal was approved. 1. Stockholder must have voted against
the corporate act.
Mere silence or abstention does not suffice. 2. Stockholder must make a written
The stockholder must have voted against the demand on the corporation within 30
corporate action [Villanueva]. days after the vote was taken for
payment of the fair value of his shares.
Amount Paid to Dissenting Stockholder a. Failure to make demand within
Provided that the corporation has sufficient such period shall be deemed
unrestricted retained earnings, the amount waiver of the appraisal right.
paid to the stockholder is the fair value of his 3. Stockholder must submit his certificate
shares as of the day prior to the date on which of stock to the corporation for notation
the vote was taken, excluding any appreciation within 10 days after demand for
or depreciation in anticipation of the corporate payment.
action [Sec. 81] a. Otherwise, right to appraisal
may be terminated at the
When Available [Sec. 80] option of corporation.
1. If amendment of AOI results in:
a. Changing or restricting the Effect of Demand for Payment [Sec. 82]
rights of any stockholder or 1. ALL rights accruing to such shares,
class of shares; or including voting and dividend rights,
b. Authorizing preferences in any shall be suspended, EXCEPT the right
respect superior to those of of such stockholder to receive payment
outstanding share of any class of the fair value thereof.
[Sec. 80];
Page 87 of 494
2. There is RESTORATION of voting and 4. Where SEC determines that such
dividend rights if the dissenting stockholder is not entitled to appraisal
stockholder is not paid the value of his right
shares within 30 days after the award 5. Failure to submit the certificates of
stock representing his shares to the
Note: The award shall be — corporation for notation as dissenting
1. Agreed upon by the dissenting shares within 10 days after demand for
stockholder and corporation; or payment, at the option of the
2. Determined and appraised by 3 corporation [Sec. 85].
disinterested persons, if they fail to
agree within 60 days from the date Effect of Extinguishment of Right
when the corporate action was 1. Right of dissenting stockholder to be
approved, these 3 persons shall be; paid for the fair value of his shares shall
a. One named by the cease;
shareholder; 2. His status as a stockholder shall
b. One named by the corporation; thereupon by restores; and
c. One chosen by a & b. 3. All dividend distributions which would
d. The findings of the majority of have accrued on his shares shall be
the appraisers shall be final paid to him [Sec. 83]
[Sec. 81].
3. If shares represented by the c. Right to Inspect
certificates bearing a notation that such
shares are dissenting shares are Basis of Right
transferred, and the certificates As the beneficial owners of the business, the
consequently cancelled: stockholders have the right to know the
a. The rights of the transferor as a financial condition and management of
dissenting stockholder under corporate affairs.
this Title [Appraisal Right] shall
cease; and A stockholder’s right of inspection is based on
b. The transferee shall have all his ownership of the assets and property of the
the rights of a regular corporation. Therefore, it is an incident of
stockholder; and all dividend ownership of the corporate property, whether
distributions which would have this ownership or interest is termed an
accrued on such shares shall equitable ownership, a beneficial ownership, or
be paid to the transferee [Sec. quasi-ownership. Such right is predicated upon
85]. the necessity of self-protection [Gokongwei Jr.
v. SEC, G.R. No. L-45911 (1979)].
When Right to Payment Ceases [Sec. 83,
generally] Records Subject to Inspection [Sec. 73]
Every corporation shall keep and carefully
General Rule: No demand for payment may preserve at its principal office all information
be withdrawn. relating to the corporation including, but
not limited to:
Exceptions: The right may be extinguished in a. The AOI and by-laws of the corporation
the following instances — and all their amendments;
1. Withdrawal of demand by the b. The current ownership structure and
stockholders WITH CONSENT of the voting rights of the corporation,
corporation including lists of stockholders or
2. Abandonment of the proposed members, group structures, intra-group
corporate action relations, ownership data, and
3. Disapproval by SEC of the proposed beneficial ownership;
corporate action where such approval
is necessary
Page 88 of 494
c. The names and addresses of all the d. The inspecting or reproducing party
members of the BOD or BOT and the shall remain bound by confidentiality
executive officers; rules under prevailing laws such as
d. A record of all business transactions; 1. Intellectual Property Code
e. A record of the resolutions of the BOD 2. Data Privacy Act
or BOT and of the stockholders or 3. Securities Regulation Code
members; 4. Rules of Court
f. Copies of the latest reportorial
requirements submitted to the Test to Determine Whether the Purpose of
Commission; and Inspection is Legitimate
g. The minutes of all meetings of
stockholders or members, or of the A legitimate purpose is one which is genuine to
BOD/BOT, which shall set forth – the interests of the stockholders as such and
1. Time and place of the meeting not contrary to the interests of the corporation
held; [Gokongwei Jr. v. SEC, G.R. No. L-45911
2. How meeting was authorized; (1979)].
3. Notice given;
4. Agenda; Legitimacy of purpose is always assumed, and
5. Whether meeting was regular it is up to the corporation or officer to claim and
or special (its object, if special) prove otherwise
6. Those present and absent
7. Every act done or ordered Valid defenses of the officer or agent of the
done at the meeting corporation who refuses to allow
h. Upon demand of the inspection and/or reproduction of records:
BOD/BOT/stockholder or member – a. The person demanding to examine and
1. Time when any director, copy excerpts from the corporation’s
trustee, stockholder or member records and minutes has improperly
entered or left the meeting used any information secured through
must be noted in the minutes; any prior examination of the records or
2. The yeas and nays must be minutes of such corporation or of any
taken on any motion or other corporation;
proposition, and a record b. The person was not acting in good
thereof carefully made; faith;
3. The protest of a director, c. The person was not acting for a
trustee, stockholder or member legitimate purpose in making the
on any action or proposed demand to examine or reproduce
action corporate records;
d. The person is a competitor, director,
Requirements for the exercise of the right officer, controlling stockholder or
of inspection [Sec. 73] otherwise represents the interests of a
a. The records are open to inspection competitor [Sec. 73].
only by any director, trustee,
stockholder, or member of the Remedies when inspection is refused
corporation in person or by a a. Mandamus
representative. Under the Rules of Court, the writ of
b. Must be done at reasonable hours on mandamus should be granted only if
business days. the court is satisfied that justice so
c. A demand in writing may be made by requires [Sec. 8, Rule 65].
the director, trustee, or stockholder at b. Injunction
their expense, for such records or c. Action for damages [Sec. 73]
excerpts from the records. d. File an action under Sec. 161 to impose
a penal offense by fine
Page 89 of 494
The unjustified failure or refusal by the
Preemptive Right Right of First
corporation, or by those responsible for
Refusal
keeping and maintaining corporate
records, to comply with the pertinent shall enjoy the stipulations, by
rules and provisions of the RCC on preemptive right to which the right is
inspection and reproduction of records subscribe to all strictly construed
shall be punished with a fine ranging issues or disposition against the right of
from P10,000.00 to P200,000.00, at of shares of any person to dispose or
the discretion of the Court. class, in proportion deal with their
to their respective property.
When the violation of this provision is shareholdings [Sec.
injurious or detrimental to the public, 38].
the penalty is a fine ranging from
P20,000.00 to P400,000.00 [Sec. 161] A right claimed A right exercisable
e. Summary investigation by SEC [Sec. against the against another
73] corporation on stockholder on his
unissued shares of shares of stock
d. Preemptive Right its capital stock, and [Villanueva].
likewise on treasury
Definition shares held by the
corporation
Pre-emptive right — An option or privilege of [Villanueva].
an existing stockholder to subscribe to a
proportionate part of shares subsequently
issued by the corporation before the same can Purpose of Pre-emptive Right
be disposed of in favor of others.
● This right includes all issues and The purpose is to enable the shareholder to
disposition of such shares any class. retain his proportionate control in the
● It is a common law right and may be corporation and to retain his equity in the
exercised by stockholders even without surplus.
legal provision.
Scope of Pre-emptive Right
Basis of Preemptive Right: Preservation of
the existing proportional rights of the The broad phrase “all issues or disposition of
stockholders [Campos]. shares of any class” is construed to include:
1. New shares issued in pursuance of
Distinguished from Right of First Refusal increase in capital stock or from the
unissued shares which form part of the
ACS; and also
Preemptive Right Right of First 2. Treasury shares
Refusal a. Treasury shares would come
under the term “disposition”
Grants stockholders Grants the existing b. Likewise considering that it is
the option to stockholders or the not included among the
subscribe to all new corporation the exceptions enumerated
issues or disposition option to purchase therein, where pre-emptive
of shares of any the issued and right shall not extend, the
class, in proportion outstanding shares intention is to include it in its
to their respective of the transferring application [SEC Opinion, 14
shareholdings [Sec. stockholder [Sec. January 1993].
38]. 97]
All stockholders of a Arises only by virtue

stock corporation of contract
Page 90 of 494
Limitations to Exercise of Pre-emptive right Waiver/Denial of Preemptive Right
[Sec. 38] Allowed by the Code provided that it is made in
1. Such pre-emptive right shall NOT the AOI
extend to shares to be issued in 1. Denial made through AOI would bind
compliance with laws requiring stock present and subsequent shareholders;
offerings or minimum stock ownership 2. 2/3 vote of all voting and non-voting
by the public; shares is necessary before waiver is
2. It shall also NOT extend to shares to be binding;
issued in good faith with the approval 3. Result of non-placement of waiver
of the stockholders representing 2/3 of clause in AOI: Waiver shall not bind
the outstanding capital stock, in future stockholders but only those who
exchange for property needed for agreed to it.
corporate purposes or in payment of a
previously contracted debt; The shareholders must be given reasonable
3. It shall not take effect if denied in the time within which to exercise their preemptive
AOI or an amendment thereto; rights.
4. If one shareholder does not want to 1. Upon expiration of such period, any
exercise his pre-emptive right, the shareholders who did not exercise
other shareholders are not entitled to such will be deemed to have waived it.
purchase the corresponding shares of 2. This is necessary so as to not hinder
the shareholder who declined. But if future financing plans of the
nobody purchased the same and later corporation. Some new investors may
on the board re-issued the shares, the be willing to invest only if all the new
pre-emptive right applies [Sundiang shares will be issued to them
and Aquino]. [Campos].
Exceptions to the Pre-emptive Right e. Right to Vote

1. When such right is denied by the
articles of incorporation or an Nature of the Right to Vote
amendment thereto; and
2. Shares to be issued: The right to vote is inherent and incidental to
a. In compliance with laws requiring the ownership of corporate stocks [Tan v.
stock offerings or minimum stock Sycip, 499 SCRA 216 (2016)].
ownership by the public; or
b. To shares to be issued in good faith It represents the right of a stockholder to
with the approval of the participate in the control and management of
stockholders representing ⅔ of the the corporation. However, it is subject to the
outstanding capital stock in rule of the majority [Villanueva].
exchange for:
1. Property needed for General Rule: No share may be deprived of
corporate purposes; or voting rights.
2. In payment of a previously
contracted debt [Sec. 38]. Exception: Shares classified and issued as
“preferred” or “redeemable” may be deprived of
Remedies in case of unwarranted denial voting rights: Provided, that there shall always
1. Injunction be a class or series of shares with complete
2. Mandamus voting rights [Sec. 6].
3. The suit should be individual and not
derivative because the wrong done is Non-Voting Shares Non-voting shares are not
to the stockholders individually entitled to vote, except as provided for in par. 3
4. SEC can cancel shares if the 3rd party of Sec. 6. Holders of nonvoting shares shall
is not innocent nevertheless be entitled to vote on the
following matters:
Page 91 of 494
a. Amendment of the articles of upon by the registered stockholder of
incorporation; record [Cojuangco, Jr. v. Roxas, 195
b. Adoption and amendment of bylaws; SCRA 797 (1991)].
c. Sale, lease, exchange, mortgage,
pledge, or other disposition of all or Exception: The PCGG may exercise
substantially all of the corporate the voting right on sequestered shares
property; whenever it is able to comply with the
d. Incurring, creating, or increasing “two-tiered” or “public character” tests:
bonded indebtedness; 1. The two-tiered test is satisfied
e. Increase or decrease of authorized when:
capital stock; a. Prima facie evidence
f. Merger or consolidation of the show that the wealth
corporation with another corporation or and/or the shares are
other corporations; indeed illgotten; and
g. Investment of corporate funds in b. There is demonstrated
another corporation or business in imminent danger of
accordance with this Code; and dissipation of the
h. Dissolution of the corporation. assets.
2. The two-tiered test does not
Except in the above cases, the vote necessary apply when the funds are prima
to approve a particular corporate act shall be facie public in character or, at
deemed to refer only to stocks with right to vote least, affected with public
[Sec. 6]. interest [Republic v.
COCOFED, 372 SCRA 462
Rules Applicable to Certain Kinds of Shares (2001)].
a. Preferred or redeemable shares may
be deprived of the right to vote [Sec. 6]. h. When shares are jointly owned by
b. Fractional shares of stock cannot be two or more persons, the consent of all
voted. the co-owners shall be necessary.
c. Treasury shares have no voting rights
as long as they remain in the treasury. Exception: There is a written proxy,
d. No delinquent stock shall be voted signed by all the co-owners,
[Sec. 70]. authorizing one or some of them or any
e. A transferee of stock cannot vote if other person to vote such share or
his transfer is not registered in the shares: Provided, That when the
stock and transfer book of the shares are owned in an “and/or”
corporation. capacity, any one of the joint owners
f. In case a stockholder grants security can vote said shares or appoint a proxy
interest in his or her shares in stock therefor [Sec. 55].
corporations, the stockholder-grantor
shall have the right to attend and vote 4. Remedial Rights
at meetings of stockholders.
a. Individual Suit
Exception: The secured creditor is
expressly given by the A suit brought by the shareholder in his own
stockholdergrantor such right in writing name against the corporation when a wrong is
which is recorded in the appropriate directly inflicted against him.
corporate books [Sec. 54]
Where a stockholder or member is denied the
g. The sequestration of shares does not right of inspection, his suit would be individual
entitle the government to exercise acts because the wrong is done to him personally
of ownership over the shares. Even and not to the other stockholders or the
sequestered shares may be voted corporation [Ago Realty & Development
Page 92 of 494
Corporation v. Dr. Angelita F. Ago, G.R. No. An individual stockholder is permitted to
211203 (2019)] institute a derivative suit on behalf of the
corporation wherein he holds stock in order to
b. Representative Suit protect or vindicate corporate rights, whenever
officials of the corporation refuse to sue or are
A suit brought by the stockholder in behalf of the ones to be sued or hold the control of the
himself and all other stockholders similarly corporation. In such actions, the suing
situated when a suit brought by the stockholder is regarded as the nominal party,
shareholder in his own name against the with the corporation as the party in interest
corporation when a wrong is directly inflicted [Ago Realty & Development Corporation v. Dr.
against him or a wrong is committed against a Angelita F. Ago, G.R. No. 211203 (2019)].
group of stockholders.
Derivative Suit as Defined in
Where the wrong is done to a group of Jurisprudence
stockholders, as where preferred stockholders'
rights are violated, a class or representative It is a suit by a shareholder to enforce a
suit will be proper for the protection of all corporate cause of action.
stockholders belonging to the same group [Ago
Realty & Development Corporation v. Dr. It is a condition sine qua non that the
Angelita F. Ago, G.R. No. 211203 (2019)] corporation be impleaded as a party because
not only is the corporation an indispensable
c. Derivative Suit party, but it is also the present rule that it must
be served with process.
The right of stockholders to bring derivative
suits is not based on any provision of the The judgment must be made binding upon the
Corporation Code or the Securities Regulation corporation in order that the corporation may
Code but is a right that is implied by the get the benefit of the suit and may not bring
fiduciary duties that directors owe corporations subsequent suit against the same defendants
and stockholders. Derivative suits are, for the same cause of action [Chua v. C.A.,
therefore, grounded not on law, but on equity G.R. No. 150793 (2004)].
[Ago Realty & Development Corporation v. Dr.
Angelita F. Ago, G.R. No. 211203 (2019)]. It is a suit brought by one or more
stockholders/members in the name and on
Definition behalf of the corporation to redress wrongs
committed against it or protect/vindicate
A suit brought by a stockholder for and on corporate rights whenever the officials of the
behalf of the corporation for its protection from corporation refuse to sue, or the ones to be
the wrongful acts committed by the sued, or has control of the corporation
directors/trustees of the corporation, when the [Sundiang and Aquino].
stockholder finds that he has no redress
because the directors/trustees, are the ones The institution of a derivative suit need not be
vested by law to decide whether or not to sue. preceded by a board resolution.
It is an action brought by minority shareholders Since the board is guilty of breaching the trust
in the name of the corporation to redress reposed in it by the stockholders, it is but logical
wrongs committed against the corporation, for to dispense with the requirement of obtaining
which the directors refuse to sue. from it authority to institute the case and to sign
the certification against forum shopping [Ago
It is a remedy designed by equity and has been Realty & Development Corporation v. Dr.
the defense of minority shareholders against Angelita F. Ago, G.R. No. 211203 (2019)].
abuses by the majority [Villanueva].
Page 93 of 494
Business Judgment Rule action occurred and the time the action
was filed;
As a general rule, when a wrong is committed 2. That the stockholder or member
against a corporation, whether to bring the suit exerted all reasonable efforts, and
or not primarily lies within the discretion and alleges the same with particularity in
exercise of business judgment of the BOD. the complaint, to exhaust all remedies
available under the AOI, by-laws, laws
But where corporate directors are guilty of a or rules governing the corporation or
breach of trust, not of mere error of judgment partnership to obtain the relief he
or abuse of discretion, and intra-corporate desires;
remedy is futile or useless, a shareholder may 3. That there is no appraisal right
institute a derivative suit in behalf of himself available for the act(s) complained of;
and other stockholders and for the benefit of 4. That the suit is not a nuisance or
the corporation. harassment suit; [Rule 8, Interim Rules
of Procedure for Intra-Corporate
The purpose of the suit is to bring about a Controversies]
redress of the wrong inflicted directly upon the 5. The action brought by the
corporation and indirectly upon the stockholder/member must be “in the
stockholders [Bitong v. C.A., G.R. No. 123553 name of the corporation or association”
(1998)]. [implied from 1st par. of Rule 8, Sec. 1
of the Interim Rules; see also Florete v.
Parties to a Derivative Suit Florete, G.R. No. 174909 (2016)].
In a derivative suit, the suing stockholder is
merely a nominal party, while the corporation is The action brought by the shareholder
the real party in interest. Thus, the action must or member must be in the name of the
be brought for the benefit and in the name of corporation or association [Villamor v.
the corporation [Villanueva]. Umale, G.R. No. 172843 (2014)].
The corporation is an unwilling co-plaintiff [Rule 6. Exhaustion of intra-corporate

3 Section 10, Rules of Court]. remedies, i.e., has made a demand on
● The corporation should be made a the BOD for the appropriate relief but
party to the suit, either as plaintiff or the latter has failed or refused to heed
defendant, for res judicata to apply. his plea; and
● BUT the personal injury suffered by the
stockholder cannot disqualify him from 7. The cause of action devolves on the
filing a derivative suit in behalf of the corporation, the wrongdoing or harm
corporation. It merely gives rise to an having been, or being caused to the
additional cause of action for damages corporation and not to the particular
against the erring corporate officers stockholder bringing the suit [Lisam
[Gochan v. Young, G.R. No. 131889 Enterprises, Inc., represented by Lolita
(2001)]. A. Soriano and Lolita A. Soriano v.
Banco de Oro Unibank, Inc. et al., G.R.
Proper Forum for Derivative Suits No. 143264 (2012)].
The Regional Trial Courts exercise jurisdiction Note: The “wrong” contemplated in a derivative
over derivative suits [Sec. 5.2., Securities suit is one in which the injury alleged be indirect
Regulation Code]. as far as the stockholders are concerned and
direct only insofar as the corporation is
Requisites of Derivative Actions concerned [de Leon]. The reliefs sought pertain
1. That the person instituting the action be to the corporation [Symaco Trading Corp. v.
a stockholder or member at the time Santos, G.R. No. 142474 (2005)].
the acts or transactions subject of the
Page 94 of 494
Stockholder may commence a derivative suit A subscription contract is unconditional (i.e.,
“for mismanagement, waste or dissipation of obligation to pay is not subject to any
corporate asset because of a special injury to contingency) and indivisible (as to the amount
him for which he is otherwise without redress and transferability). [Fua Cun v. Summers
[Yu v. Yukayguan, G.R. No. 177549 (2009)]. (1923)] Hence, if the subscriber paid 20% of his
subscription, he is not entitled to the issuance
Exhaustion of Administrative Remedies of certificates corresponding to 20% of the
shares.
General Rule: A derivative suit can only be
filed when there has been a showing of Unpaid claim refers to any unpaid subscription,
exhaustion of intra-corporate remedies. and not to any indebtedness which a
subscriber may owe the corporation rising from
Exception: But where corporate directors are any other transaction. [China Banking Corp. v.
the ones guilty of a breach of trust, and intra- C.A., G.R. No. 117604 (1997)]
corporate remedy is futile or useless,
shareholders may institute a derivative suit for Liability to the Corporation for Interest on
the benefit of the corporation without having to Unpaid Subscription if so Required by the
exhaust intra-corporate remedies in order to By-Laws [Sec. 65]
bring about a redress of the wrong inflicted
directly upon the corporation and indirectly General Rule: Subscribers for stock are NOT
upon the stockholders [Villanueva]. liable to pay interest on his unpaid subscription.
Requisites of a Derivative Suit according to Exception: If so required in the by-laws at the

Jurisprudence [SMC v. Kahn, G.R. No. 85339 rate fixed in the by-laws. If no rate is fixed in the
(1989)] subscription contract, the prevailing legal rate
a. The party bringing the suit should be a shall apply. [Sec. 65]
shareholder as of the time of the act or
transaction complained of the number Notes: Transfer for consideration of treasury
of his shares not being material; shares is a sale (or disposition) by the
b. He has tried to exhaust intra-corporate corporation (not subscription). A transfer of
institute the relevant suit against the previously issued shares by a stockholder to a
erring parties. third person in a sale (or disposition). Transfer
of unissued shares is subscription.
5. Obligations of a Stockholder
Shareholders are not creditors of the
Liability to the Corporation for Unpaid corporation with respect to their shareholdings
Subscription [Sec. 66] thereto and the principle of compensation or
Payment of unpaid subscription or any set-off has no application.
percentage thereof, together with any interest
accrued shall be made: Subscription contract is NOT required to be in
1. On the date specified in the writing.
subscription contract; or
2. On the date stated in the call made by Liability for Watered Stocks [Sec. 64]
the board.
Definition
Failure to pay on such date shall:
1. Render the entire balance due and Watered Stocks — Shares issued as fully paid
payable; and when in truth no consideration is paid, or the
2. Make the stockholder liable for interest consideration received is known to be less than
at the legal rate on such balance, the par value or issued value of the shares.
unless a different interest rate is [Sec. 64]
provided in the subscription contract.
Page 95 of 494
See b. Watered stocks under 10. Capital
Affairs The sanction can be found in Sec. 158 which
can be:
Liability of directors or officers [Sec. 64] 1. A fine from P5,000 and not more than
P1,000 for each day of continuing
Any director or officer of a corporation who: violation but in no case to exceed
1. Consents to the issuance of stocks for P2,000,000;
a consideration less than its par or 2. An issuance of a permanent cease-
issued value; and-desist order, suspension or
2. Consents to the issuance of stocks for revocation of the certificate of
a consideration other than cash, valued incorporation, or dissolution and
in excess of its fair value; or forfeiture of corporate assets.
3. Having knowledge of the insufficient
consideration, does not file a written Liability for Assuming to Act as a
objection with the corporate secretary. Corporation Knowing it to be Without
Authority
The director or officer shall be liable to the
corporation or its creditors, SOLIDARILY with All persons who assume to act as a
the stockholder concerned to the corporation corporation, knowing it to be without authority
and its creditors for the difference in value. to do so, shall be liable as general partners for
[Sec. 64] all debts, liabilities and damages incurred or
arising as a result thereof.
Value received at Php XXX
When any such ostensible corporation is sued
time of issuance of
on any transaction entered or on any tort
the stock
committed by it as a corporation, it shall not be
Par or issued value (XXX) allowed to use as a defense its lack of
corporate personality.
Liability for watered Php XXX
stock Anyone who assumes an obligation to an
ostensible corporation cannot resist
performance thereof on the ground that there
Personal liability of corporate directors, was in fact no corporation. [Sec. 20]
trustees or officers attaches when they consent
to the issuance of watered down stocks or
6. Meetings
when, having knowledge of such issuance, do
not file with the corporate secretary their written
objection. [SPI Technologies Inc. V. Mapua, Kinds of Meetings
G.R. No. 191154 (2014)] Meetings of directors, trustees, stockholders,
or members may be regular or special [Sec.
Liability for Dividends Unlawfully Paid 48].
The director, trustee or officer shall be liable as When [Sec. 52]

a trustee for the corporation and must account
for the profits, which would otherwise have Regular meetings of directors or trustees shall
accrued to the corporation when: be held monthly unless the by-laws provide
1. A director, trustee willfully attempts to otherwise.
acquire, or acquires any interest
adverse to the corporation Special meetings of the BOD or trustees may
2. In respect of any matter which has be held at any time upon the call of the
been reposed in them in confidence, president or as provided in the by-laws.
and upon which, equity imposes a
disability upon themselves to deal in
their own behalf. [Sec. 30]
Page 96 of 494
Where [Sec. 53] address administrative, technical, and logistical
issues [SEC Memo. Circ. No. 6, s. 2020].
Meetings of directors or trustees of
corporations may be held anywhere in or Attendance and Voting by Proxy
outside of the Philippines unless the by-laws
provide otherwise. Directors or trustees cannot attend or vote by
proxy at board meetings [Sec. 52].
Notice
In the Philippines, teleconferencing and
Notice of regular or special meetings stating videoconferencing of members of BOD of
the date, time and place of the meeting must private corporations is a reality, in light of
be sent to every director or trustee at least two Republic Act No. 8792. The Securities and
(2) days* prior to the scheduled meeting, Exchange Commission issued SEC
unless a longer time is provided by the by-laws. Memorandum Circular No. 15, series of 2001,
on November 30, 2001, providing the
Note: This was previously just one day, under guidelines to be complied with in relation to
the old corporation code. such conferences [Expertravel and Tours, Inc.
v. CA, G.R. No. 152392 (2005)].
A director or trustee may waive this
requirement, either expressly or impliedly [Sec. Mandatory Recusal
52].
A director or trustee who has a potential
Attendance in Meetings interest in any related party transaction must
recuse from voting on the approval of the
In the old corporation code, directors or related party transaction without prejudice to
compliance with the requirements of Section
trustees cannot be represented or voted by
proxies at board meetings [Sec. 25, CC]. 31 of this Code [Sec. 52].
Allowable Alternative Modes of Attendance Who Presides
The chairman, or in his absence, the president

Directors or trustees who cannot physically
attend or vote at board meetings can shall preside at all meetings of the directors or
trustees as well as of the stockholders or
participate and vote through:
1. Remote communication such as members, unless the bylaws provide otherwise
[Sec. 53].
videoconferencing, teleconferencing;
or
2. Other alternative modes of Quorum
communication that allow them
reasonable opportunities to participate Quorum to Transact Corporate Business
[Sec. 52]. General Rule: Majority of the directors or
trustees as stated in the articles of
If a director or trustee intends to participate in incorporation, shall constitute a quorum to
a meeting through remote communication, transact corporate business [Sec. 52].
he/she shall notify in advance the Presiding
Officer and the Corporate Secretary of his/her Exception: Unless the articles of incorporation
intention. The Corporate Secretary shall note or the by-laws provide for a GREATER
such fact in the Minutes of the meeting. majority.
Corporations may issue their own internal
procedures for the conduct of board meetings
through remote communication or other
alternative modes of communication to
Page 97 of 494
Decisions Reached by Majority of Summary of Board Meetings
Quorum Regular Special
Meeting Meeting
General Rule: Every decision reached by at
least a majority of the directors or trustees Description Meetings Meetings
constituting a quorum shall be valid as a that are fixed that are
corporate act. by law or as called for a
provided by special
Exception: A vote of a majority of all the the by-laws purpose
members of the board is required in case of
election of officers [Sec. 52] and in other Date and Held Held anytime
instances provided for in the Revised time monthly, upon call
Corporation Code, such as, amendment to the unless
articles of incorporation and by-laws, and other otherwise
instances set forth in Secs. 36, 37, 39, and 41. provided by
the by-laws
In Case of Death of Board Members
Venue Anywhere in and outside the
In stock corporations: Shareholders may Philippines, unless
generally transfer their shares. Thus, on the otherwise provided by by-
death of a shareholder, the executor or laws
administrator duly appointed by the Court is
Notice Date, time, and place of the
vested with the legal title to the stock and
meeting must be sent to
entitled to vote it. Until a settlement and division
every member at least two
of the estate is effected, the stocks of the
(2) days prior to the
decedent are held by the administrator or
scheduled meeting, unless a
executor.
longer time is provided in
the by-laws
In non-stock corporations: Membership in
and all rights arising from a non-stock
This requirement may be
corporation are personal and non-transferable,
waived
unless the articles of incorporation or the
bylaws of the corporation provide otherwise. In Attendance Proxy not allowed
other words, the determination of whether or
not “dead members” are entitled to exercise Voting through remote
their voting rights (through their executor or communication is allowed
administrator), depends on the Articles of (videoconferencing,
Incorporation or by-laws [Tan v. Sycip, G.R. teleconferencing, etc.)
No. 153468 (2006)].
Who The chairman and in his
Rule on Abstention Presides absence, the president
No inference can be drawn in a vote of Quorum General Rule: Majority of

abstention. When a director or trustee the directors or trustees, as
abstains, it cannot be said that he intended to stated in the AOI
acquiesce in the action taken by those who
voted affirmatively. Neither, for that matter, can Exception: Unless the AOI
such inference be drawn from the abstention or the by-laws provide for a
that he was abstaining because he was not GREATER majority
then ready to make a decision [Lopez v. Ercita,
G.R. No. L-32991 (1972)].
Page 98 of 494
I. Board of Directors and In case of close corporations, the
stockholders may manage the business of
Trustees the corporation rather than by a BOD, if the
Articles of Incorporation so provide [Sec.
1. Repository of Corporate Powers 96]
Doctrine of centralized management The power to purchase real property is vested

in the BOD or trustees. While a corporation
Board is Seat of Corporate Powers may appoint agents to negotiate for the
purchase of real property needed by the
General Rule: Unless otherwise provided in corporation, the final say will have to be with
this Code, the board of directors or trustees the board, whose approval will finalize the
shall exercise the corporate powers, conduct transaction [Spouses Constantine Firme v.
all business, and control all properties of the Bukal Enterprises and Development
corporation [Sec. 22]. Corporation, G.R. No. 146608 (2003)].
Governing Body of the Corporation Indisputably, one of the rights of a stockholder

It is well established in corporation law that the is the right to participate in the control or
corporation can act only through its board of management of the corporation. This is
directors in the case of stock corporations, or exercised through his vote in the election of
board of trustees in the case of non-stock directors because it is the BOD that controls or
corporations [De Leon]. manages the corporation [Gamboa v. Teves,
G.R. No. 176579 (2011)].
Exceptions:
Limitations on powers of BOD/BOT
In case of an Executive Committee duly 1. Limitations imposed by the Constitution,
authorized in the by-laws [Sec. 34]; statutes, articles of incorporation or by-
laws;
Exception to Exception: The following may 2. Certain acts of the corporation that require
not be delegated to the executive committee: joint action of the stockholders and BOD:
1. Approval of any action for which a. Removal of director [Sec. 27]
shareholders' approval is also b. Amendments of Articles of
required; Incorporation [Sec. 15]
2. The filing of vacancies in the board; c. Fundamental changes [Sec. 37]
3. The amendment or repeal of by-laws or d. Declaration of stock dividends
the adoption of new by-laws; [Sec. 42]
4. The amendment or repeal of any e. Entering into management
resolution of the board which by its contracts [Sec. 43]
express terms is not so amendable or f. Fixing of consideration of no- par
repealable; and shares [Sec. 61]
5. A distribution of cash dividends to the g. Fixing of compensation of directors
shareholders [Sec. 34.] [Sec. 29]
3. Cannot exercise powers notpossessed by
In case of a contracted manager which may the corporation.
be an individual, a partnership, or another
corporation Principle on Delegation of Board
Power
Note: In case the contracted manager is
another corporation, the special rule in Sec. 43 Under Sec. 23 (now Sec. 22, RCC), the power
applies. and the responsibility to decide whether the
corporation should enter a contract that will
bind the corporation is lodged in the board,
Page 99 of 494
subject to the articles of incorporation, by-laws, Term v. Tenure
or relevant provisions of law.
Term Tenure
However, just as a natural person may
Time during which The period within
authorize another to do certain acts for and on
the officer may claim which the director
his behalf, the BOD may validly delegate some
to hold the office as holds office,
of its functions and powers to officers,
of right and fixes the including the
committees, or agents. The authority of such
interval after which holdover period after
individuals to bind the corporation is generally
the several the end of his term
derived from law, corporate by-laws or
incumbents shall
authorization from the board, either expressly
succeed one
or impliedly by habit, custom or acquiescence
another.
in the general course of business [People’s
Aircargo v. CA, G.R. No. 117847 (1998)]. Not affected by the Includes holdover
holdover
Corporate powers may be directly conferred
upon corporate officers or agents by statute,
the articles of incorporation, the by-laws, or by Fixed by statute, and May be shorter or
resolution or other act of the board of directors it does not change longer (in case of a
[Citibank, N.A. v. Chua, 220 SCRA 75 (1993)]. simply because the holdover) than the
office may have term for reasons
2. Tenure, Qualifications, and become vacant, nor within or beyond the
because the power of the
Disqualifications of Directors
incumbent holds incumbentMay be
over in office beyond shorter or longer (in
a. Tenure the end of the term case of a holdover)
due to the fact that a than the term for
Directors – Term of 1 year from among the successor has not reasons within or
holders of stocks registered in the corporation’s been elected and beyond the power of
books [Sec. 22]. has failed to qualify. the incumbent
Trustees – Term not exceeding 3 years from
among the members of the corporation [Sec. [Valle Verde Country Club v. Africa, G.R. No.
22]. 151969 (2009)]
Holdover Principle Permanent representation not allowed in

BOD
Upon failure of a quorum at any meeting of the
stockholders or members called for an election, The board of directors of corporations must be
the directorate naturally holds over and elected from among the stockholders or
continues to function until another directorate members directors every year. Estoppel does
is chosen and qualified. not set in to legitimize what is wrongful (Grace
Each director and trustee shall hold office until Christian High School v. CA, G.R. No. 108905,
the successor is elected and qualified [Sec. October 23, 1997).
22].
b. Qualifications
The failure to elect does not terminate the
terms of incumbent officers nor dissolve the Director: Must own at least one (1) share of
corporation. stock.
Trustee: Must be a member of the corporation.
A director who ceases to own at least one (1)

share of stock or a trustee who ceases to be a
Page 100 of 494
member of the corporation shall cease to be Note: The foregoing is without prejudice to
such [Sec. 22]. qualifications or other disqualifications, which
the Commission, the primary regulatory
To be eligible as a director, what is material is agency, or the Philippine Competition
the legal title to, not beneficial ownership of, the Commission may impose in its promotion of
stock as appearing on the books of the good corporate governance or as a sanction in
corporation [Lee v. CA, G.R. No. 93695 its administrative proceedings.
(1992)].
An amendment to the corporation’s by-laws
Must be a natural person, of legal age, possess which renders a stockholder ineligible to be a
full legal capacity director, if he be also a director in a corporation
whose business is in competition with that of
Must not be convicted by final judgment of an the other corporation, has been sustained as
offense punishable by imprisonment for a valid. This is based upon the principle that
period exceeding 6 years [Sec. 26] where the director is so employed in the service
of a rival company, he cannot serve both, but
Other qualifications as may be prescribed in must betray one or the other. Such an
the by-laws of the corporation [Sec. 46]. amendment "advances the benefit of the
corporation and is good" [Gokongwei, Jr. v.
While additional qualifications may be SEC, G.R. No. L-45911 (1979)].
prescribed, this cannot conflict with the
requirements as set by the RCC. Note: See Sec. 160
Note: The RCC removed the requirement that 3. Requirement of Independent

majority of the directors or trustees must be Directors
residents of the Philippines.
Independent Directors
c. Disqualifications
An independent director is a person who, apart
A person shall be disqualified from being a from shareholdings and fees received from the
director, trustee, or officer of any corporation if, corporation, is independent of management
within five (5) years prior to the election or and free from any business or other
appointment as such, the person was: relationship which could or could reasonably
be perceived to materially interfere with the
a. Convicted by final judgment: exercise of independent judgment in carrying
1. Of an offense punishable by out the responsibilities as a director [Sec. 22].
imprisonment for a period exceeding six (6)
years;
2. For violating this Code; and
Requirement for Independent Directors
3. For violating Republic Act No. 8799,
Corporations vested with public interest are
otherwise known as “The Securities
now required to have independent directors
Regulation Code”; administratively liable for
constituting at least twenty percent (20%) of
any
the board [Sec. 22]. This is to promote good
governance.
b. Found administratively liable for any
offense involving fraud acts; and
These corporations include:
a. Corporations covered by the Securities
c. By a foreign court or equivalent foreign
Regulation Code, namely:
regulatory authority for acts, violations, or
1. Those whose securities are
misconduct similar to those enumerated in
registered with the Commission;
paragraphs (a) and (b) above [Sec. 26].
2. Corporations listed with an
exchange or with assets of at least Fifty
million pesos (P50,000,000.00); and
Page 101 of 494
3. Having two hundred (200) or more Rules Governing all Methods of Voting
holders of shares, each holding at least a. The total number of votes cast shall not
one hundred (100) shares of a class of exceed the number of shares owned by
its equity shares; the stockholders as shown in the books
b. Banks and quasi-banks, NSSLAs, of the corporation multiplied by the
pawnshops, corporations engaged in money whole number of directors to be elected
service business, pre-need, trust and b. No delinquent stock shall be voted
insurance companies, and other financial [Sec. 23].
intermediaries;
c. Other corporations engaged in business Straight Voting
vested with public interest like the above, as
may be determined by the Commission [Sec. Every stockholder may vote such number of
22]. shares for as many persons as there are
directors to be elected [Sec. 23].
Manner of Election
Cumulative Voting
Independent directors must be elected by the
shareholders present or entitled to vote in Cumulative Voting for One Candidate
absentia during the election of directors [Sec. A stockholder is allowed to concentrate his
22]. votes and give one candidate as many votes
as the number of directors to be elected
Independent directors shall be subject to rules multiplied by the number of his shares shall
and regulations governing their: equal [Sec. 23].
a. Qualifications, disqualifications, voting
requirements, duration of term and Illustration:
term limit, maximum number of board
memberships; and If there are 5 directors to be elected and Pedro,
b. Other requirements that the as shareholder, has 100 shares, Pedro can
Commission will prescribe to give 500 (5 x 100 shares) votes to just one
strengthen their independence and candidate.
align with international best practices
[Sec. 22]. Cumulative Voting by Distribution
4. Elections A stockholder may cumulate his shares by

multiplying the number of his shares by the
Number of Directors and Trustees number of directors to be elected and distribute
the same among as many candidates as he
Directors: Not more than fifteen (15) shall see fit [Sec. 23].
Trustees: May be more than fifteen (15) [Sec.
13 and 91] Illustration:
The RCC removed the minimum number of In the illustration above, Pedro instead may
directors which stood at five (5) under the old choose to give 100 votes to candidate 1, 100
code [Sec. 14, Old Corporation Code]. votes to candidate 2, 100 votes to candidate 3,
150 votes to candidate 4, and 50 votes to
Election of Directors or Trustees [Sec. 23] candidate 5.
Methods of Voting Quorum

a. Straight voting
b. Cumulative voting for one candidate At all elections of directors or trustees, there
c. Cumulative voting by distribution must be present, either in person or through a
representative authorized to act by written
proxy:
Page 102 of 494

a. Stock Corporations: The owners of b. The secretary, upon written
majority of the outstanding capital demand of the stockholders
stock representing or holding at least
b. Non-Stock Corporations: A majority of a MAJORITY of the capital
the members entitled to vote [Sec. 23]. stock or a MAJORITY of the
members entitled to vote;
It is necessary that there be a quorum. An 3. There must be previous notice to the
election without quorum is invalid. stockholders or members of the
intention to remove a director; and
If the owners of the majority of the outstanding 4. There must be a vote of the
capital stock or majority of the members stockholders representing 2/3 of
entitled to vote are not present in person, by outstanding capital stock or in case of
proxy, or through remote communication, or a nonstock corporation, 2/3 of
not voting in absentia at the meeting, such members entitled to vote.
meeting may be adjourned [Sec. 23].
New Power of the SEC under the Revised
Election Contests Corporation Code [Sec. 27]
All matters affecting the manner and conduct of The Commission shall, motu proprio or upon
the election of directors are properly verified complaint, and after due notice and
cognizable by the regular courts. Otherwise, hearing, order the removal of a director or
these matters may be brought before the SEC trustee elected despite the disqualification, or
for resolution based on the regulatory powers it whose disqualification arose or is discovered
exercises over corporations, partnerships, and subsequent to an election.
associations [SEC v. CA, 739 SCRA 99
(2014)]. The removal of a disqualified director shall be
without prejudice to other sanctions that the
5. Removal [Sec. 27] Commission may impose on the board of
directors or trustees who, with knowledge of
General Rule: Any Director or Trustee of a the disqualification, failed to remove such
corporation may be removed from office, with director or trustee. [Sec. 27]
or without cause. [Sec. 27]
6. Filling of Vacancies [Sec. 28]
Exception: If the director was elected by the
minority, there must be cause for removal Ways which the filling of a vacancy may
because the minority may not be deprived of occur:
the right to representation to which they may be 1. Expiration of term;
entitled to under Sec. 23 of the Code. [Sec. 27] 2. Removal;
3. Grounds other than the above, but the
Note: The right to representation refers to the remaining directors can constitute a
right to cumulative voting for one candidate. quorum.
4. Grounds other than the above, but the
Requisites for Removal: remaining directors cannot constitute a
1. It must take place either at a regular quorum for the purpose of filling the
meeting or special meeting of the vacancy;
stockholders or members called for the 5. By reason of an increase in the number
purpose; of directors or trustees.
2. A special meeting for the purpose of
removing directors or trustees must be
called by:
a. The secretary, on order of the
president; or
Page 103 of 494

Cause of Procedure 2. Emergency action is required to
Vacancy prevent grave, substantial, and
irreparable loss or damage to the
Expiration The election by stockholders shall corporation.
of term be held no later than the day of
such expiration at a meeting called
The action by the designated director or trustee
for that purpose.
shall be limited to the emergency action
Removal The election may be held on the necessary. [Sec. 28]
same day of the meeting
authorizing the removal and this Term of designated director or trustee
fact must be so stated in the
agenda and notice of said The term of the designated director or trustee
meeting. shall cease:
1. Within a reasonable time from the
termination of the emergency; or
Other The election must be held no later
2. Upon election of the replacement
grounds, than forty-five (45) days from the
but the time the vacancy arose.
director or trustee, whichever comes
remaining earlier. [Sec. 28]
directors
can 7. Compensation [Sec. 29]
constitute a
quorum General Rule: Directors or trustees are only
Other a. The vacancy must be filled by
entitled to reasonable per diems. They are not
grounds, the stockholders or members in a entitled to compensation as directors or
but the regular or special meeting for that trustees. [Sec. 29]
remaining purpose; or
directors b. In case of the necessity of Exceptions:
CANNOT emergency action, the vacancy a. When Articles of Incorporation, by-
constitute a may be temporarily filled from laws, or an advance contract provides
quorum: among the officers of the for compensation.
corporation by unanimous vote of b. Compensation other than per diems
the remaining directors or trustees.
may also be granted to directors by the
By reason Shall be filled only by an election vote of the stockholders representing
of an at a regular or at a special meeting at least a majority of the Outstanding
increase in of stockholders duly called for the Capital Stock or a majority of the
the number purpose, or in the same meeting members at a regular or special
of directors authorizing the increase of stockholders’ meeting.
or trustees directors or trustees if so stated in
the notice of the meeting.
Note: The total yearly compensation of
Note: In all elections to fill vacancies under this directors shall not exceed 10% of the net
section, the procedure set forth in Sections 23 income before income tax of the corporation
and 25 of the Revised Corporation Code shall during the preceding year. [Sec. 29]
apply. [Sec. 28]
Added in the RCC
Designation of director or trustee a. The directors or trustees shall NOT
participate in the determination of their
A vacancy may be temporarily filled from own per diems or compensation.
among the officers of the corporation by b. Corporations vested with public
unanimous vote of the remaining directors or interest shall submit to their
trustees when: shareholders and the Commission, an
1. The vacancy prevents the remaining annual report of the total compensation
directors from constituting a quorum; of each of their directors or trustees.
and
Page 104 of 494

Compensation of Directors as Corporate Duty of Diligence
Officers
The directors should not willfully and knowingly
The position of being Chairman and Vice- vote for or assent to patently unlawful acts of
Chairman, like that of treasurer and secretary, the corporation or act in bad faith or with gross
are not considered directorship positions, but negligence in directing the affairs of the
officership positions that would entitle the corporation. [Sec. 30]
occupants to compensation.
Note: The conditions for the application of Sec.
Likewise, the limitation placed under Sec. 30 31 (now Sec. 30, RCC) of the Corporation
(now Sec. 29, RCC) of the Corporation Code Code require factual foundations to be first laid
that directors cannot receive compensation out in appropriate judicial proceedings. Hence,
exceeding 10% of the net income of the concluding that a person breached fiduciary
corporation would not apply to the duties as an officer and member of the BOD of
compensation given to such positions since it a corporation without competent evidence
is being given in their capacity as officers of the thereon would be unwarranted and
corporation and not as board members. unreasonable. [Republic of the Philippines v.
[Western Institute of Technology v. Salas, G.R. Sandiganbayan (First Division) et al., G.R. No.
No. 113032 (1997)] 166859 (2011)]
8. Disloyalty Duty of Loyalty
Three-Fold Duty General Rule: Where a director, by virtue of

such office, acquires a business opportunity
In this jurisdiction, the members of the BOD which should belong to the corporation,
have a three-fold duty: duty of obedience, thereby obtaining profits to the prejudice of
duty of diligence, and duty of loyalty. such corporation, the director must account for
and refund to the latter all such profits.
1. Duty of Obedience - shall direct the
affairs of the corporation only in Exception: Unless the act has been ratified
accordance with the purposes for by a vote of the stockholders owning or
which it was organized; representing at least two-thirds (2/3) of the
2. Duty of Diligence - shall not willfully outstanding capital stock. [Sec. 33]
and knowingly vote for or assent to
patently unlawful acts of the Doctrine of Corporate Opportunity
corporation or act in bad faith or with
gross negligence in directing the affairs Unless his act is ratified, a director shall refund
of the corporation; and to the corporation all the profits he realizes on
3. Duty of Loyalty - shall not acquire any a business opportunity which:
personal or pecuniary interest in a. Corporation is financially able to
conflict with their duty as such directors undertake
or trustees. [Strategic Alliance b. From its nature, is in line with
Development Corp v. Radstock corporation’s business and is of
Securities Ltd., G.R. No. 178158 practical advantage to it; and
(2009)] c. One in which the corporation has an
interest or a reasonable expectancy.
Duty of Obedience
The rule shall be applied notwithstanding the
The Directors or Trustees and Officers should fact that the director risked his own funds in the
direct the affairs of the corporations only in venture. [Sec. 33]
accordance with the purposes for which it was
organized. By embracing the opportunity, the self-interest
of the officer or director will be brought into
Page 105 of 494

conflict with that of his corporation. Hence, the 10. Solidary Liabilities for Damages
law does not permit him to seize the
opportunity even if he will use his own funds in The directors and trustees are solidarily liable
the venture. [Sundiang & Aquino] for damages arising from the ff.
1. Willfully and knowingly voting for and
A director, trustee, or officer shall be liable as a assenting to patently unlawful acts of
trustee for the corporation and must account the corporation [Sec. 30];
for the profits which otherwise would have 2. Gross negligence or bad faith in
accrued to the corporation if: directing the affairs of the corporation
1. He attempts to acquire, or acquire any [Sec. 30];
interest adverse to the corporation 3. Acquiring any personal or pecuniary
in respect of any matter which has interest in conflict of duty [Sec. 30];
been reposed in them in confidence; 4. Consenting to the issuance of watered
and stocks, or, having knowledge thereof,
2. Upon which, equity imposes a disability failing to file objections with secretary
upon themselves to deal in their own [Sec. 64];
behalf. [Sec. 30] 5. Agreeing or stipulating in a contract to
hold himself liable with the corporation;
Note: Differences between Sec. 30 and Sec. or
33: 6. By virtue of a specific provision of law.
First, while both involve the same subject 11. Personal Liabilities
matter (business opportunity) they concern
different personalities; Sec. 33 is applicable
General rule: Members of the Board, who
only to directors and not to officers, whereas purport to act in good faith for and on behalf of
Sec. 30 applies to directors, trustees and
the corporation within the lawful scope of their
officers.
authority, are not liable for the consequences
of their acts. When the acts are of such nature
Second, Sec. 33 allows a ratification of a
and done under those circumstances, they are
transaction by a self-dealing director by vote of
attributed to the corporation alone and no
stockholders representing at least 2/3 of the
personal liability is incurred [Price v. Innodata
outstanding capital stock.
Phils., Inc., G.R. No. 178505 (2008)].
9. Business Judgment Rule Exception: When sufficient proof exists on

record that the officers acted fraudulently,
As a general rule, when a wrong is committed beyond his authority or when the officer agrees
against a corporation, whether to bring the suit to be personally liable on behalf of the
or not primarily lies within the discretion and corporation.
exercise of business judgment of the BOD.
Note: Members of the BOD who are also
1. But where corporate directors are guilty of a officers are held to a more stringent liability
breach of trust, not of mere error of judgment because they are in-charge of day-to-day
or abuse of discretion, and inta-corporate activities [Campos].
remedy is futile or useless, a shareholder may
institute a derivative suit in behalf of himself The provisions on seizing corporate
and other stockholders and for the benefit of opportunity and disloyalty [Secs. 30 and 33]
the corporation, shall also apply to corporate officers [Price v.
Innodata Phils., Inc., G.R. No. 178505 (2008)].
2. The purpose of the suit is to bring about a
redress of the wrong inflicted directly upon the
corporation and indirectly upon the
stockholders [Bitong v. C.A., G.R. No. 123553
(1998)].
Page 106 of 494

responsible for the violation or
Doctrine of Limited Doctrine of
indispensable to its commission; or
Liability Immunity
2. Anyone who shall aid, abet, counsel,
Shields the Protects a person command, induce, or procure any
shareholders from acting for and in violation of this Code, or any rule,
corporate liability behalf regulation, or order of the Commission
beyond their agreed corporation [Sec. 171-172].
contribution to the being
capital or personally liable for Criminal Liability of Corporate Agents
shareholding in the his authorized
corporation actions Criminal action is limited to the corporate
agents guilty of an act amounting to a crime
and never against the corporation itself.
Strains in Labor Law
Since the BOD is the repository of corporate
powers and acts as the agent of the
The Supreme Court appears to have different
corporation, the directors may be held
views regarding the personal liability of officers
criminally liable [Time Inc. v. Reyes, G.R. No.
when it comes to labor law violations:
L-28882 (1971)].
Absent proof that the manager exceeded his
Corporations, partnerships, associations, and
authority in dealing as regards the employee,
other juridical entities cannot be put to jail.
he cannot be held personally liable for the said
Hence, the criminal liability falls on the human
employee’s monetary compensation [Nicario v.
agent responsible for the violation of the Trust
NLRC, GR No. 125340 (1998)].
Receipts Law [Ong v. CA, G.R. No. 119858
(2003); see also Sec. 13, P.D. 115].
Officers can be held personally liable for 13th
month pay of employees after the corporation
has ceased to exist. This is because the 13. Special Fact Doctrine
officers are deemed to have acted on behalf of
the corporation [Restaurante Las Conchas v. General Rule:
Llego, 372 Phil 697 (1999)].
Majority view: Directors only owe their duty to
the corporation. They owe no fiduciary duty to
12. Responsibility for Crimes
stockholders, but they may deal with each
other at fair and reasonable terms, as if they
Since a corporation is a person by mere legal
were unrelated. No duty to disclose facts
fiction, it cannot be proceeded against
known to the director or officer. [Taylor v.
criminally because it cannot commit a crime in
Wright, 53 N.Y.S. 423 (1945)]
which personal violence or malicious intent is
required.
Note: Minority View (Realistic View)
recognizes the directors’ obligation to the
Note: However, violations of the Code, if it is
stockholders individually as well as collectively,
committed by a corporation, the same may,
and refuses to permit him to profit at the latter’s
after notice and hearing, be dissolved in
expense by the use of information obtained as
appropriate proceedings before the
a result of official position and duties.
Commission [Sec. 170].
Exception:
If the offender is a corporation, the penalty
may, at the discretion of the court, be imposed
Special Facts Doctrine
upon:
Conceding the absence of a fiduciary
1. Such corporation and/or upon its
relationship in the ordinary case, where special
directors, trustees, stockholders,
circumstances or facts are present which make
members, officers, or employees
Page 107 of 494

it inequitable for the director to withhold foregoing insiders. [Sec. 3.8, Securities
information from the stockholder – Regulation Code]
Courts nevertheless hold that the duty to
disclose arises and concealment is fraud 15. Contracts
Examples: a. By Self-Dealing Directors With the
Corporation [Sec. 31]
Concealment of the defendant-purchaser's
identity (the corporate officer had used an General Rule: A contract of the corporation
agent go-between to avoid detection of his with (1) one or more of its directors, trustees,
actions by the seller here) officers or their spouses and relatives within
the fourth civil degree of consanguinity or
Failure to disclose significant facts that affinity is voidable, at the option of such
materially affected the price of the stock. corporation. [Sec. 31]
[Strong v. Repide, 213 U.S. 419 (1909)]
Exception:
14. Inside Information Such contract is VALID if all of the following
conditions are present:
The fiduciary position of insiders, directors, and 1. The presence of such director or
officers prohibits them from using confidential trustee in the board meeting in which
information relating to the business of the the contract was approved was not
corporation to benefit themselves or any necessary to constitute a quorum for
competitor corporation in which they may have such meeting;
a mere substantial interest. 2. The vote of such director or trustee was
not necessary for the approval of the
Since loss and prejudice to the corporation is contract;
not a requirement for liability, the corporation 3. The contract is fair and reasonable
has a cause of action as long as there is unfair under the circumstances; and
use of inside information. 4. In case of corporations vested with
public interest: Material contracts are
It is inside information if it is not generally approved by at least two-thirds (2/3) of
available to others and is acquired because of the entire membership of the board,
the close relationship of the director or officer with at least a majority of the
to the corporation. independent directors voting to
approve the material contract; and
An INSIDER means: 5. In case of an officer: The contract has
1. The issuer; been previously authorized by the
2. A director or officer (or any person BOD. [Sec. 31]
performing similar functions) of, or a
person controlling the issuer; gives or Ratification
gave him access to material
information about the issuer or the In case of absence of the first three* conditions
security that is not generally available above, contract may be ratified if:
to the public; a. Stockholders representing at least 2/3
3. A government employee, director, or of the outstanding capital stock or at
officer of an exchange, clearing agency least 2/3 of the members in a meeting
and/or self-regulatory organization who called for the purpose voted to ratify the
has access to material information contract;
about an issuer or a security that is not b. There is full disclosure of the adverse
generally available to the public; or interest of the directors or trustees
4. A person who learns such information involved is made at such meeting; AND
by a communication from any c. The contract is fair and reasonable
under the circumstances. [Sec. 31]
Page 108 of 494
b. Between Corporations With 1. Full disclosure of the adverse interest
Interlocking Directors [Sec. 32] of the directors/trustees involved is
made on such meeting;
General Rule: A contract between two or more 2. The contract is fair and reasonable
corporations having interlocking directors shall under the circumstances. [Sec. 31-32]
NOT be invalidated on that ground alone. [Sec.
32] J. Capital Affairs
Exception: If contract is fraudulent or not fair 1. Certificate of Stock
and reasonable under the circumstances, such
contract is invalid. [Sec. 32]
a. Nature of the certificate
Interlocking, characterized
Shares of stock so issued are personal
Interlocking directors are persons who serve as property and may be transferred by delivery of
member of the board of directors of two or more the certificate or certificates indorsed by the
competing corporations or corporations owner, his attorney-in-fact, or any other person
engaged in practically the same kind of legally authorized to make the transfer [Sec.
business. 62, RCC].
Interlocking director with nominal and A certificate of stock is —

substantial interest An instrument formally issued by the
corporation with the intention that the same
Nominal Interest – His stockholdings are 20% constitute the best evidence of the rights and
or less of the OCS status of a shareholder
Substantial Interest – His stockholdings An instrument signed by the proper corporate

exceed 20% of the OCS officer acknowledging that the person named in
the document is the owner of a designated
If the interest of the interlocking director in one number of shares of stock. It is prima facie
of the corporations is substantial, while nominal evidence that the holder is a shareholder of a
in the other, the contract shall be VALID, if the corporation [Lao v. Lao, 567 SCRA 558,
following conditions are met, insofar as the 2008)].
latter corporation is concerned:
1. The presence of such director or The paper representative or tangible evidence
trustee in the board meeting in which of the stock itself and of the various interests
the contract was approved was NOT therein.
necessary to constitute a quorum for
such meeting; It is merely evidence of the holder’s interest
2. That the vote of such director or trustee and status in the corporation, his ownership of
was not necessary for the approval of the share represented thereby.
the contract; and
3. That the contract is fair and reasonable It expresses the contract between the
under the circumstances. corporation and the stockholder [Makati Sports
Club v. Cheng, G.R. No. 178523 (2010)].
Where (a) and (b) are absent, the contract can
be ratified by the vote of the stockholders A certificate of stock is NOT —
representing at least 2/3 of the outstanding 1. A condition precedent to the acquisition
capital stock or at least 2/3 of the members in of the rights and status of a shareholder
a meeting called for the purpose voted to ratify 2. A stock in the corporation
the contract, provided that: 3. The equivalent of ownership of the
share it represents
4. Essential to the existence of a share of
stock or the nature of the relation of
Page 109 of 494
shareholder to the corporation [Makati Transfers of Uncertificated Securities; How
Sports Club v. Cheng, G.R. No. Made
178523 (2010)]. Valid as between parties - validly made and
consummated by appropriate book-entries in
b. Uncertificated shares the securities intermediaries, or in the stock
and transfer book held by the corporation or the
An uncertificated share is a subscription duly stock transfer agent.
recorded in the corporate books but has no
corresponding certificate of stock yet issued. A transfer made pursuant to the foregoing has
the effect of delivery of a security in bearer form
Uncertificated shares or securities are those or duly indorsed in blank representing the
evidenced by electronic or similar records [Sec. amount of security or right transferred,
3.14, Securities Regulation Code]. including the unrestricted negotiability of that
security by reason of such delivery.
Added provision in Sec. 62 of the Revised
Corporation Code: Valid as to corporation – when the transfer is
recorded in the books of the corporation so as
The Commission may require corporations to show the names of the parties to the transfer
whose securities are traded in trading markets and the number of shares transferred [Sec.
and, which can reasonably demonstrate their 43.3, Securities Regulation Code].
capability to do so, to issue their securities or
shares of stocks in uncertificated or scripless c. Negotiability; requirements for valid
form in accordance with the rules of the transfer of stocks
Commission.
Theory of Quasi-Negotiability
Notwithstanding Sec. 62, RCC (Certificate of Although a stock certificate is sometimes
Stock and Transfer of Shares), a corporation regarded as quasi-negotiable, in the sense that
whose securities are registered pursuant to the it may be transferred by delivery, it is
SRC or listed on securities exchange may: wellsettled that the instrument is non-
negotiable, because:
If so resolved by the BOD and agreed by a 1. The holder thereof takes it without
shareholder, investor or securities prejudice to such rights or defenses as
intermediary, issue shares to, or record the the registered owner or creditor may
transfer of some or all its shares into the name have under the law
of such shareholders, investors or, securities 2. Except insofar as such rights or
intermediary in the form of uncertified defenses are subject to the limitations
securities. imposed by the principles governing
estoppels [Republic v. Sandiganbayan,
The use of uncertified securities in these G.R. Nos. 107789 & 147214, April 30,
circumstances shall be without prejudice to the 2003].
rights of the securities intermediary
subsequently to require the corporation to Certificates of stock are not negotiable
issue a certificate in respect of any shares instruments. Consequently —
recorded in its name; and 1. A transferee under a forged
assignment acquires no title which can
If so provided in its articles of incorporation and be asserted against the true owner
by-laws, issue all of the shares of a particular unless the latter’s negligence has been
class in the form of uncertificated securities such as to create an estoppel against
and subject to a condition that investors may him
not require the corporation to issue a certificate 2. If the owner of the certificate has
in respect of any shares recorded in their name endorsed it in blank, and it is stolen
[Sec. 43, Securities Regulation Code]. from him, no title is acquired by on
innocent purchaser for value [De los
Page 110 of 494
Santos v. Republic, G.R. No. L-4818 deed of assignment is not a fatal flaw which
(1955)]. renders the transfer invalid.
Street Certificate Requisites for a valid transfer per Sec. 62,

When a stock certificate is endorsed in blank RCC:
by the owner thereof, it constitutes what is 1. Between the parties:
termed as street certificate. 2. Delivery
3. Indorsement
Upon its face, the holder is entitled to demand 4. To be valid as to third persons:
its transfer into his name from the issuing Recorded in the books of the
corporation. corporation [Republic v. Estate of Hans
Menzi, G.R. No. 152578 (2005)].
Such certificate is deemed quasi-negotiable,
and as such the transferee thereof is justified The execution of a deed of sale does not
in believing that it belongs to the holder and necessarily make the transfer effective. The
transferor [Santamaria v. Hongkong and delivery of the stock certificate duly indorsed by
Shanghai Banking Corporation, 89 Phil. 780, the owner is the operative act that transfers the
788-789 (1951)]. shares. The absence of delivery is a fatal
defect which is not cured by mere execution of
Requirements for Valid Transfer of Stocks a deed of assignment [Rural Bank of Lipa City
For a valid transfer of stocks, the requirements v. CA, G.R. No. 124535 (2001)].
are as follows:
1. There must be delivery of the stock The stock and transfer book is the basis for
certificate; ascertaining the persons entitled to the rights
2. The certificate must be endorsed by and subject to the liabilities of a stockholder.
the owner or his attorney-in-fact or Where a transferee is not yet recognized as a
other persons legally authorized to stockholder, the corporation is under no
make the transfer; and specific legal duty to issue stock certificates in
3. To be valid against third parties, the the transferee’s name [Ponce v. Alsons
transfer must be recorded in the books Cement Corp., G.R. NO. 139802 (2002)].
of the corporation (i.e., showing the
names of the parties to the transaction, Citing Hager v. Bryan (1911): A mandamus
the date of the transfer, the number of should not issue to compel the secretary of a
the certificate or certificates and the corporation to make a transfer of the stock on
number of shares transferred) [Sec. 62, the books of the company, unless it
RCC] [Bitong v. CA, G.R. No. 123553 affirmatively appears that he has failed or
(1998)]. refused so to do, upon the demand either:
1. Of the person in whose name the stock
No shares of stock against which the is registered, or
corporation holds an unpaid claim shall be 2. Of some person holding a power of
transferable in the books of the corporation attorney for that purpose from the
[Sec. 62, RCC]. registered owner of the stock.
The Revised Corporation Code acknowledges The purpose of registration is two-fold:

that the delivery of a duly indorsed stock 1. To enable the transferee to exercise all
certificate is sufficient to transfer ownership of the rights of a stockholder, including
shares of stock in stock corporations. Such the right to vote and to be voted for, and
mode of transfer is valid between the parties. 2. To inform the corporation of any
change in share ownership so that it
In order to bind third persons, however, the can ascertain the persons entitled to
transfer must be recorded in the books of the the rights and subject to the liabilities of
corporation. Clearly then, the absence of a a stockholder [Batangas Laguna
Page 111 of 494

Tayabas Bus Co. v. Bitangas, G.R. No. It is not the domicile of the owner of a certificate
137934 (2001)]. but the domicile of the corporation which is
decisive [Chua Guan v. Samahang
Until challenged in a proper proceeding, a Magsasaka, Inc. (1935)].
stockholder of record has a right to participate
in any meeting. The residence of the corporation is the place
where the principal office of the corporation is
His vote can be properly counted to determine located as stated in its AOI, even though the
whether a stockholders’ resolution was corporation has closed its office therein and
approved, despite the claim of the alleged relocated to another place [Hyatt Elevators and
transferee. Escalators Corp. v. Goldstar Elevator Phils.,
Inc., G.R. No. 161026 (2005)].
On the other hand, a person who has
purchased stock, and who desires to be Exception: In property taxation – the situs of
recognized as a stockholder for the purpose of intangible property, such as shares of stocks,
voting, must secure such a standing by having is at the domicile or residence of the owner.
the transfer recorded in the corporate books.
Exception to the Exception:
Until the transfer is registered, the transferee is 1. When a nonresident alien has shares
not a stockholder, but an outsider of stock in a domestic corporation, then
the situs will be in the Philippines; and
d. Issuance 2. For purposes of the estate tax, the
gross estate of a resident decedent,
Full payment whether citizen or alien, or a citizen
decedent, whether resident or
General Rule: No certificate of stock shall be nonresident, includes his intangible
issued to a subscriber until the full amount of personal property wherever situated
his subscription together with interest and [De Leon]
expenses (in case of delinquent shares), if any
is due, has been paid [Sec. 63, RCC]. 2. Watered Stocks
Exception: Where it was the practice of the a. Definition

corporation since its inception to issue Watered stock are shares issued as fully paid
certificates of stock to its individual when in truth —
stockholders for unpaid shares of stock and to 1. No consideration is paid in any form; or
give full voting power to shares fully paid 2. The consideration received is known to
[Baltazar v. Lingayen Gulf Electric Power be less than the par value or issued
Company, G.R. No. L-16236 (1965)]. value of the shares [Sec. 64, RCC].
Payment pro-rata Watered stocks can either be par or no-par

value shares.
The entire subscription must be paid first
before the certificates of stock can be issued. A watered stock is a stock issued in exchange
Partial payments are to be applied pro rata to for:
each share of stock subscribed [Nava v. Peers 1. A consideration less than its par value
Mktg. Corp., G.R. No. L-28120 (1976)]. or issued price; and
2. A non-cash consideration valued in
e. Situs of the Shares of Stock excess of its fair value [Herbosa, 2019].
General Rule: The situs of shares of stock is Scope

the country where the corporation is domiciled Watered stocks include the following:
[Wells Fargo Bank v. CIR, G.R. No. L-46720 1. Issued without consideration (bonus
(1940)]. share)
Page 112 of 494
2. Issued as fully paid when the 3. Having knowledge of the insufficient
corporation has received less sum of consideration, does not file a written
money than its par or issued value objection with the corporate secretary.
(discounted share)
3. Issued for consideration other than The director or officer shall be liable to the
actual cash (i.e., property or services), corporation or its creditors, SOLIDARILY with
the fair valuation of which is less than the stockholder concerned to the corporation
its par or issued value and its creditors for the difference in value [Sec.
4. Issue stock dividend when there are no 64].
sufficient retained earnings or surplus
profit to justify it. Value received at time of Php XXX
issuance of the stock
Note: Subsequent increase in the value of the
property used in paying the stock does not do Par or issued value (XXX)
away with the watered stocks, nor cure the Liability for watered stock Php XXX
defect in issuance. The existence of watered
stocks is determined at the time of issuance of Personal liability of corporate directors,
the stock. trustees or officers attaches when they consent
to the issuance of watered-down stocks or
Rationale Behind Prohibition when, having knowledge of such issuance, do
Stock watering is prohibited because: not file with the corporate secretary their written
1. Corporation is deprived of needed objection [SPI Technologies Inc. V. Mapua,
capital and the opportunity to market its G.R. No. 191154 (2014)].
securities to its own advantage
2. Existing and future stockholders who c. Trust Fund Doctrine for Liability for
are also injured by the dilution of their Watered Stocks
proportionate interests in the
corporation Where the corporation issues watered stock
3. Present and future creditors who are and thereby assumes an ostensible
injured as the corporation is deprived of capitalization in excess of its real assets, the
the assets or capital and reduces the transaction necessarily involves —
value of the corporate assets, which 1. The misleading of subsequent
stand as a substitute for the creditors; and
stockholders’ personal liability to them 2. A constructive fraud upon creditors,
4. Persons who deal with it or purchase whether done with that purpose in mind
its securities who are deceived or not
because stock watering is invariable
accompanied with misleading Hence, it is held that recovery may be had by a
corporate accounts and financial creditor in such case, even though the
statements corporation itself has no cause of action
against the stockholders.
b. Liability of directors or officers [Sec. 1. Some of the earlier decisions put the
64] right of recovery in such a case upon
the so-called “trust fund doctrine.”
Any director or officer of a corporation who: 2. The creditors’ right of action to compel
1. Consents to the issuance of stocks for the making good of the representation
a consideration less than its par or as to the corporation’s capital is based
issued value; on fraud, and the trust fund doctrine is
2. Consents to the issuance of stocks for only another way of expressing the
a consideration other than cash, valued same underlying idea [De Leon].
in excess of its fair value; or
Despite the view of foreign authors that the
fraud theory is the prevailing view, in the
Page 113 of 494

Philippine jurisdiction, the trust fund doctrine 1. Become delinquent; and
on watered stock prevails. 2. Subject to sale under Sec. 67 of RCC,
unless the BOD orders otherwise.
3. Payment of Balance of Subscription
Requisites for a valid call
Time when the balance of the subscription
should be paid: SEC opined on July 21, 1976 that the following
1. On the date specified in the are the requisites for a valid call:
subscription contract, without need of 1. It must be made in the manner
demand or call. prescribed by law;
2. If no date of payment has been 2. It must be made by the BOD; and
specified, on the date specified on the 3. It must operate uniformly upon all the
call made by the BOD shareholders.
3. If no date of payment has been
specified on the call made, within 30 There are two instances when call is not
days from the date of call; and necessary to make the subscriber liable for
4. When insolvency supervenes upon a payment of the unpaid subscription:
corporation and the court assumes
jurisdiction to wind it up, all unpaid When, under the terms of the subscription
subscriptions become payable on contract, subscription is payable, not upon call,
demand, and are at once recoverable, but immediately, or on a specified day, or when
without necessity of any prior call. it is payable in installments at specified times;
[Sec. 66, RCC] and
a. Call by Board of Directors
If the corporation becomes insolvent, which
The BOD of any stock corporation may, at any makes the liability on the unpaid subscription
time: due and demandable, regardless of any
1. Declare due and payable to the stipulation to the contrary in the subscription
corporation unpaid subscriptions to the agreement [Villanueva].
capital stock; and
2. Collect the same or such percentage b. Notice Requirement
thereof, in either case with accrued
interest, if any, as it may deem Where call is necessary, notice must be given
necessary. to the stockholder concerned. A call without
notice to the subscriber is practically no
When Payment Should be Made call at all.
Payment shall be made: The notice is regarded as a condition

a. On the date specified in the contract of precedent to the right of recovery. It must,
subscription; or therefore, be alleged and proved to maintain an
b. On the date stated in the call. action for the call [Lingayen Gulf Electric Power
Co., Inc. v. Baltazar, G.R. No. L-4824 (1965)].
Failure to pay on such date shall —
1. Render the entire balance due and The right to notice of call, however, may be
payable; and waived by the subscriber [De Leon].
2. Make the stockholder liable for interest
at the legal rate on such balance, 4. Sale of Delinquent Shares
unless a different rate of interest is
provided for in the by-laws. Delinquent Shares - shares in which the
corresponding subscription or balance remains
If within 30 days from said date no payment is unpaid after a grace period of 30 days from —
made, all stocks covered by said subscription a. The date specified in the contract of
shall — subscription; or
Page 114 of 494

b. The date stated in the call made by the 2. The date, time and place of the sale,
BOD. which shall not be less than 30 days
nor more than 60 days from the date
All stocks covered by said subscription shall the stocks became delinquent, which is
thereupon become delinquent and shall be 30 days after the date specified in the
subject to delinquency sale, unless the BOD contract of subscription or on the date
orders otherwise [Sec. 67]. stated in the call.
a. Effect of Delinquency Notice of sale [Sec. 67]
Effects of Delinquency If the BOD resolves to proceed with the sale:

1. Notice of sale and a copy of the
Generally, delinquency suspends the rights of resolution shall be sent to every
a subscriber, except the right to receive delinquent stockholder either
dividends personally or by registered mail.
1. No delinquent stock shall be voted for 2. Notice of sale shall furthermore be
2. No delinquent stock shall be entitled to published once a week for 2
vote or to representation at any consecutive weeks in a newspaper of
stockholders’ meeting. general circulation in the province or
3. Delinquent stock shall be subject to city where the principal office of the
delinquency sale. corporation is located.
A subscriber acquires all the rights of a Auction sale

shareholder at the point of subscription. His
political and economic rights are not impaired Procedure for delinquency sale [Sec. 67,
by the fact that he has unpaid subscription. RCC]
1. Call for payment made by the BOD.
Delinquency suspends the rights of a 2. Notice of call served on each
subscriber, except the right to receive stockholder.
dividends. 3. Notice of delinquency issued by the
BOD upon failure of the stockholder to
The dividends corresponding to such shares, if pay within 30 days from date specified.
any, shall be applied against the unpaid 4. Service of notice of delinquency on the
amount. [Herbosa, 2019]. non-paying subscriber, PLUS
publication in a newspaper of general
Note: The holder thereof shall NOT be entitled circulation in the province or city where
to any of the rights of a stockholder except the the principal office of the corporation is
right to dividends. But the dividends it will located, once a week for 2 consecutive
receive will be subject to Sec. 42, RCC, that is weeks.
1. Cash dividends shall first be applied to
the unpaid balance on the subscription Note: Requirements on notice and publication
plus costs and expenses; and are mandatory. Lacking such requirements,
2. Stock dividends shall be withheld until the stockholder may question the sale as
the unpaid subscription is fully paid. provided under Sec. 67, RCC.
b. Call by Resolution of the Board of Public Auction

Directors
The highest bidder is one who is willing to pay
The BOD may, by resolution, order the sale of the balance of the subscription for the least
delinquent stock and shall specifically state — number of shares.
1. The amount due on each subscription
plus all accrued interest, and The stock so purchased shall be transferred to
such purchases in the books of the corporation
Page 115 of 494

and a certificate of such stock shall be issued of the stock certificate or certificates, indorsed
in his favor. by
a. The owner; or
The remaining shares, if any, shall be credited b. The owner’s attorney-in-fact; or
in favor of the delinquent stockholder who shall c. Other person legally authorized to
likewise be entitled to the issuance of a make the transfer [Sec. 62].
certificate of stock covering such shares.
Sale of partially paid shares
If there are no bidders, the corporation must bid
for the whole number of shares regardless of No shares of stock against which the
how much the shareholders has paid. Such corporation holds any unpaid claim shall be
stocks will pertain to the corporation as fully transferable in the books of the corporation
paid treasury stocks. [Sec. 62].
Payment by Delinquent Stockholder A corporation may refuse to acknowledge and

register a sale or assignment of shares which
The delinquent stockholder may stop the are not fully paid and may continue to hold the
auction by paying to the corporation on or original subscriber liable on the payment of the
before the date specified for the sale the subscription.
balance due on his subscription, plus accrued a. However, the above principle in
interest, costs of advertisement and expenses Section 62 cannot be utilized by the
of the sale. corporation to refuse to recognize
ownership over pledged shares
Otherwise, the public auction shall proceed purchased at public auction.
and the delinquent shares shall be sold to the b. The term “unpaid claims” refers to “any
bidder that will pay the full amount of the unpaid claims arising from unpaid
balance of subscription with accrued interest, subscription, and not to any
costs and expenses of the sale, for the smallest indebtedness which a subscriber or
number of shares or fraction of a share. stockholder may owe the corporation
arising from any other transactions
Irregularities in the delinquency sale [Sec. [China Banking Corp. v. CA, G.R. No.
68] 117604 (1997)].
Action to recover delinquent stock must be on Sale of a portion of shares not fully paid
the ground of irregularity or defect in:
a. the notice of sale or The SEC has opined on several occasions that
b. in the sale itself of delinquent stock a stockholder who has not paid the full amount
of his subscription cannot transfer part of his
Unless, party seeking to recover first pays or subscription in view of the indivisible nature of
tenders to the party holding the stock the sum a subscription contract.
for which the same was sold, with interest from
the date of sale at the legal rate. Rationale Behind Prohibition
The action must be commenced within 6 The reason behind the principle of disallowing
months from the date of sale. transfer of not fully paid subscription to several
transferee is that it would be difficult to
5. Alienation of Shares determine:
1. Whether or not the partial payments
Sale of fully paid shares made should be applied as —
a. Full payment for the
Shares of stock so issued are personal corresponding number of
property and may be transferred by the delivery shares which can only be
covered by such payment; or
Page 116 of 494

b. Proportional payment to each Restrictions on the Right to Encumber
and all of the entire number of Shares
subscribed shares
Restriction Valid/Invalid
2. The unpaid balance to be assumed by
each transferee [Villanueva]. Absolutely prohibits INVALID
the stockholders
Sale of all of shares not fully paid from pledging or It would be violative
mortgaging their of the statutory right
The SEC has opined that the entire shares without the of the stockholders
subscription, although not yet fully paid, may consent of the BOD to encumber shares
be transferred to a single transferee, who of stock as allowed
because of the transfer must assume the in Sec. 54
unpaid balance.
Merely allows the VALID and binding
It is necessary, however, to secure the consent corporation or
of the corporation, since the transfer of existing stockholders
subscription rights and obligations to accept the offer
contemplates a novation of contract which within the option
under Article 1293 of the Civil Code cannot be period, and
made without the consent of the creditor thereafter, if no one
[Villanueva]. accepts the offer,
the stockholder is
5. Alienation of Shares free to pledge or
mortgage his shares
a. Allowable Restrictions on the Sale of in favor of any 3rd
Shares party
General Rule: Free Transferability of Shares Right to Vote of Secured Creditors and
Shares of stock so issued are personal Administrators
property and may be transferred [Sec. 62]
General Rule: In case a stockholder grants
Exception: In CLOSE corporations, security interest in his or her shares in stock
restrictions on the right to transfer shares may corporations, the stockholder-grantor shall
be provided in the Articles of Incorporation, have the right to attend and vote at meetings of
bylaws, and certificates [Sec. 97]. Note: The stockholders
SEC has allowed corporations other than close
corporations to provide for restrictions on the Exception: Unless the secured creditor is
right to transfer share expressly given by the stockholder-grantor
Involuntary dealings such right in writing which is recorded in the
appropriate corporate books [Sec. 54].
Right to Encumber
Executors, administrators, receivers, and other
Shares Shares of stock are personal property, legal representatives duly appointed by the
and the owner has an inherent right, as incident court may attend and vote on behalf of the
of ownership to transfer the same at will, which stockholders or members without need of any
would include the power to encumber the written proxy [Sec. 54].
shares.
Attachment, Execution and Other
The right of a stockholder to pledge, mortgage Involuntary Dealings on Shares
or otherwise encumber his shares is
recognized under Sec. 54 of the RCC which Attachments of shares of stock are not
regulates the manner of voting on pledged or included in the term “transfer” as provided in
mortgaged shares. [Section 62, RCC]. Both the Revised Rules of
Page 117 of 494
Court and [Revised Corporation Code] do not There is a presumption of equality of the rights
require annotation in the corporation’s STB for and features of shares when nothing is
the attachment of shares to be valid and expressly provided to the contrary.
binding on the corporation and third parties a. Although a corporation has the power
[Chemphil Export & Import Corp. v. CA, 251 to classify its shares of stock, provide
SCRA 257 (1995)]. for preferences and other conditions,
no presumption should exist to
A bona fide transfer of shares, not registered in distinguish one share from another.
the corporate books, is not valid as against a b. Sec. 6 of the RCC now requires that the
subsequent lawful attachment of said shares, distinguishing features be stated also
regardless of whether the attaching creditor in the Certificate of Stock
had actual notice of said transfer or not. All
transfers not so entered on the books of the b. Requisites of a Valid Transfer
corporation are absolutely void as against third
parties; not because they are without notice or Same as requirements for valid transfer of
fraudulent in law or fact, but because they are stocks.
made so void by statute [Garcia v. Jomouad,
323 SCRA 424 (2000)]. No transfer shall be valid, except as between
the parties, until the transfer is recorded in the
Bias Against Voluntary Sales books of the corporation showing:
a. The names of the parties to the
By the strict application of Sec. 63 of the transaction
Corporation Code [now Sec. 62, RCC] to cover b. The date of the transfer
only the sale, assignment, or absolute c. The number of the certificate or
disposition of shares of stock, the SC has certificates and
placed a bias against voluntary sales, d. The number of shares transferred [Sec.
assignments or dispositions of shares of stock 62].
vis-à-vis pledges, mortgages, attachment or
levy thereof. The failure to register a sale or disposition of
shares of stock in the books of the corporation
To be valid and binding on third parties, the would render the same invalid to all persons,
voluntary sale, assignment or disposition of including the attaching creditors of the seller
shares requires the essential element of [Uson v. Diosomito, 61 Phil. 535 (1935)].
registration in the stock and transfer book
6. Corporate Books and Records
Otherwise the sale, assignment or disposition
is considered void as to third parties, even Every corporation shall keep and carefully
when they have actual notice. preserve at its principal office all information
including but not limited to:
In contrast, when it comes to pledge, 1. Articles of incorporation and by-laws
mortgage, encumbrance, attachment or levy of and all their amendments;
shares, registration thereof in the stock and 2. Current ownership structure and voting
transfer book is not essential either for validity rights of corporation
or as a species of notifying third parties 3. Names and addresses of all members
[Villanueva]. of BOD/trustees and the executive
officers
The doctrine of equality of shares states that 4. Record of all business transactions
all stocks issued by the corporation are 5. Record of resolutions of BOD/Trustees
presumed equal with the same privileges and and of stockholders/members
liabilities, provided that the Articles of 6. Copies of latest reportorial
Incorporation is silent on such differences [Sec. requirements submitted to the
6]. Commission; and
Page 118 of 494

7. Minutes of all meetings of appropriate by the Department of Finance, the
stockholders/members or of financial statements may be certified under
BOD/trustees. oath by the treasurer and the president.
Stock Corporations [Sec. 73] a. Right to Inspect Corporate Records
Stock corporations must also keep:

Who May Inspect
1. Books that record all business
transactions of the corporation which
Corporate records shall be open to inspection
shall include contract, memoranda, by any director, trustee, stockholder or
journals, ledgers, etc;
member of the corporation.
2. Minute book for meetings of the
stockholders/members;
A requesting party who is not a stockholder or
3. Minute book for meetings of the
member of record, or is a competitor, director,
board/trustees; officer, controlling stockholder or otherwise
4. Stock and transfer book, which shall
represents the interests of a competitor shall
contain: have no right to inspect or demand
a. A record of all stocks in the
reproduction of corporate records.
names of the stockholders
alphabetically arranged;
The inspecting or reproducing party shall
b. The installments paid and remain bound by confidentiality rules under
unpaid on all stocks for which
prevailing laws, such as the rules on trade
subscription has been made, secrets or processes under the Intellectual
and the date of payment of any
Property Code, Data Privacy Act, and the
installment; Securities Regulation Code.
c. A statement of every
alienation, sale or transfer of Manner and Time of Inspection
stock made, the date thereof,
by and to whom made; and Inspection may be in person or by a
d. Such other entries as the by-
representative at reasonable hours on
laws may prescribe
business days, and a demand in writing may be
made for copies of such records or excerpts
Note: The duty to keep these books is
from said records.
imperative and mandatory. The stockholder
can likewise inspect the financial statements of
Directors of a corporation have the unqualified
the corporation [Sec. 73]. right to inspect the books and records of the
corporation at all reasonable times.
Financial Statements [Sec. 74]
The right of inspection is not to be denied on
A corporation shall furnish a stockholder or the ground that the director or shareholder is
member its most recent financial statement
on unfriendly terms with the officers of the
within 10 days from receipt of written request. corporation whose records are sought to be
inspected.
At a regular meeting, the Board shall present a
financial report of the operations of the
A director or stockholder can make copies,
corporation for the preceding year, which shall abstracts, and memoranda of documents,
include financial statements duly signed and
books, and papers as an incident to the right of
certified in accordance with the Code.
inspection, but cannot, without an order of a
court, be permitted to take books from the
Exception: However, if the total assets or total
office of the corporation.
liabilities of the corporation is less than Six
hundred thousand pesos (P600,000.00), or
However, a director or stockholder does not
such other amount as may be determined have any absolute right to secure certified
Page 119 of 494
copies of the minutes of the corporation until Exception:
these minutes have been written up and If such refusal is made pursuant to a resolution
approved by the directors [Veraguth v. Isabela or order of the BOD/BOT, the liability shall be
Sugar, G.R. No. L-37064 (1932)]. imposed upon the directors or trustees who
voted for such refusal:
A stockholder of a sequestered company has
the right to inspect and/or examine the records Defenses
of the corporation pursuant to Sec. 74 of the It shall be a defense to any action under
Corporation Code (now Sec. 73, RCC) [Africa Section 73:
v. PCGG, G.R. No. 83831 (1992)]. 1. That the person demanding to examine
has improperly used any information
b. Effect of Refusal to Inspect Corporate secured through any prior examination
Records 2. That the person was not acting in
good faith or for a legitimate purpose
If the corporation denies or does not act on a in making the demand to examine
demand for inspection, the aggrieved party 3. That the person is a competitor,
may report such to the Commission. director, officer, controlling stockholder
or otherwise represents the interests of
The Commission shall conduct a summary a competitor.
investigation and issue an order directing the
inspection. Remedies when inspection is refused
a. Mandamus
Refusal to allow inspection is a criminal b. Injunction
offense. Such refusal, when done in violation of c. Action for damages
Sec. 74(4) of the Corporation Code (now Sec. d. File an action under Sec. 161 to impose
73, RCC), properly falls within the purview of a penal offense by fine and/or
Sec. 144 of the same code and thus may be imprisonment.
penalized as an offense [Yujuico and Sumbilla
v. Quiambao and Pilapil, G.R. No. 180416 Under the Rules of Court, the writ of
(2014)]. (please note that the Code’s mandamus should be granted only if the court
provisions have been changed under the RCC) is satisfied that justice so requires [Sec. 8, Rule
65].
General Rule:
Any officer or agent of the corporation who K. Dissolution and Liquidation
shall refuse to allow inspection shall be liable
to the director, trustee, stockholder or member
for damages, and shall be punished with a 1. Modes of dissolution
fine: [Sec. 73]
1. Ranging from P10,000.00 to Based on jurisprudence, the methods of
P200.000.00 effecting dissolution as prescribed by law are
2. When the violation is injurious or exclusive, and a corporation cannot be
detrimental to the public, the penalty is dissolved except in the manner prescribed by
a fine ranging from P20.000.00 to law [De Leon].
P400.000.00 [Sec. 161]
Dissolutions may be either 1) voluntary or 2)
Because the obligations provided for in Sec. involuntary
73, RCC fall on the corporation, violation of the
same is done by the corporation; thus, criminal
action based on such violation can only be Voluntary Involuntary
maintained against corporate officers or other
such persons acting on behalf of the Voluntary surrender Expiration of the
corporations. of its charter by the shortened corporate
vote of the BOD/T term [Sec 36
Page 120 of 494

Voluntary Involuntary a. Voluntary and involuntary dissolution
and the 1. Where no creditors are affected [Sec.

stockholders/membe 134]
rs where no
creditors are This type of dissolution is initiated by the
affected [Sec 134 corporation. It does not prejudice, or is not
consented by creditors.
By the judgment of By legislative
the SEC after enactment Procedure
hearing of petition If dissolution of a corporation does not
for voluntary prejudice the rights of any creditor (Sec. 134):
dissolution, where a. Notice of the meeting should be given
creditors are to the stockholders or members by
affected personal delivery, registered mail, or by
any means authorized under its bylaws
at least 20 days prior to the meeting.
Amending the AOI to Failure to organize b. The notice of meeting should also be
shorten its term [Sec and commence published once prior to the meeting
136] business within 5 1. Notice shall contain the time,
years from place and object of the meeting
incorporation [Sec 2. in a newspaper published in
21 the place where the principal
office of said corporation is
In case of a Cessation of located, or if no newspaper is
corporation sole, by business for 5 years published in such place, then in
submitting to the [Sec 21 a newspaper of general
SEC a verified circulation in the Philippines.
declaration of the c. The resolution to dissolve must be
dissolution for approved by the majority of the BOD/T
approval and approved by at least the majority of
the Outstanding Capital Stock or
By merger or By order of the SEC majority of the members.
consolidation on grounds under d. The corporation must submit the
existing laws [Sec following to the SEC:
138] 1. A verified request for
dissolution stating the
By order of the
following:
Courts following a
a. the reason for the
quo warranto
dissolution
proceeding, a
b. the form, manner, and
proceeding involving
time when the notices
a financially
were given
distressed
c. names of the
corporation, or for
stockholders and
grounds under
directors or members
existing laws.
and trustees who
approved of the
Note: Where the veil of corporate fiction is dissolution
pierced, it does not operate as a cause for the d. the date, place, and
dissolution of the corporation. time of the meeting in
which the vote was
made,
Page 121 of 494
e. date of publication a. A petition shall be filed with the SEC
2. Copy of the resolution certified containing the following:
by the majority of the BOD/T 1. signature by a majority of its
and countersigned by the BOD/T or other officers having
secretary. management of its affairs;
3. Proof of publication 2. verified by its president, or
4. Favorable recommendation secretary or one of its director
from the appropriate regulatory or trustees;
agency, when necessary 3. all claims and demands against
5. The signed and countersigned the corporation; and
copy will be filed with the SEC 4. resolved upon by affirmative
and the latter will issue the vote of the stockholders
certificate of dissolution. representing at least ⅔ of the
Outstanding Capital Stock or ⅔
Withdrawal of the request [Sec. 137] of members;
b. The corporation must submit the
The corporation may withdraw its verified following to the SEC.
request for dissolution within 15 days from 1. The petition for dissolution
receipt by the SEC. Otherwise, the SEC shall stating the following:
approve the request and issue the certificate of a. the reason for the
dissolution. dissolution;
b. the form, manner, and
Effectivity of the dissolution [Sec. 134] time when the notices
were given;
Dissolution shall take effect upon the issuance c. the date, place and
of the certificate of dissolution by the SEC. time of the meeting in
which the vote was
Favorable recommendation by the made
appropriate agency required [Sec. 134] 2. A copy of the resolution
authorizing the dissolution,
No application of dissolution will be approved certified by the majority of the
without the favorable recommendation of the BOD/T and countersigned by
appropriate government agency for: the secretary.
1. Banks, 3. A list of all its creditors
2. banking and quasi-banking institutions, c. If the petition is sufficient in form and
3. pre-need, insurance and trust substance, the SEC shall issue an
companies, order fixing the date on or before which
4. non-stock savings and loans objections to the petition may be filed.
associations (NSSLA), Such date shall not be less than 30
5. pawnshops, and days nor more than 60 days after the
6. other financial intermediaries entry of the order.
d. A copy of the order shall be published
2. Where creditors are affected [Sec. at least once a week for 3 consecutive
135] weeks in a newspaper of general
circulation published in the municipality
This covers a case where the corporation or city of the corporation’s principal
petitions for its dissolution which may prejudice office. If none, in a newspaper of
the rights of creditors or are not consented by general circulation in the Philippines. A
all of them. Here, the corporation is not under similar copy shall be posted for 3
financial distress or in a state of insolvency. In consecutive weeks in 3 public places in
those cases, the corporation must file a petition such municipality or city.
for rehabilitation or liquidation in court e. A hearing of any issue or objections
[Herbosa, 2019]. raised shall be conducted 5 days after
Page 122 of 494

the lapse of the expiration of the time to
Shortening of the Expiration of the
file objections.
Corporate Term Original Term
f. If the objections are insufficient or the
material facts in the petition are true, corporation, ipso corporate term, and
judgment shall be rendered dissolving facto, once the such term has
the corporation and directing the shortened term has expired, the
disposition of assets. The judgment arrived corporation may file
may include the appointment of a a petition for revival
receiver. of corporate
1. As long as 2/3 vote is obtained, existence.
no member/ stockholder can
prevent such dissolution unless
the majority stockholders acted 4. Withdrawal of Dissolution [Sec. 137]
in bad faith. The latter may be
held liable for damages A withdrawal of the request for dissolution shall
[Campos]. be:
2. Even where there are creditors a. Made in writing;
of the corporation who may be b. Duly verified by any incorporator,
prejudiced by the dissolution, it director, trustee, shareholder, or
is still possible for the member;
corporation to terminate its c. Signed by the same number of
existence prior to the expiration incorporators, directors, trustees,
of its term, provided said shareholders, or members necessary
creditors are given the to request for dissolution as set forth in
opportunity to present their Sec. 133-136;
claims and objections so that d. Submitted no later than fifteen (15)
their interests may be days from receipt by the Commission
protected [Campos]. of the request for dissolution.
3. By shortening of corporate term [Sec. A withdrawal of the petition for dissolution shall
136] be in the form of a motion and similar in
substance to a withdrawal of request for
A voluntary dissolution may be effected by dissolution but shall be verified and filed prior
amending the AOI to shorten the corporate to publication of the order setting the deadline
term under Sec 16. for filing objections to the petition.
Ipso Facto Dissolution SEC Action

Upon receipt of a withdrawal of request for
Upon approval of the expired shortened term, dissolution, the Commission shall withhold
the corporation shall be deemed dissolved action on the request for dissolution and shall,
without any further proceedings. The after investigation:
corporation shall be deemed dissolved without a. Make a pronouncement that the
any further proceedings, taking effect on the request for dissolution is deemed
day following the last day of the corporate term. withdrawn;
b. Direct a joint meeting of the board of
Shortening vs. Expiration [Divina] directors or trustees and the
stockholders or members for the
purpose of ascertaining whether to
Shortening of the Expiration of the proceed with dissolution; or
Corporate Term Original Term c. Issue such other orders as it may deem
appropriate.
Has the effect of Where a corporation
dissolving the elects to retain its
Page 123 of 494

5. Involuntary dissolution third persons or take away the vested
rights of its creditors [De Leon].
By Expiration of Corporate Term
Note: Thus, except for the expiration of
The RCC provides that a corporation shall its term, no dissolution can be effective
have perpetual existence. The AOIs of existing without some act of the State [Daguhoy
corporations shall be deemed amended to Enterprises v. Ponce, G.R. No. L-6515
reflect their perpetual term. The exception is (1954)].
when the AOIs of corporations created under
the effectivity of this Code provide for a specific Non-Use of Corporate Charter [Sec 21; Sec
period [Sec 11]. 138(a)]
If a corporation fails to formally organize and
An existing corporation may opt out of the rule commence the transaction of its business or
on perpetual existence by notifying the construction of its works within 5 years, its
Commission, provided it was approved by certificate of incorporation shall be deemed
shareholders, and without prejudice to the revoked, its corporate powers shall cease, and
appraisal right of dissenting stockholders the corporation shall be deemed dissolved
[Herbosa, 2019]. When such term has expired, [Sec. 21].
a petition for revival of corporate existence may
be filed [Divina]. Dissolution in this case is automatic [Campos].
Legislative Dissolution Formal organization includes not only the

The inherent power of Congress to make laws adoption of the by-laws but also the
carries with it the power to amend or repeal establishment of the body which will administer
them. Involuntary corporate dissolution may be the affairs of the corporation and exercise its
effected through the amendment or repeal of powers
the Revised Corporation Code [implied from
Sec. 184, De Leon]. By-laws should be adopted within one month of
receipt of official notice of the issuance of the
The limitations on the power to dissolve certificate of incorporation, otherwise the
corporations by legislative enactment are as certificate may be suspended or revoked [PD
follows: 902-A, Sec. 6 (i)(5)].
a. Under the Constitution, the
amendment, alteration, or repeal of the Continuous Inoperation of Corporation
corporate franchise of a public utility [Sec 21; 138(b)]
shall be made only “when the common
good so requires”; If a corporation commenced its business but
b. Under Sec. 84 of the Code, it is fails to continue operations after least 5
provided that: “No right or remedy in consecutive years, the corporation is first
favor of or against any corporation, its placed on delinquent status, after due notice
stockholders, members, directors, and hearing.
trustees, or officers, nor any liability
incurred by any such corporation, The delinquent corporation is given 2 years to
stockholders, members, directors, resume operations and comply with all the
trustees, or officers, shall be removed requirements that the SEC shall prescribe.
or impaired either by the subsequent Otherwise, the SEC will prescribe its
dissolution of said corporation or by dissolution. The corporation may have the
any subsequent amendment or repeal revocation reconsidered. Otherwise, the SEC
of this Code or of any part thereof”; may proceed to involuntary dissolution with
c. While Congress may provide for the notice and hearing.
dissolution of a corporation, it cannot
impair the obligation of existing Dissolution in this case is not automatic
contracts between the corporation and [Campos].
Page 124 of 494

Dissolution by the SEC on Grounds Under Upon receipt of a lawful court order
the Code and Other Existing Laws dissolving the corporation
The Revised Corporation Code also introduced The ground under (c) may involve or arise from
a number of changes on involuntary a quo warranto proceeding involving a de facto
dissolution. Sec. 138 codified the grounds that corporation (Sec 19, RCC) or a liquidation
may lead to involuntary dissolution by the proceeding involving an insolvent debtor under
Commission motu proprio or upon filing of a FRIA (infra).
verified complaint by any interested party.
Upon finding by final judgment that the
Grounds for dissolution [Sec. 21; Sec 138] corporation procured its incorporation
a. Non-use of corporate charter [Sec. 21]; through fraud
b. Continuous inoperation of a The ground under (d) constitutes cases where
corporation [Sec. 21]; a corporation misrepresented its purpose of
c. Upon receipt of a lawful court order incorporation, or when the incorporators used
dissolving the corporation; fictitious names, there was then fraud in the
d. Upon finding by final judgment that the procurement of the certificate.
corporation procured its incorporation
through fraud; Upon finding by final judgment that the
e. Upon finding by final judgment that the corporation was created for an unlawful
corporation: purpose
1. Was created for the purpose of
committing, concealing or The ground under (e) is a new provision. Here,
aiding the commission of a corporation found by final judgment to have
securities violations, been created for the purpose of committing,
smuggling, tax evasion, money concealing, or aiding the commission of
laundering, or graft and corrupt securities violations, smuggling, tax evasion,
practices; money laundering, or graft and corrupt
2. Committed or aided in the practices, may be subjected to involuntary
commission of securities dissolution by the SEC, motu proprio or upon
violations, smuggling, tax filing of a verified complaint by any interested
evasion, money laundering, or
graft and corrupt practices, and 2. Methods of liquidation
its stockholders knew; and
3. Repeatedly and knowingly Liquidation is the process by which all the
tolerated the commission of assets of the corporation are converted into
graft and corrupt practices or liquid assets (cash) in order to facilitate the
other fraudulent or illegal acts payment of obligations to creditors, and the
by its directors, trustees, remaining balance if any is to be distributed to
officers, or employees. the stockholders.
Non-use of corporate charter and Among corporate creditors, the rules on

continuous inoperation concurrence and preference of credits apply.
The grounds for dissolution under (a) and (b) It is a proceeding in rem.
as discussed above, will lead to the dissolution
of the corporation unless the corporation files a The end of corporate relations does not result
petition to set aside its delinquency status, and in the immediate termination of corporate
the SEC grants it. existence. A corporation shall have the
extended term of 3 years to wind up its
corporate affairs and liquidate its assets
[Herbosa].
Page 125 of 494

The RCC provides that any distributable asset It may not acquire new rights or incur new
to an unknown creditor or corporator shall be obligations.
escheated in favor of the national government.
This was previously in favor of the LGU where It may only have rights as may be required by
such assets are located, under the old Code. the process of liquidation [Herbosa].
Difference Between Liquidation and Pending actions against the corporation are not
Rehabilitation extinguished
Pending actions against the corporation may

Liquidation Rehabilitation
still be prosecuted against the corporation even
The winding up of a Contemplates a beyond the 3-year period.
corporation so that continuance of
assets are corporate life and General Rule: The creditors of the corporation
distributed to those activities in an effort who were not paid within the 3-year period may
entitled to receive to restore and follow the property of the corporation that may
them. It is the reinstate the have passed to its stockholders
process of reducing corporation to its
assets to cash, former position of Exceptions:
discharging liabilities successful operation 1. Unless the action is barred by
and dividing surplus and solvency. Both prescription or laches; or
or loss cannot be 2. Unless there was a disposition of said
undertaken at the property in favor of a purchaser in good
same time faith.
[Phil. Veterans Bank v. Employees Union, G.R. Suits not brought against the corporation
No. 105364 (2001)]. within the 3-year period may still be
prosecuted against the corporation, since there
Winding up of corporate affairs is nothing in Sec. 122, par. 1 which bars action
for the recovery of the debts of the corporation
Under Sec. 139 of the RCC, a corporation against the liquidator thereof after the lapse of
loses its juridical personality and can no longer the winding up period of 3 years [Republic of
enter into transactions that have the effect of the Philippines v. Marsman Dev. Co., G.R. No.
continuing its business. The only exception to L-175109 (1972)].
this is the “winding-up” period which takes
place for 3 years after the loss of the Right of the corporation to appeal a
corporation’s juridical personality. judgment is not extinguished by the
expiration of the 3-year period
It continues to be a body corporate for
purposes of prosecuting and defending suits by Corporations whose certificate of registration
and against it and to enable it to settle and was revoked by the SEC may still maintain
close its affairs, culminating in the disposition actions in court for the protection of its rights
and distribution of its remaining assets. which includes the right to appeal [Paramount
Insurance Corp. v. A.C. Ordonez Corp., G.R.
It may, during the 3-year term, appoint a trustee No. 175109 (2008)].
or a receiver who may act beyond that period.
Methods of Liquidation
A corporation in the process of liquidation has a. By the corporation itself or its board of
no legal authority to engage in any new directors or trustees (Sec. 139[1],
business, even if the same is in accordance RCC)
with the primary purpose stated in its article of b. By conveyance to a trustee within a
incorporation. three-year period (Sec. 139[2], RCC;
Page 126 of 494

Board of Liquidators v. Kalaw, G.R. No. When a corporation is liquidating pursuant to
L-18805, 1967) the statutory period of 3 years to liquidate, it is
c. By a management committee or only allowed to continue for the purpose of final
rehabilitation receiver appointed by closure of its business and no other purposes.
SEC (Sec. 119, RCC)
d. By liquidation after three years In fact, within that period, the corporation is
enjoined from “continuing the business for
a. By the Corporation Itself which it was established” [Alhambra Cigar and
Cigarette Mfg. v. SEC, G.R. No. L23606
The liquidation and distribution of the assets of (1968)]
a dissolved corporation is a matter of internal
concern of the corporation and falls within the b. Conveyance to A Trustee Within A 3-
power of the directors and stockholders or duly Year Period
appointed liquidation trustee [SEC Opinion,
July 23, 1996]. Liquidation may also be placed in the hands of
a trustee or assignee. All the corporate assets
The corporation through its board and/or are conveyed to such trustee or assignee by a
executive officers are in charge for this method resolution of stockholders at any time during
of liquidation. the 3-year period [Sec. 139].
The Legislature intended to let the In this method, the 3-year limitation DOES
shareholders have the control of the assets of NOT apply, provided that the designation of the
the corporation upon dissolution in winding up trustees is made within the period.
its affairs.
The normal method of procedure is for the General Rule: There is no time limit within
directors and executive officers to have charge which the trustee must finish the liquidation,
of the winding up operations, though there is and he may sue and be sued as such even
the alternative method of assigning the beyond the 3-year period.
property of the corporation to trustees for the
benefit of its creditors and shareholders [China Exception: The trusteeship is limited in its
Banking Corp. V. M. Michelin & Cie, 58 Phil. duration by the deed of trust. Trustees to whom
261 (1933)]. the corporate assets have been conveyed
pursuant to liquidation may sue and be sued as
The termination of the life of a corporate entity such in all matters connected with the
does not by itself cause the extinction or liquidation [National Abaca v. Pore, G.R. No. L-
diminution of the rights and liabilities of such 16779 (1961)].
entity.
The trustee of a dissolved corporation may
If the 3-year extended life has expired without commence a suit that can proceed to final
a trustee or receiver having been expressly judgment even beyond the 3-year period of
designated by the corporation, within that liquidation [Reburiano v. CA, G.R. No. 102965
period, the BOD (or trustees) itself, may be (1999)].
permitted to so continue as "trustees" by legal
implication. Unless the trusteeship is limited in its duration
by the deed of trust, there is no time limit within
Such designation as “trustees” is for the which the trustee must finish liquidation [Board
purpose of completing the corporate liquidation of Liquidators v. Kalaw, G.R. No. L-18805
[Pepsi-Cola Products Philippines, Inc. v. CA, (1967)].
G.R. No. 145855 (2004)].
Any corporate creditor, shareholder, member,
A corporation under liquidation may not amend or other person-in-interest may petition the
its articles of incorporation to extend its courts for the appointment of a different
lifespan. trustee/s in liquidation [Clemente et.al. v. CA,
Page 127 of 494
G.R. No. 82407 (1995), citing Gelano v. CA, The receiver’s principal duty is to:
103 SCRA 90] a. Preserve and maximize the value of
the assets of the debtor during the
c. By Management Committee or rehabilitation proceedings;
Rehabilitation Receiver b. Assess the viability of rehabilitation,
and implement a Rehabilitation Plan
In SEC’s judgment dissolving the corporation
Unless appointed by the court, the
and directing disposition of its assets as justice
rehabilitation receiver shall not take over the
requires, it may appoint a receiver to collect
management and control of the debtor but may
such assets and pay the debts of the
recommend the appointment of a management
corporation [Sec. 135].
committee over the debtor in the cases
provided by the FRIA [Sec. 31, FRIA].
In the exercise of its jurisdiction, the
Commission possesses the following powers:
What is a Management Committee
1. To appoint one or more receivers of the
property, real and personal, which is
The management committee is the body
the subject of the action pending before
appointed by the court who shall take the place
the Commission in such other cases
of the management and the governing body of
whenever necessary in order to
the debtor corporation and assume their rights
preserve the rights of the
and responsibilities. A rehabilitation receiver
partieslitigants and/or protect the
may also be appointed to assume the
interest of the investing public and
management of the corporation [Sec. 36,
creditors;
FRIA].
2. To create and appoint a management
committee, board, or body upon
A management committee may be appointed in
petition or motu propio to undertake the
the following cases:
management of corporations,
1. Actual or imminent danger of
partnerships or other associations not
dissipation, loss, wastage or
supervised or regulated by other
destruction of the debtor’s assets or
government agencies in appropriate
other properties;
cases [PD 902-A, as amended by PD
2. Paralyzation of the business
1799, Sec. 6].
operations of the debtor; or
3. Gross mismanagement of the debtor,
While the SEC has the authority to dissolve a
or fraud or other wrongful conduct on
corporation, it does not have the authority to
the part of, or gross or willful violation
settle disputes arising from its liquidation. A
of the FRIA by existing management of
commercial court is in the best position to
the debtor or the owner, partner,
convene all stakeholders, including creditors,
director, officer or representative/s in
to ascertain their claims and determine their
management of the debtor [Sec. 36,
preferences [Consuelo Metals Corporation v.
FRIA].
Planters Development Bank G.R. No. 152580
(2008)].
Effects of Appointing a Receiver
Who is a Rehabilitation Receiver
The appointment of a receiver suspends the
authority of the corporation, as well as its
A rehabilitation receiver is a natural or juridical
directors and officers, over the properties of the
person appointed by the court pursuant to RA
corporation.
10142 or the Financial Rehabilitation and
Insolvency Act (FRIA) of 2010, whenever
The receiver shall act as the representative of
necessary in order to preserve the rights of the
the corporation.
parties-litigants and/or protect the interest of
the investing public and creditors.
Page 128 of 494

The receivership shall exist indefinitely until the
Receivership Trusteeship
complete settlement and liquidation of the
corporation, unless otherwise limited are deemed officers the terms of the trust
[Herbosa]. of the court and agreement
must therefore be
The mere appointment of a receiver, without accountable to the
anything more, does not result in the court by provision of
dissolution of the corporation, nor bar it from law
the exercise of its corporate rights [Leyte
Asphalt and Mineral Oil Co. Ltd., v. Block Both are not subject to the 3-year period
Johnston and Breenbrawn, G.R. No. 9755 because the corporation is substituted in
(1928)]. either case by the trustee or the receiver
who may sue or be sued even after the
While the appointment of a receiver rests within expiration of the 3-year period.
the sound judicial discretion of the court, such
discretion must, however, always be exercised However, in the case of trusteeship, the
with caution and governed by legal and trustee must have been designated within
equitable principles, the violation of which will the 3-year period
amount to its abuse, and in making such
appointment the court should take into
consideration all the facts and weigh the 3-Year Period Does Not Apply
relative advantages and disadvantages of When the liquidation of a dissolved corporation
appointing a receiver to wind up the corporate has been placed in the hands of a receiver or
business [China Banking Corp. v. M. Michelin assignee:
& Cie, 58 Phil. 261 (1933)]. a. The 3-year period prescribed by law for
liquidation cannot be made to apply,
Receivership vs. Trusteeship and
b. The receiver or trustee may institute all
actions leading to the liquidation of the
Receivership Trusteeship assets of the corporation even after the
expiration of said period [Sumera v.
Receivership is Trusteeship is a Valencia, 67 Phil. 721 (1939)].
created by judicial contractual
appointment of a relationship that can
rehabilitation be created by a
d. Liquidation after three years
receiver and/or corporation through
management its Board of Under Sec. 139, after the expiration of the 3-
committee Directors. year winding-up period, pending actions by or
against the corporation are abated.
Both involve transfers of legal/naked title
from the corporation to the trustee, receiver, It should not, however, be construed as to
or management committee. prevent a corporation from pursuing activities
which would complete the final liquidation of a
From the time the assets of the corporation dissolved corporation.
are transferred to a trustee or receiver
pursuant to liquidation, all such assets are In this case, Northern Luzon Corporation Inc.
then held by and in the name of the trustee which term has long expired, was unable to
or receiver who can lawfully proceed with dispose of its remaining assets even during the
liquidation even if the corporation no longer 3- year period granted it by Sec. 122 [now Sec.
exists, because he has title to the assets 139, RCC].
The receiver and The trustee in Accordingly, it should be allowed to continue

management liquidation is liquidating its remaining assets in order to
committee members accountable under
Page 129 of 494

complete the process of dissolving the L. Other corporations
corporation.
Likewise, it should be allowed to distribute the 1. Close corporations

proceeds from said disposition to its
stockholders or creditors if any. A contrary Statutory Definition
interpretation would have unjust and absurd A close corporation is –
results. SEC-OGC Opinion No. 15-07 (2015) a. One whose AOI provides that:
citing SECAC No. 347 (1991). 1. All the corporation’s issued stock of
all classes, exclusive of treasury
Directors as Trustees shares, shall be held of record by
If full liquidation can only be effected after the not more than a specified number
3-year period and there is no trustee, the of persons, not exceeding twenty
directors may be permitted to complete the (20);
liquidation by continuing as trustees by legal 2. All the issued stock of all classes
implication [Reburiano v. CA, G.R. No. 102965 shall be subject to one or more
(1999)]. specified restrictions on transfer
permitted by this Title; and
A corporation’s BOD is not rendered functus 3. The corporation shall not list in any
officio by its dissolution. stock exchange or make any public
offering of its stocks of any class.
Sec. 122 [now Sec 139] allows a corporation to b. One where two-thirds (2/3) or more of
continue its existence for a limited purpose, its voting stock or voting rights is NOT
necessarily there must be a board that will owned or controlled by another
continue acting for and on behalf of the corporation, which is not a close
dissolved corporation for that purpose [Aguirre corporation within the meaning of this
v. FQB+7, Inc., G.R. No. 170770 (2013)]. Code [Sec. 95, RCC].
Continuation of Pending Suits A narrow distribution of ownership does not, by

The trustee of a corporation may continue to itself, make a close corporation. When a
prosecute a case commenced by the corporation’s AOI does not contain the
corporation within 3 years from its dissolution provisions enumerated under Sec. 96 of the
until rendition of the final judgment, even if such Code [now Sec. 95, RCC], such corporation is
judgment is rendered beyond the 3-year period not a “close corporation”. It does not become
allowed by Sec 139, RCC. one either, just because only a few individuals
a. However, an already defunct owned 99.866% of its subscribed capital stock
corporation is barred from initiating a [San Juan Structural and Steel Fabricators v.
suit after the lapse of the said 3-year CA, G.R. No. 129459 (1998)].
period.
b. If a petition is filed after the corporate “Incorporated Partnership”
existence, the effect is that petitioner A close corporation embodies what
lacks the capacity to sue as a businessmen perceive to be the best features
corporation. of a partnership and a corporation, such as –
c. To allow such petition to prosper, on a. Corporation: separate personality,
the ground that it is for the sole purpose limited liability, and the right of
of liquidating the corporation’s assets, succession
would be to circumvent the provisions b. Partnership: delectus personae (the
of Sec. 122 of the Corporation Code selection of a person satisfactory to
(now Sec. 139, RCC) [Alabang oneself for a position), and general
Development Corporation v. Alabang management by all partners of
Hills Village Association and Rafael business affairs [Villanueva].
Tinio, G.R. No. 187456 (2014)].
Page 130 of 494

Incorporating a Close Corporation 1. Deemed to be directors for the purpose
General Rule: Any corporation may be of applying the provisions of this Code;
incorporated as a close corporation. and, unless the context clearly requires
otherwise
Exceptions: The following cannot be 2. Subject to all liabilities of directors
incorporated as a close corporation – [Sec. 96, RCC].
a. Mining or oil companies
b. Stock exchanges Identity and Number of Stockholders
c. Banks 1. Stockholders of record not more than
d. Insurance companies 20
e. Public utilities 2. Stocks not publicly listed
f. Educational institutions; 3. Restricted transfer of ownership of
g. Corporations declared to be vested stocks [Sec. 95, RCC].
with public interest in accordance with
the provisions of this Code [Sec. 95, Voting Stock or Voting Rights Not Held by
RCC]. Another Corporation
A corporation cannot be deemed as a close
Applicability of RCC Provisions corporation when at least two-thirds (2/3) of its
The provisions of Title XII (Close Corporations) voting stock or voting rights is owned or
primarily govern close corporations, while other controlled by another corporation, which is not
Titles of the RCC apply suppletory, except as a close corporation within the meaning of this
otherwise provided under Title XII [Sec. 95, Code [Sec. 95, RCC].
RCC].
b. Validity of restrictions on transfer of
a. Characteristics of a Close shares
Corporation
In order to be binding on any purchaser in good
Direct Management by Stockholders faith, restrictions on the right to transfer shares
The AOI of a close corporation may provide must appear in the:
that the business of the corporation shall be 1. AOI;
managed by the stockholders of the 2. By-laws; and
corporation rather than by a board of directors 3. Certificate of stock [Sec. 97, RCC].
[Sec. 96, RCC].
Right of First Refusal
The feature of a close corporation, whereby Restrictions on transfer shall not be more
there is a merger of stock ownership and active onerous than granting the existing
management is what significantly distinguishes stockholders or the corporation the option to
it from other corporations [Villanueva]. purchase the shares of the transferring
stockholder.
Identity of Stock Ownership and Active a. Said option is subject to such
Management reasonable terms, conditions or period
All or most of the stockholders of a close stated in the AOI, by-laws, and
corporation are active in the corporate certificate of stock.
business either as directors, officers, or other b. If upon the expiration of said period, the
key men in management [Campos]. existing stockholders or the corporation
fails to exercise the option to purchase,
Stockholders’ Meeting Unnecessary the transferring stockholder may sell
So long as the abovementioned AOI provision their shares to any third person [Sec.
continues in effect, no meeting of stockholders 97, RCC].
need be called to elect directors.
The right of first refusal, as discussed above, is
Provided, that the stockholders of the the most onerous transfer restriction allowed.
corporation shall be:
Page 131 of 494
● Such right is a control scheme Exception: The AOI provides otherwise. [Sec.
essential to a close corporation. 101, RCC].
● It allows the existing stockholders the
power to maintain the character of d. Amendment of Articles of
delectus personae by preventing an Incorporation
outsider from coming into and
interfering with the affairs of the close Contents of the AOI of Close Corporations
corporation [Villanueva]. Mandatory Provisions
A transfer restriction should NOT amount to a The AOI of a close corporation must provide
deprivation of a stockholder’s right to ultimately that:
dispose of his shareholdings [Rural Bank of 1. All the corporation’s issued stock of all
Salinas v. CA, 210 SCRA 510 (1992)]. classes, exclusive of treasury shares,
shall be held of record by not more
c. Pre-emptive right than a specified number of persons,
not exceeding twenty (20);
Definition 2. All the issued stock of all classes shall
The preemptive right is a right granted to be subject to one or more specified
stockholders to subscribe to all issues or restrictions on transfer permitted by
disposition of shares of any class, in proportion this Title; and
to their respective shareholdings. [Sec. 38, 3. The corporation shall not list in any
RCC]. stock exchange or make any public
offering of its stocks of any class [Sec.
No limit to pre-emptive rights. Thus, includes 95, RCC].
sale of treasury shares and for acquisition of
properties Optional Provisions
Scope of Pre-emptive Right in Ordinary The AOI of a close corporation may provide for:
Corporations 1. A classification of shares or rights, the
In ordinary corporations, the pre-emptive right qualifications for owning or holding the
shall not extend to – same, and restrictions on their
1. Shares issued in compliance with laws transfers, subject to the provisions of
requiring stock offerings or minimum the following section;
stock ownership by the public; or 2. A classification of directors into one (1)
2. Shares issued in good faith with the or more classes, each of whom may be
approval of the stockholders voted for and elected solely by a
representing two-thirds (2/3) of the particular class of stock;
outstanding capital stock, in exchange 3. Greater quorum or voting requirements
for property needed for corporate in meetings of stockholders or directors
purposes or in payment of a previously than those provided in this Code;
contracted debt [Sec. 38, RCC]. 4. The management by the stockholders
of the business of the corporation,
Scope of Pre-emptive Right in Close rather than by a board of directors; and
Corporations 5. The election or appointment by the
stockholders of all officers or
General Rule: The pre-emptive right of employees, or specified officers or
stockholders in close corporations shall extend employees, instead of by the board of
to ALL stock to be issued, including reissuance directors [Sec. 96, RCC].
of treasury shares, whether:
1. For money, property or personal

services; or
2. In payment of corporate debts.
Page 132 of 494
Amendments Essence of a Non-Stock Corporation
Any amendment to the AOI, which seeks: It is legally possible for a corporation having
1. To delete or remove any provision capital stock to still be considered a non-stock
required by this Title; or corporation.
2. To reduce a quorum or voting
requirement stated in said articles of For this reason, the essence of a non-stock
Incorporation corporation is NOT the non-existence of shares
of stock, but that:
Shall require, at a meeting duly called for the 1. Its primary purpose should be
purpose, the affirmative vote – eleemosynary in nature; and
1. Of at least two-thirds (2/3) of the 2. There is a prohibition in its AOI and by-
outstanding capital stock, whether with laws that no part of the income or any
or without voting rights; or form of dividend is distributable to the
2. Of such greater proportion of shares as members, trustees, or officers of the
may be specifically provided in the AOI corporation [Villanueva].
for amending, deleting, or removing
any of the aforesaid provisions [Sec. Purpose
102, RCC].
Non-stock corporations may be formed or
2. Non-Stock Corporations organized for the following purposes:
1. Charitable;
2. Religious;
a. Definition
3. Educational;
4. Professional;
Corporation Code (RA 11232) 5. Cultural;
6. Fraternal;
Section 3. Classes of Corporations. –
Corporations formed or organized under this Code
7. Literary;
may be stock or nonstock corporations. Stock 8. Scientific;
corporations are those which have capital stock 9. Social;
divided into shares and are authorized to distribute 10. Civic service;
to the holders of such shares, dividends, or 11. Similar purposes, like trade, industry,
allotments of the surplus profits on the basis of the agricultural and like chambers; or
shares held. All other corporations are nonstock
corporations. The territorial and political
12. Any combination thereof, subject to the
subdivisions shall enjoy local autonomy. special provisions of this Title governing
particular classes of non- stock
corporations [Sec. 87, RCC].
A non- stock corporation is one where no part
of its income is distributable as dividends to its A non-stock corporation may not include in its
members,trustees, or officers [Sec. 86, RCC]. AOI a purpose which would change or
contradict its nature as such [Sec. 13(b), RCC].
All other corporations are non-stock
corporations [Sec. 3]. A nonstock corporation may not engage in an
investment business, where profit is the main or
Its governing body is usually the Board of underlying purpose [People v. Menil, 340 SCRA
Trustees (BoT). However, non-stock 125 (2000)].
corporations may, through their articles of
incorporation or their by-laws, designate their b. Treatment of Profit
governing boards by any name other than as
board of trustees [Sec. 174]. Any profit which a non-stock corporation may
obtain incidental to its operations shall,
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for
Page 133 of 494

which the corporation was organized, subject to
the provisions of this Title [Sec. 86, RCC].
A non-stock corporation holds its funds in trust

for the carrying out of the objectives and
purposes expressed in its AOI. Thus, if it were
to be converted to a stock corporation, it must
be dissolved first, otherwise, such
transformation would be tantamount to an
unauthorized distribution of its assets or income
to its members [Villanueva].
Earning of Profits Merely Incidental
It is not inconsistent with the nature of a

nonstock corporation to incidentally earn profits
in pursuing its eleemosynary purpose [CIR v.
University of Visayas, 1 SCRA 669 (1961)].
The incurring of profit or losses does not

determine whether an activity is for profit or non-
profit, what the courts will consider is:
1. Whether dividends have been declared;
or
2. Whether its profit was ever used for
personal or individual gain, and not for
the purpose of carrying out the
objectives of the enterprise [Manila
Sanitarium and Hospital v. Gabuco, 7
SCRA 14 (1963)]
Page 134 of 494

Summary: Stock v. Non-Stock Corporations
Stock Non-Stock
Stock corporations are those which have All other corporations [Sec. 3, RCC]. One where
capital stock divided into shares and are no part of its income is distributable as dividends
authorized to distribute to the holders of such to its members, trustees, or officers [Sec. 87,
shares, dividends, or allotments of the surplus RCC].
profits based on the shares held [Sec. 3,
RCC].
Purpose
Primarily to make profits for its shareholders. Non-stock corporations may be formed or
organized for charitable, religious, educational,
professional, cultural, fraternal, literary,
scientific, social, civic service, or similar
purposes, like trade, industry, agricultural and
like chambers, or any combination thereof,
subject to the special provisions of this Title
governing particular classes of non-stock
corporations [Sec. 87, RCC].
Distribution of Profits
Profit is distributed to shareholders. A nonstock corporation is one where no part of

its income is distributable as dividends to its
members, trustees, or officers: Provided, that
any profit which a non-stock corporation may
obtain incidental to its operations shall,
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which
the corporation was organized, subject to the
provisions of this Title [Sec. 86, RCC].
Scope of Voting Rights
Each stockholder votes according to the Each member, regardless of class, is entitled to
proportion of his shares in the corporation. No one (1) vote UNLESS such right to vote has
share may be deprived of voting rights except been limited, broadened, or denied in the AOI or
those classified and issued as “preferred” or by- laws [Sec. 88, RCC].
“redeemable” shares, unless otherwise
provided in this Code: Provided, That there
shall always be a class or series of shares
with complete voting rights [Sec. 6, RCC].
Voting by Proxy
Page 135 of 494

Summary: Stock v. Non-Stock Corporations
Stock Non-Stock
Stockholders and members may vote in May be denied by the AOI or the by-laws [Sec.
person or by proxy in all meetings of 88, RCC]
stockholders or members.
When so authorized in the by-laws or by a

majority of the board of directors, the
stockholders or members of corporations may
also vote through remote communication or in
absentia: Provided, That the votes are
received before the corporation finishes the
tally of votes [Sec. 57, RCC].
Who Exercises Corporate Power
Board of Directors or Trustees [Sec. 22, 92, Board of Trustees, which may or may not be
RCC]. more than 15 trustees, as provided by the AOI
or by-laws [Sec. 23, 91, RCC].
Term of Directors of Trustees
Directors / trustees shall hold office for 1 year Directors/trustees shall hold office for not more
and until their successors are elected and than 3 years [Sec. 91].
qualified [Sec. 23].
Election of Officers
Directors shall be elected for a term of one (1) Trustees shall be elected for a term not
year from among the holders of stocks exceeding three (3) years. Except with respect
registered in the corporation’s books Each to independent trustees of nonstock
director and trustee shall hold office until the corporations vested with public interest, only a
successor is elected and qualified [Sec. 22, member of the corporation shall be elected as
RCC]. trustee [Sec. 91, RCC].
The articles of incorporation may provide that Officers may directly be elected by the members
all officers or employees or that specified UNLESS the AOI or by-laws provide otherwise
officers or employees shall be elected or [Sec. 91, RCC].
appointed by the stockholders, instead of by
the board of directors [Sec. 97].
Transferability of interest or membership
Transferable. Generally non-transferable since membership

and all rights arising therefrom are personal.
However, the AOI or by-laws can provide
otherwise [Sec. 89, RCC].
Page 136 of 494

3. Educational Corporations Non-Stock Stock
Definition way; and

3. The term of
A stock or nonstock corporation organized for 1/5 of them
educational purposes. [Sec. 105, RCC] expires
every year
Educational corporations shall be governed by [Sec. 106, RCC].
special laws and the general provisions [of the
Revised Corporation Code]. [Sec. 105, RCC]
Rules as to Vacancies
If organized as a non-stock corporation
Trustees thereafter elected to fill vacancies,
Trustees of educational institutions organized occurring before the expiration of a particular
as non-stock corporations shall not be less term, shall hold office only for the unexpired
than five (5) nor more than fifteen (15). Period.
Provided, however, that the number of trustees
shall be in multiples of five (5). They shall Trustees elected thereafter to fill vacancies
classify themselves in such a way that the term caused by expiration of term shall hold office
of 1/5 of them expires every year, unless for five (5) years [Sec. 106, RCC].
otherwise provided by the AOI or BL [Sec. 106].
Quorum
If organized as a stock corporation
A majority of the trustees shall constitute a
For institutions organized as stock quorum for the transaction of business [Sec.
corporations, the number and term of directors 106, RCC].
shall be governed by the provisions on stock
corporations [Sec. 106]. Constitutional Provisions Related to
Educational Corporations
Composition of the Board
Educational institutions, other than those
established by religious groups and mission
Non-Stock Stock boards, shall be owned solely by citizens of the
Philippines or corporations or associations at
Trustees of For institutions least sixty per centum of the capital of which is
educational organized as stock owned by such citizens. The Congress may,
institutions corporations, however, require increased Filipino equity
organized as non- the number, and participation in all educational institutions. The
stock corporations term of directors control and administration of educational
shall not be less shall be institutions shall be vested in citizens of the
than five (5) nor governed Philippines [CONST, Art. XIV, Sec. 4(2), par. 1].
more than fifteen by the
(15). Provided, provisions on No educational institution shall be established
however, that: stock corporations exclusively for aliens and no group of aliens
1. The number [Sec. 106, RCC]. shall comprise more than one-third of the
of trustees enrollment in any school. The provisions of this
shall be in The powers and subsection shall not apply to schools
multiples of authority of trustees established for foreign diplomatic personnel
five; shall be defined in and their dependents and, unless otherwise
2. They the bylaws. provided by law, for other foreign temporary
shall residents [CONST, Art. XIV, Sec. 4(2), par. 1].
classify
themselves
in such a
Page 137 of 494
4. Religious Corporations Register of Deeds of Davao City, G.R. No. L-
8451 (1957)].
Classification
Religious corporations may be incorporated by Incorporation Contents of the AOI
one or more persons. Such corporations may
be classified into: The AOI of the corporation sole must set forth
1. Corporations sole; and the following:
2. Religious societies [Sec. 107, RCC]. 1. That the applicant chief archbishop,
bishop, priest, minister, rabbi, or
Religious corporations shall be governed by presiding elder represents the religious
Title XIII, and by the general provisions on denomination, sect, or church who
nonstock corporations insofar as applicable desires to become a corporation sole;
[Sec. 107, RCC]. 2. That the rules, regulations and
discipline of the religious
a. Corporation Sole denomination, sect or church are
consistent with becoming a corporation
A corporation sole may be formed by the chief sole and do not forbid it;
archbishop, bishop, priest, minister, rabbi, or 3. That such chief archbishop, bishop,
other presiding elder of such religious priest, minister, rabbi, or presiding
denomination, sect, or church [Sec. 108, RCC]. elder is charged with:
4. The administration of the temporalities;
A corporation sole consists of only one person 5. The management of the affairs, estate
and his successors (who will always be one at and properties of the religious
a time), in some particular station [Roman denomination, sect, or church within
Catholic Apostolic Adm. of Davao v. LRC, 102 the territorial jurisdiction, so described
Phil. 596 (1957)]. succinctly in the AOI; and
6. The manner by which any vacancy
Purpose occurring in the office of chief
archbishop, bishop, priest, minister,
A corporation sole is incorporated for the rabbi, or presiding elder is required to
purpose of administering and managing, as be filled, according to the rules,
trustee, the affairs, property and temporalities regulations or discipline of the religious
of any religious denomination, sect or church denomination, sect, or church; and
[Sec. 108, RCC]. 7. The place where the principal office of
the corporation sole is to be
A corporation sole is not the owner of the established and located, which place
properties that he may acquire, but merely the must be within the territory of the
administrator thereof [Roman Catholic Philippines [Sec. 109, RCC].
Apostolic Adm. of Davao v. LRC, 102 Phil. 596 Submission of the AOI The chief
(1957)] archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious
Nationality denomination, sect or church must file
the AOI with the Commission [Sec.
A corporation sole has no nationality, but for 109, RCC].
the purpose of applying nationalization laws,
nationality is determined not by the nationality The articles of incorporation must be:
of its presiding elder but by the nationality of its 1. Verified, by affidavit or affirmation of
members constituting the sect in the the chief archbishop, bishop, priest,
Philippines. minister, rabbi, or presiding elder, as
the case may be; and
Thus, the Roman Catholic Church can acquire 2. Accompanied by a copy of the
lands in the Philippines even if it is headed by commission, certificate of election or
the Pope [Roman Catholic Apostolic, etc v. letter of appointment of such chief
Page 138 of 494

archbishop, bishop, priest, minister, If such approval mechanism is made to operate
rabbi, or presiding elder, duly certified in a corporation sole, its one member in whom
to be correct by any notary public [Sec. all the powers of the corporation technically
110, RCC]. belong, needs to get the concurrence of 2/3 of
its membership. The one member is but a
From and after filing with the Commission of trustee of its membership.
the said AOI:
1. Such chief archbishop, bishop, priest, There is no point to dissolving the corporation
minister, rabbi, or presiding elder shall sole of one member to enable the corporation
become a corporation sole; and aggregate to emerge from it. The one member,
2. All temporalities, estate and properties with the concurrence of two-thirds of the
of the religious denomination, sect or membership of the organization for whom he
church theretofore administered or acts as trustee, can self-will the amendment.
managed as such chief archbishop, He can, with membership concurrence,
bishop, priest, minister, rabbi, or increase the technical number of the members
presiding elder shall be personally held of the corporation from “sole” or one to the
in trust as a corporation sole. greater number authorized by its amended
a. For the use, purpose, exclusive articles [Iglesia Evangelica Metodista En Las
benefit and on behalf of the Filipinas (Corporation Sole) Inc., et al v. Bishop
religious denomination, sect,or Nathanael Lazaro, et al, G.R. No. 184088
church. (2010)].
b. This includes hospitals,
schools, colleges, orphan Filing of Vacancies
asylums, parsonages, and
cemeteries thereof [Sec. 110, The successors in office of any chief
RCC]. archbishop, bishop, priest, minister, rabbi, or
presiding elder in a corporation sole:
Power to Amend AOI 1. Shall become the corporation sole on
their accession to office; and
Note that Sec. 107 allows the application to 2. Shall be permitted to transact business
religious corporations of the general provisions as such upon filing a copy of their
governing non-stock corporations, insofar as commission, certificate of election, or
applicable. letters of appointment, duly certified by
any notary public with the Commission
For non-stock corporations, the power to [Sec. 112, RCC].
amend its Articles of Incorporation lies in its
members. The code requires two-thirds of their During any vacancy in the office, all the powers
votes for the approval of such an amendment. and authority of the corporation sole during
such vacancy shall be exercised by the person
So how will this requirement apply to a or persons authorized by the rules, regulations
corporation sole that has technically but one or discipline of the religious denomination,
member (the head of the religious sect, or church represented by the corporation
organization) who holds in his hands its broad sole to:
corporate powers over the properties, rights, 1. Administer the temporalities and
and interests of his religious organization? 2. Manage the affairs, estate, and
properties of the corporation sole [Sec.
Although a non-stock corporation has a 112, RCC].
personality that is distinct from those of its
members who established it, its AOI cannot be Alienation of Property
amended solely through the action of its BOT.
The amendment needs the concurrence of at A corporation sole may sell, or mortgage real
least 2/3 of its membership. property held by it by:
Page 139 of 494

1. Obtaining an order for that purpose the purpose of winding up its affairs [Sec. 113,
from the Regional Trial Court of the RCC].
province where the property is situated
2. Adducing proof that: b. Religious Societies
a. The notice of the application for
leave to sell or mortgage has Definition
been made through publication
or as directed by the Court; and A religious corporation incorporated by more
b. It is in the interest of the than one person. Also called “corporation
corporation that leave to sell or aggregate.”
mortgage be granted.
Incorporation
The application for leave to sell or mortgage:
1. Must be made by petition, duly verified, General Rule: Any religious society, religious
by the chief archbishop, bishop, priest, order, diocese, synod, or district organization
minister, rabbi, or presiding elder of any religious denomination, sect, or church,
acting as corporation sole, and; may incorporate for the administration of its
2. May be opposed by any member of the temporalities or for the management of its
religious denomination, sect, or church affairs, properties, and estate:
represented by the corporation sole. 1. Upon written consent of at least two-
thirds (2/3) of its membership; and/or
Provided, that in cases where the rules, 2. By an affirmative vote at a meeting
regulations, and discipline of the religious called for the purpose of at least two-
denomination, sect, or church, religious thirds (2/3) of its membership
society, or order concerned represented by
such corporation sole regulate the method of Exception: Unless forbidden by competent
acquiring, holding, selling, and mortgaging real authority, the Constitution, pertinent rules,
estate and personal property: regulations, or discipline of the religious
1. Such rules, regulations and discipline denomination, sect, or church of which it is a
shall control; and part [Sec. 114, RCC].
2. The intervention of the courts shall not
be necessary [Sec. 111, RCC]. Filing and Contents of the AOI
The AOI must be:
1. Verified by the affidavit of the presiding
Voluntary Dissolution elder, secretary, or clerk or other
A corporation sole may be dissolved and its member of such religious society or
affairs settled voluntarily by submitting to the religious order, or diocese, synod, or
Commission a verified declaration of district organization of the religious
dissolution, setting forth: denomination, sect, or church; and
1. The name of the corporation; 2. Filed with the Commission [Sec. 114,
2. The reason for dissolution and winding RCC].
up;
3. The authorization for the dissolution of The AOI must set forth the following:
the corporation by the particular 1. That the religious society or religious
religious denomination, sect or church; order, or diocese, synod, or district
4. The names and addresses of the organization is a religious organization
persons who are to supervise the of a religious denomination, sect or
winding up of the affairs of the church;
corporation [Sec. 113, RCC]. 2. That at least two-thirds (2/3) of its
membership has given written consent
Upon approval of such declaration of or has voted to incorporate, at a duly
dissolution by the Commission, the corporation convened meeting of the body;
shall cease to carry on its operations except for
Page 140 of 494

3. That the incorporation of the religious Sole proprietorship v. OPC
society or religious order, diocese,
synod, or district organization is not
Sole Proprietorship OPC
forbidden by competent authority or by
the Constitution, rules, regulations or Has no separate Has a legal
discipline of the religious legal personality personality separate
denomination, sect, or church of which from the proprietor and distinct from the
it forms part; conducting the sole stockholder of
4. That the religious society or religious business the corporation
order, diocese, synod, or district
organization desires to incorporate for The assets of the The assets of the
the administration of its affairs, sole proprietorship OPC are not owned
properties and estate; are similarly owned by its sole
5. The place within the Philippines where by the proprietor stockholder unless
the principal office of the corporation is conducting the the OPC is not
to be established and located; and business adequately financed
6. The names, nationalities, and and or the assets.
residence addresses of the trustees,
not less than five (5) nor more than The obligations that The obligations of
fifteen (15) elected by the religious the sole the OPC cannot be
society or religious order, or the proprietorship enforced against its
diocese, synod, or district organization incurred in sole stockholder,
to serve for the first year, or such other conducting the unless the situation
period as may be prescribed by the business may be warrants the piercing
laws of the religious society, or enforced against the of the veil of
religious order, or of the diocese, proprietor. corporate fiction.
synod, or district organization [Sec.
114, RCC]. Registered with the Registered with the
DTI. SEC.
5. One-Person Corporations [Divina, “Highlights of the Revised Corporation
Code”]
Definition
a. Excepted Corporations
A corporation with a single stockholder. [Sec.
116, RCC] Only a natural person, trust, or an estate may
form a One Person Corporation.
Who may form OPCs
The following may NOT incorporate as OCPs:
Only the following may form OPCs: 1. Banks;
1. A natural person; 2. Quasi-banks;
2. A trust; or 3. Pre-need companies;
3. An estate 4. Public and publicly-listed companies;
and
Note: A natural person who is licensed to 5. Non-chartered GOCCs. [Sec. 116,
exercise a profession may not organize as a RCC]
OPC for the purpose of exercising such
profession, except as otherwise provided A natural person who is licensed to exercise a
under special laws [Sec. 116, RCC]. profession may not organize as a One Person
Corporation for the purpose of exercising such
profession except as otherwise provided under
special laws. [Sec. 10, RCC]
Page 141 of 494

b. Capital Stock Requirement Treasurer, Corporate Secretary, and Other
Officers
A One Person Corporation shall not be
required to have a minimum authorized capital Within fifteen (15) days from the issuance of its
stock, except as otherwise provided by special certificate of incorporation, the OPC shall
law [Sec. 117, RCC]. appoint:
1. A treasurer;
c. Articles of Incorporation and By- 2. A corporate secretary; and
Laws 3. Other officers as it may deem
necessary
Articles of Incorporation
Note: The single stockholder may NOT be
A One Person Corporation shall file articles of appointed as the corporate secretary.
incorporation in accordance with the
requirements under Section 14 of this Code. It Within five (5) days from appointment, the OPC
shall likewise substantially contain the shall notify the Commission thereof [Sec. 122,
following: RCC].
1. If the single stockholder is a trust or an
estate: Treasurer’s Bond
a. The name, nationality, and
residence of the trustee, A single stockholder who is likewise the self-
administrator, executor, appointed treasurer of the corporation, shall
guardian, conservator, give a bond to the Commission in such a sum
custodian, or other person as may be required: Provided, that:
exercising fiduciary duties 1. The said stockholder/treasurer shall
b. Proof of such authority to act on undertake in writing:
behalf of the trust or estate; and a. To faithfully administer the
2. Name, nationality, residence of the OPC’s funds to be received as
nominee and alternate nominee, and treasurer, and
the extent, coverage and limitation of b. To disburse and invest the
the authority [Sec. 118, RCC]. same according to the articles
of incorporation as approved
By-Laws by the Commission.
2. The bond shall be renewed every two
The OPC is not required to submit and file (2) years or as often as may be
corporate by-laws [Sec. 119, RCC]. required [Sec. 122, RCC].
d. Corporate Name Corporate Secretary’s Special Functions
A One Person Corporation shall indicate the In addition to the functions designated by the
letters “OPC” either below or at the end of its OPC, the corporate secretary shall:
corporate name [Sec. 120, RCC]. 1. Be responsible for maintaining the
minutes book and/or records of the
corporation;
e. Corporate Structure and Officers
2. Notify the nominee or alternate
nominee of the death or incapacity of
Single Stockholder as Director, President The
the single stockholder
single stockholder shall be the sole director
a. Such notice shall be given no
andpresident of the One Person Corporation
later than five (5) days from
[Sec. 121, RCC].
such occurrence;
3. Notify the Commission of the death of
the single stockholder within five (5)
Page 142 of 494

days from such occurrence and stating Term of Alternate Nominee
in such notice:
a. The names, residence In case of the nominee’s inability, incapacity,
addresses, and contact details death, or refusal to discharge the functions as
of all known legal heirs; and director and manager of the corporation:
4. Call the nominee or alternate nominee 1. The alternate nominee shall sit as
and the known legal heirs to a meeting director and manage the One Person
and advise the legal heirs with regard Corporation; and
to, among others: 2. The alternate nominee shall serve only
a. The election of a new director; for the same term, and under the same
b. Amendment of the AOI; and conditions applicable to the nominee
c. Other ancillary and/or [Sec. 125, RCC].
consequential matters [Sec.
123, RCC]. Change of Nominee or Alternate Nominee
f. Nominee The single stockholder may, at any time,

change its nominee and alternate nominee by
The single stockholder shall designate in the submitting to the Commission:
AOI a nominee and an alternate nominee who 1. The names of the new nominees; and
shall, in the event of the single stockholder’s 2. The new nominees’ corresponding
death or incapacity: written consent. Note: For this purpose,
1. Take the place of the single the AOI need not be amended [Sec.
stockholder as director; and 126, RCC].
2. Manage the corporation’s affairs [Sec.
124, RCC]. g. Liability
Term of Nominee Limited Liability
When the single stockholder is temporarily An important advantage of the corporation is

incapacitated: the limitation of an investor’s liability to the
1. The nominee shall sit as director and amount of investment, which flows from the
manage the affairs of the OPC; and legal theory that a corporate entity is separate
2. The nominee shall serve only until the and distinct from its stockholders [San Juan
stockholder, by self-determination, Structural and Steel, Inc. v. CA, 296 SCRA 631
regains the capacity to assume such (1998)].
duties. [Sec. 125, RCC].
3. Liability of Single Shareholder
In case of death or permanent incapacity of the A sole shareholder claiming limited liability has
single stockholder: the burden of affirmatively showing that the
1. The nominee shall sit as director and corporation was adequately financed.
manage the affairs of the OPC
2. The nominee shall serve until: Where the single stockholder cannot prove that
a. The legal heirs of the single the property of the OPC is independent of the
stockholder have been lawfully stockholder’s personal property, the
determined; and stockholder shall be jointly and severally liable
b. The heirs have designated one for the debts and other liabilities of the OPC.
of them or have agreed that the
estate shall be the single Applicability of the Doctrine of Piercing the
stockholder of the OPC [Sec. Corporate Veil
125, RCC].
The principle of piercing the corporate veil
applies with equal force to OPCs, as with other
corporations[Sec. 130, RCC]. When the veil of
Page 143 of 494

corporate fiction is pierced the corporation will 1. Within seven (7) days from receipt of
be considered as a mere association of either an affidavit of heirship or self-
persons; and the liability will directly attach to adjudication executed by a sole heir, or
the stockholders or to the other corporation. any other legal document declaring the
legal heirs of the single stockholder,
h. Conversion of Corporation to One the nominee or alternate nominee
Person Corporation and Vice-Versa shall:
a. Transfer the shares to the duly
Conversion from an Ordinary Corporation designated legal heir or estate;
to an OPC and
b. Notify the Commission of the
When a single stockholder acquires ALL the transfer.
stocks of an ordinary stock corporation, the 2. Within sixty (60) days from the transfer
latter may apply for conversion into a One of the shares, the legal heirs shall notify
Person Corporation, subject to the submission the Commission of their decision to
of such documents as the Commission may either:
require. a. Wind up and dissolve the One
Person Corporation; or
If the application for conversion is approved: b. Convert it into an ordinary
1. The Commission shall issue certificate stock corporation.
of filing of amended articles of
incorporation reflecting the conversion The ordinary stock corporation converted
2. The OPC converted from an ordinary from a One Person Corporation shall
stock corporation shall succeed the succeed the latter and be legally responsible
latter and be legally responsible for all for all the latter’s outstanding liabilities as of
the latter’s outstanding liabilities as of the date of conversion [Sec. 132, RCC].
the date of conversion [Sec. 131,
RCC]. 6. Foreign Corporations
Conversion from a OPC to an Ordinary Definition

Stock Corporation
Those formed, organized, or existing under any
A One Person Corporation may be converted laws other than those of the Philippines and
into an ordinary stock corporation after: whose laws allow Filipino citizens and
1. Due notice to the Commission of such corporations to do business in its own country
fact and of the circumstances leading or state [Sec. 140].
to the conversion; and
a. Such notice shall be filed with In contrast, a domestic corporation is one
the Commission within sixty formed, organized, or existing under the laws
(60) days from the occurrence of the Philippines
of the circumstances leading to
the conversion into an ordinary a. Bases of Authority Over Foreign
stock corporation Corporations
2. Compliance with all other requirements
for stock corporations under this Code
Consent
and applicable rules.
As a rule, a foreign corporation can have no
If all requirements have been complied with,
legal existence or status beyond the bounds of
the Commission shall issue an amended the State or sovereignty by which it is created
certificate of incorporation reflecting the
or incorporated and organized. It exists only in
conversion [Sec. 132, RCC]. contemplation of law and by force of the law.
In case of death of the single stockholder:
Page 144 of 494
Where that law ceases to operate, the Said business activities serve as the basis by
corporation can have no existence. which a host state is deemed to have authority
over a foreign corporation within its territorial
However, this principle does not prevent a jurisdiction [Villanueva].
corporation from acting in another State or
country with the latter’s express or implied Concept of doing business
consent.
The concept of "doing business" implies a
Consent Doctrine continuity of commercial dealings and
arrangements and the performance of
The legal standing of foreign corporations in acts/works/exercise of some of the functions
the host state is founded on international law normally incident to the purpose or object of a
on the basis of consent, whether implied or foreign corporation’s organization
express. [Mentholatum Co., Inc. v. Mangaliman, 72 Phil.
525 (1941)].
A corporation can exercise none of the
functions and privileges conferred by its charter It is the crucial point to determine:
in another State or country except by the 1. Whether foreign corporations and
comity and consent of such State or country. multinational enterprises have come
[DE LEON] within the territorial jurisdictions of the
host countries; and
Under Philippine law, the condition is that it 2. To what extent they are bound to obtain
must obtain a license to do business in the licenses within various host countries
Philippines [CAMPOS]. before they can sue with local courts
and administrative bodies [Villanueva].
Consent as Basis for Exercise of
Jurisdiction Jurisprudential Tests of “Doing Business in
the Philippines”
To obtain jurisdiction over foreign corporations, 1. Twin Characterization Test
the considerations of due process and fair play Continuity Test: Doing business
require that consent be obtained. [Villanueva] implies a continuity of commercial
dealings and arrangements, or
The jurisdiction of courts to render judgment in performance of acts normally incidental
personam is grounded on their de facto power to the purpose and object of the
over the defendant's person. His presence organization.
within the territorial jurisdiction of a court is
prerequisite to its rendition of judgment Substance Test: Doing business
personally binding him. [Pennoyer v, Neff, 95 implies that a foreign corporation is
U.S. 714 (1877)] continuing the body or substance of the
enterprise of business for which it was
Thus, a foreign corporation may be subjected organized [Agilent Technologies v.
to jurisdiction by reason of consent, ownership Integrated Silicon Technology, G.R.
of property within the State, or by reason of No. 154618 (2004)].
activities within or having an effect within the 2. Contract Test: A foreign corporation is
state. [Villanueva citing Salonga] doing business in the Philippines if the
contracts entered into by the foreign
Doctrine of “Doing Business” corporation or by an agent acting under
the control and direction of the foreign
When a foreign corporation undertakes corporation are consummated in the
business activities within the territorial Philippines [Pacific Vegetable Oil v.
jurisdiction of a host state, then it ascribes to Singson, G.R. No. L-7917 (1955)].
the host state standing to enforce its laws,
rules, and regulations [Villanueva].
Page 145 of 494
b. Necessity of a License to Do 5. The names and addresses of the
Business present directors and officers of the
corporation;
Every foreign corporation, which on the date of 6. A statement of its authorized capital
the effectivity of this Code, is authorized to do stock and the aggregate number of
business in the Philippines under a license shares which the corporation has
issued to it, shall continue to have such authority to issue, itemized by class,
authority under the terms and conditions of its par value of shares, shares without par
license, subject to the provisions of this Code value, and series, if any;
and other special laws [Sec. 141, RCC]. 7. A statement of its outstanding capital
stock and the aggregate number of
A foreign corporation transacting business in shares which the corporation has
the Philippines is required to secure a license issued, itemized by class, par value of
to have the personality to sue before Philippine shares, shares without par value, and
courts. (See c. Personality to Sue and series, if any;
Suability) 8. A statement of the amount actually
paid in; and
Requisites for the issuance of a license 9. Such additional information as may be
A foreign corporation shall submit: necessary or appropriate in order to
1. A copy of its articles of incorporation enable the Commission to determine
and bylaws, certified in accordance whether such corporation is entitled to
with law; and a license to transact business in the
2. Their translation to an official language Philippines, and to determine and
of the Philippines, if necessary. [Sec assess the fees payable [Sec. 142,
142, RCC] RCC].
The application shall be under oath and, unless Issuance of a License

already stated in its articles of incorporation,
shall specifically set forth the following: Upon issuance of the license, such foreign
1. The date and term of incorporation; corporation may commence to transact
2. The address, including the street business in the Philippines and continue to do
number, of the principal office of the so for as long as it retains its authority to act as
corporation in the country or State of a corporation under the laws of the country or
incorporation; State of its incorporation, unless such license
3. The name and address of its resident is:
agent authorized to accept summons 1. Surrendered;
and process in all legal proceedings 2. Revoked;
and all notices affecting the 3. Suspended; or
corporation, pending the establishment 4. Annulled in accordance with this Code
of a local office; or other special laws [Sec. 143, RCC].
4. The place in the Philippines where the
corporation intends to operate; The Deposit of Securities
specific purpose or purposes which the
corporation intends to pursue in the Within 60 days, the licensee, except foreign
transaction of its business in the banking or insurance corporations, shall
Philippines: deposit with the Commission for the benefit
a. Provided, That said purpose or of present and future creditors of the licensee
purposes are those specifically in the Philippines, securities satisfactory to
stated in the certificate of the Commission, consisting of:
authority issued by the 1. Bonds or other evidence of
appropriate government indebtedness of the Government of the
agency; Philippines, its political subdivisions
and instrumentalities, or of
Page 146 of 494
government-owned or - controlled 2. Upon proof to the satisfaction of the
corporations and entities; Commission that the licensee has no
2. Shares of stock or debt securities that liability to Philippine residents,
are registered under RA 8799 (The including the Government of the
Securities Regulation Code); Republic of the Philippines [Sec. 143,
3. Shares of stock in domestic RCC].
corporations listed in the stock
exchange; Amendment of License
4. Shares of stock in domestic insurance
companies and banks, any financial A foreign corporation shall obtain an amended
instrument determined suitable by the license in the event it changes its corporate
Commission, or; name, or desires to pursue other or additional
5. Any combination thereof with an actual purposes in the Philippines
market value of at least Five hundred
thousand(P500,000.00) pesos or such Said amendment may be made by submitting
other amount that may be set by the an application with the Commission, endorsed
Commission [Sec. 143, RCC]. by the appropriate government agency [Sec.
148, RCC].
Within 6 Months After Each Fiscal Year of the
License, the Commission shall require: 1. Resident Agent
1. The licensee to deposit additional
securities or financial instruments Definition
equivalent in actual market value to 2%
of the amount by which the licensee’s A resident agent may be either:
gross income for that fiscal year 1. An individual residing in the Philippines
exceeds P10,000,000.00. (must be of good moral character and
2. The deposit of additional securities or sound financial standing) or
financial instruments if the actual 2. A domestic corporation (must likewise
market value of the deposited be of sound financial standing and
securities or financial instruments has must show proof of good standing)
decreased by at least 10% of their lawfully transacting business in the
actual market value at the time they Philippines [Sec. 144, RCC].
were deposited [Sec. 143, RCC]. The foreign corporation shall file a written
power of attorney:
The Commission may: 1. Designating a person (Philippine
1. At its discretion, release part of the resident), on whom summons and
additional deposit if the gross income other legal processes may be served in
of the licensee has decreased, or if the all actions or other legal proceedings
actual market value of the total deposit against such corporation; and
has increased, by more than ten (10%) 2. Consenting that service upon such
percent of their actual market value at resident agent shall be admitted and
the time they were deposited. held as valid, as if served upon the duly
2. Allow the licensee to make substitute authorized officers of the foreign
deposits for those already on deposit corporation at its home office [Sec.
as long as the licensee is solvent [Sec 144, RCC].
143, RCC].
It shall be the duty of the resident agent to
In the event the licensee ceases to do business immediately notify the Commission in writing of
in the Philippines, its deposits shall be any change in the resident agent’s address
returned: [Sec. 144, RCC].
1. Upon the licensee’s application
therefore; and
Page 147 of 494

c. Personality to Sue and Suability contracting with a foreign corporation from later
taking advantage of its noncompliance with the
Summary of Rules statutes chiefly in cases where such person
has received the benefits of the contract
[Communications Materials and Design, Inc. v.
Status Consequence Court ofAppeals, 260 SCRA 673 (1996)].
Doing Business in Can sue and be
the PH, WITH a sued Suability of Foreign Corporations
license
No foreign corporation transacting business in
the Philippines without a license, or its
successors or assigns, shall be permitted to
Doing Business in General Rule: maintain or intervene in any action, suit or
the PH, WITHOUT a Cannot sue, but may proceeding in any court or administrative
license be sued in the PH agency of the Philippines.
Exception: Nevertheless, such corporation may be sued or

Capacity to sue proceeded against before Philippine courts or
may not be administrative tribunals on any valid cause of
questioned if the action recognized under Philippine laws [Sec.
other party is 150, RCC].
estopped
A foreign corporation cannot claim exemption
NOT doing business May sue
from being sued in Philippine courts for acts
in the PH, on May be
done against a person or persons in the
isolated transactions sued
Philippines [Facilities Management
Corporation v. De La Osa, G.R. No. L-38649
(1979)].
Capacity to Sue
e. Instances When Unlicensed Foreign
Foreign corporations which conduct regular Corporations May be Allowed to Sue
business should be denied any access to (Isolated Transactions)
courts until they secure a license to ensure that
they will abide by the decisions of the local Doctrine of Isolated Transactions
courts [Eriks Ltd. v. CA, 267 SCRA 567 (1997)].
Foreign corporations are not required to obtain
A foreign corporation transacting business in a license to obtain relief from local courts or
the Philippines is required to secure a license agencies [Villanueva].
to have the personality to sue before, or
intervene in, any court or administrative In an isolated transaction, there is no intent on
proceeding [Sec. 150, RCC; Campos]. the part of the foreign corporation to engage in
a progressive pursuit of the purpose of a
By filing an action before Philippine courts, a business transaction [Eriks Ltd. v. CA, 267
foreign corporation puts itself under their SCRA 567 (1997)].
jurisdiction [Communication Materials v. CA,
260 SCRA 673 (1996)]. General Rule: No foreign corporation
transacting business in the Philippines without
By estoppel a license, or its successors or assigns, shall be
permitted to maintain or intervene in any
One who has dealt with a corporation of foreign action, suit or proceeding in any court or
origin as a corporate entity is estopped to deny administrative agency of the Philippines.
its corporate existence and capacity: The
principle will be applied to prevent a person
Page 148 of 494
Exceptions: which such corporation is authorized
1. But such may be sued or proceeded under its license;
against before Philippine courts or ● Transacting business in the Philippines
administrative tribunals on any valid as agent of or acting on behalf of any
cause of action recognized under foreign corporation or entity not duly
Philippine laws [Sec. 150, RCC]. licensed to do business in the
2. One who has dealt with a corporation Philippines; or
of foreign origin as a corporate entity is ● Any other ground as would render it
estopped to deny its corporate unfit to transact business in the
existence and capacity Philippines. [Sec. 151, RCC]
[Communications Materials and
Design, Inc. v. Court of Appeals, 260 M. Merger and Consolidation
SCRA 673 (1996)].
3. If a foreign corporation is not doing
business in the Philippines, it needs no
1. Concept
license to sue before Philippine courts
Definitions
on an isolated transaction or on a
cause of action entirely independent of
Merger - A corporation absorbs the other and
any business transaction [Agilent
remains in existence while the others are
Technologies v. Integrated Silicon,
dissolved [Sec.75, RCC].
G.R. No. 154618 (2004)].
Mergers may be horizontal (between competing
f. Grounds for Revocation of License
firms), vertical (if a corporation acquires another
which uses or distributes its products) or
Grounds for revocation of license:
conglomerate (neither competing nor related in
the chain of production or distribution)
● Failure to file its annual report or pay
[Campos].
any fees as required by this Code;
● Failure to appoint and maintain a
Consolidation – a new corporation is created,
resident agent in the Philippines as
and consolidating corporations are
required by this Title;
extinguished [Sec.75, RCC].
● Failure, after change of its resident
agent or address, to submit to the
Commission a statement of such Merger Consolidation
change as required by this Title;
● Failure to submit to the Commission an One or more Union of 2 or more
authenticated copy of any amendment corporations are corporations to form
to its articles of incorporation or bylaws absorbed by another a new corporation
or of any articles of merger or which survives and
consolidation within the time continues the
prescribed by this Title; combined business
● A misrepresentation of any material
matter in any application, report, One of All constituent
affidavit or other document submitted the constituent corporations
by such corporation pursuant to this corporations disappear
Title; remains as an with the
● Failure to pay any and all taxes, existing juridical emergence of a new
imposts, assessments or penalties, if person, whereas the corporate entity
any, lawfully due to the Philippine other corporation
Government or any of its agencies or shall cease to exist
political subdivisions;
The surviving The new corporate
● Transacting business in the Philippines
corporation shall entity shall obtain all
outside of the purpose or purposes for
Page 149 of 494

The Plan must be approved by the board of
Merger Consolidation
directors or trustees of each constituent
acquire all the the assets of corporation by majority vote [Sec. 75, RCC].
assets, rights of the disappearing
action, and corporations, 4. Articles of Merger or Consolidation
assuming all the and likewise shall
liabilities of assume all their The Articles of Merger or Consolidation takes
the disappearing liabilities. the place of the AOI of the consolidated
corporation/s. corporation or amends the AOI of the surviving
corporation. [Sec. 77, RCC]
There is no liquidation of the assets of the
dissolved corporation, all rights, properties Requisites
and franchises are acquired by the 1. Executed by each of the constituent
surviving/new corporation. corporations;
2. Signed by the president/vice president;
Merger and consolidation involve fundamental 3. Certified by the secretary/assistant
changes in the corporation, the rights of secretary of each corporation. [Sec. 77,
stockholders and creditors. There must be an RCC]
express provision of law that authorizes them.
Otherwise, such combinations are ultra vires. Contents
With the approval of the Corporation Code, The Articles must contain the following:
such express authority has been granted 1. Plan of the merger/consolidation
[Campos]. 2. As to stock corporations, the number of
shares outstanding, or in the case of
non-stock corporations, the number of
2. Constituent Corporation vs. members;
Consolidated Corporation 3. As to each corporation, the number of
shares or members voting for or
Constituent Consolidated Surviving against such plan, respectively;
Corporation Corporation Corporation 4. the carrying amounts and fair values of
the assets and liabilities of the
The parties to The new One of the respective companies as of the agreed
a merger or single constituent cut-off date
consolidation. corporation corporation 5. The method to be used in the merger
created s which or consolidation of accounts of the
through remain in companies;
consolidation. existence 6. The provisional or pro-forma values, as
after the merged or consolidated, using the
merger. accounting method; and
7. Such other information as may be
3. Plan of Merger or Consolidation prescribed by the Commission [Sec.
77, RCC].
Each of the constituent corporations must draw
up a Plan of Merger or Consolidation which Procedure
shall set forth:
1. Names of the corporation involved; Approval of Plan or Merger or
Consolidation by BOD and Stockholders of
2. Terms and mode of carrying it to effect;
3. Statement of changes, if any, in the Constituent Corporations [Sec. 76, RCC]
present articles of the surviving 1. Approval by majority vote of each of the
corporation to be formed in the case of board of directors or trustees of the
merger; and with respect to the constituent corporations of the plan of
merger or consolidation.
consolidated corporation in case of
consolidation
Page 150 of 494
2. Approval by the stockholders or Execution of Articles of Merger or
members of each of such corporations Consolidation
at separate corporate meetings duly
called for that purpose. Articles of Merger or Articles of Consolidation
a. The affirmative vote of shall be executed by each of the constituent
stockholders representing at corporations.
least two-thirds (2/3) of the
outstanding capital stock of Submission to SEC of the Articles
each corporation in the case of
stock corporations or at least The Articles of Merger or Consolidation are
two-thirds (2/3) of the members submitted to the SEC for approval.
in the case of non-stock
corporations shall be Mergers and consolidations of corporations
necessary for the approval of governed by special laws require a
such plan. recommendation from the appropriate
b. Holders of non-voting shares government agency [Sec. 78 (1), RCC].
are entitled to vote on the plan
[Sec. 6, par. 6(6)]. Action by SEC
3. Notice of such meetings shall be given 1. If necessary, the SEC shall set a
to all stockholders or members in the hearing, notifying all corporations
same manner as giving notice of concerned at least 2 weeks before.
regular or special meetings under 2. SEC shall issue a certificate approving
Section 49. The notice shall state the the articles and plan of merger or of
purpose of the meeting and include a consolidation. [Sec. 78, RCC]
copy or a summary of the plan of
merger or consolidation. Upon the issuance of the certificate of
merger or consolidation, such merger or
Any dissenting stockholder in stock consolidation shall become effective [Sec.
corporations may exercise his appraisal right in 78, RCC].
accordance with the Code. Provided that if
after the approval by the stockholders of such A merger or consolidation does not
plan, the board of directors decides to abandon become effective by mere agreement of
the plan, the appraisal right shall be the constituent corporations. The approval
extinguished. of the SEC is required [PNB v. Andrada
Electric and Engr. Co., Inc. (2002)].
Amendment to the plan of merger or
consolidation Notwithstanding Sec. 79 (now, sec. 78,
RCC), parties may stipulate a specific
An amendment to the Plan may be made by effective date of merger (or consolidation)
approval of the majority vote of the where no 3rd party will be prejudiced [SEC
respective boards of directors or trustees of Opinion No. 09-13, July 1, 2009].
all the constituent corporations and ratified
by the affirmative vote of stockholders 5. Effects
representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds As enumerated in the RCC, the following are
(2/3) of the members of each of the the legal effects of merger/consolidation:
constituent corporations. Such plan, together 1. The constituent corporations shall
with any amendment, shall be considered as become a single corporation which, in
the agreement of merger or consolidation case of merger, shall be the surviving
corporation designated in the plan of
merger; and, in case of consolidation,
shall be the consolidated corporation
designated in the plan of consolidation;
Page 151 of 494

2. The separate existence of the Unlike regular transfer/acquisition, it is able to
constituent corporations shall cease, achieve a continuous flow of the juridical
except that of the surviving or the personalities and business enterprises of the
consolidated corporation; constituent corporations. There is no “legal
3. The surviving or the consolidated break” in their juridical personalities and
corporation shall possess all the rights, business enterprises.
privileges, immunities, and powers and
shall be subject to all the duties and Thus, merger/consolidation is not a violation of
liabilities of a corporation organized a non-transfer clause. The surviving or
under this Code; consolidated corporation is not considered a
4. The surviving or the consolidated transferee.
corporation shall possess all the rights,
privileges, immunities and franchises Unlike regular transfer of assets/business
of each constituent corporation; and all enterprise, there is no gain or loss in the pursuit
real or personal property, all of merger or consolidation, thus it is not subject
receivables due on whatever account, to taxable gains under Section 40(C)(2)(a) of
including subscriptions to shares and the NIRC, as amended by the Train Law.
other choses in action, and every other
interest of, belonging to, or due to each As to Constituent Corporations Corporate
constituent corporation, shall be existence
deemed transferred to and vested in
such surviving or consolidated The constituent corporations shall become a
corporation without further act or deed; single corporation. The separate existence of
and the constituents shall cease, except that of the
5. The surviving or consolidated surviving or the consolidated corporation. The
corporation shall be responsible for all absorbed or constituent corporations are ipso
the liabilities and obligations of each facto dissolved by operation of law [SEC
constituent corporation as though such Opinion, July 16, 1981].
surviving or consolidated corporation
had itself incurred such liabilities or Assets and liabilities
obligations; and any pending claim,
action or proceeding brought by or There is no liquidation of the assets of the
against any constituent corporation dissolved corporations [Campos].
may be prosecuted by or against the
surviving or consolidated corporation. The surviving or the consolidated corporation
The rights of creditors or liens upon the shall possess all the rights, privileges,
property of such constituent immunities, powers, and franchises of each
corporations shall not be impaired by constituent corporation and the properties shall
the merger or consolidation [Sec. 79, be deemed transferred to and vested in the
RCC]. surviving or consolidated corporation without
further act or deed.
Although in a merger, there is dissolution of the
absorbed corporations, there is no winding up The surviving or the consolidated corporation
of their affairs, because the surviving shall be subject to all the duties and liabilities
corporation automatically acquires all their of the dissolving corporation(s).
rights, privileges, powers, and liabilities
[Associated Bank v. CA, 291 SCRA 511]. As to Creditors
Same goes for the consolidated corporation.
The creditors of a corporation cannot prevent
Salient Advantages of its merger or consolidation with another even if
Mergers/Consolidation the surviving or new corporation is not as
acceptable a debtor as the absorbed
corporation [Campos].
Page 152 of 494

Any claim, action or proceeding pending by or
against any of the constituent corporations may
be prosecuted by or against the surviving or
consolidated corporation.
The rights of the creditors or lien upon the

property of any of each constituent corporation
shall not be impaired by such merger or
consolidation.
Mergers and Consolidations in Employees
Because there is no legal break by the act of

merging, consolidating, it is logical to expect
that the contractual rights of employees and
the existing collective bargaining agreement, if
any, would have to be absorbed by the
surviving/consolidated corporation. However,
SC has made contrary rulings.
The rule on automatic assumption/absorption

does not impair the right of an employer to
terminate the employment of the absorbed
employees for a lawful or authorized cause or
the right of such an employee to resign, retire,
or otherwise sever his employment, whether
before or after the merger, subject to existing
contractual obligations [The Philippine
Geothermal Inc. Employees Union v. Unocal
Philippines, Inc., (2016)].
Page 153 of 494

BANKING LAWS
COMMERCIAL LAW
BANKING LAWS COMMERCIAL LAW
(c) five (5) members who shall come from the private
sector, all of whom shall serve full-time: Provided,
A. NEW CENTRAL however, That of the members first appointed under
the provisions of this subsection, three (3) shall have
BANK ACT a term of six (6) years, and the other two (2), three
(3) years.
No member of the Monetary Board may be

1. State Policies reappointed more than once.
Section 7. Vacancies. – Any vacancy in the

New Central Bank Act
Monetary Board created by the death, resignation,
or removal of any member shall be filled by the
Section 1. Declaration of Policy. – The State shall
appointment of a new member to complete the
maintain a central monetary authority that shall
unexpired period of the term of the member
function and operate as an independent and
concerned.
accountable body corporate in the discharge of its
mandated responsibilities concerning money,
Section 8. Qualifications. – The members of the
banking and credit. In line with this policy, and
Monetary Board must be natural-born citizens of the
considering its unique functions and responsibilities,
Philippines, at least thirty-five (35) years of age, with
the central monetary authority established under this
the exception of the Governor who should at least
Act, while being a government-owned corporation,
be forty (40) years of age, of good moral character,
shall enjoy fiscal and administrative autonomy.
of unquestionable integrity, of known probity and
patriotism, and with recognized competence in
social and economic disciplines.
2. Monetary Board and its Powers and
Functions Section 9. Disqualifications. – In addition to the
disqualifications imposed by Republic Act No. 6713,
a. Composition a member of the Monetary Board is disqualified from
being a director, officer, employee, consultant,
lawyer, agent or stockholder of any bank, quasi-
New Central Bank Act bank or any other institution which is subject to
supervision or examination by the Bangko Sentral,
Section 6. Composition of the Monetary Board. – in which case such member shall resign from, and
The powers and functions of the Bangko Sentral divest himself of any and all interests in such
shall be exercised by the Bangko Sentral Monetary institution before assumption of office as member of
Board, hereafter referred to as the Monetary Board, the Monetary Board.
composed of seven (7) members appointed by the
President of the Philippines for a term of six (6) The members of the Monetary Board coming from
years. the private sector shall not hold any other public
office or public employment during their tenure.
The seven (7) members are:
No person shall be a member of the Monetary Board
(a) the Governor of the Bangko Sentral, who shall be if he has been connected directly with any
the Chairman of the Monetary Board. The Governor multilateral banking or financial institution or has a
of the Bangko Sentral shall be head of a department substantial interest in any private bank in the
and his appointment shall be subject to confirmation Philippines, within one (1) year prior to his
by the Commission on Appointments. Whenever the appointment; likewise, no member of the Monetary
Governor is unable to attend a meeting of the Board, Board shall be employed in any such institution
he shall designate a Deputy Governor to act as his within two (2) years after the expiration of his term
alternate: Provided, That in such event, the except when he serves as an official representative
Monetary Board shall designate one of its members of the Philippine Government to such institution.
as acting Chairman;
Section 10. Removal. – The President may remove
(b) a member of the Cabinet to be designated by the any member of the Monetary Board for any of the
President of the Philippines. Whenever the following reasons: (a)If the member is subsequently
designated Cabinet Member is unable to attend a disqualified under the provisions of Section 8 of this
meeting of the Board, he shall designate an Act; or (b)If he is physically or mentally incapacitated
Undersecretary in his Department to attend as his that he cannot properly discharge his duties and
alternate; and responsibilities and such incapacity has lasted for
more than six (6) months; or(c)If the member is guilty
Page 155 of 494

of acts or operations which are of fraudulent or illegal Power to impose administrative sanctions
character or which are manifestly opposed to the on erring banks.
aims and interests of the Bangko Sentral; or (d)If the
member no longer possesses the qualifications 3. The Bangko Sentral ng Pilipinas
specified in Section 8 of this Act.
and Banks in Distress
b. Powers, Duties and Functions a. Conservatorship
Power to close banks. New Central Bank Act

The action of the MB on this matter is final and
executory. Such exercise may nonetheless be Section 29. Appointment of Conservator. -
subject to judicial inquiry and can be set aside Whenever, on the basis of a report submitted by the
if found to be in excess of jurisdiction or with appropriate supervising or examining department,
such grave abuse of discretion as to amount to the Monetary Board finds that a bank or a quasi-
bank is in a state of continuing inability or
lack or excess of jurisdiction. [Bangko Sentral unwillingness to maintain a condition of liquidity
ng Pilipinas Monetary Board v. Antonio- deemed adequate to protect the interest of
Valenzuela, G.R. No. 184778] depositors and creditors, the Monetary Board may
appoint a conservator with such powers as the
In cases involving the BSP, power to Monetary Board shall deem necessary to take
authorize the BSP Governor to represent it charge of the assets, liabilities, and the management
thereof, reorganize the management, collect all
personally or through a counsel, even a monies and debts due said institution, and exercise
private counsel, and the authority to all powers necessary to restore its viability. The
represent the BSP may be delegated to any conservator shall report and be responsible to the
of its officers. [Bangko Sentral ng Pilipinas v. Monetary Board and shall have the power to
Legaspi, G.R. No. 205966] overrule or revoke the actions of the previous
management and board of directors of the bank or
quasi-bank.
Duty to cause the prosecution of those
alleged violators. The conservator should be competent and
However, nothing under the Central Bank Act knowledgeable in bank operations and
and the General Banking Act imposes a clear, management. The conservatorship shall not exceed
specific duty on the former to do the actual one (1) year.
prosecution of the latter.
The conservator shall receive remuneration to be
fixed by the Monetary Board in an amount not to
Being an artificial person, The Central Bank is exceed two-thirds (2/3) of the salary of the president
limited to its statutory powers and the nearest of the institution in one (1) year, payable in twelve
power to which prosecution of violators of (12) equal monthly payments: Provided, That, if at
banking laws may be attributed is its power to any time within the one-year period, the
sue and be sued. But this corporate power of conservatorship is terminated on the ground that the
institution can operate on its own, the conservator
litigation evidently refers to civil cases only. shall receive the balance of the remuneration which
[Perez v. Monetary Board, G.R. No. L-23307] he would have received up to the end of the year;
but if the conservatorship is terminated on other
Exclusive authority to assess, evaluate and grounds, the conservator shall not be entitled to
determine the condition of any bank, and such remaining balance. The Monetary Board may
finding such condition to be one of insolvency, appoint a conservator connected with the Bangko
Sentral, in which case he shall not be entitled to
or that its continuance in business would receive any remuneration or emolument from the
involve a probable loss to its depositors or Bangko Sentral during the conservatorship. The
creditors, forbid bank or non-bank financial expenses attendant to the conservatorship shall be
institution to do business in the Philippines. borne by the bank or quasi-bank concerned.
To this end, they shall designate an official of
the BSP or other competent person as receiver The Monetary Board shall terminate the
conservatorship when it is satisfied that the
to immediately take charge of its assets and institution can continue to operate on its own and the
liabilities. [Koruga v. Arcenas, Jr., G.R. Nos. conservatorship is no longer necessary. The
168332, 169053] conservatorship shall likewise be terminated should
Page 156 of 494

the Monetary Board, on the basis of the report of the Procedure for Damages under
conservator or of its own findings, determine that the Conservatorship
continuance in business of the institution would
involve probable loss to its depositors or creditors, in
which case the provisions of Section 30 shall apply. Damages arising Damages arising
from the MB's act of from the acts of the
placing the bank conservator
Requisites before the order of under
conservatorship may be set aside by a conservatorship
court:
1. The appropriate pleading must be filed by May be claimed only Comes with
the stockholders of record representing the if the MB's action is injunction to restrain
majority of the capital stock of the bank in the plainly arbitrary and the enforcement of
proper court; made in bad faith, the CB's
2. Said pleading must be filed within ten (10) and that the action implementing
days from receipt of notice by said majority therefor is resolutions.
stockholders of the order placing the bank inseparable from an
under conservatorship; and action to set aside the The fifth paragraph of
3. There must be convincing proof, after conservatorship. Section 29 of the
hearing, that the action is plainly arbitrary and Central Bank Act
made in bad faith. [Central Bank of the Must be filed within equally applies
Philippines v. Court of Appeals, G.R. No. 10 days from receipt because the
88353, 08 May 1992] of notice of the order questioned acts are
placing the bank but incidental to the
The powers of a conservator are described as under conservatorship.
vast and far-reaching. However, such powers conservatorship.
must be related to the "(preservation of) the
assets of the bank, (the reorganization of) the
2. Closure
management thereof and (the restoration of) its
viability." Such powers cannot extend to the
The action of the MB on closure is final and
post-facto repudiation of perfected
executory. [Bangko Sentral ng Pilipinas
transactions, otherwise they would infringe
Monetary Board v. Antonio-Valenzuela, G.R.
against the non-impairment clause of the
No. 184778, 02 October 2009]
Constitution.
The closure of a bank may be considered as an
The conservator merely takes the place of a
exercise of police power. Such exercise may
bank's board of directors. What the said board
nonetheless be subject to judicial inquiry and
cannot do — such as repudiating a contract
can be set aside if found to be in excess of
validly entered into under the doctrine of
jurisdiction or with such grave abuse of
implied authority — the conservator cannot do
discretion as to amount to lack or excess of
either. [First Philippine International Bank v.
jurisdiction. [Bangko Sentral ng Pilipinas
Court of Appeals, G.R. No. 115849, 24 January
Monetary Board v. Antonio-Valenzuela, G.R.
1996)]
No. 184778, 02 October 2009]
RA 7653 no longer requires that an

examination be made before the MB can issue
a closure order. [Rural Bank of San Miguel Inc.
v. Monetary Board, Central Bank of the
Philippines, G.R. No. 150886, 16 February
2007]
Under the law, the sanction of closure could be

imposed upon a bank by the BSP even without
notice and hearing. [Bangko Sentral ng
Page 157 of 494
Pilipinas Monetary Board v. Antonio- cases, the Monetary Board may summarily and
Valenzuela, G.R. No. 184778, 02 October without need for prior hearing forbid the institution
2009] from doing business in the Philippines and designate
the Philippine Deposit Insurance Corporation as
The "close now, hear later" doctrine has receiver of the banking institution.
already been justified as a measure for the
For a quasi-bank, any person of recognized
protection of the public interest. Swift action is competence in banking or finance may be
called for on the part of the BSP when it finds designated as receiver.
that a bank is in dire straits. Unless adequate
and determined efforts are taken by the The receiver shall immediately gather and take
government against distressed and charge of all the assets and liabilities of the
institution, administer the same for the benefit of its
mismanaged banks, public faith in the banking
creditors, and exercise the general powers of a
system is certain to deteriorate to the prejudice receiver under the Revised Rules of Court but shall
of the national economy itself, not to mention not, with the exception of administrative
the losses suffered by the bank depositors, expenditures, pay or commit any act that will involve
creditors, and stockholders, who all deserve the transfer or disposition of any asset of the
the protection of the government. [Bangko institution: Provided, That the receiver may deposit
or place the funds of the institution in nonspeculative
Sentral ng Pilipinas Monetary Board v.
investments. The receiver shall determine as soon
Antonio-Valenzuela, G.R. No. 184778, 02 as possible, but not later than ninety (90) days from
October 2009] take-over, whether the institution may be
rehabilitated or otherwise placed in such a condition
The period during which the bank cannot do so that it may be permitted to resume business with
business due to insolvency is not a fortuitous safety to its depositors and creditors and the general
public: Provided, That any determination for the
event, unless it is shown that the government's
resumption of business of the institution shall be
action to place a bank under receivership or subject to prior approval of the Monetary Board.
liquidation proceedings is tainted with
arbitrariness, or that the regulatory body has xxx
acted without jurisdiction. [Spouses Poon v.
Prime Savings Bank, G.R. No. 183794, 13
The law entrusts to the MB the appreciation
June 2016]
and determination of whether any or all of the
statutory grounds for the closure and
3. Receivership
receivership of the erring bank are present.
The MB, under R.A. No. 7653, has been
New Central Bank Act invested with more power of closure and
placement of a bank under receivership for
Section 30. Proceedings in Receivership and
insolvency or illiquidity, or because the bank’s
Liquidation. – Whenever, upon report of the head of
the supervising or examining department, the continuance in business would probably result
Monetary Board finds that a bank or quasi-bank: in the loss to depositors or creditors. [Vivas, v.
Monetary Board of the Central Bank of the
(a) is unable to pay its liabilities as they become due Philippines, G.R. No. 191424, 07 August
in the ordinary course of business: Provided, That 2013)]
this shall not include inability to pay caused by
extraordinary demands induced by financial panic in
the banking community; To address the growing concerns in the
banking industry, the legislature has sufficiently
(b) has insufficient realizable assets, as determined empowered the MB to effectively monitor and
by the Bangko Sentral, to meet its liabilities; or supervise banks and financial institutions and,
if circumstances warrant, to forbid them to do
(c) cannot continue in business without involving
business, to take over their management or to
probable losses to its depositors or creditors; or
place them under receivership. The legislature
(d) has willfully violated a cease and desist order has clearly spelled out the reasonable
under Section 37 that has become final, involving parameters of the power entrusted to the MB
acts or transactions which amount to fraud or a and assigned to it only the manner of enforcing
dissipation of the assets of the institution; in which said power. In other words, the MB was given
Page 158 of 494
a wide discretion and latitude only as to how proceed with the liquidation of the institution. The
the law should be implemented in order to receiver shall:
attain its objective of protecting the interest of
the public, the banking industry and the (1) file ex parte with the proper regional trial court,
economy. [Vivas, v. Monetary Board of the and without requirement of prior notice or any other
action, a petition for assistance in the liquidation of
Central Bank of the Philippines, G.R. No.
the institution pursuant to aliquidation plan adopted
191424, 07 August 2013] by the Philippine Deposit Insurance Corporation for
general application to all closed banks. In case of
The assets of the bank pass beyond its control quasi-banks, the liquidation plan shall be adopted by
into the possession and control of the receiver the Monetary Board. Upon acquiring jurisdiction, the
whose duty it is to administer the assets for the court shall, upon motion by the receiver after due
notice, adjudicate disputed claims against the
benefit of the creditors of the bank. Thus, the
institution, assist the enforcement of individual
appointment of a receiver operates to suspend liabilities of the stockholders, directors and officers,
the authority of the bank and of its directors and and decide on other issues as may be material to
officers over its property and effects, such implement the liquidation plan adopted. The receiver
authority being reposed in the receiver, and in shall pay the cost of the proceedings from the assets
this respect, the receivership is equivalent to of the institution.
an injunction to restrain the bank officers from
(2) convert the assets of the institution to money,
intermeddling with the property of the bank in dispose of the same to creditors and other parties,
any way. [Abacus Real Estate Development for the purpose of paying the debts of such institution
Center, Inc. v. Manila Banking Corporation, in accordance with the rules on concurrence and
G.R. No. 162270, 06 April 2005] preference of credit under the Civil Code of the
Philippines and he may, in the name of the
institution, and with the assistance of counsel as he
A bank receiver only has powers of
may retain, institute such actions as may be
administration. [Abacus Real Estate necessary to collect and recover accounts and
Development Center, Inc. v. Manila Banking assets of, or defend any action against, the
Corporation, G.R. No. 162270, 06 April 2005] institution. The assets of an institution under
receivership or liquidation shall be deemed in
Granting or approving an "exclusive option to custodia legis in the hands of the receiver and shall,
from the moment the institution was placed under
purchase" is not an act of administration, but
such receivership or liquidation, be exempt from any
an act of strict ownership, involving, as it does, order of garnishment, levy, attachment, or
the disposition of property of the bank. [Abacus execution.
Real Estate Development Center, Inc. v.
Manila Banking Corporation, supra The actions of the Monetary Board taken under this
section or under Section 29 of this Act shall be final
and executory, and may not be restrained or set
If circumstances warrant it, the MB may forbid
aside by the court except on petition for certiorari on
a bank from doing business and place it under the ground that the action taken was in excess of
receivership without prior notice and hearing. jurisdiction or with such grave abuse of discretion as
(Vivas, v. Monetary Board of the Central Bank to amount to lack or excess of jurisdiction. The
of the Philippines, supra) petition for certiorari may only be filed by the
stockholders of record representing the majority of
the capital stock within ten (10) days from receipt by
4. Liquidation
the board of directors of the institution of the order
directing receivership, liquidation or
New Central Bank Act conservatorship.
Section 30. Proceedings in Receivership and The designation of a conservator under Section 29
Liquidation. – xxx of this Act or the appointment of a receiver under this
section shall be vested exclusively with the
If the receiver determines that the institution cannot Monetary Board. Furthermore, the designation of a
be rehabilitated or permitted to resume business in conservator is not a precondition to the designation
accordance with the next preceding paragraph, the of a receiver.
Monetary Board shall notify in writing the board of
directors of its findings and direct the receiver to
Page 159 of 494

Court with Jurisdiction "Disputed claims" refer to all claims, whether
they be against the assets of the insolvent
Section 29 only finds operation in cases where bank, for specific performance, breach of
there are claims against an insolvent bank. The contract, damages, or whatever. [Miranda v.
exclusive jurisdiction of the liquidation court Philippine Deposit Insurance Corporation,
pertains only to the adjudication of claims supra]
against the bank. It does not cover the reverse
situation where it is the bank which files a claim The rationale behind judicial liquidation is
against another person or legal entity. [Manalo intended to prevent multiplicity of actions
v. Court of Appeals, G.R. No. 141297, 08 against the insolvent bank. It is a pragmatic
October 2001] arrangement designed to establish due
process and orderliness in the liquidation of the
The requirement that all claims against the bank, to obviate the proliferation of litigations
bank be pursued in the liquidation proceedings and to avoid injustice and arbitrariness. The
filed by the Central Bank is intended to prevent lawmaking body contemplated that for
multiplicity of actions against the insolvent convenience, only one court, if possible, should
bank and designed to establish due process pass upon the claims against the insolvent
and orderliness in the liquidation of the bank, to bank and that the liquidation court should
obviate the proliferation of litigations and to assist the Superintendent of Banks and
avoid injustice and arbitrariness. The regulate his operations. [Miranda v. Philippine
lawmaking body contemplated that for Deposit Insurance Corporation, supra]
convenience, only one court, if possible, should
pass upon the claims against the insolvent In the absence of fraud, the purchase of a
bank and that the liquidation court should cashier's check, like the purchase of a draft on
assist the Superintendents of Banks and a correspondent bank, creates the relation of
regulate his operations. [Manalo v. Court of creditor and debtor, not that of principal and
Appeals, supra] agent, with the result that the purchaser or
holder thereof is not entitled to a preference
A bank which had been ordered closed by the over general creditors in the assets of the bank
monetary board retains its juridical personality issuing the check, when it fails before payment
which can sue and be sued through its of the check. However, in a situation involving
liquidator. The only limitation being that the the element of fraud, where a cashier's check
prosecution or defense of the action must be is purchased from a bank at a time when it is
done through the liquidator. Otherwise, no suit insolvent, as its officers know or are bound to
for or against an insolvent entity would prosper. know by the exercise of reasonable diligence,
In such situation, banks in liquidation would it has been held that the purchase is entitled to
lose what justly belongs to them through a a preference in the assets of the bank on its
mere technicality. [Manalo v. Court of Appeals, liquidation before the check is paid. [Miranda v.
supra] Philippine Deposit Insurance Corporation,
supra]
The power and authority of the Monetary Board
to close banks and liquidate them thereafter Differences in the procedure for involuntary
when public interest so requires is an exercise dissolution and liquidation of a corporation
of the police power of the State. Police power, under the Corporation Code, and that of a
however, is subject to judicial inquiry. It may not banking corporation under the New Central
be exercised arbitrarily or unreasonably and Bank Act:
could be set aside if it is either capricious,
discriminatory, whimsical, arbitrary, unjust, or
is tantamount to a denial of due process and
equal protection clauses of the Constitution.
[Miranda v. Philippine Deposit Insurance
Corporation, G.R. No. 169334, 08 September
2006]
Page 160 of 494

Dissolution of Corporation v. Liquidation of
Dissolution of Liquidation of Bank
Bank
Corporation
Dissolution of Liquidation of Bank a tax clearance stock. PDIC, as the

Corporation having been issued. appointed receiver,
The corporation is shall file ex parte with
May be done upon The Monetary Board allowed to continue the proper RTC, and
the filing of a verified may summarily and as a body corporate without requirement
complaint and after without need for prior for three years after of prior notice or any
proper notice and hearing, forbid the its dissolution, for the other action, a
hearing, on grounds banking corporation purpose of petition for
provided by existing from doing business prosecuting and assistance in the
laws, rules, and in the Philippines, for defending suits by or liquidation of the
regulations. causes enumerated against it, to settle bank. The bank is not
in Section 30 of the and close its affairs, given the option to
Upon receipt by the New Central Bank and to dispose of and undertake its own
corporation of the Act; and appoint the convey its property liquidation.
order of suspension PDIC as receiver of and distribute its
from the SEC, it is the bank. assets, but not for the Nothing in Section 30
required to notify and purpose of continuing of RA 7653 requires
submit a copy of the PDIC shall its business. The the BSP, through the
said order, together immediately gather corporation may Monetary Board, to
with its final tax and take charge of all undertake its own make an·
return, to the BIR. the assets and liquidation, or at any independent
liabilities of the time during the said determination of
The SEC is also closed bank and three years, it may whether a bank may
required to furnish the administer the same convey all of its still be rehabilitated
BIR a copy of its order for the benefit of its property to trustees or not. As expressly
of suspension. creditors. for the benefit of its stated in the afore-
stockholders, cited provision, once
The BIR is supposed The summary nature members, creditors, the receiver
to issue a tax of the procedure for and other persons in determines that
clearance to the the involuntary interest. rehabilitation is no
corporation within 30 closure of a bank is longer feasible, the
days from receipt of especially stressed in Monetary Board is
the foregoing Section 30 of the simply obligated to:
documentary New Central Bank (a) notify in writing
requirements. Act, which explicitly the bank's board of
states that the directors of the same;
The SEC shall issue actions of the and (b) direct the
the final order of Monetary Board PDIC to proceed with
dissolution only after under the said liquidation.
the corporation has Section or Section 29
[In Re: Petition for Assistance in the Liquidation
submitted its tax shall be final and
in the Rural Bank of Bokod Benguet v. Bureau
clearance; or in case executory, and may of Internal Revenue, G.R. No. 158261, 18
of involuntary not be restrained or
December 2006]
dissolution, the SEC set aside by the court
may proceed with the except on a Petition
Make a separate and distinct factual
dissolution after 30 for Certiorari filed by
determination before it can order the liquidation
days from receipt by the stockholders of
of a bank or quasi-bank when the PDIC has
the BIR of the record of the bank
already made such determination. (Apex
documentary representing a
Bancrights Holdings, Inc. et. al. v. Bangko
requirements without majority of the capital
Page 161 of 494
Sentral Ng Pilipinas, G.R. No. 214866, 2
October 2017)
B. GENERAL
The liquidation court has the exclusive
jurisdiction to adjudicate disputed claims BANKING LAW OF
against the closed bank, assist in the
enforcement of individual liabilities of the 2000
stockholders, directors and officers, and decide
on all other issues as may be material to 1. Definition and Classification of
implement the distribution plan adopted by the
Banks
PDIC for general application to all closed
banks. Simply put, if there is a judicial
liquidation of an insolvent bank, all claims
a. Definition
against the bank should be filed in a liquidation
A bank has been defined as a moneyed
proceeding. (Allan Cu v. Small Business
Guarantee and Finance Corporation, G.R. No. institute founded to facilitate the borrowing,
lending and safe-keeping of money and to
218381, July 14, 2021)
deal, in notes, bills of exchange, and
credits. (Republic v. Security Credit and
Section 30 of RA 7653 is curative in character
when it declared that the liquidation court shall Acceptance Corporation, G.R. No. L-20583, 23
January 1967)
have jurisdiction in the same proceedings to
assist in the adjudication of the disputed claims
An investment company which loans out the
against the Bank. (Hermosa Savings and Loan
Bank v. Development Bank of the Philippines, money of its customers, collects the
G.R. No. 222972, February 10, 2021) interest and charges a commission to both
lender and borrower, is a bank. (Republic v.
The rationale for consolidating all claims Security Credit and Acceptance Corporation,
against the bank with the liquidation court is "to G.R. No. L-20583, 23 January 1967)
prevent multiplicity of actions against the
insolvent bank and x x x to establish due Any person engaged in the business
process and orderliness in the liquidation of the carried on by banks of deposit, of discount,
or of circulation is doing a banking business,
bank, to obviate the proliferation of litigations
and to avoid injustice and arbitrariness. although but one of these functions is
exercised. (Republic v. Security Credit and
(Hermosa Savings and Loan Bank v.
Development Bank of the Philippines, G.R. No. Acceptance Corporation, G.R. No. L-20583, 23
January 1967)
222972, February 10, 2021)
Section 30 of RA 7653 gives the liquidation General Banking Law of 2000

court the authority to "adjudicate disputed
claims against the institution, assist the Section 3. Definition and Classification of Banks.
enforcement of individual liabilities of the 3.1. "Banks" shall refer to entities engaged in the
stockholders, directors and officers, and decide lending of funds obtained in the form of deposits.
on other issues as may be material to
implement the liquidation plan adopted."
(Hermosa Savings and Loan Bank v. b. Classification
Development Bank of the Philippines, G.R. No.
222972, February 10, 2021) General Banking Law of 2000
Section 3. Definition and Classification of Banks.

Banks shall be classified into:
(a) Universal banks;
(b) Commercial banks;
Page 162 of 494

Banks Quasi- Trust

(c) Thrift banks, composed of: (i) Savings and Banks Entities
mortgage banks, (ii) Stock savings and loan
associations, and (iii) Private development banks, as G.R. No. L-
defined in the Republic Act No. 7906 (hereafter the
"Thrift Banks Act");
20583, 23
January
(d) Rural banks, as defined in Republic Act No. 73S3 1967)
(hereafter the "Rural Banks Act");
An
(e) Cooperative banks, as defined in Republic Act investment
No 6938 (hereafter the "Cooperative Code");
company
(f) Islamic banks as defined in Republic Act No. which loans
6848, otherwise known as the "Charter of Al out the
Amanah Islamic Investment Bank of the money of its
Philippines"; and customers,
collects the
(g) Other classifications of banks as determined by
the Monetary Board of the Bangko Sentral ng interest and
Pilipinas. charges a
commission
to both
2. Distinction of Banks from Quasi- lender and
Banks and Trust Entities borrower.
(Republic v.
Banks Quasi- Trust Security
Banks Entities Credit and
Acceptance
Entities Entities A stock Corporation,
engaged in engaged in corporation G.R. No. L-
the lending of the borrowing or a person 20583, 23
funds of funds duly January
obtained in through the authorized by 1967)
the form of issuance, the Monetary
deposits. endorsement Board to Pawnshops
(Sec. 3) or engage in They are non-banks/banking institutions.
assignment trust
A moneyed with recourse business. The nature of their business activities partakes
institute or (Sec. 79) that of a financial intermediary in that its
founded to acceptance principal function is lending.
facilitate the of deposit Only such a
borrowing, substitutes as corporation Furthermore, pawnshops are under the
lending and defined in may act as a regulatory supervision of the Bangko Sentral
safe- Section 95 of trustee or ng Pilipinas and covered by its Manual of
keeping of Republic Act administer Regulations for Non-Bank Financial
money and No. 7653 for any trust or Institutions. (First Planters Pawnshop, Inc. v.
to deal, in purposes of hold property Commissioner of Internal Revenue, G.R. No.
notes, bills re-lending or in trust or on 174134, 30 July 2008)
of exchange, purchasing of deposit for
and credits. receivables the use,
(Republic v. and other benefit, or
Security obligations. behoof of
Credit and (Sec. 4) others. (Sec.
Acceptance 79)
Corporation,
Page 163 of 494
3. Diligence Required of Banks 138569, 11 September 2003; Citystate
Savings Bank v. Tobias, G.R. No. 227990]
New Civil Code
Strict care in the selection and supervision of
Article 1173. The fault or negligence of the obligor its employees [Citystate Savings Bank v.
consists in the omission of that diligence which is Tobias, G.R. No. 227990]
required by the nature of the obligation and
corresponds with the circumstances of the persons, Care and trustworthiness expected of bank
of the time and of the place. When negligence shows
employees and officials is far greater than
bad faith, the provisions of articles 1171 and 2201,
paragraph 2, shall apply. those of ordinary clerks and employees.
[Philippine National Bank v. Raymundo, G.R.
If the law or contract does not state the diligence No. 208672, 07 December 2016]
which is to be observed in the performance, that
which is expected of a good father of a family shall However, the banks' compliance with this
be required.
degree of diligence is to be determined in
accordance with the particular circumstances
of each case. [Spouses Carbonell v.
General Banking Law of 2000
Metropolitan Bank And Trust Company, G.R.
Section 2. Declaration of Policy. - The State No. 178467, 26 April 2017]
recognizes the vital role of banks providing an
environment conducive to the sustained A bank's disregard of its own banking policy
development of the national economy and the amounts to gross negligence.
fiduciary nature of banking that requires high
standards of integrity and performance. In
furtherance thereof, the State shall promote and Payment of the amounts of checks without
maintain a stable and efficient banking and financial previously clearing them with the drawee bank,
system that is globally competitive, dynamic and especially so where the drawee bank is a
responsive to the demands of a developing foreign bank and the amounts involved were
economy. large, is contrary to normal or ordinary banking
practice. [Philippine National Bank v.
a. Standards of Diligence Raymundo, G.R. No. 208672, 07 December
2016]
Higher than that of a good father of a family
[Philippine National Bank v. Raymundo, G.R. Rationale:
No. 208672, 07 December 2016; Consolidated The business and industry is imbued with
Bank and Trust Corporation v. Court of public interest. [Ong Bun v. Bank of the
Appeals, G.R. No. 138569, 11 September Philippine Islands, G.R. No. 212362]
2003]
There is a fiduciary relationship between the
Treat the depositor's account with the utmost bank and its depositors.
fidelity. [Simex International (Manila) Inc. v.
Court of Appeals, G.R. No. 88013, 19 March A blunder on the part of the bank, such as the
1990] dishonor of a check without good reason, can
cause the depositor not a little embarrassment
Treat the accounts of its depositors with if not also financial loss and perhaps even civil
meticulous care. [Simex International (Manila) and criminal litigation. [Simex International
Inc. v. Court of Appeals, G.R. No. 88013, 19 (Manila) Inc. v. Court of Appeals, G.R. No.
March 1990; Consolidated Bank and Trust 88013, 19 March 1990]
Corporation v. Court of Appeals, G.R. No.
138569, 11 September 2003] The relationship between the bank and
depositor is fiduciary. [Consolidated Bank and
Observe "high standards of integrity and Trust Corporation v. Court of Appeals, G.R. No.
performance." [Consolidated Bank and Trust 138569, 11 September 2003]
Corporation v. Court of Appeals, G.R. No.
Page 164 of 494
The very nature of their work in handling negligence of the defendant, who had the last
millions of pesos in daily transactions. fair chance to prevent the impending harm by
[Philippine National Bank v. Raymundo, G.R. the exercise of due diligence. Moreover, in
No. 208672, 07 December 2016] situations where the doctrine has been applied,
it was defendant's failure to exercise such
Their stability depends on the confidence of the ordinary care, having the last clear chance to
people in their honesty and efficiency. avoid loss or injury, which was the proximate
[Citystate Savings Bank v. Tobias, G.R. No. cause of the occurrence of such loss or injury.
227990] [Bank of the Philippine Islands v. Spouses.
Quiaoit, G.R. No. 199562, 16 January 2019]
The contract between the bank and its
depositor is governed by the provisions of the A bank is liable for wrongful acts of its officers
Civil Code on simple loan or mutuum, with the done in the interests of the bank or in the
bank as the debtor and the depositor as the course of dealings of the officers in their
creditor. [Citystate Savings Bank v. Tobias, representative capacity but not for acts outside
G.R. No. 227990 (2018)] the scope of their authority. [Citystate Savings
Bank v. Tobias, G.R. No. 227990]
Liability of Banks
Banking institutions may be held liable for Application of these principles is especially
damages for failure to exercise the diligence necessary because banks have a fiduciary
required of it resulting to contractual breach or relationship with the public and their stability
where the act or omission complained of depends on the confidence of the people in
constitutes an actionable tort. [Citystate their honesty and efficiency. Such faith will be
Savings Bank v. Tobias, G.R. No. 227990] eroded where banks do not exercise strict care
in the selection and supervision of its
When the action against the bank is premised employees, resulting in prejudice to their
on breach of contractual obligations, a bank's depositors. [Citystate Savings Bank v. Tobias,
liability as debtor is not merely vicarious but G.R. No. 227990)]
primary, in that the defense of exercise of due
diligence in the selection and supervision of its 4. Nature of Bank Funds and Bank
employees is not available. Liability of banks is Deposits
also primary and sole when the loss or damage
to its depositors is directly attributable to its The complaint filed with the Bangko Sentral ng
acts, finding that the proximate cause of the Pilipinas was an invocation of the BSP’s
loss was due to the bank's negligence or supervisory powers over banking operations
breach. [Citystate Savings Bank v. Tobias, which does not amount to a judicial
G.R. No. 227990] proceeding. It brought to the attention of the
BSP the alleged questionable actions of the
The doctrine of last clear chance, stated bank’s Board of Directors in violation of the
broadly, is that the negligence of the plaintiff principles of good corporate governance. It
does not preclude a recovery for the prayed for the conduct of an investigation over
negligence of the defendant where it appears the alleged unsafe and unsound business
that the defendant, by exercising reasonable practices of the bank and to make necessary
care and prudence, might have avoided corrective measures to prevent the collapse of
injurious consequences to the plaintiff the bank.
notwithstanding the plaintiff's negligence. The
doctrine necessarily assumes negligence on A ruling by the BSP concerning the soundness
the part of the defendant and contributory of the bank operations will not adversely or
negligence on the part of the plaintiff, and does directly affect the resolution of the intra-
not apply except upon that assumption. Stated corporate controversies pending before the
differently, the antecedent negligence of the trial court. [Suan v. Gonzales, A.C. No. 6377,
plaintiff does not preclude him from recovering 12 March 2007]
damages caused by the supervening
Page 165 of 494

5. Stipulation on Interests Equitable PCI Bank, G.R. No. 208336, 21
November 2018)
High interest rates
There is nothing inherently wrong with the
Stipulated interest rates of 3% per month and escalation clause because it is validly
higher are excessive, iniquitous, stipulated in commercial contracts as one of
unconscionable and exorbitant. Such the means adopted to maintain fiscal stability
stipulations are void for being contrary to and to retain the value of money in long term
morals, if not against the law. [Macalinao v. contracts.
Bank of the Philippine Islands, G.R. No.
175490, 17 September 2009] The escalation clause that "grants the creditor
an unbridled right to adjust the interest
Since the stipulation on the interest rate is void, independently and upwardly, completely
it is as if there was no express contract thereon. depriving the debtor of the right to assent to an
Hence, courts may reduce the interest rate as important modification in the agreement" is
reason and equity demand. [Macalinao v. Bank void. Such escalation clause violates the
of the Philippine Islands, G.R. No. 175490, 17 principle of mutuality of contracts, and should
September 2009] be annulled.
Central Bank Circular No. 905 did not repeal There should be a corresponding de
nor in any way amend the Usury Law but escalation clause that authorizes a reduction in
simply suspended the latter’s effectivity. The the interest rates corresponding to downward
illegality of usury is wholly the creature of changes made by law or by the Monetary
legislation. A Central Bank Circular cannot Board. (Villa Crista Monte Realty &
repeal a law. Only a law can repeal another Development Corporation v. Equitable PCI
law. Bank, G.R. No. 208336, 21 November 2018)
However, nothing in CB Circular No. 905 6. Prohibitive Transactions by Bank

grants lenders a carte blanche authority to Directors and Officers
raise interest rates to levels which will either
enslave their borrowers or lead to a
hemorrhaging of their assets. a. Single Borrower’s Limit
The nullity of the stipulation of usurious interest General Banking Law of 2000
does not affect the lender’s right to recover the
principal of a loan, nor affect the other terms Section 35. Limit on Loans, Credit Accommodations
thereof. [Advocates for Truth in Lending Inc. v. and Guarantees
Bangko Sentral ng Pilipinas, Monetary Board, 35.1 Except as the Monetary Board may otherwise
G.R. No. 192986, 15 January 2013] prescribe for reasons of national interest, the total
amount of loans, credit accommodations and
Escalation clauses guarantees as may be defined by the Monetary
Board that may be extended by a bank to any
Requisites for a valid escalation clause: person, partnership, association, corporation or
other entity shall at no time exceed twenty percent
(1) that there can be an increase in interest (20%) of the net worth of such bank. The basis for
rates if allowed by law or by the Monetary determining compliance with single borrower limit is
Board; and the total credit commitment of the bank to the
(2) that there must be a stipulation for the borrower.
reduction of the stipulated interest rates in the
event that the applicable maximum rates of 35.2. Unless the Monetary Board prescribes
otherwise, the total amount of loans, credit
interest are reduced by law or by the Monetary accommodations and guarantees prescribed in the
Board (de-escalation clause). (Villa Crista preceding paragraph may be increased by an
Monte Realty & Development Corporation v. additional ten percent (10%) of the net worth of such
bank provided the additional liabilities of any
Page 166 of 494

borrower are adequately secured by trust receipts,

shipping documents, warehouse receipts or other 35.7. Certain types of contingent accounts of
similar documents transferring or securing title borrowers may be included among those subject to
covering readily marketable, non-perishable goods these prescribed limits as may be determined by the
which must be fully covered by insurance. Monetary Board.
35.3 The above prescribed ceilings shall include (a)

the direct liability of the maker or acceptor of paper If the loans were of a DOSRI nature or without
discounted with or sold to such bank and the liability the benefit of the required approvals or in
of a general endorser, drawer or guarantor who excess of the Single Borrower’s Limit, they
obtains a loan or other credit accommodation from
or discounts paper with or sells papers to such bank;
would not be void for that reason. Instead, the
(b) in the case of an individual who owns or controls bank or the officers responsible for the
a majority interest in a corporation, partnership, approval and grant of the DOSRI loan would be
association or any other entity, the liabilities of said subject only to sanctions under the law.
entities to such bank; (c) in the case of a corporation, (Republic v. Sandiganbayan, G.R. Nos.
all liabilities to such bank of all subsidiaries in which 166859, 169203, 180702, 12 April 2011)
such corporation owns or controls a majority
interest; and (d) in the case of a partnership,
association or other entity, the liabilities of the b. Restrictions on Bank Exposure to
members thereof to such bank. DOSRI (Directors, Officers,
35.4. Even if a parent corporation, partnership,
Stockholders and their Related
association, entity or an individual who owns or Interests
controls a majority interest in such entities has no
liability to the bank, the Monetary Board may
prescribe the combination of the liabilities of
subsidiary corporations or members of the
Section 36. Restriction on Bank Exposure to
partnership, association, entity or such individual
Directors, Officers, Stockholders and Their Related
under certain circumstances, including but not
Interests. - No director or officer of any bank shall,
limited to any of the following situations: (a) the
directly or indirectly, for himself or as the
parent corporation, partnership, association, entity
representative or agent of others, borrow from such
or individual guarantees the repayment of the
bank nor shall he become a guarantor, endorser or
liabilities; (b) the liabilities were incurred for the
surety for loans from such bank to others, or in any
accommodation of the parent corporation or another
manner be an obligor or incur any contractual liability
subsidiary or of the partnership or association or
to the bank except with the written approval of the
entity or such individual; or (c) the subsidiaries
majority of all the directors of the bank, excluding the
though separate entities operate merely as
director concerned: Provided, That such written
departments or divisions of a single entity.
approval shall not be required for loans, other credit
accommodations and advances granted to officers
35.5. For purposes of this Section, loans, other
under a fringe benefit plan approved by the Bangko
credit accommodations and guarantees shall
Sentral. The required approval shall be entered
exclude: (a) loans and other credit accommodations
upon the records of the bank and a copy of such
secured by obligations of the Bangko Sentral or of
entry shall be transmitted forthwith to the appropriate
the Philippine Government: (b) loans and other
supervising and examining department of the
credit accommodations fully guaranteed by the
Bangko Sentral. Dealings of a bank with any of its
government as to the payment of principal and
directors, officers or stockholders and their related
interest; (c) loans and other credit accommodations
interests shall be upon terms not less favorable to
covered by assignment of deposits maintained in the
the bank than those offered to others. After due
lending bank and held in the Philippines; (d) loans,
notice to the board of directors of the bank, the office
credit accommodations and acceptances under
of any bank director or officer who violates the
letters of credit to the extent covered by margin
provisions of this Section may be declared vacant
deposits; and (e) other loans or credit
and the director or officer shall be subject to the
accommodations which the Monetary Board may
penal provisions of the New Central Bank Act. The
from time to time, specify as non-risk items.
Monetary Board may regulate the amount of loans,
credit accommodations and guarantees that may be
35.6. Loans and other credit accommodations,
extended, directly or indirectly, by a bank to its
deposits maintained with, and usual guarantees by
directors, officers, stockholders and their related
a bank to any other bank or non-bank entity, whether
interests, as well as investments of such bank in
locally or abroad, shall be subject to the limits as
enterprises owned or controlled by said directors,
herein prescribed.
officers, stockholders and their related interests.
Page 167 of 494

However, the outstanding loans, credit (b) Furnish false or make misrepresentation or
accommodations and guarantees which a bank may suppression of material facts for the purpose of
extend to each of its stockholders, directors, or obtaining, renewing, or increasing a loan or other
officers and their related interests, shall be limited to credit accommodation or extending the period
an amount equivalent to their respective thereof;
unencumbered deposits and book value of their
paid-in capital contribution in the bank: Provided, (c) Attempt to defraud the said bank in the event of
however, That loans, credit accommodations and a court action to recover a loan or other credit
guarantees secured by assets considered as non- accommodation; or
risk by the Monetary Board shall be excluded from
such limit: Provided, further, That loans, credit (d) Offer any director, officer, employee or agent of
accommodations and advances to officers in the a bank any gift, fee, commission, or any other form
form of fringe benefits granted in accordance with of compensation in order to influence such persons
rules as may be prescribed by the Monetary Board into approving a loan or other credit accommodation
shall not be subject to the individual limit. The application.
Monetary Board shall define the term "related
interests." The limit on loans, credit 55.3 No examiner, officer or employee of the Bangko
accommodations and guarantees prescribed herein Sentral or of any department, bureau, office, branch
shall not apply to loans, credit accommodations and or agency of the Government that is assigned to
guarantees extended by a cooperative bank to its supervise, examine, assist or render technical
cooperative shareholders. assistance to any bank shall commit any of the acts
enumerated in this Section or aid in the commission
of the same. (87-Aa)
The making of false reports or misrepresentation or
Section 55. Prohibited Transactions. suppression of material facts by personnel of the
Bangko Sental ng Pilipinas shall be subject to the
55.1. No director, officer, employee, or agent of any administrative and criminal sanctions provided
bank shall - under the New Central Bank Act.
(a) Make false entries in any bank report or 55.4. Consistent with the provisions of Republic Act
statement or participate in any fraudulent No. 1405, otherwise known as the Banks Secrecy
transaction, thereby affecting the financial interest Law, no bank shall employ casual or non regular
of, or causing damage to, the bank or any person; personnel or too lengthy probationary personnel in
the conduct of its business involving bank deposits.
(b) Without order of a court of competent jurisdiction,
disclose to any unauthorized person any information
relative to the funds or properties in the custody of A direct borrowing is obviously one that is
the bank belonging to private individuals, made in the name of the DOSRI himself or
corporations, or any other entity: Provided, That with where the DOSRI is a named party, while an
respect to bank deposits, the provisions of existing indirect borrowing includes one that is made by
laws shall prevail;
a third party, but the DOSRI has a stake in the
(c) Accept gifts, fees, or commissions or any other transaction. (Soriano v. People, G.R. No.
form of remuneration in connection with the approval 162336, 01 February 2010)
of a loan or other credit accommodation from said
bank; If the loans were of a DOSRI nature or without
the benefit of the required approvals or in
(d) Overvalue or aid in overvaluing any security for
excess of the Single Borrower’s Limit, they
the purpose of influencing in any way the actions of
the bank or any bank; or would not be void for that reason. Instead, the
bank or the officers responsible for the
(e) Outsource inherent banking functions. approval and grant of the DOSRI loan would be
subject only to sanctions under the law.
55.2. No borrower of a bank shall - [Republic v. Sandiganbayan, G.R. Nos.
166859, 169203, 180702, 12 April 2011]
(a) Fraudulently overvalue property offered as
security for a loan or other credit accommodation Section 83 of RA 337 actually imposes three
from the bank; restrictions.
Page 168 of 494

The approval requirement (found in the first
sentence of the first paragraph of the law)
refers to the written approval of the majority of C. SECRECY OF
the bank’s board of directors required before
bank directors and officers can in any manner BANK DEPOSITS
be an obligor for money borrowed from or
loaned by the bank. Failure to secure the (R.A. No. 1405, as
approval renders the bank director or officer
concerned liable for prosecution and, upon amended, and R.A.
conviction, subjects him to the penalty provided
in the third sentence of first paragraph of
No. 6426, as
Section 83.
amended)
The reportorial requirement, on the other hand,
mandates that any such approval should be 1. Purpose [Sec. 1]
entered upon the records of the corporation,
and a copy of the entry be transmitted to the It is hereby declared to be the policy of the
appropriate supervising department. The Government to:
reportorial requirement is addressed to the 1. give encouragement to the people to
bank itself, which, upon its failure to do so, deposit their money in banking
subjects it to quo warranto proceedings under institutions and ;
Section 87 of RA 337. 2. to discourage private hoarding so that the
same may be properly utilized by banks
The ceiling requirement under the second in authorized loans to assist in the
paragraph of Section 83 regulates the amount economic development of the country.
of credit accommodations that banks may
extend to their directors or officers by limiting The absolute confidentiality rule in R.A. No.
these to an amount equivalent to the respective 1405 actually aims at protection from
outstanding deposits and book value of the unwarranted inquiry or investigation if the
paid-in capital contribution in the bank. Again, purpose of such inquiry or investigation is
this is a requirement directed at the bank. In merely to determine the existence and nature,
this light, a prosecution for violation of the first as well as the amount of the deposit in any
paragraph of Section 83, such as the one given bank account. [BSB. Group, Inc. v. Go,
involved here, does not require an allegation G.R. No. 168644 (2010)]
that the loan exceeded the legal limit. Even if
the loan involved is below the legal limit, a 2. Prohibited Acts [Secs. 2 & 3]
written approval by the majority of the bank’s
directors is still required; otherwise, the bank
director or officer who becomes an obligor of 1. Examination, inquiry, or looking into deposits
of whatever nature with banks or banking
the bank is liable. Compliance with the ceiling
requirement does not dispense with the institutions in the Philippines including
approval requirement. investments in bonds issued by the
(Go v. Bangko Sentral ng Pilipinas, G.R. No. Government of the Philippines, its political
178429, 23 October 2009) subdivisions and its instrumentalities;
2. Disclosure by banking institutions' officials or

employees to unauthorized persons
regarding information about covered
deposits and investments
Page 169 of 494

3. Deposits Covered limited only to accounts which give rise to a
creditor-debtor relationship between the
a. General Rule depositor and the bank. [Estrada v.
All [peso] deposits of whatever nature with Sandiganbayan (Special Division), G.R. Nos.
banks or banking institutions in the Philippines 157284-95, 30 November 2006]
including investments in bonds issued by the
Government of the Philippines, its political d. Presumption in favor of
subdivisions and its instrumentalities, are confidentiality
hereby considered as of an absolutely
confidential nature. [Sec. 2 of RA No. 1405]
Any exception to the rule of absolute
confidentiality must be specifically legislated.
The phrase "of whatever nature" proscribes
any restrictive interpretation of "deposits."
By force of statute, all bank deposits are
absolutely confidential, and that nature is
Moreover, it is clear from the immediately
unaltered even by the legislated exceptions
quoted provision that, generally, the law
referred to above.
applies not only to money which is deposited
but also to those which are invested. This
There is disfavor towards construing these
further shows that the law was not intended to
exceptions in such a manner that would
apply only to "deposits" in the strict sense of the
authorize unlimited discretion on the part of the
word. Otherwise, there would have been no
government or of any party seeking to enforce
need to add the phrase "or invested." [Estrada
those exceptions and inquire into bank
v. Sandiganbayan (Special Division), G.R.
deposits.
Nos. 157284-95, 30 November 2006]
If there are doubts in upholding the absolutely
b. Deposits and Funds Covered by confidential nature of bank deposits against
Other Laws on Confidentiality affirming the authority to inquire into such
accounts, then such doubts must be resolved
All foreign currency deposits authorized under in favor of the former. Such a stance would
this Act, as amended by Presidential Decree persist unless Congress passes a law
No. 1035, as well as foreign currency deposits reversing the general state policy of preserving
authorized under Presidential Decree No. the absolutely confidential nature of Philippine
1034, are hereby declared as and considered bank accounts. [Republic v. Eugenio, Jr., G.R.
of an absolutely confidential nature [Sec. 8 of No. 174629, 14 February 2008]
RA No. 6426]
e. Zones of Privacy
Funds placed in a bank not in the nature of a
deposit by private individuals or entities.
Disclosure to any unauthorized information Under the RA 1405, bank deposits are
relative to said funds is also prohibited [Sec. statutorily protected or recognized zones of
55.1 of Ra No. 8791, The General Banking Law privacy. [People v. Estrada, G.R. No. 164368
of 2000] (2009); Marquez v. Desierto, G.R. No. 135882
(2001); Ople v. Torres, G.R. No. 127685
c. Trust Accounts (1998)]
While the fundamental law has not bothered

The contention that trust accounts are not with the triviality of specifically addressing
covered by the term "deposits," as used in R.A. privacy rights relative to banking accounts,
1405, by the mere fact that they do not entail a there, nevertheless, exists in our jurisdiction a
creditor-debtor relationship between the trustor legitimate expectation of privacy governing
and the bank, does not lie. An examination of such accounts. The source of this right of
the law shows that the term "deposits" used expectation is statutory, and it is found in R.A.
therein is to be understood broadly and not No. 1405, otherwise known as the Bank
Page 170 of 494
Secrecy Act of 1955. [BSB Group, Inc., v. Go, tax information from a foreign tax
G.R. No. 168644 (2010)] authority pursuant to an
international convention or
4. Exceptions agreement on tax matters to which
the Philippines is a signatory or a
Deposits: party of [Sec. 6(f), NIRC]
1. Upon written permission of the depositors; b. Unexplained wealth under Sec. 8 of the
2. Case of impeachment; Anti-Graft and Corrupt Practices Act
3. Upon order of a competent court in cases of (RA 3019). [PNB v. Gancayco, G.R. No.
bribery or dereliction of duty of public officials; L-18343 (1965)]’
4.Cases where the money deposited or
invested is the subject matter of the litigation; Not necessarily an exception: Power of the
[Sec. 2 of RA No. 1405] Ombudsman to “examine and have access to
bank accounts and records” under Sec. 15[8]
Where the money deposited or invested is of RA 6770. [Morales, The Philippine General
the subject matter: Banking Law (Annotated) (2017) citing
a. The inquiry into bank deposits allowable Marquez v. Desierto, infra]
under R.A. No. 1405 must be premised
on the fact that the money deposited in 5. Garnishment of Deposits, Including
the account is itself the subject of the Foreign Deposits
action [BSB Group v. Go, G.R. No.
168644, 16 February 2010] General rule: The prohibition against
b. Whether the transaction is considered a examination of or inquiry into a bank deposit
sale or money placement does not under Republic Act 1405 does not preclude its
make the money the "subject matter of being garnished to insure satisfaction of a
litigation" [Oñate v. Abrogar, G.R. Nos. judgment. [China Banking Corporation v.
107303 & 107491, February 23, 1995] Ortega, G.R. No. L-34964, 31 January 1973]
c. Inasmuch as [the case] is aimed at
recovering the amount converted by the In the garnishment of deposits to insure
[defendants] for their own benefit, satisfaction of a judgment, there is no real
necessarily, an inquiry into the inquiry, and if the existence of the deposit is
whereabouts of the illegally acquired disclosed, the disclosure is purely incidental to
amount extends to whatever is the execution process. It is hard to conceive
concealed by being held or recorded in that it was ever within the intention of Congress
the name of persons other than the one to enable debtors to evade payment of their just
responsible for the illegal acquisition debts, even if ordered by the Court, through the
[Mellon Bank v. Magsino, G.R. No. expedient of converting their assets into cash
71479, 18 October 1990] and depositing the same in a bank. [China
Banking Corporation v. Ortega, supra]
Other Exceptions:
a. The Commissioner of Internal Revenue Exception: Foreign Currency Deposits
is hereby authorized to inquire into the The foreign currency deposits shall be exempt
bank deposits and other related from attachment, garnishment, or any other
information held by financial institutions order or process of any court, legislative body,
of: government agency or any administrative body
1. A decedent in order to determine his whatsoever. [Sec. 8, RA No. 6426]
gross estate; and
2. Any taxpayer who has filed an Penalties [Sec. 5]
application to compromise his tax Any violation of this law will subject offender
liability on the ground of financial upon conviction, to an imprisonment of not
incapacity. more than five years or a fine of not more than
3. A specific taxpayer or taxpayers twenty thousand pesos or both, in the
subject of a request for the supply of discretion of the court.
Page 171 of 494
securities or rendering services as
investment agent, advisor, or
D. ANTI-MONEY consultant,
b. Mutual funds, close – end investment
LAUNDERING ACT companies, common trust funds, pre
– need companies and other similar
The section numbers hereinafter generally entities
pertain to RA 9160 or the Anti-Money c. Foreign exchange corporations,
Laundering Act, as amended by RA 9194 and money changers, money payment,
RA 10365, unless otherwise indicated. remittance and transfer companies
and other similar entities, and
Money Laundering is a crime where the d. Other entities administering or
proceeds of an unlawful activity are transacted, otherwise dealing in currency,
thereby making them appear to have originated commodities or financial derivatives
from legitimate sources. based thereon, valuable objects, cash
substitutes and other similar
It is governed by RA 9160, as amended by RA monetary instruments or property
9194 (2003), RA 10167 (2012), RA 10365 supervised or regulated by the
(2013) and RA 10927 (2017). Securities and Exchange
Commission (SEC).
1. Policy of the Law 4. Jewelry dealers in precious metals, who, as
a business, trade in precious metals, for
It is the policy of the State to: transactions in excess of Php1,000,000.
1. Protect and preserve the integrity and 5. Jewelry dealers in precious stones, who, as
confidentiality of bank accounts; a business, trade in precious stones, for
2. Ensure that the Philippines shall not be transactions in excess of Php1,000,000
used as a money laundering site for the 6. Company service providers which, as a
proceeds of any criminal activity. business, provide any of the following
services to third parties:
Consistent with its foreign policy, the State a. Acting as a formation agent of juridical
shall extend cooperation in transnational persons;
investigations and prosecutions of persons b. Acting as, or arranging for another
involved in money laundering activities person to act as:
whenever committed. [Sec. 2] 7. A director or corporate secretary of a
company
2. Covered Institutions and Their 8. A partner of a partnership, or
9. A similar position in relation to other juridical
Obligations
persons;
a. Providing a registered office, business
Covered Institutions address or accommodation,
1. Banks, non-banks, quasi–banks, trust correspondence or administrative
entities, foreign exchange dealers, address for a company, a partnership
pawnshops, money changers, remittance or any other legal person or
and transfer companies and other similar arrangement; and
entities and all other persons and their b. Acting as, or arranging for another
subsidiaries and affiliates supervised or person to act as, a nominee
regulated by the BSP; shareholder for another person
2. Insurance companies, pre-need companies 10. Persons who provide any of the following
and all other persons supervised or services:
regulated by the Insurance Commission; 11. Managing of client money, securities or other
3. Those who are: assets;
a. Securities dealers, brokers, 12. Management of bank, savings or securities
salesmen, investment houses and accounts;
other similar entities managing
Page 172 of 494
13. Organization of contributions for the Record Keeping
creation, operation or management of All records of all transactions of covered
companies; and institutions shall be maintained and safely
14. Creation, operation or management of stored for five (5) years from the dates of
juridical persons or arrangements and transactions.
buying or selling business entities. [Sec. 1] With respect to closed accounts, the records
15. Casinos, including internet and ship-based on customer identification, account files and
casinos, with respect to their casino cash business correspondence, shall be preserved
transactions related to their gaming and safely stored for at least five (5) years from
operations. [Sec. 1] the dates when they were closed.
The term ‘covered persons’ excludes lawyers Reporting of Covered and Suspicious
and accountants acting as independent legal Transactions
professionals, (1) in relation to information
concerning their clients; or (2) where disclosure General Rule: Covered institutions shall report
of information would compromise client to the AMLC all covered transactions within
confidences or the attorney-client relationship. five (5) working days from occurrence.
Provided, (1) that these lawyers and
accountants are authorized to practice in the Exception: If the Anti Money Laundering
Philippines and (2) shall continue to be subject Council (AMLC) prescribed a longer period not
to the provisions of their respective codes of exceeding fifteen (15) working days. [Sec.
conduct and/or professional responsibility or 9(c)]
any of its amendments. [Sec. 1]
When reporting covered transactions to the
Obligations of Covered Institutions AMLC:
a. Customer Identification 1. Covered institutions and their officers,
b. Record Keeping and employees are prohibited from
c. Reporting of Covered and Suspicious communicating, directly or indirectly,
Transactions in any manner, to any person, entity, or
the media:
Customer Identification a. The fact that a covered
Covered institutions shall: transaction report has or is
a. Establish and record a true identity of about to be reported;
its clients, based on official documents b. The contents thereof;
b. Maintain a system of verifying the true c. Any other information in
identity of their clients relation thereto; and
c. In case of corporate clients, require a 2. Neither may such reporting be
system to verify: published or aired in any manner or
1. Legal existence and organizational form by the mass media, electronic
structure; and mail, or other similar devices. [Sec. 9,
2. Authority and identification of RA 10365]
persons purporting to act on their
behalf In case of violation, criminal liability ensues as
against the concerned officer and employee of
Anonymous accounts, accounts under fictitious the covered person and media.
names, and all other similar accounts shall be
absolutely prohibited. Peso and foreign Anti-money laundering regulations
currency non- checking numbered accounts Republic Act No. 9160, otherwise known as the
shall be allowed. The BSP may conduct annual Anti-Money Laundering Act, as amended
testing solely limited to the determination of the (AMLA) and its 2018 implementing rules and
existence and true identity of the owners of regulations (IRR) impose certain obligations
such accounts. [Sec. 9] upon covered persons to ensure that the
Philippines will not be used as a money
Page 173 of 494

laundering site for the proceeds of any unlawful risk-based approach, which include the
activity. Below are the key obligations of following procedures:
covered persons under the AMLA and its IRR.
Customer identification process
Customer due diligence (CDD) Covered persons shall identify and record the
obligations true identity of their customers, whether
permanent or occasional, and whether natural
Under the AMLA IRR, covered persons must or juridical person, or legal arrangement.
conduct CDD for the following purposes: Note that in case the customer engages in a
1. To identify the customer, and its agents transaction with a covered person for the first
and beneficial owners; time, the covered person must require the
2. To determine the risk posed by each customer to present the original and submit a
customer; clear copy of, at least, one identification
3. To establish, maintain, close or terminate document (ID). In case the ID presented does
the account or business relationship; and not bear any photo of the customer, or the
4. To assess the level of monitoring to be photo-bearing ID or a copy thereof does not
applied. clearly show the face of the customer, a
covered person may utilize information and
CDD measures must be undertaken when: communication technology or any other
establishing business or professional technology to take the photo of the customer.
relationship;
1. Carrying out occasional transactions Customer verification process
above PHP100,000 or any other Covered persons shall implement and maintain
threshold as may be determined by the a system of verifying the true identity of their
relevant supervising authority, with clients, including validating the truthfulness of
notice to the Anti-Money Laundering the information and confirming the authenticity
Council (AMLC), including situations of the identification documents presented,
where the transaction is carried out in a submitted and provided by the customer, using
single operation or in several reliable and independent sources, documents,
operations that appear to be linked; data, or information.
2. Carrying out occasional wire transfers
under certain circumstances; The covered persons must independently
3. There is a suspicion of money verify the collected data during customer
laundering/terrorism financing (ML/TF), identification process, through any of the
regardless of any exemptions or following:
thresholds; or 1. Face-to-face contact;
4. The covered person has doubts about the 2. Use of information and communication
veracity or adequacy of previously technology;
obtained identification information and/or 3. By confirming the authenticity of the
data. identification documents to the issuing
office;
Further, the AMLA IRR requires covered 4. Reliance on third parties and service
persons to apply CDD requirements to existing providers; or
customers on the basis of materiality and risk, 5. Such other methods of validation
and conduct due diligence on existing based on reliable and independent
relationships at appropriate times, taking into sources, documents, data, or
account whether and when CDD measures information.
have previously been undertaken and the
adequacy of information and document Identification and verification of agents
obtained. Covered persons shall verify that any person
purporting to act on behalf of a customer is so
In conducting CDD, the covered persons must authorized, and identify and verify the identity
adopt appropriate CDD measures following a of that person.
Page 174 of 494

The covered person must verify the validity of availed of by the customers;
the authority of the agent. In case of doubt as 2. The purpose of the account or
to whether the person purporting to act on transaction;
behalf of the customer is being used as a 3. The source of fund and source of wealth;
dummy in circumvention of existing laws, the 4. The nature of business and/or
covered person must apply enhanced due employment;
diligence and file a suspicious transaction 5. Country of origin and residence of
report, if warranted. operations, or the fact that a customer
came from a high- risk jurisdiction or
Beneficial ownership verification geographical area;
Covered persons shall identify the beneficial 6. Watchlist of individuals and entities
owner and take reasonable measures to engaged in illegal activities or terrorist
verify the identity of the beneficial owner, related activities as circularized by the
using the relevant information or data BSP, AMLC, and other international
obtained from a reliable sources, such that the entities or organizations, such as the
covered person is satisfied that it knows who Office of Foreign Assets Control of the
the beneficial owner is. U.S. Department of the Treasury and
United Nations Sanctions List;
The covered person must obtain a copy of the 7. The existence of suspicious transaction
written document evidencing the relationship indicators; and
and apply the same standards for assessing 8. Such other factors as the covered
the risk profile and determining the standard persons may deem reasonable or
of CDD to be applied to both. necessary to consider in assessing the
risk of a customer, including the amount
Determination of the purpose of of funds to be transacted by a customer
relationship or the size of transactions undertaken,
Covered persons shall understand and, as regularity or duration of the transaction,
appropriate, obtain information on, the and/or are included in the negative list.
purpose and intended nature of the account,
transaction, or the business or professional Where the risks are higher, covered persons
relationship with their customers. must conduct enhanced due diligence. On the
other hand, where lower risks of ML/TF have
Ongoing monitoring process been identified, through an adequate analysis
Covered persons shall, on the basis of of risk by the covered person, reduced due
materiality and risk, conduct ongoing diligence procedures may be applied.
monitoring by establishing a system that will
enable them to understand the normal and Transaction reporting
reasonable account or business activity of
customers, and scrutinize transactions The AMLA IRR provides that covered persons
undertaken throughout the course of the must report to the AMLC all covered
business or professional relationship to transactions within five working days, unless
ensure that the customers’ accounts, the AMLC prescribes a different period not
including transactions being conducted, are exceeding 15 working days. Further,
consistent with the covered person’s suspicious transactions shall be filed with the
knowledge of its customer, their business and AMLC within the period prescribed under the
risk profile, including where necessary, the registration and reporting guidelines of the
source of funds. AMLC.
Covered persons must develop a clear set of Record keeping

criteria for customer risk profiling and
assessment, which must include at least three Under the AMLA IRR, covered persons are
of the following: required to maintain and safely store for five
1. The nature of the service or product to be years from the dates of transactions all records
Page 175 of 494

of customer identification and transactions keeping and reporting requirements;
documents. Further, covered persons must 7. Compliance with freeze, bank inquiry
keep the electronic copies of all covered and and asset preservation orders, and all
suspicious transaction reports, for at least five directives of the AMLC;
years from the dates of submission to the 8. Adequate safeguards on the
AMLC. In addition, covered persons shall keep confidentiality and use of information
all records obtained through CDD, account files exchange, including safeguards to
and business correspondence, and the results prevent tipping-off; and
of any analysis undertaken, for, at least, five 9. Cooperation with the AMLC and
years following the closure of account, supervising authority.
termination of the business or professional
relationship or after the date of the occasional Designation of an AML compliance
transaction. officer
If a case has been filed in court involving the Covered persons must designate an AML
account, records must be retained and safely compliance officer or create a compliance unit,
kept beyond the five-year period, until it is responsible for the covered person’s day-to-
officially confirmed by the AMLC Secretariat day compliance with the AMLA and TFPSA,
that the case has been resolved, decided or their respective IRR, and other AMLC
terminated with finality. issuances. The internal auditor, general
manager or proprietor, as the case maybe,
Adoption of a money laundering shall be the compliance officer in case the
terrorist financing prevention program resources of the covered person hamper the
(MTPP) establishments of the compliance unit. The
compliance officer or the head of the
Under the AMLA IRR, covered persons must compliance unit must be of senior
formulate and implement a comprehensive management level.
and risk-based MTPP that is compliant with
the AMLA and Republic Act 10168 (otherwise 3. Covered and Suspicious
known as Terrorism Financing Prevention Transactions
and Suppression Act or TFPSA), their
respective IRR, and other AMLC issuances, General Rule: A covered transaction is a
and the AML/CTF guidelines of their transaction in cash or other equivalent
supervising authorities. The MTPP must be monetary instrument involving a total amount in
commensurate to the size and risk profile of excess of Php 500,000 within one banking day.
the covered person. The covered person must [Sec. 3(b)]
consider the results of the national risk
assessment and its own risk assessment in Exception: for Casinos or “covered persons
the development and/or updating of its MTPP. under Section 3(a)(8),” a single casino
The MTPP shall be in writing and shall transaction involving an amount in excess of
include, at the minimum, internal policies, Php 5,000,000 or its equivalent in any other
controls and procedures on the following: currency.
1. Risk management;
2. Compliance management setup, Suspicious Transactions are transactions
including the designation of a with covered institutions, regardless of the
compliance officer at the management amount involved, where any of the following
level or creation of compliance unit; circumstances exist:
3. Screening procedures to ensure high 1. There is no underlying legal or trade
standards when hiring employees; obligation, purpose or economic
4. Continuing education and training justification;
program; 2. The client is not properly identified;
5. Independent audit function;
6. Details of implementation of CDD, record-
Page 176 of 494
3. The amount involved is not 3. Conceals or disguises the true nature,
commensurate with the business or source, location, disposition, movement
financial capacity of the client; or ownership of or rights with respect to
4. Taking into account all known said monetary instrument or property;
circumstances, it may be perceived that 4. Attempts or conspires to commit money
the client’s transaction is structured to laundering offenses referred to in
avoid being the subject of reporting paragraphs (a), (b) or (c);
requirements under this Act; 5. Aids, abets, assists in or counsels the
5. Any circumstance relating to the commission of the money laundering
transaction which is observed to deviate offenses referred to in paragraphs (a),
from the profile of the client and/or the (b) or (c) above; and
client’s past transactions with the 6. Performs or fails to perform any act as a
covered institution; result of which he facilitates the offense
6. The transaction is in any way related to of money laundering referred to in
an unlawful activity or offense under this paragraphs (a), (b) or (c) above.
Act that is about to be, is being or has
been committed. [Sec. 3(b-1)] Money laundering is also committed by any
covered person who, knowing that a covered
5. Safe Harbor Provision or suspicious transaction is required under this
Act to be reported to the Anti-Money
The Safe Harbor Provision states that no Laundering Council (AMLC), fails to do so.
administrative, criminal or civil [Sec. 4, RA 10365].
proceedings shall lie against any person for
having made a covered transaction report in Unlawful activity refers to any act or omission
the regular performance of his duties and in or series or combination thereof involving or
good faith, whether or not such reporting having direct relation to the following:
results in any criminal prosecution under this 1. Kidnapping for ransom under Article
Act or any other Philippine law. [Sec. 9] 267 of Act No. 3815, otherwise known as
Lawyers and accountants acting as the Revised Penal Code, as amended;
independent legal professionals are not subject 2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15,
to the reporting requirement if the relevant and 16 of RA 9165, otherwise known as
information was obtained in circumstances the Comprehensive Dangerous Drugs
subject to professional secrecy or legal Act of 2002;
professional privilege. [Sec. 9(c)] 3. Section 3 paragraphs B, C, E, G, H and I
of RA. 3019, as amended; otherwise
6. When and How Money Laundering known as the Anti-Graft and Corrupt
is Committed (Including Predicate Practices Act;
4. Plunder under RA 7080, as amended;
Crimes) 5. Robbery and extortion under Articles
294, 295, 296, 299, 300, 301 and 302 of
Money laundering is a crime whereby the
the Revised Penal Code, as amended;
proceeds of an unlawful activity are transacted,
6. Jueteng and Masiao punished as illegal
thereby making them appear to have originated
gambling under Presidential Decree No.
from legitimate sources.
1602;
7. Piracy on the high seas under the
Money Laundering is committed by any
Revised Penal Code, as amended and
person who, knowing that any monetary
Presidential Decree No. 532;
instrument or property represents, involves, or
8. Qualified theft under Article 310 of the
relates to the proceeds of any unlawful activity:
Revised Penal Code, as amended;
1. Transacts said monetary instrument or
9. Swindling under Article 315 of the
property;
Revised Penal Code, as amended;
2. Converts, transfers, disposes of, moves,
10. Smuggling under RA Nos. 455 and
acquires, possesses or uses said
1937;
monetary instrument or property;
Page 177 of 494
11. Violations under RA 8792, otherwise 10. Violations of Sections 101 to 107, and
known as the Electronic Commerce 110 of RA 7942, otherwise known as the
Act of 2000; Philippine Mining Act of 1995;
12. Hijacking and other violations under RA 11. Violations of Section 27(c), (e), (f), (g)
6235; destructive arson and murder, and (i), of RA 9147, otherwise known as
as defined under the Revised Penal the Wildlife Resources Conservation
Code, as amended, including those and Protection Act;
perpetrated by terrorists against non- 12. Violation of Section 7(b) of RA 9072,
combatant persons and similar targets; otherwise known as the National Caves
13. Fraudulent practices and other and Cave Resources Management
violations under RA 8799, otherwise Protection Act;
known as the Securities Regulation 13. Violation of RA 6539, otherwise known
Code of 2000; as the Anti-Carnapping Act of 2002, as
14. Felonies or offenses of a similar amended;
nature that are punishable under the 14. Violations of Sections 1, 3 and 5 of PD
penal laws of other countries. [Sec. 3 (i)] 1866, as amended, otherwise known as
the decree Codifying the Laws on
RA 10365 further added the following: Illegal/Unlawful Possession,
1. Terrorism and conspiracy to commit Manufacture, Dealing In, Acquisition
terrorism as defined and penalized or Disposition of Firearms,
under Sections 3 and 4 of RA No. 9372; Ammunition or Explosives;
2. Financing of terrorism under Section 4 15. Violation of PD 1612, otherwise known
and offenses punishable under Sections as the Anti-Fencing Law;
5, 6, 7 and 8 of RA 10168, otherwise 16. Violation of Section 6 of RA 8042,
known as the Terrorism Financing otherwise known as the Migrant
Prevention and Suppression Act of 2012; Workers and Overseas Filipinos Act
3. Bribery under Articles 210, 211 and 211- of 1995, as amended by RA 10022;
A of the Revised Penal Code, as 17. Violation of RA 8293, otherwise known
amended, and Corruption of Public as the Intellectual Property Code of
Officers under Article 212 of the the Philippines;
Revised Penal Code, as amended; 18. Violation of Section 4 of RA 9995,
4. Frauds and Illegal Exactions and otherwise known as the Anti-Photo and
Transactions under Articles 213, 214, Video Voyeurism Act of 2009;
215 and 216 of the Revised Penal Code, 19. Violation of Section 4 of RA 9775,
as amended; otherwise known as the Anti-Child
5. Malversation of Public Funds and Pornography Act of 2009;
Property under Articles 217 and 222 of 20. Violations of Sections 5, 7, 8, 9, 10(c),
the Revised Penal Code, as amended; (d) and (e), 11, 12 and 14 of RA 7610,
6. Forgeries and Counterfeiting under otherwise known as the Special
Articles 163, 166, 167, 168, 169 and 176 Protection of Children Against Abuse,
of the Revised Penal Code, as amended; Exploitation and Discrimination.
7. Violations of Sections 4 to 6 of RA 9208,
otherwise known as the Anti-Trafficking 7. Authority to Inquire Into Bank
in Persons Act of 2003; Deposits
8. Violations of Sections 78 to 79 of Chapter
IV, of Presidential Decree No. 705, General Rule: The AMLC may inquire into or
otherwise known as the Revised examine any particular deposit or investment,
Forestry Code of the Philippines, as including related accounts, with any banking
amended; institution or non-bank financial institution upon
9. Violations of Sections 86 to 106 of order of any competent court in cases of
Chapter VI, of RA 8550, otherwise violation of this Act when it has been
known as the Philippine Fisheries established that there is probable cause that
Code of 1998;
Page 178 of 494

the deposits or investments involved are 8. Freezing and Forfeiture
related:
1. To an unlawful activity as defined in Sec. Application for Freeze Orders
3(i); or
2. To any money laundering offense under Who may apply
Sec. 4 Upon verified ex parte petition by the AMLC
and after determination that probable cause
Related Accounts refers to accounts, funds exists that any monetary instrument or property
and sources of which originated from and/or is in any way related to an unlawful activity, the
are materially linked to the monetary Court of Appeals may issue a freeze order,
instrument(s) or property(ies) subject of the which shall be effective immediately, directing
freeze order(s). the concerned covered persons and
Exception: No court order shall be required in government agency to desist from allowing any
the following cases – transaction, withdrawal, transfer, removal,
1. Kidnapping for ransom under Article 267 conversion, concealment, or other disposition
of the RPC of the subject monetary instrument or property.
2. Sections 4, 5, 7, 8, 9, 10, 12, 13, 14 ,15 [Rule 10(a), Revised IRR]
and 16 of RA No. 9615
3. Hijacking and other violations under RA
Effectivity
No. 6235; destructive arson and murder
The freeze order shall be effective
as defined under the RPC
immediately and shall not exceed six (6)
4. Felonies or offenses of a nature similar to
months depending upon the circumstances of
those mentioned in Section 3(i) (1), (2),
the case.
and (12) which are punishable under the
penal laws of other countries;
On motion of the AMLC filed before the
5. Terrorism and conspiracy to commit
expiration of the original period of the freeze
terrorism as defined and penalized under
order, the court may, for good cause shown,
RA No. 9372.
extend its effectivity. Upon the timely filing of
The authority of AMLC to inquire into or
such motion and pending resolution by the
examine the main account and the related
Court of Appeals, the freeze order shall remain
accounts shall comply with the Due Process
effective. [Rule 10(a)(3), Revised IRR]
requirements (Art. III, Sec. 2 and 3) of the 1987
Constitution. Likewise, the constitutional
injunction against ex post facto laws and bills Duties of covered institutions
of attainder shall be respected. [Sec. 21, as 1. Implement Freeze Order. - Upon receipt
amended by RA 10365] of the notice of the freeze order, the
covered person and government agency
A bank inquiry order may be availed of without concerned shall immediately freeze the
need of a pre-existing case under the AMLA. If monetary instrument or property subject
the contrary position is adopted, the AMLC thereof, and shall immediately desist
would be virtually deprived of its character as a from and not allow any transaction,
discovery tool, and thus would become less withdrawal, transfer, removal,
circumspect in filing complaints against conversion, other movement or
suspect account holders. However, unlike a concealment thereof.
freeze order, it cannot be issued ex parte. 2. Freeze Related Accounts. - Upon receipt
Without doubt, a requirement that the of the freeze order and upon verification
application for a bank inquiry order be done by the covered person that there are
with notice to the account holder will alert the accounts related to the monetary
latter that there is a plan to inspect his bank instrument or property subject of the
account on the belief that the funds therein are freeze order, the covered person shall
involved in an unlawful activity or money immediately freeze these related
laundering offense. [Republic v Eugenio, G.R. accounts wherever these may be found.
No. 174629 (2008)] If the related accounts cannot be
determined within 24 hours from receipt
Page 179 of 494
of the freeze order due to the volume 1. With due diligence, the former cannot be
and/or complexity of the transactions, or located, or
any other justifiable factors, the covered 2. It has been substantially altered,
person shall effect the freezing of the destroyed, diminished in value or
related accounts within a reasonable otherwise rendered worthless by any act
period and shall submit a supplemental or omission, or
return thereof to the Court of Appeals 3. It has been concealed, removed,
and the AMLC within 24 hours from the converted, or otherwise transferred, or
freezing of said related accounts. 4. It is located outside the Philippines or has
3. Furnish Copy of Freeze Order to Owner been placed or brought outside the
or Holder. - The covered person and jurisdiction of the court, or
government agency concerned shall 5. It has been commingled with other
likewise immediately furnish a copy of monetary instrument or property
the notice of the freeze order upon the belonging to either the offender himself
owner or holder of the monetary or a third person or entity, thereby
instrument or property or related rendering the same difficult to identify or
accounts subject thereof. be segregated for purposes of forfeiture.
4. Submit Detailed Return. - Within 24 hours [Sec. 12(a), as amended by RA 10365]
from receipt of the freeze order, the
covered person and government agency Claim on Forfeited Assets
concerned shall submit, by personal Where the court has issued an order of
delivery, to the Court of Appeals and to forfeiture of the monetary instrument or
the AMLC, a written detailed return on property in a criminal prosecution for any
the freeze order. money laundering offense defined under
Section 4 of this Act, the offender or any other
The covered person shall also submit to the person claiming an interest therein may apply,
AMLC, through the internet, an electronic by verified petition, for a declaration that the
detailed return in a format to be prescribed by same legitimately belongs to him and for
the latter. [Rule 10(e), Revised IRR] segregation or exclusion of the monetary
instrument or property corresponding thereto.
Forfeiture Provisions
Where filed: With the court which rendered the
Civil Forfeiture judgment of forfeiture.
Upon determination by the AMLC that
probable cause exists that any monetary When filed: Within 15 days from the date of
instrument or property is in any way related to the finality of the order of forfeiture, in default of
an unlawful activity or a money laundering which the said order shall become final and
offense, the AMLC shall file with the executory. [Sec. 12(b)]
appropriate court (through the OSG) a Note: This provision shall apply in both civil and
verified ex parte petition for forfeiture. [Sec. criminal forfeiture.
12(a), as amended by RA 10365]
Payment in Lieu of Forfeiture
Procedural rule applicable: The Rules of The court may, instead of enforcing the order
Court on Civil Forfeiture. of forfeiture of the monetary instrument or
property or part thereof or interest therein,
What is covered by the forfeiture accordingly order the convicted offender to
The forfeiture shall include those other pay an amount equal to the value of said
monetary instrument or property having an monetary instrument or property, where:
equivalent value to that of the monetary 1. The court has issued an order of forfeiture
instrument or property found to be related in of the monetary instrument or property
any way to an unlawful activity or a money subject of a money laundering offense
laundering offense, when: (defined under Section 4), and
2. Said order cannot be enforced because:
Page 180 of 494
a. Any particular monetary instrument covered transaction or suspicious
or property cannot, with due transaction report or request for
diligence, be located, or assistance from a foreign State, or
b. It has been substantially altered, believed by the Council, on the basis of
destroyed, diminished in value or substantial evidence, to be, in whole or
otherwise rendered worthless by in part, wherever located, representing,
any act or omission, directly or involving, or related to, directly or
indirectly, attributable to the indirectly, in any manner or by any
offender, or means, the proceeds of an unlawful
c. It has been concealed, removed, activity;
converted, or otherwise 3. To institute civil forfeiture proceedings
transferred to prevent the same and all other remedial proceedings
from being found or to avoid through the Office of the Solicitor
forfeiture thereof, or General;
d. It is located outside the Philippines 4. To cause the filing of complaints with the
or has been placed or brought Department of Justice or the
outside the jurisdiction of the court, Ombudsman for the prosecution of
or money laundering offenses;
e. It has been commingled with other 5. To investigate suspicious transactions
monetary instruments or property and covered transactions deemed
belonging to either the offender suspicious after an investigation by
himself or a third person or entity, AMLC, money laundering activities, and
thereby rendering the same other violations of this Act;
difficult to identify or be segregated 6. To apply before the Court of Appeals, ex
for purposes of forfeiture [Sec. parte, for the freezing of any monetary
12(c)] instrument or property alleged to be
laundered, proceeds from or
Note: This provision shall apply in both civil and instrumentalities used/ intended for use
criminal forfeiture. in any unlawful activity (as defined in
Section 3(i) hereof);
9. Anti-Money Laundering Council; 7. To implement such measures as may be
Functions necessary and justified under this Act to
counteract money laundering;
The Anti-Money Laundering Council shall be 8. To receive and take action in respect of,
composed of the Governor of the Bangko any request from foreign states for
Sentral ng Pilipinas (BSP) as chairman, and assistance in their own anti-money
the Commissioner of the Insurance laundering operations provided in this
Commission and the Chairman of the Act;
Securities and Exchange Commission (SEC) 9. To develop educational programs on
as members. [Sec. 7] the pernicious effects of money
laundering, the methods and techniques
Functions used in money laundering, the viable
The AMLC shall act unanimously in the means of preventing money laundering
discharge of its functions as defined and the effective ways of prosecuting
hereunder: and punishing offenders;
1. To require and receive covered or 10. To enlist the assistance of any branch,
suspicious transaction reports from department, bureau, office, agency or
covered institutions; instrumentality of the government,
2. To issue orders addressed to the including government-owned and -
appropriate Supervising Authority or the controlled corporations, in undertaking
covered institution to determine the true any and all anti-money laundering
identity of the owner of any monetary operations, which may include the use of
instrument or property subject of a its personnel, facilities and resources for
Page 181 of 494

the more resolute prevention, detection
and investigation of money laundering
offenses and prosecution of offenders;
and
11. To impose administrative sanctions
for the violation of laws, rules,
regulations and orders and resolutions
issued pursuant thereto; [Sec. 7]
12. To require the Land Registration
Authority and all its Registries of Deeds
to submit to the AMLC, reports on all real
estate transactions involving an amount
in excess of Php 500,000 within 15 days
from the date of registration of the
transaction, in a form to be prescribed by
the AMLC. The AMLC may also require
the Land Registration Authority and all its
Registries of Deeds to submit copies of
relevant documents of all real estate
transactions. [Sec. 7]
Page 182 of 494

INSURANCE
COMMERCIAL LAW
INSURANCE LAW COMMERCIAL LAW
2. Wherein one undertakes for a
consideration;
INSURANCE 3. To indemnify another against loss,
damage, or liability;
4. Arising from an unknown or contingent
I. Basic Concepts event.
1. Definition
Contingent Event Unknown Event
a. Insurance Event that is not Event which is
certain to take place. certain to happen,
Insurance is essentially a contract by which but the time of its
one party (the insurer), for a consideration that happening is not
is usually paid in money, either in a lump sum known.
or at different times during the continuance of
the risk, promises to make a certain payment,
usually of money, upon the destruction or injury General Rule: A past event cannot be a
of “something” in which the other party (the designated event in an insurance contract.
insured) has an interest [Carale, The Philippine
Insurance Law (2014)]. Exception: It may be a designated event only
in cases where it has happened already, but
On August 15, 2013, RA 10607 (An Act the parties do not know about it e.g., prior loss
Strengthening the Insurance Industry, Further of a ship at sea (applicable only to marine
Amending Presidential Decree No. 612, insurance) [De Leon, The Insurance Code of
Otherwise Known as “The Insurance Code,” as the Philippines Annotated (2014)].
Amended by Presidential Decree Nos. 1141,
1280, 1455, 1460, 1814 and 1981, and Batas The unknown event may be past or future.
Pambansa Blg. 874, and for Other Purposes) Even if the proximate cause of the loss is a
was signed into law. It is a restatement of the fortuitous event, the insurer may still be liable if
Insurance Code (PD 612), with it is the event or peril insured against [De Leon].
amendments.
2. Form
The section numbers hereinafter generally
pertain to RA 10607, unless otherwise There is no particular form required for a
indicated. contract of insurance.
b. Contract of Insurance May an Insurance Contract be Oral?

The Insurance Code has no provision requiring
A contract of insurance is an agreement a particular form for the validity of an insurance
whereby one undertakes for a consideration to contract. In our jurisdiction, the Supreme Court
indemnify another against loss, damage or has not made a categorical ruling against the
liability arising from an unknown or contingent validity of an oral contract of insurance
event [Sec. 2(a)]. [Carale].
Note: A contract of suretyship shall be Note: An insurance policy is different from the
deemed to be an insurance contract, within the contract of insurance. The policy is the
meaning of the Insurance Code, only if made formal written instrument evidencing the
by a surety who or which, as such, is doing contract of insurance entered into between the
an insurance business as hereinafter insured and the insurer [Sec. 232].
provided.
Thus, a contract of insurance is:

1. A contract of indemnity;
Page 184 of 494

3. Doing or Transacting Insurance b. From such determination, it concludes
Business that:
1. If these are the principal
The term “doing an insurance business or objectives, the business is that
transacting an insurance business” of insurance.
includes: 2. But if they are merely incidental
a. Making or proposing to make, as and service is the principal
insurer, any insurance contract; purpose, then the business is
b. Making or proposing to make, as not insurance.
surety, any contract of suretyship as a
vocation and not as merely incidental 4. Governing Law
to any other legitimate business or
activity of the surety; General Rule: The Insurance Code primarily
c. Doing any kind of business, including a governs insurance contracts.
reinsurance business, specifically
recognized as constituting the doing Exception: When there is a special law which
of an insurance business within the specifically governs (e.g., insurance contract
meaning of the Insurance Code; under R.A. 1161 or the Social Security Act), in
d. Doing or proposing to do any business which case, the Insurance Code governs
in substance equivalent to any of the subsidiarily.
foregoing in a manner designed to
evade the provisions of the Insurance Matters not expressly provided for in the
Code [Sec. 2(b)]. Insurance Code and special laws are regulated
by the Civil Code.
Note: That no profit is derived from the making
of insurance contracts, agreements, or Other Special Laws:
transactions, or that no separate or direct a. National Health Insurance Act of 2013
consideration is received therefor, shall not be (RA 10606, amending RA 7875)
deemed conclusive to show that the making b. The Revised Government Service
thereof does not constitute the doing or Insurance Act of 1997 (RA 8291)
transacting of an insurance business [Sec. c. The Social Security Act (RA 8282)
2(b)]. d. The Property Insurance Law (RA 656,
as amended by PD 245)
General Rule: An insurance business consists e. The Philippine Deposit Insurance Act
in undertaking, for a consideration, to of 1963 (RA 3591).
indemnify another against loss, damage or f. RA 4898, as amended by RA 5756
liability arising from an unknown or contingent providing life, disability, and accident
event. insurance to barangay officials
g. Universal Health Care Act (RA 11223)
Exception: Those not formally designated as
insurance businesses but are deemed “doing 5. Parties to an Insurance Contract
or transacting an insurance business” as listed
in Sec. 2(b). a. Insurer
Principal Object and Purpose Test The insurer is the party who assumes or
The “principal object and purpose test” ! accepts the risk of loss and undertakes for
a. Determines: consideration to indemnify the insured or to pay
1. Whether the assumption of risk a certain lump sum on the happening of the
and indemnification of loss are event or peril insured against. May be any
the principal object and corporation, partnership, or association, duly
purpose of the organization; or authorized to transact insurance business
2. Whether they are merely [Sec. 6].
incidental to its business.
Page 185 of 494
b. Insured designated peril. It is based on probability of
loss and extent of liability [43 Am. Jur. 2d326].
The insured is the person in whose favor the
contract is operative and whose loss is the Premium Assessment
occasion for the payment of the insurance
proceeds by the insurer [Carale]. A sum levied and A sum collected to
paid to meet meet actual loss
c. Exception anticipated loss [Vance].
[Vance].
Anyone except a public enemy may be A sum specifically
insured [Sec. 7]. levied by mutual
insurance
There is no definition of what a “public enemy” companies or
is, but a definition that is generally accepted associations, upon a
and in keeping with the nature of an insurance fixed and definite
contract is one where a person possesses the plan, to pay losses
nationality of the state with which another is at and expenses [Sec.
war [Carale]. 403]
A. Elements of an Insurance 3. Risk of Loss or Damage

Contract
Peril is any contingent or unknown event which
Elements [C2R2IM] may cause a loss. Its existence creates a risk
1. Cause — event or peril insured against and its occurrence results in loss.
2. Consideration — premium payments
paid by the insured The event or peril insured against must be such
3. Risk of loss or damage being assured that its happening will:
by the insurer a. Damnify or cause loss to a person; or
4. Risk-distributing scheme — b. Create liability against him [Sec. 3]
distribution and transfer by the insurer
of risk of loss, damage or liability 4. Risk-Distributing Scheme
among persons having similar risks
5. Insurable interest — the insured Insurance contracts serve to distribute the
possesses an interest of some kind, risk of economic loss, damage or liability
susceptible of pecuniary estimation, among as many as possible of those who are
which the event insured against may subject to the same kind of risk.
cause loss or damage
6. A meeting of minds of the parties Scheme:
upon all the foregoing essentials a. The payment of premiums by all will
inure to a general fund, out of which
1. Cause payment will be made for anyone who
has suffered an economic loss.
Cause refers to an event or peril insured b. Hence, each member contributes to a
against. small degree toward compensation for
losses suffered by any member of the
2. Consideration group.
An insurance premium is the agreed price for 5. Insurable Interest

assuming and carrying the risk. It is the
consideration paid to the insurer for Insurable interest is the interest which the law
undertaking to indemnify the insured against a requires the owner of an insurance policy to
have in the person or thing insured [Carale].
Page 186 of 494

In terms of the event insured against, it is the and acceptance. The insurance policy merely
relation between the insurer and the risk evidences the terms and conditions thereof.
insured, such that the occurrence of the risk will
cause substantial loss or harm of some kind to Exception: It is stipulated that the policy is
the insured [Carale]. essential to the existence of the contract
[Campos].
Under the Code, the following are void:
a. Stipulation in a policy for the payment b. Aleatory
of loss whether the person insured has
or has not any interest in the property It is aleatory because it depends upon some
insured; contingent event. The obligation of the insurer
b. Stipulation that the policy shall be to pay depends on the happening of an event
received as proof of such interest; which is uncertain, or though certain, is to occur
c. Policy executed by way of gaming or at an indeterminate time [Art. 2010, NCC].
wagering [Sec. 25].
Being an aleatory contract does not
Note: Insurable interest is not required in necessarily mean that it is a “contract of
industrial life insurance. chance” because in a contract of insurance,
the parties seek to distribute possible loss by
6. Meeting of the Minds reason of mischance, unlike a wagering
contract [Carale].
The two parties to a contract of insurance
whose minds need to meet regarding the c. Voluntary
essential elements are the insurer and the
insured. General Rule: Parties may incorporate
appropriate provisions and conditions they
The insured is not always the person to whom choose, as long as they are not contrary to law,
the proceeds are paid. Such person is the morals, good customs, public order, or public
beneficiary [Vance]. policy [Art. 1305, NCC].
B. Characteristics/Nature of Exception: Some insurance contracts,

particularly liability insurance, may be required
Insurance Contracts by law in certain instances:
1. Compulsory motor vehicle liability
1. In General insurance for motor vehicles [Secs.
386-402];
An insurance contract is [CAVE-CCPU] 2. Compulsory coverage in state
a. Consensual; insurance fund for employees [Arts.
b. Aleatory; 168-184, Labor Code];
c. Voluntary; 3. As a condition to granting a license to
d. Executory and unilateral but conduct business or calling affecting
synallagmatic; the public safety or welfare [De Leon];
e. Conditional; 4. Social insurance for members of the
f. Contract of adhesion; GSIS and for employees of the private
g. Personal contract; sector covered by the SSS.
h. Uberrimae fides contract
d. Executory and Unilateral but
a. Consensual Synallagmatic
General Rule: An insurance contract is Once the insured pays the premium, the
perfected by the meeting of the minds of the contract already takes effect. After the payment
parties. There must be a concurrence of offer of premiums, the insurance imposes a
Page 187 of 494

unilateral obligation on the insurer who h. Uberrimae fides Contract (i.e. a
promises to indemnify in case of loss. contract of the highest degree of good
faith)
It is also synallagmatic [Vitug, J., Separate
Opinion in UCPB General Insurance Co., Inc. Each party is required to:
v. Masagana Telemart, Inc., G.R. No. 137172 1. Deal with each other in utmost good
(2001)] and reciprocal such that even if the faith;
contingent event or designated peril does not 2. Disclose conditions affecting the risk of
occur, the insurer has still provided protection which he is aware;
against the risk for the period covered by the 3. Disclose any material fact which the
insurance contract. applicant knows and ought to know.
e. Conditional Violation of this duty gives the aggrieved party

the right to rescind the contract. Where the
It is conditional because the insurer incurs aggrieved party is the insured, the bad faith of
liability only upon the happening of the event the insurer will preclude it from denying liability
insured against. However, many other on the policy based on breach of warranty
conditions are usually required (e.g. payment [Campos].
of premium or performance of other acts) as
precedent to the right of the insured to claim 2. For Specific Kinds of Insurance
benefits under the insurance.
Contracts
f. Contract of Adhesion (Fine Print Rule)
a. For Non-Life Insurance
Insurance contracts are already presented to
Contract of Indemnity
the insured in its printed form on a “take it or
The insured who has insurable interest over
leave it” basis. The insured merely must agree
the property is only entitled to recover the
to its terms. Such contracts of adhesion are
amount of actual loss sustained. The burden
valid.
is upon him to establish the amount of such
loss. Property insurance is personal in the
General Rule: When the terms of the contract
sense that it is the damage to the personal
are clear and leave no doubt upon the intention
interest and not the property that is being
of the contracting parties, the literal meaning of
reimbursed.
its stipulations shall control [Art. 1370, NCC].
General Rule: Only non-life insurance or
Exception: Where the terms of the contract
property insurance contracts are contracts
are ambiguous and susceptible to various
of indemnity. Life insurance contracts are not
interpretations, the issue is to be resolved
contracts of indemnity because the value of life
against the insurer, being the party who
cannot be quantified.
prepared the contract [Art. 1377, NCC].
Ambiguity is interpreted liberally in favor of the
Exception: The basis of the insurable interest
insured and strictly against the insurer who
of the policy owner on the life of the insured is
prepared the same.
a commercial relationship (e.g. creditor-
debtor, mortgagor/guarantor-mortgagee).
g. Personal Contract
b. For Life Insurance
The contract of insurance is basically between
the insurer and the insured.
Nature of Property
Life insurance policies, unlike property
The insured cannot assign, before the
insurance, are generally assignable or
happening of the loss, his rights under a
transferable as they are in the nature of
property policy to others without the consent of
property [Sec. 81].
the insurer [Secs. 20, 58, 83].
Page 188 of 494
C. Classes of Insurance b. Goods or cargoes;
c. Earnings such as freight, passage
money, commissions, or profits; and
1. Marine Insurance
d. Liability (protection and indemnity
insurance).
a. Definition
2. Inland Marine Insurance
Marine insurance covers loss or damage to
property and persons in connection with all
Inland marine insurance covers the land or
risks or perils of navigation. It includes “marine
over-the-land transportation perils of property
protection and indemnity insurance” against
shipped by railroads, motor trucks, airplanes,
liability incidental to ownership, operation,
and other means of transportation. It also
maintenance or construction of vessels and
covers risks of lake, river or other inland
facilities therefor [Carale].
waterway transportation and other waterborne
perils outside those covered by ocean marine
Marine insurance includes:
insurance.
1. Loss or damage to:
a. Vessels, cargo, freightage,
profits, and all kinds of property
c. Loan on Bottomry and Loan on
and interests therein, in Respondentia Distinguished
connection with any and all Loan on Bottomry Loan on
risks or perils of navigation; Respondentia
b. Person or property
appertaining to a marine, Loan obtained for the Loan obtained as
inland marine, transit or value of the vessel security for the value
transportation insurance; on a voyage of the cargo to be
c. Precious stones, jewels, transported
jewelry, precious metals,
whether in course of Both depend upon the safe conclusion of the
transportation or otherwise; voyage [Carale]
d. Instrumentalities of
transportation and In a loan on bottomry, the insurable interest
communication, excluding of a shipowner on its bottomed boat is the
buildings, aids to navigation difference between the amount of the loan and
and transportation, and the value of the boat. Thus, if the amount of the
appurtenant facilities for the loan does not cover the total value of the boat,
control of waterways. the owner can still insure the boat.
2. Marine protection and indemnity
insurance against liability incidental to
d. Risks
ownership, operation, maintenance or
construction of vessels and facilities
1. Types of Risk
therefore [Sec. 101; Carale].
Perils of the Sea
b. Divisions Ocean marine insurance protects ships at sea
and the cargo or freight on such ships from
1. Ocean Marine Insurance standard “perils of the sea” or “perils of
navigation.”
Ocean marine insurance insures against risk
connected with navigation to which a ship, Perils of the sea include:
cargo, freightage, profits, or other insurable a. Losses caused by sea damage, or by
interest in movable property, may be exposed the violence of the elements;
during a certain voyage or a fixed period of b. Losses from extraordinary occurrences
time. Its scope includes: or those which cannot be guarded
a. Ships or hulls;
Page 189 of 494
against by the ordinary exertion of usually contemplated and avoids putting upon
human skill or prudence; the insured the burden of establishing that the
c. Barratry or the willful and intentional act loss was due to peril falling within the policy’s
on the part of the master or the crew, in coverage. The insurer avoids liability by
pursuance of some unlawful or demonstrating that a specific provision
fraudulent purpose, without the expressly excludes the loss from coverage
consent of the owner, and to the [Choa Tiek Seng v. Court of Appeals, G.R. No.
prejudice of his interest (e.g., burning 84507 (1990)].
the ship, unlawfully selling the cargo).
Exception: In an all-risk policy, all risks are
Perils of the sea do not include ordinary wear covered unless expressly excepted. The
and tear of the voyage and injuries suffered by burden rests on the insurer to prove that the
the vessel in consequence of her not being loss is caused by a risk that is excluded
unseaworthy [Roque v. IAC, G.R. No. L-66935 [Filipino Merchants Ins. Co. v. CA, G.R. No.
(1985)]. 85141(1989)].
Perils of the Ship e. Loss

Perils of the ship are those which cause a loss
which, in the ordinary course of events, results Loss may be total (actual or constructive) or
from the: partial.
a. Ordinary, natural, and inevitable action
of the sea; 1.Total Loss
b. Ordinary wear and tear of the ship; and
c. Negligent failure of the shipowner to 2. Actual Loss
provide the vessel with the proper Actual total loss exists when the subject
equipment to convey the cargo under matter of the insurance is wholly destroyed or
ordinary conditions [De Leon]. lost or when it is so damaged that it no longer
exists in its original character [Vance].
Perils of the Sea Perils of the Ship
Actual loss is caused by:
Covers casualties Covers losses a. A total destruction of the thing insured;
due to unusual resulting from b. The irretrievable loss of the thing by
violence or ordinary wear and sinking, or by being broken up;
extraordinary tear or other damage c. Any damage to the thing which renders
causes connected to incidental to the it valueless to the owner for the
navigation voyage purpose for which he held it;
d. Any other event which effectively
Covers losses which Covers losses which deprives the owner of the possession,
cannot be guarded result from the at the port of destination of the thing
against by prudence negligent failure of insured [Sec. 132].
and the ordinary the shipowner to
exertion of human provide the vessel Actual loss may be presumed from the
skill with the proper continued absence of a ship without being
equipment, and can heard of. The length of time which is sufficient
thus be guarded to raise this presumption depends on the
against by ordinary circumstances of the case [Sec. 134].
exertion of human
skill 3. Constructive Loss
Constructive total loss or “technical total
loss” is one in which the loss, although not
2. Rules on All Risks Covered
actually total, is of such character that the
insured is entitled, if he thinks fit, to treat it as
General Rule: An “all risks” provision of a
total by abandonment [45 CJS 1150]. A
marine policy extends coverage to risks not
Page 190 of 494
constructive total loss is one which gives to a Note: Freightage cannot, in any case, be
person insured a right to abandon [Sec. 133]. abandoned, unless the ship is also abandoned.
Three rules exist as to determining when there f. Abandonment

is a constructive total loss:
1. English rule Abandonment is the act of the insured by
There is constructive total loss when the which, after a constructive total loss, he
subject matter of the insurance, while still declares the relinquishment to the insurer of his
existent in specie, is so damaged as not to be interest in the thing insured [Sec. 140].
worth, when repaired, the cost of the repairs.
Aside from the requirements under Sec. 141
2. American rule above-mentioned:
There is constructive total loss when it is so 1. An abandonment must be neither
damaged that the costs of repairs would partial nor conditional [Sec. 142];
exceed one-half of the value of the thing as 2. An abandonment must be made
acquired (also known as the “fifty percent within a reasonable time after
rule”). receipt of reliable information of the
loss, but where the information is of a
3. Philippine rule doubtful character, the insured is
The insured may not abandon the thing insured entitled to a reasonable time to make
unless the loss or damage is more than three- inquiry [Sec. 143];
fourths of its value [De Leon]. 3. Abandonment is made by giving
notice thereof to the insurer, which
A person insured by a contract of marine may be done orally, or in writing:
insurance may abandon the thing insured and Provided, That if the notice be done
recover for a total loss thereof when the cause orally, a written notice of such
of the loss is a peril insured against— abandonment shall be submitted within
a. If more than 3⁄4 thereof in value is seven days from such oral notice [Sec.
actually lost, or would have to be 145];
expended to recover it from the peril; 4. Abandonment must be absolute and
b. If it is injured to such an extent as to total.
reduce its value by more than 3⁄4;
c. If the thing insured is a ship, and the No notice of abandonment is required for
contemplated voyage cannot be recovery of loss in cases of actual total loss.
lawfully performed without incurring
either an expense to the insured of Where the information upon which an
more than 3⁄4 the value of the thing abandonment has been made proves
abandoned or a risk which a prudent incorrect, or the thing insured was so far
man would not take under the restored when the abandonment was made
circumstances; or that there was in fact no total loss, the
d. If the thing insured is cargo or abandonment becomes ineffectual.
freightage, and the voyage cannot be
performed, nor another ship procured A valid abandonment has the following
by the master, within a reasonable time characteristics:
and with reasonable diligence, to 1. There must be an actual
forward the cargo without incurring relinquishment by the person insured
either an expense to the insured of of his interest in the thing insured;
more than 3⁄4 the value of the thing 2. There must be a constructive total
abandoned or a risk which a prudent loss;
man would not take under the 3. It must be factual [Sec. 144];
circumstances [Sec. 141]. 4. The notice of abandonment must be
explicit and must specify the
Page 191 of 494

particular cause of the abandonment
Gross/General Simple/Particular
[Sec. 146].
Average Average
Effects of abandonment: vessel, her cargo, or persons interested in
1. An abandonment is equivalent to a both at the same the vessel and her
transfer by the insured of his interest to time from a real and cargo [Art. 809]
the insurer, with all the chances of known risk [Art. 811,
recovery and indemnity [Sec. 148]; Code of Commerce]
2. If a marine insurer pays for a loss as if
it were an actual total loss, he is entitled Loss is borne by all Loss is borne alone
to whatever may remain of the thing the owners of the by the owner of the
insured, or its proceeds or salvage, as interests involved, cargo or of the
if there had been a formal who are pro tanto vessel, as the case
abandonment [Sec. 149]; obliged to give may be [De Leon];
3. Upon an abandonment, acts done in proportionate such loss is not
good faith by those who were agents of contributions to suffered by all
the insured in respect to the thing make up for such persons contributing
insured, subsequent to the loss, are at loss, since the ratably [Carale]
the risk of the insurer, and for his sacrifice was made
benefit [Sec. 150]. for the common
benefit of all who
g. Average have an interest in
the venture [Art. 812;
The following are considered averages: Carale]
1. All extraordinary or accidental
expenses which may be incurred
during the navigation for the Requisites to claim general average
preservation of the vessel or cargo, or contributions:
both; 1. There must be a common danger to the
2. All damages or deterioration the vessel vessel or cargo;
may suffer from the time she puts to 2. The sacrifice must be for the common
sea from the port of departure until she safety or for the benefit of all;
casts anchor in the port of destination, 3. It must be successful (i.e. resulted in
and those suffered by the merchandise the saving of the vessel and/or cargo);
from the time it is loaded in the port of 4. Expenses or damages should have
shipment until it is unloaded in the port been incurred or inflicted after taking
of consignment [Art. 806, Code of proper legal steps and authority
Commerce]. [Magsaysay v. Agan, G.R. No. L-6393
(1955)].
There are two kinds of averages:
1. Gross or general Vance, however, includes as part of the
2. Simple or particular requisites:
1. Sacrifice was made by the master or
upon his authority; and
Gross/General Simple/Particular 2. That it was not caused by any fault of
Average Average the party asking for the contribution.
Includes damages Includes damages An example of particular average loss would

and expenses which and expenses be the wages of the crew when the vessel is
are deliberately caused to the vessel detained by reason of force majeure. In such a
caused by the or her cargo, which case, the loss is only partial and must be borne
master of the vessel have not inured to by the owner of the vessel alone [Carale].
or upon his authority, the common benefit
in order to save the and profit of all the
Page 192 of 494
Rules on averages in marine insurance condition [Roque v. Intermediate Appellate
Where it has been agreed that an insurance Court, G.R. No. L-66935 (1985)].
upon a particular thing, or class of things, shall
be free from particular average: A vessel should be seaworthy at the time
1. A marine insurer is not liable for any commencement of the risk or start of the
particular average loss not depriving voyage, except:
the insured of the possession of the 1. Time policy: When the insurance is
whole of such thing, or class of things made for a specified length of time, the
at the port of destination (even though implied warranty is not complied with
it becomes entirely worthless); unless the ship be seaworthy at the
2. However, such insurer is liable for his commencement of every voyage it
proportion of all general average loss undertakes during that time;
assessed upon the thing insured [Sec. 2. Cargo policy: When the insurance is
138]. upon the cargo which, by the terms of
the policy, description of the voyage, or
h. Warranties established custom of the trade, is to
be transhipped at an intermediate port,
Implied warranties in marine insurance: the implied warranty is not complied
1. Implied warranty of seaworthiness with unless each vessel upon which the
2. Implied warranty against improper cargo is shipped, or transhipped, be
deviation seaworthy at the commencement of
3. Implied warranty of proper each particular voyage [Sec. 117].
documentation
Where different portions of the voyage
Implied Warranty of Seaworthiness contemplated by a policy differ in respect to the
things requisite to make the ship seaworthy
In every marine insurance upon a ship or therefor, a warranty of seaworthiness is
freight, or freightage, or upon anything which is complied with if, at the commencement of each
the subject of marine insurance, a warranty is portion, the ship is seaworthy with reference to
implied that the ship is seaworthy [Sec. 115]. that portion [Sec. 119].
A vessel is seaworthy if: The insurer is not liable despite breach of

1. It is fit to perform the service and to warranty when the ship becomes unseaworthy
encounter the ordinary perils of the during the voyage to which an insurance
voyage contemplated by the parties to relates, but there is an unreasonable delay in
the policy [Sec. 116]; repairing the defect [Sec. 120].
2. It is properly laden;
3. It is provided with a competent master; Implied Warranty Against Improper
4. It is provided with a sufficient number Deviation
of competent officers and seamen;
5. It is provided with the requisite A deviation is a departure from the course of
appurtenances and equipment; the voyage insured, or an unreasonable delay
6. It is provided with other necessary or in pursuing the voyage or the commencement
proper stores and implements for of an entirely different voyage [Sec.125].
voyage [Sec.118].
There is proper deviation when:
Note: There is an implied warranty of 1. Caused by circumstances over which
seaworthiness in every contract of ordinary neither the master nor the owner of the
marine insurance, as provided in Sec. 113 in ship has any control;
relation to Sec. 99. It becomes the obligation of 2. Necessary to comply with a warranty,
a cargo owner to look for a reliable common or to avoid a peril, whether or not the
carrier which keeps its vessels in seaworthy peril is insured against;
Page 193 of 494

3. Made in good faith, and upon Exception: It is caused by lightning or a natural
reasonable grounds of belief in its disaster or casualty not attributable to human
necessity to avoid a peril; or agency [Phil. Home Assurance Corp. v. CA,
4. Made in good faith, for the purpose of G.R. No. 106999 (1996)].
saving human life or relieving another
vessel in distress [Sec. 126]. Fire or other so-called “allied risks”
enumerated in Sec. 169 must be the
Note: In instances when deviation is proper, proximate cause of the damage or loss.
insurer remains liable.
The presence of heat, steam, or even smoke is
Every deviation not specified in the last section evidence of fire, but taken by itself will not
is improper [Sec. 127]. prove the existence of fire.
The effect of any loss subsequent to an b. Risks

improper deviation is that the insurer is not
liable [Sec. 128]. The risk assumed by the insurer is the loss and
damage caused by hostile fire and not
Implied Warranty of Proper Documentation friendly fire.
Where the nationality or neutrality of a ship or

Hostile Fire Friendly Fire
cargo is expressly warranted, it is implied that
the ship will carry the requisite documents to
Fire that escapes Fire that burns in a
show such nationality or neutrality and that it
from the place where place where it is
will not carry any documents which cast
it was intended to intended to burn
reasonable suspicion thereon [Sec. 122].
burn and ought to be, and ought to be (e.g.
or one which remains fire burning in a stove
2. Fire completely within its or a lamp) [De Leon].
proper place but
a. Definition because of the But friendly fire may
unsuitable materials become hostile fire
Fire insurance is a contract of indemnity by used to light it, by escaping from the
which the insurer, for a stipulated premium, becomes inherently place where it ought
agrees to indemnify the insured against loss dangerous and to be to some place
by: uncontrollable [De in which it ought not
1. Fire, lightning, windstorm, tornado, or Leon]. to be [Carale].
earthquake; and
2. Other allied risks, when such risks are
covered by extension to fire insurance The principle underlying this distinction is that
policies or under separate policies the policy shall not be construed to protect the
[Sec. 169]. insured from injury consequent upon his
negligent use or management of fire, so long
Fire is oxidation which is so rapid as to produce as it burns in the place where it ought to be
either a flame or a glow. Spontaneous [Carale].
combustion is usually rapid oxidation. Fire is
always caused by combustion, but combustion c. Alterations in Use or Condition
does not always cause fire [Western Woolen
Mills Co. v. Northern Assurance Co., 139 Fed An alteration in the use or condition of a thing
637 (1905)]. insured from that to which it is limited by the
policy:
General Rule: Fire cannot be considered a 1. Entitles an insurer to rescind a contract
natural disaster or calamity or an act of God of fire insurance if such alteration:
since it almost always arises from acts of man a. Increases the risks, and
or by human means. b. Was made:
Page 194 of 494

1. Without the consent of In an open policy, the actual loss, as
the insurer, and determined, will represent the total indemnity
2. By means within the due the insured except only that the total
control of the insured. indemnity shall not exceed the total value of the
2. Does not affect a contract of fire policy [Development. Ins. Corp. v. IAC, G.R.
insurance if the alteration does not No. 71360 (1986)].
increase the risk [Secs. 170-171].
Valued policy
Note: A contract of fire insurance is not affected If there is a valuation, the effect shall be like a
by any act of the insured after the execution of marine insurance policy wherein the valuation
the policy, which does not violate its provisions, is conclusive between the parties in adjusting
even though it increases the risk and is the the loss [Sec. 158].
cause of the loss [Sec. 172].
Option-to-rebuild clause
Transferring machinery to another location, Whenever the insured desires to have a
despite a provision in the policy stating that the valuation named in his policy, insuring any
machine cannot be transferred without the building or structure against fire, he may
consent of the insurer, is considered an require such building or structure to be
alteration in the condition and location of the examined by an independent appraiser and the
thing insured [Malayan Insurance Co, Ltd. v. value of the insured’s interest therein may then
PAP Co., Ltd., G.R. No. 200784 (2013)]. be fixed as between the insurer and the
insured. The cost of such examination shall be
d. Measure of Indemnity paid for by the insured. A clause shall be
inserted in such policy stating substantially that
In an open policy, only the expense necessary the value of the insured’s interest in such
to replace the thing lost or injured in the building or structure has been thus fixed [Sec.
condition it was at the time of the injury will be 174].
paid.
3. Casualty
In a valued policy, the parties are bound by
the valuation, in the absence of fraud or a. Definition
mistake [Sec. 173].
Casualty insurance is insurance covering loss
The parties may provide for an option-to- or liability arising from accident or mishap.
rebuild clause concerning the repairing,
rebuilding, or replacing of buildings or Casualty insurance includes but is not limited
structures wholly or partially damages [Sec. to:
174]. 1. Employer’s liability insurance;
2. Motor vehicle liability insurance;
Note: No policy of fire insurance shall be 3. Plate glass insurance;
pledged, hypothecated, or transferred to any 4. Burglary and theft insurance;
person, firm, or company who acts as agent for 5. Personal accident and health
or otherwise represents the issuing company insurance, as written by non-life
[Sec. 175]. insurance companies; and
6. Other substantially similar kinds of
Open policy insurance.
In the absence of express valuation in a fire
insurance policy, the insured is only entitled to Casualty insurance does not include certain
recover the amount of actual loss sustained types of loss which, by law or custom, are
and the burden of proof is upon him to establish considered as falling exclusively within the
the amount of such loss by preponderance of scope of other types of insurance, such as fire
evidence. or marine [Sec. 176].
Page 195 of 494

b. Intentional Injury and Accidental Under this kind of insurance, no action will lie
Injury Distinguished against the insurer unless brought by the
insured for loss actually sustained and paid by
Intentional Injury Accidental Injury him. Liability of the insurer attaches only after
the insured has paid his liability to the third
Injury involves the Injury happens by
party [De Leon].
exercise of the chance or
reasoning faculties, fortuitously, without
Note: Except with respect to compulsory motor
consciousness, intention or design,
vehicle liability insurance, the Insurance Code
and volition which is unexpected,
contains no other provisions applicable to
unusual and
casualty insurance or to robbery insurance in
unforeseen
particular. These contracts are, therefore,
Where a provision of The terms do not, governed by the general provisions applicable
the policy excludes without qualification, to all types of insurance. Outside of these, the
intentional injury, it is exclude events rights and obligations of the parties must be
the intention of the resulting in damage determined by the terms of their contract,
person inflicting the due to fault, taking into consideration its purpose and
injury that is recklessness, or always in accordance with the general
controlling negligence of third principles of insurance law [Fortune Insurance
parties & Surety Co. v. CA, G.R. No. 115278 (1995)].
If the injuries
suffered by the d. No-Action Clause
insured clearly
resulted from the A no-action clause is a requirement in a policy
intentional act of the of liability insurance which provides that a suit
third person, the must first be instituted, and a final judgment be
insurer is relieved first obtained against the insured before the
from liability as person injured can recover on the policy.
stipulated
However, a no-action clause cannot prevail
over Rules of Court provisions which are aimed
c. Divisions at avoiding multiplicity of suits. Parties (i.e. the
insured and the insurer) may be joined as
1. Liability Insurance defendants in a case commenced by the third
party claiming under a liability insurance, as the
This is insurance against specified perils which right to relief in respect to the same
may give rise to liability on the part of the transactions is alleged to exist [Sec. 5, Rule 2;
insured. Sec. 6, Rule 3, 2019 Rules of Civil Procedure;
Guingon v. Del Monte, G.R. No. L- 22042
The insurer assumes the obligation to pay the (1967)].
third party in whose favor the liability of the
insured arises. The liability of the insurer 4. Suretyship
attaches as soon as the liability of the insured
to the third party is established. It covers a. Definition
liability incurred from quasi-delict or criminal
negligence but cannot cover deliberate criminal A contract of suretyship is an agreement
acts [De Leon]. whereby a party, called the surety, guarantees
the performance by another party, called the
2. Indemnity Insurance principal or obligor, of an obligation or
undertaking in favor of a third party called the
This is insurance against specified perils which obligee [Sec. 177].
may affect the persons.
Page 196 of 494

It includes official recognizances, stipulations, 5. Life
bonds, or undertakings issued by any company
by virtue of and under the provisions of Act. No Life insurance is insurance on human lives
536, as amended by 2206 [Sec. 177]. and insurance appertaining thereto or
connected therewith.
Note: The Civil Code shall be applied in a
suppletory character whenever necessary in The following shall be considered a life
interpreting the provisions of a contract of insurance contract for purposes of the
suretyship [Sec. 180]. Insurance Code:
a. Every contract or undertaking for the
b. Nature of Contract payment of annuities, including
contracts for the payment of lump sums
It shall be deemed as insurance contract if under a retirement program where a
the surety’s main business is that of suretyship, life insurance company manages or
and not where the contract is merely incidental acts as a trustee for such retirement
to any other legitimate business or activity of program;
the surety. b. Every contract or pledge for the
payment of endowments or annuities
It is an accessory contract unlike a contract [Secs. 181-182].
of insurance which is the principal contract
itself. An insurance upon life may be made payable:
a. On the death of the person;
The contract of a surety is evidenced by a b. On his surviving a specified period; or
document called surety bond which is c. On the continuance or cessation of life
essentially a promise to guarantee the [Sec. 182].
obligation of the obligor. In turn, the obligor
executes an indemnity agreement in favor of The parties to a life insurance are the
the insurer [De Leon]. following:
a. Owner of the policy: One who has the
When the obligee accepts the bond, the bond power to name the beneficiary, assign
becomes valid and enforceable, whether or not it, cash it in or use as collateral, with the
the premium has been paid by the obligor, obligation to pay the premiums.
unlike in an insurance contract where payment b. Cestui que vie: One on whose life
of premium is necessary for the contract to be insurance is obtained.
valid. If the obligee has not yet accepted, then c. Beneficiary: One to whom the
payment of premium is still necessary for the proceeds may be paid.
contract of suretyship to be valid.
Note: There may be only one person for all
c. Liability of Surety three parties.
The liability of the surety or sureties under a a. Types

bond is joint and several, or solidary [Sec. 178].
This means that upon the default of the 1. Individual Life
principal obligor, the surety becomes primarily
liable. Unlike a guarantor, a surety is not Individual life insurance is insurance on
entitled to the benefit of exhaustion of the human lives and insurance appertaining
principal obligor’s assets and assumes as a thereto or connected therewith. It may be made
regular party to the undertaking. payable on the death of the person, or after his
surviving a specified period (as an annuity or
Said liability is limited or fixed to the amount of endowment), or otherwise contingently on the
the bond. continuation or cessation of life.
Page 197 of 494

2. Group Life b. Other Classifications of Life Policies
Group life insurance is a blanket policy 1. Ordinary or Whole Life Policy

covering a number of individuals who are 2. Term Life Insurance
usually a cohesive group (e.g. employees of a 3. Modified Life Insurance
company) and are subjected to a common risk.
No medical examination is usually required of
Ordinary or whole life policy is where the
each person insured (in contrast to individual
insurer agrees to pay the face value of the
life insurance).
policy upon the death of the insured.
Group insurance is a single insurance
The following are distinct variations of whole
contract that provides coverage for many
life policy:
individuals. The employer-policy holder is the
1. Ordinary Life Insurance — Premiums
agent of the insurer in collecting the premium
are paid throughout the lifetime of the
[Pineda v. CA, G.R. No. 105562 (1993)].
person insured or until the person
reaches a predetermined specified age
Typically, the policy owner is an employer, and
at which point the coverage continues
the policy covers the employees or members of
without the payment of additional
the group, with one master contract kept by the
premiums.
employer. Where the employee is required to
2. Limited Payment Life Insurance —
pay a portion of the premium, the arrangement
Premiums are paid only during a
is called a contributory plan, wherein his
specified number of years or until a
share is deducted from his wages [Carale].
specified event occurs.
3. Single Premium Life Insurance —
3. Industrial Life
The coverage is acquired by the
payment of a single premium.
Industrial life insurance refers to an
4. Joint Life Insurance — Coverage is
insurance policy under which the premiums are
payable upon the first death among two
payable either monthly or oftener, if:
or more insured (normally purchased
a. The face amount of insurance provided
by business partners or spouses) and
in any policy is not more than 500 times
paid to the survivor.
that of the current statutory minimum
5. Universal Life Insurance —
daily wage in the City of Manila; and
Emphasizes the separation of the
b. The words “industrial policy” are
portion of the premium that is used to
printed upon the policy as part of the
cover the insurance protection from the
descriptive matter [Sec. 235].
portion of the premium allocated to an
investment.
It provides insurance coverage to industrial
6. Variable Life Insurance — Some
workers or people who are unable to afford
amount of death benefit provided by a
insurance for bigger amounts.
variable life insurance policy is
guaranteed by the insurer, but the total
It shall not lapse after non-payment of
death benefit and the cash value of the
premiums in 3 months after the expiration of
insurance before death depend on the
the grace period if such non-payment is due to
investment performance of that portion
the failure of the company to send its
of the premium which is allocated to a
representatives to the insured to collect
separate fund.
premium [Sec. 235].
7. Pure Endowment Policy — Where
the insurer pays the insured if the
4. Microinsurance insured survives a specified period. If
Infra. the insured dies within the period, the
insurer is released from liability and
unless the contract otherwise provides,
Page 198 of 494

need not reimburse any part of the Note: Any stipulation extending the 2-
premiums paid. year period is void.
8. Endowment Policy — Where the
insured is paid the face value of the b. Suicide is committed in a state of
policy if he outlives the designated insanity, regardless of the date of the
period. If he dies within said period, the commission, unless suicide is an
insurer pays the proceeds to the excepted peril [Sec. 183].
beneficiary. This is a combination of
term policy and pure endowment Since suicide is contrary to the laws of nature
policy. and the ordinary rules of conduct, it is never
presumed. The burden of proving lies with the
Term life insurance provides for the payment insurer, who seeks to avoid liability under a life
of a specified amount if death occurs within the policy, excepting it from coverage [Campos].
period designated in the policy, usually for
periods of one to five years. Suicide as an Excepted Risk vs. Willful
Exposure to Needless Peril
Modified life insurance is a policy that Suicide and willful exposure to needless peril
combines term and whole life insurance into a are in pan materia because they both signify a
single insurance policy. Premiums paid by the disregard for one's life. The only difference is in
insured are substantially less during the first degree, as suicide imports a positive act of
few years then later increases during the ending such life whereas the second act
remaining term of the policy [Carale]. indicates a reckless risking of it that is almost
suicidal in intent. To illustrate, a person who
c. Risks walks a tightrope one thousand meters above
the ground and without any safety device may
Five important risks: not actually be intending to commit suicide, but
1. Death or Survival; his act is nonetheless suicidal. He would thus
2. Suicide be considered as 'willfully exposing himself to
3. Death at the hands of the law; needless peril [Sun Life Insurance v. Court of
4. Killing by the beneficiary; and Appeals, G.R. No. 92383 (1992)].
5. Accidental Death
3. Death at the Hands of the Law
1. Death or Survival
Death at the hands of the law (e.g. legal
Life insurance may be made payable on the execution) is one of the risks assumed by the
death of the person, or on his surviving a insurer under a life insurance policy in the
specified period, or otherwise contingently on absence of a valid policy exception [Campos].
the continuation or cessation of life [Campos].
4. Killing by the Beneficiary
Death of the insured must be proven by the
beneficiary before the insurer can be made to General Rule: The interest of a beneficiary in
pay. a life insurance policy shall be forfeited when
the beneficiary is the principal, accomplice, or
2. Suicide accessory in willfully bringing about the death
of the insured. In such an event, the other
Insurer is liable only when: beneficiaries so named shall receive their
a. Suicide is committed after the policy share and divide among them the forfeited
has been in force for a period of 2 years share of the “guilty” beneficiary. In the absence
from the date of its issue or of its last of other beneficiaries, proceeds shall be paid
reinstatement unless the policy according to the policy contract, and if silent, it
provides a shorter period. shall be paid to the estate of the insured [Sec.
12].
Page 199 of 494

Exceptions: The fact that there were nine wounds in total is
a. Accidental killing proof that the victim was killed intentionally, as
b. Self-defense this cannot be considered accidental. Thus, the
c. Insanity of the beneficiary at the time incident is not covered by the supplemental
he killed the insured insurance on death by accident [Biagtan v.
d. Negligence Insular G.R. No. L-25579 (1972)].
Note: Conviction of the beneficiary is 6. Microinsurance

necessary before his interest in the insurance
policy is forfeited in favor of the others indicated Microinsurance is a financial product or
in Sec. 12. service that meets the risk protection needs of
the poor, where:
5. Accidental Death a. The number of contributions,
premiums, fees, or charges, computed
The terms “accident” and “accidental means” on a daily basis, does not exceed 7.5%
have been taken to mean that they happen by of the current daily minimum wage rate
chance or fortuitously, without intention and for nonagricultural workers in Metro
design and are unexpected, unusual, and Manila; and
unforeseen. b. The maximum sum of guaranteed
benefits is not more than 1,000 times of
Where the death or injury is not the natural or the said current daily minimum wage
probable result of the insured’s voluntary act, rate [Sec. 187].
or if something unforeseen occurs in the doing
of the act which produces the injury, the No insurance company or mutual benefit
resulting death is within the protection of the association shall engage in the business of
policies insuring against death or injury from microinsurance unless it possesses all the
accident [Carale]. requirements as may be prescribed by the
Commissioner [Sec. 188].
General Rule: Death or injury does not result
from accident or accidental means within the 7. Compulsory Motor Vehicle Insurance
terms of an accident-policy if it is the natural
result of the insured’s voluntary act, Compulsory motor vehicle liability
unaccompanied by anything unforeseen insurance is a policy of insurance or guaranty
except the death or injury. in cash or surety bond to indemnify the death,
bodily injury, and/or damage to property of a
There is no accident when a deliberate act is third-party or passenger arising from the use of
performed, unless some additional, a motor vehicle.
unexpected, independent, and unforeseen
happening occurs which produces or brings It shall be unlawful for any land transportation
about the result of injury or death [Finnman operator or owner of a motor vehicle to operate
General Assurance Corp. v. CA, G.R. No. the same in the public highways unless there is
100970 (1992)]. in force, a policy of insurance or guaranty in
cash or surety bond:
An event is not an accident if it is due to a a. Issued in accordance with the
voluntary and intentional act on the part of provisions of this chapter;
anyone, including third parties. In the absence b. To indemnity the death, bodily injury
of proof that the incident was intentional, the and/or damage to property of a third-
insurer shall pay the beneficiary the value of party or passenger arising from the use
the supplemental policy covering death by thereof [Sec. 387].
accident [Calanoc v. CA, G.R. No. L-8151
(1955)]. It is a requisite for registration or renewal of
registration of a motor vehicle by every land
transportation operator or owner [Sec. 390]. It
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is the only type of compulsory insurance Any claim for death or injury to any passenger
provided for under the Insurance Code. or third party shall be paid without the necessity
of proving fault or negligence of any kind,
It applies to all vehicles whether public or provided the total indemnity in respect of any
private. person shall not exceed P15,000.
To the extent that motor vehicle insurance is The claim shall be made against only one
compulsory, it must be a liability policy, and motor vehicle. It shall lie against the insurer of
the provision making it merely an indemnity the vehicle in which the occupant is riding, and
insurance contract cannot have any effect no other. The claimant is not free to choose
[Campos]. from which insurer he will claim the no fault
indemnity [Perla Compania de Seguros v.
The insurer’s liability is direct and primary, so Ancheta, G.R. No. L-49699 (1988)].
the insurer need not wait for final judgment in
the criminal case to be liable. The purpose is to 8. Compulsory Insurance Coverage for
give immediate financial assistance to victims Agency-Hired Workers
of motor vehicle accidents and/or their
dependents, regardless of the financial a. Definition
capability of motor vehicle owners or operators
responsible for the accident sustained [Shafer Compulsory insurance coverage for
v. Judge, RTC Olongapo, G.R. No. 78848 agency-hired workers is an insurance
(1988)]. mechanism made available by the law to
provide insurance protection for OFWs.
The claimants/victims may be a passenger or
a third party. The insured may be the party at Each migrant worker to be deployed by a
fault as against claims of third parties (i.e. third- recruitment/manning agency shall be covered
party liability) or the victim of the contingent by a compulsory insurance contract which shall
event. be secured at no cost to the said worker.
The following clauses are relevant to Basis: It is the policy of the State to provide
compulsory motor vehicle liability insurance: adequate protection to the overseas Filipino
a. Authorized Driver Clause is a workers by ensuring coverage under the
stipulation in a motor vehicle insurance compulsory insurance requirement in Section
policy which provides that the driver, 37-A of the Migrant Workers and Overseas
other than the insured owner, must be Filipinos Act of 1995, as amended [Sec. 1(b),
duly licensed to drive the motor vehicle, Guideline I, Insurance Guidelines on Rule XVI
otherwise the insurer is excused from of the Omnibus Rules and Regulations
liability; Implementing RA 8042].
b. Theft Clause is a stipulation including
theft as one of the risks insured b. Qualifications
against. If there is such a provision and
the vehicle was unlawfully taken, the To be qualified to provide for the Migrant
insurer is liable under the theft clause Workers’ Compulsory Insurance Coverage, the
and the authorized driver clause does insurance company must:
not apply. The insured can recover 1. Be a reputable private life, non-life and
even if the thief has no driver’s license. composite insurance company;
c. No Fault Clause is a provision 2. Be duly licensed by IC;
required in every compulsory motor 3. Be in existence and operational for at
vehicle liability insurance regarding least five (5) years;
claims for death or injury to a 4. Have a net worth of at least Php
passenger or third party on a liability 500,000,000 based on the audited
insurance policy covering the vehicle. financial statements for the
immediately preceding year;
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5. Have a current year certificate of General Rule: Insurable interest must be
authority; and capable of pecuniary estimation because the
6. Have an IC-approved standard polic purpose of insurance is to indemnify. It would
[Sec. 1, Guideline III, Insurance be difficult to measure if the benefit derived or
Guidelines on Rule XVI of the Omnibus the loss incurred is not capable of pecuniary
Rules and Regulations Implementing estimation.
RA 8042].
Exception: The insurable interest need not
c. Disqualifications always be pecuniary in nature (e.g. in insuring
the life of a person, the purpose is not to
Insurance companies who have directors, indemnify but to act as an investment or
partners, officers, employees, or agents with savings instrument) [Lucena v. Crawford, 2Bos
relatives within the fourth civil degree of & PNR 269 (1806)].
consanguinity or affinity who work or have
interest in any of the licensed Ratio: It is a deterrence to the insured.
recruitment/manning agencies or in any of the
government agencies involved in the overseas A policy issued to a person without insurable
employment program shall be disqualified from interest is a mere wager policy or contract and
providing the migrant worker’s insurance is void for illegality [De Leon].
coverage.
Evidence that life insurance is regarded as a
It shall be the duty of the said directors, wager policy:
partners, officers, employees, or agents to 1. The original proposal to take out
disclose any such interest to the IC and POEA insurance was that of the beneficiary;
[Sec. 2, Guideline III, Insurance Guidelines on 2. The premiums are paid by the
Rule XVI of the Omnibus Rules and beneficiary;
Regulations Implementing RA 8042]. 3. The beneficiary has no interest,
economic or emotional, in the
D. Insurable Interest continued life of the insured [De Leon].
Insurable interest (or what may be insured) is The insurable interest is the measure of the
that interest which a person is deemed to have upper limit of his provable loss under the
in the subject matter insured, where he has a contract. Insurance should not provide the
relation or connection with or concern in it, such insured means of making a net profit from the
that the person will: happening of the event insured against [De
1. Derive pecuniary benefit or advantage Leon].
from the preservation of the subject
matter insured; and D. When insurable interest
2. Suffer pecuniary loss or damage from should exist
its destruction, termination, or injury by
the happening of the event insured Insurable Interest Required
against [Lalican v. Insular Life Ins.,
G.R. No. 183526 (2009)]. Life/Health Property
An insurable interest is one of the most basic Inception ✓ ✓

and essential requirements in an insurance
contract. The existence of an insurable interest Intervening
gives a person the legal right to insure the Period
subject matter of the policy of insurance
[Lalican v. Insular Life Ins., G.R. No. 183526 Occurrence ✓
(2009)]. It may not be waived by stipulation. of Loss
Absence of insurable interest renders the
insurance contract void [Sec. 25].
Page 202 of 494
For Life Insurance: Insurable interest over may become the owner of the interest
life/health must exist at the time of the inception insured during the circumstance of the
of the contract but may be lost after [Sec. 19]. risk [Sec. 57].
For Property Insurance: Insurable interest It is an exception to the general rule that upon
must exist at the time of the inception of the maturity, the proceeds of a policy shall be given
contract and at the occurrence of the loss. But exclusively to the proper interest if the person
it need not exist during the intervening period in whose name or for whose benefit it is made.
or from the time between when the policy takes
effect, and the loss occurs. The alienation of In case of an express prohibition against
insured property will not defeat a recovery if the alienation in the policy [Art. 1306, NCC],
insured has subsequently reacquired the alienation will not merely suspend the contract
property and possesses an insurable interest but avoid it entirely.
at the time of loss [Sec. 19].
1. In Life/Health
Change of interest means the absolute Every person has an insurable interest in the
transfer of the property insured. life and health:
a. Of himself, of his spouse and of his
General Rule: A change of interest in the thing children;
insured does not transfer the policy but b. Of any person on whom he depends
suspends the insurance to an equivalent extent wholly or in part for education or
until the interest in the thing and the interest in support, or in whom he has a pecuniary
the insurance policy are vested in the same interest;
person. Thus, the contract is not rendered void
but is merely suspended [Sec. 20]. General Rule: For blood relationships,
no pecuniary relationship is needed.
Exception: The relationship suffices for family
1. Life, health, and accident insurance. members regardless of whether or not
2. A change of interest in the thing insured financial interest exists.
after the occurrence of an injury which
results in a loss does not affect the Ratio: One would naturally protect the
policy [Sec. 21]. life of his family member regardless of
3. A change in the interest in one or more whether there is monetary
of several things, separately insured by consideration. Good faith is presumed.
one policy, such as a conveyance of
one or more things, does not affect the Exception: Relationships with lesser
policy with respect to the others not so degree of kinship (e.g., aunt, niece,
conveyed [Sec. 22]. nephew, cousin). Pecuniary benefit is
4. A change of interest by will or essential. Relationships by affinity (in-
succession on the death of the insured. laws) and gratitude and affection are
His interest passes to his heir or legal not deemed sufficient. There must be
representative who may continue the actual pecuniary benefit.
insurance policy on the property by c. Of any person under a legal obligation
continuing paying premiums [Sec. 23]. to him for the payment of money, or
5. A transfer of interest by one of several respecting property or services, of
partners, joint owners, or owners in which death or illness might delay or
common, who are jointly insured, to the prevent the performance; and
others. This will avoid the policy only as d. Of any person upon whose life any
to the selling partners or co-owners, estate or interest vested in him
but not as to others [Sec. 24]. depends [Sec. 10].
6. Automatic transfers of interest in cases
in which the policy is so framed that it A person is not allowed to take out insurance
will inure to the benefit of whosoever upon the life of a stranger [Carale].
Page 203 of 494
There is no insurable interest in the life of a. Must be a pecuniary interest;
an illegitimate spouse. A creditor may take b. Exists whenever the relation between
out insurance on the life of his debtor, but his the assured and the insured is such
insurable interest is only up to the amount of that the assured has a reasonable
the debt, and only when the debt is unsecured expectation of deriving benefit from the
[Carale]. continuation of the life insured or of
suffering detriment through its
The Insurance Code does not expressly termination [De Leon].
provide the type of spouse, whether illegitimate
or legitimate. However, it can be presumed that General Rule: When the owner of the policy
the provision refers to legitimate spouses, insures the life of another, and designates a
based on Art. 195 of the Family Code on third party as beneficiary, both the owner
support, as well as Art. 739, NCC on prohibited and beneficiary must have an insurable
donations. interest in the life of the cestui que vie.
On the insurable interest of children: the law Exception: An assignee of the insurance
does not make any qualifications on the status contract is not required to have insurable
of the child. This is in accord with Art. 195 of interest in the life of the insured, since insurable
the Family Code. interest over life should exist only during the
inception of the contract.
Measure of Indemnity
General Rule: The measure of indemnity Note: An assignment of the insurance contract
under a policy of insurance upon life or health is different from a change in the designated
is the sum fixed in the policy. beneficiary.
Exception: The interest of a person insured is But if a person obtains a policy on the life of
susceptible of exact pecuniary measurement another and names himself as the beneficiary,
[Sec. 186]. he must have insurable interest therein [De
Leon].
a. In Life Insurance
iii. Beneficiary
Life insurance policies may be divided into two
general classes: A beneficiary is the person named or
1. Insurance upon one’s life designated in a contract of life, health, or
2. Insurance upon the life of another accident insurance as the person who is to
receive the proceeds or benefits which become
i. Interest in One’s Own Life payable, if the insured risk occurs.
The cestui que vie is the insured himself. The General Rule: A person may designate a
insured can designate anyone to be the beneficiary, irrespective of the beneficiary’s
beneficiary of the policy. lack of insurable interest, provided he acts in
good faith and without intent to make the
Each person has unlimited interest in his own transaction merely a cover for a forbidden
life, whether the insurance is for the benefit of wagering contract [De Leon].
himself or another [40 CJS 909].
Exception: Any person who is forbidden from
The beneficiary designated need not have any receiving any donation under Art. 739, NCC
interest in the life of the insured when the latter cannot be named beneficiary of a life insurance
takes out policy on his own life [De Leon]. policy by the person who cannot make any
donation to him [Art. 2012, NCC].
ii. Interest in Life of Another
The insurable interest in the life of another:
Page 204 of 494

Art. 739, NCC. The following donations are void: interest disappears once the debt has
1. Those made between persons who been paid;
were guilty of adultery or 2. In the case of a company’s insurance
concubinage at the time of the taken on the life of an employee,
donation; insurable interest disappears once the
2. Those made between persons found employee leaves the company.
guilty of the same criminal offense,
in consideration thereof; 2. In Property
3. Those made to a public officer or his
wife, descendants and ascendants, The following are considered as insurable
by reason of his office. (…) interest, provided that they are of such nature
that a contemplated peril might directly damnify
iv. Changing the Beneficiary the insured:
Every interest in real or personal
General Rule: The insured shall have the right property; or (e.g. Ownership)
to change the beneficiary he designated in the Any relation thereto; or (e.g. Interest of
policy [Sec. 11]. a trustee or a commission agent)
Any liability in respect thereof [Sec. 13]
Exception: If the insured expressly waived his (e.g. Interest of a carrier or depository
right to change the beneficiary, this makes the of goods)
latter an irrevocable beneficiary. But despite
the waiver, he can still change the beneficiary, A person has an insurable interest in property
provided he obtained the beneficiary’s consent when he sustains such relation with respect to
[Sec. 11]. it that he has a reasonable expectation of:
a. Benefit to be derived from its continued
Under the Slayer Statute, when the existence; or
beneficiary is the principal, accomplice or b. Loss or liability from its destruction
accessory in willfully bringing about the death [Carale; Gaisano Cagayan Ins. V. Ins.
of the insured, the interest of beneficiary in life Co. of North America, G.R. No. 147839
insurance policy is forfeited [Sec. 12]. (2006)].
v. Transfer of Policy An insurable interest in property may consist in:

a. An existing interest [Sec. 14];
The life insurance policy can be transferred Existing interest in property may be a legal
whether the transferee has insurable interest or title or equitable title [De Leon].
not. Notice of the transfer to the insurer is not
required for the validity of the same [Secs. 184- Examples of those having existing interest
185]. are:
1. Owners as regards their properties,
There is no right of subrogation in life 2. A buyer in a perfected contract of
insurance, because it is not a contract of sale,
indemnity. 3. A carrier or depository [Sec 15],
4. A warehouseman [General Bonded
b. In Health Insurance Warehouse Act],
5. Trustees in the case of the seller of
General Rule: Interest in the life or health of a property not yet delivered,
person must exist at the inception of the 6. Mortgagors over the property
insurance contract but need not exist thereafter mortgaged, and lessor, lessee and
or when the loss occurs [Sec. 19]. sublessee over the property leased
[De Leon].
Exception:
1. In the case of a creditor’s insurance
taken on the life of the debtor, insurable
Page 205 of 494

b. An inchoate interest founded on an 3. A change in interest by will or
existing interest [Sec. 14]; or succession upon the death of the
Inchoate interest in property exists but insured [Sec. 23];
is incomplete or unripe until the 4. A transfer of interest by one of several
happening of an event [De Leon]. partners, joint owners, or owners in
common who are jointly insured. The
Examples of inchoate interests are: acquiring co-owner has the same
1. The interest of stockholders with interest; his interest merely increases
respect to dividends in case of upon acquiring other co-owners
profits and shares in the assets, interest [Sec. 24].
and
2. The interest of a partner in the Note: This makes a distinction between a
properties belonging to the transfer in favor of a partner and in favor of a
partnership [De Leon]. stranger. The latter will avoid the policy while
c. An expectancy, coupled with an the former will not [Carale].
existing interest in that out of which
the expectancy arises [Sec. 14]. Mere transfer of the property does not transfer
- For example, a farmer who the policy but suspends it until the same person
planted crops has insurable becomes the owner of both the policy and the
interest over his harvest which can thing insured [Sec. 20].
be expected [De Leon].
b. Measure of Indemnity
A mere contingent or expectant interest in
anything, not founded on an actual right to the Being a contract of indemnity, the measure of
thing, nor upon any valid contract for it, is not insurable interest in property is the extent to
insurable [Sec. 16]. A son has no insurable which the insured might be damnified by the
interest over the property of his father because loss of injury thereof [Sec. 17].
such is just a mere expectancy and has no
legal basis before he inherits such property The insured cannot recover a greater value
[Carale]. than that of his actual loss because it would be
a wagering policy contrary to public policy and
a. Time of Existence void.
General Rule: Interest in property insured A carrier or depository of any kind has an
must exist both at inception and at time of loss, insurable interest in a thing held by him as
but not in the intervening period [Sec. 19]. such, to the extent of his liability but not to
exceed the value thereof [Sec. 15].
This means that the insurable interest in the
property must exist both at the inception of the c. Interest in Property and Life
contract and at the time of the loss [Carale]. Distinguished
Exceptions: Property Life

1. A change in interest over the thing
Extent
insured after the loss contemplated.
The insured may sell the remains Limited to actual Unlimited (save in life
without prejudice to his right to recover value of the interest insurance effected by
[Sec. 21]; thereon a creditor on the life
2. A change of interest in one or more of the debtor –
several distinct things, separately amount of debt only)
insured by one policy. This does not
avoid the insurance as to the others Existence
[Sec. 22].
Page 206 of 494

requires disclosure of other existing insurance
Property Life
policy. In such case, non-disclosure will avoid
Must exist when the Must exist at the time the policy. It is intended to prevent over
insurance takes the insurance takes insurance and thus avert the perpetration of
effect and when the effect, BUT need not fraud.
loss occurs, BUT exist thereafter
need not exist in the If there is double insurance and loss occurs:
meantime a. Each of the insurers will be liable only
up to the face value of their respective
Expectation of benefit to be derived policies; and
b. The insured has the option of choosing
Must have legal Need not have legal the order by which he will claim from
basis basis the insurers [Carale].
Interest of beneficiary Over insurance occurs when the value of the
insurance exceeds the value of the insurable
Must have insurable Need not have
interest.
interest over the insurable interest
thing insured over the life of the
Over insurance It is not per se void, however,
insured if the insured
recovery is allowed only to the extent of the
himself secured the
loss or damage incurred by the insured
policy. But if the
[Carale].
insurance was
obtained by the
An insurer may cancel an insurance policy,
beneficiary, the latter
other than life, based on a “discovery of other
must have insurable
insurance coverage that makes the total
interest over the life
insurance in excess of the value of the property
of the insured
insured,” subject to the requirement of prior
[Sundiang; Aquino]
notice [Sec. 64(f)].
E. Double Insurance and Over- The insured is entitled to a ratable return of the
premium, proportioned to the amount by which
insurance the aggregate sum insured in all the policies
exceeds the insurable value of the thing at risk
Double insurance exists where the same
(in case of an over insurance by several
person is insured by several insurers
insurers other than life) [Sec. 83].
separately in respect to the same subject and
interest [Sec. 95].
If there is over-insurance and loss occurs, then
the insurers will pay pro-rata or in the order as
Requisites of double insurance:
stated in contract or excess clause.
a. The same person is insured;
b. Two or more insurers insuring
separately; Double Insurance Over-insurance
c. The same subject matter;
d. The same interest insured; and Amount of insurance Amount of insurance
e. The same risk or peril insured against may or may not exceeds the value of
[Malayan Insurance v. Philippine First exceed the value of the insured’s
the insured’s insurable interest
Insurance, G.R. No. 184300 (2012)].
insurable interest
Double insurance is not prohibited under the

law unless the policy contains a stipulation to There are always There may be one or
the contrary. Usually, insurance policies several insurers more insurers
contain other insurance clause, which
Page 207 of 494
Rules for Payment the person in whose name or for whose benefit
Where the insured in a policy other than life is it is made.
over insured by double insurance:
a. The insured, unless the policy Exception: It is otherwise specified in the
otherwise provides, may claim policy [Sec. 53].
payment from the insurers in such
order as he may select, up to the Examples wherein multiple persons may each
amount for which the insurers are have insurable interest over the same property:
severally liable under their respective a. Corporations — the corporation and its
contracts; stockholders have insurable interest
b. Each insurer is bound, as between over the corporate assets.
himself and the other insurers, to
b. Partnerships — the partnership and the
contribute ratably to the loss in
partners composing it have insurable
proportion to the amount for which he
is liable under his contract [Sec. 96]. interest over its assets.
c. Assignments — the assignor and
Rules for claiming payment under Valued assignee have insurable interest over
Policies vs. Unvalued Policies [Sec. 96] the property assigned.
Valued Policy Unvalued policy d. Trusts — the trustor and trustee have
insurable interest over the property in
trust.
Any sum received by Any sum received by
him under any other him under any policy e. Lease Agreements — the lessor,
policy shall be shall be deducted lessee and sub-lessees have insurable
deducted from the against the full interest over the property in lease.
value of the policy insurable value for f. Mortgages — the mortgagor and
without regard to the any sum received by mortgagee/s have insurable interest
actual value of the him under any policy
over the property mortgaged.
subject matter
insured
F. No Fault, Suicide, and
Where the insured receives any sum in
Incontestability Clauses
excess of the valuation (for valued policies),
or of the insurable value (for unvalued
policies), the insured must hold such sum in
a. No Fault Clause
trust for the insurers, according to their right
of contribution among themselves The “no fault” clause connotes that the victim
of a tort can recover for his loss from his insurer
without regard to his own contributory fault or
the fault of the tortfeasor. This is to guarantee
Sec. 96 enunciates the principle of contribution
compensation or indemnity to persons
which requires each insurer to contribute
suffering loss in motor vehicle accidents
ratably to the loss or damage considering that
[Campos].
the several insurances cover the same subject
matter and interest against the same peril. If
Its essence is in seeking to provide victims of
the loss is greater than the sum of all the
vehicular accidents or their heirs immediate
policies issued, each insurer is liable for the
compensation, although in a limited amount,
amount of his policy.
pending final determination of who is
responsible for the accident and liable for the
4. Multiple or Several Interests on victims’ injuries or death [Campos].
Same Property
General Rule: The insurance proceeds shall

be applied exclusively to the proper interest of
Page 208 of 494

i. Multiple Interests over Mortgaged mortgagee’s rights and the mortgagee
Property can no longer recover the mortgagor’s
indebtedness.
The Insurance Code recognizes that both the d. If the proceeds are less than the credit,
mortgagor and mortgagee have each separate then the mortgagee may recover from
and distinct insurable interest in the mortgaged the mortgagor the deficiency. Upon
property. They may take out separate policies payment, the insurer is subrogated to
with the same or different insurance the rights of the mortgagee against the
companies. Insurance taken by one on his own mortgagor to the extent of the amount
name only, does not inure to the benefit of the paid.
other [Sec. 53].
When a mortgagee insured his own interest
Thus, a mortgagor has an insurable interest and a loss occurs, he is entitled to recover on
equal to the value of the mortgaged property the insurance. The mortgagee, however, is not
and a mortgagee, only to the extent of the debt allowed to retain his claim against the
secured by the mortgage [Geagonia v. CA, mortgagor, but it passes by subrogation to the
G.R. No. 114427(1995)]. insurer, to the extent of the insurance money
paid [Palileo v. Cosio, G.R. No. L- 7667
(1955)].
Mortgagor Mortgagee
When a mortgagor takes out an insurance for
As owner, the Only to the extent of his own benefit, only he can recover from the
interest is to the the debt secured insurer but the mortgagee has a lien on the
extent of the value of proceeds by virtue of the mortgage. A
the property, mortgagor can make the proceeds payable to
regardless of or assigned to the mortgagee [De Leon].
whether it equals to
the mortgage debt or Ways where a mortgagee may be the
not beneficial payee:
a. As assignee with the consent of the
His interest lies in What is insured is not insurer
that the loss or the property, but his b. A pledge without such consent;
destruction of the interest as c. The original policy may contain a
property will not mortgagee, which mortgage clause;
extinguish his subsists until the d. A rider making the policy payable to the
mortgage debt mortgage debt is mortgagee “as his interest may appear”
extinguished may be attached;
[Carale]. e. A “standard mortgage clause,”
containing a collateral independent
When mortgagee takes out insurance contract between the mortgagee and
policy the insurer may be attached;
a. When a mortgagee insures his own f. The policy, though by its terms payable
interest in the mortgaged property absolutely to the mortgagor, may have
without reference to the right of the been procured by a mortgagor under a
mortgagor, the mortgagee is entitled to contract duty to insure for the
the proceeds of the policy in case of mortgagee's benefit [Geagonia v. CA,
loss to the extent of his credit [De G.R. No. 114427 (1995)].
Leon].
b. If the proceeds are more than the total ii. Open Loss Payable Mortgage Clause
amount of credit, then the mortgagee
has no right to the excess. An open loss payable clause states that the
c. If the proceeds are equal to the credit, proceeds of the insurance contract is payable
then the insurer is subrogated to the to the mortgagee as beneficiary.
Page 209 of 494

The contract, however, is procured by the So long as an application for insurance has not
mortgagor for his interest in the property. He is been either accepted or rejected, it is merely a
the party to the contract, not the mortgagee. proposal or an offer to make a contract [Perez
v. CA, G.R. No. 112329 (2000)].
The acts of the mortgagor prior to the loss,
which would otherwise avoid the insurance, The insurance contract becomes effective
affects the mortgagee, even if the property is in upon payment of first premium, provided there
the hands of said mortgagee. has been an approval of the application.
3. Union Mortgage or Standard Mortgage The parties may impose additional conditions
Clause precedent to the validity of the policy as a
contract as they see fit. Usually, it is stipulated
A standard or union mortgage clause makes a in the application that the contract shall not
separate and distinct contract of insurance on become binding until the policy is delivered and
the interest of the mortgagee, thus any act of the first premium is paid [De Leon].
the mortgagor will not affect the mortgagee
[Carale]. Cognition Theory: An acceptance made by
letter shall not bind the person making the offer,
This clause is like an open loss payable clause, except from the time it came to his knowledge.
except that it is stipulated that the acts of the
mortgagor cannot invalidate the insurance, In Enriquez v. Sun Life Assurance Co. [G.R.
provided that if the mortgagor fails to pay the No. L-15895 (1920)] the Court held that:
premiums due, the mortgagee shall, on a. The submission of an application, even
demand, pay said premiums [De Leon]. with premium payment is a mere offer
on the part of the applicant, and does
b. Suicide Clause not bind the insurer;
b. An insurance contract is also not
[See IV. Classes, E. Life, 3. Risks, b) Suicide,
p. 16] perfected where the applicant dies
before the approval of his application or
c. Incontestability Clause it does not appear that the acceptance
of the application ever came to the
[See VIII. Rescission of Insurance Contracts, knowledge of the applicant.
A. Concealment, 7. Incontestability Clause, p.
35] a. Delay in Acceptance
II. Perfection of the Delay in acting on the application does not

constitute acceptance even though the insured
Insurance Contract has forwarded his first premium with his
application [Perez v. CA, G.R. No. 112329
1. Offer and (2000)].
Acceptance/Consensuality
When there is delay in acceptance due to the
An insurance contract is consensual, it is negligence of the insurance company which
therefore perfected by mere consent. Consent takes unreasonably long time before the
is manifested by the meeting of the offer and application is processed and the applicant dies,
the acceptance upon the object or the cause the contract is not perfected.
which are to constitute the contract.
The insurer can be liable for damages in
There is an offer when the insured submits an accordance with the “tort theory:” An
application to the insurer. There is acceptance insurance contract is imbued with public
when the insurer approves the application. interest. Thus, the insurer should act on an
application for insurance within a reasonable
Page 210 of 494
time, otherwise the applicant loses the Exceptions:
opportunity to obtain insurance from other a. Whenever the grace period provision
sources. Unreasonable delay in the applies in the case of a life or an
acceptance or rejection of these applications industrial life policy [Sec. 77].
can constitute negligence under Art. 2176 of b. Whenever under the broker and
the Civil Code. agency agreements with duly licensed
intermediaries, a 90-day credit
An acceptance made by letter shall bind the extension is given.
person making the offer from the date it came
to his knowledge [Enriquez v. Sun Life, 41 Phil. Note: No credit extension to a duly
269 (1920)]. licensed intermediary should exceed
90 days from the date of issuance of
The insurance business is imbued with public the policy [Sec. 77].
interest; thus, it is the duty of the insurer to act c. When there is an acknowledgment in
with reasonable promptness in acting on the contract that the premium has been
applications submitted to it [Wallace v. Hartford paid [Sec. 79].
Fire Insurance Co, 31 Idaho 48r (1918)]. d. Payment to an agent [South Sea
Surety v. CA 244 SCRA 744 (1995);
b. Delivery of Policy Arreola v. CA 236 SCRA 643 (1994)].
Now included In Section 315 of the
Delivery is the act of placing the insurance Insurance Code [American Home
policy (i.e. the physical document) into the Assurance v. Chua 309 SCRA 250
possession of the insured. (1999)].
e. Credit Extension [UCPB General
The delivery can be proof of the acceptance of Insurance v. Masagana 356 SCRA 307
the insurer of the offer of the insured. (2001)].
It is not, however, a pre-requisite of a valid Jurisprudence decided before the enactment of

contract of insurance. RA 10607 has provided two further exceptions:
a. Agreement to grant payment of
Note: Actual manual delivery is not necessary premium in installment basis and
[Vda. De Sindayen v. Insular Life, 62 Phil 51 partial payment has been made
(1935)]. [Makati Tuscany v. CA, G.R. No. 95546
(1992)].
Delivery to the agent cannot be considered b. When parties are barred by estoppel
delivery to the insured, as the agent of the [UCPB v. Masagana Telemart, G.R.
insurance company is not the agent of the No. 137172 (2001)].
insured [Bradley v. New York Life Ins., 275 F.
657 (1921)]. a. Authority of Agent to Receive
Premium
2. Premium Payment
Where an insurer authorizes an insurance
An insurance premium is the agreed price for agent or broker to deliver a policy to the
assuming and carrying the risk, i.e. the insured, it is deemed to have authorized said
consideration paid to an insurer for undertaking agent to receive the premium on its behalf.
to indemnify the insured against the specified
peril. The insurer is bound by its agent’s
acknowledgement of receipt of payment of
General Rule: No insurance policy issued or premium [American Home Assurance Co. v.
renewal is valid and binding until actual Chua, G.R. No. 130421 (1999)].
payment of the premium. Any agreement to
the contrary is void [Sec. 77].
Page 211 of 494

b. Payment by Post-Dated Check d. Non-Default Options in Life Insurance
The payment of premium by a postdated check In the case of individual life or endowment
at a stated maturity subsequent to the loss is insurance, the policy shall contain a provision
insufficient to put the insurance into effect. specifying the options to which the policyholder
is entitled to in the event of default in a premium
But payment by a check bearing a date prior payment after three (3) full annual premiums
to the loss, assuming availability of funds, shall have been paid [Sec. 233(f)].
would be sufficient, even if it remains
unencashed at the time of the loss. The Such option shall consist of:
subsequent effects of encashment would • A cash surrender value payable upon
retroact to the date of the instrument and its surrender of the policy which shall not
acceptance by the creditor [Vitug]. be less than the reserve on the policy.
c. Non-Payment of Premium The basis of which shall be indicated,

for the then current policy year; and
1. Effects
a. Prevents the contract from becoming Any dividend additions thereto, shall be
binding, unless waived [Philippine reduced by a surrender charge, which
Phoenix Surety and Insurance v. shall not be more than one-fifth (1/5) of
Woodworks, G.R. No. L-25317 (1979)]. the entire reserve or two and one-half
b. Does not affect the validity of the percent (2½%) of the amount insured
contracts unless, by express and any dividend additions thereto
stipulation, it is provided that the policy
shall, in that event, be suspended or • One or more paid-up benefits on a plan
shall lapse. or plans specified in the policy of such
value as may be purchased by the cash
2. Applicable Grace Periods surrender value [Sec. 233(f)].
In case of individual life insurance, the policy 1. Cash Surrender Value (CSV)
holder is entitled a grace period of either 30
days or one month within which payment of any The CSV is the amount that the insured is
premium after the first may be made [Sec. 233]. entitled to receive if he surrenders the policy
and releases his claims upon it.
In cases of industrial life insurance, the grace a. The right to CSV accrues only after
period is four weeks, and where premiums are three full annual premium payments.
paid monthly, either 30 days or one month b. The insured is given the right to claim
[Sec. 236]. the amount less than the reserve,
reduced by surrender charge [Sec.
3. Excuses for Non-Payment 233(f)(1)].
a. Fortuitous events which render The CSV is an amount which the insurance
payment by the insured wholly company holds in trust for the insured to be
impossible will not prevent forfeiture of delivered to him upon demand. When the
the policy when the premium remains company’s credit for advances is paid out of the
unpaid. In other words, it is not an cash value or cash surrender value, that value
excuse. and the company’s liability is diminished
b. Non-payment of premiums occasioned [Manufacturer’s Life Ins. v. Meer, G.R. No. L-
by war causes an insurance to be not 2910 (1951)].
merely suspended, but completely
abrogated [Constantino v. Asia Life Ratio: The premium is uniform throughout a
Ins. Co. G.R. No. L-1669 (1950)]. lifetime, but the risk is varied (i.e. higher risk
when older, lower when young). Thus, the cost
Page 212 of 494
of protection is more expensive during the early In effect, the insurance policy continues in
years of the policy. force for a period covered by the payment.
2. Alternatives to CSV After the period, if the insured still does not
resume paying his premiums, the policy
Extended Insurance / Term Insurance lapses, unless CSV still remains. If there is still
This is where the insured, after having paid CSV, APL continues until CSV is exhausted.
three full annual premiums, is given the right
to have the policy continued in force from date e. Reinstatement of a Lapsed Policy of
of default for a time either stated or equal to the Life Insurance
amount of the CSV, taken as a single premium.
In the case of individual life or endowment
The face value of the policy remains the same insurance, the policy shall contain a provision
but only within the term. that the policyholder shall be entitled to have
the policy reinstated:
If death occurs during this period, the 1. At any time within three (3) years from
beneficiary can recover the face value of the the date of default of premium payment
policy, but if the insured survives, the a. Unless the cash surrender
beneficiary gets nothing. value has been duly paid
b. Unless the extension period
Reinstatement is allowed if made within the has expired
term purchased; no reinstatement after the 2. Upon production of evidence of
lapse of the term purchased. insurability satisfactory to the
company; and
Paid-up insurance 3. Upon payment of all overdue premiums
This is where, after the insurance is “paid-up,” and any indebtedness to the company
the insured who has paid three full annual upon said policy, with interest rate not
premiums is given the right, upon default, to exceeding that which would have been
have the policy continued from the date of applicable to said premiums and
default for the whole period of insurance indebtedness in the policy years prior
without further payment of premiums. to reinstatement [Sec. 233(j)].
It is also called “reduced paid-up'' because, in Reinstatement of a lapsed life insurance policy
effect, the policy, terms, and conditions are the is NOT a non-default option. It does not create
same but the face value is reduced to the “paid- a new contract, but merely revives the original
up” value. policy so the insurer cannot require a higher
premium than the amount stipulated in the
The terms and conditions of the original policy contract. It does not apply to group/industrial
remain the same, however, the amount will be life insurance.
less than the original face value.
Requisites [Sec. 233(j)]:
Automatic premium loan (APL) • It must be exercised within three years
This is where, upon default, the insurer lends from date of default;
or advances to the insured without any need of • The insured must present evidence of
application on his part, the amount necessary insurability satisfactory to the insurer;
to pay overdue premium, but not to exceed the • He must pay all back premiums and all
CSV of the policy. indebtedness to the insurer (with
interest);
It only applies if requested in writing by the • The CSV must not have been duly paid
insured either in the application or at any time to the insured nor the extension period
before expiration of the grace period. expired;
Page 213 of 494

• The application must be filed during the III. Rights and Obligations
insured’s lifetime [Andres v. Crown Life
Ins., G.R. No. L-10874 (1958)]. of Parties
f. Refund of Premiums
Return of premiums can be made in the A. Insurer
following cases:
1. If the thing insured was never exposed The party who assumes or accepts the risk of
to the risks insured against, the whole loss and undertakes for a consideration to
premium should be refunded [Sec. indemnify the insured or to pay him a certain
80(a)]. sum on the happening of a specified
2. When the contract is voidable due to contingency or event;
the fraud or misrepresentation of the
insurer or his agent, the whole An insurer may be:
premium should be refunded [Sec. 82]. (1) A foreign or domestic company or
3. When by any default of the insured corporation; or
other than actual fraud, the insurer (2) A partnership or an association
never incurred any liability under the
policy and the whole premium should Insurance Corporations are corporations
be refunded [Sec. 82]. formed or organized:
4. When the contract is voidable because
of the existence of facts of which the 1. To save any person or persons or other
insured was ignorant without his fault, corporations harmless from loss,
the whole premium should be refunded damage, or liability from any unknown or
[Sec. 82]. future or contingent event, or
5. Where the insurance is for a definite 2. To indemnify or to compensate any
period and the insured surrenders his person or persons or other corporations
policy, to such portion of the premium for any such loss, damage, or liability, or
as corresponds with the unexpired time 3. To guarantee the performance of, or
at a pro rata rate, unless a short period compliance with, contractual obligations
rate has been agreed upon and or the payment of debt of others.
appears on the face of the policy, the
premium should be returned [Sec. An Insurance Corporation must have:
80(b)]. 1. Sufficient Capital and assets required
6. When there is over-insurance by under the Insurance Code and pertinent
several insurers, the return premiums regulations issued by the Commission;
should be proportioned to the amount and
by which the aggregate sum insured in 2. A Certificate of Authority to operate
all the policies exceeds the insurable issued by the Insurance Commission
value of the thing at risk [Sec. 83]. which should be renewable every 3
7. When rescission is granted due to the years. (New Insurance Code, Sec. 193)
insurer’s breach of contract.
Page 214 of 494

● If the insurance company, however,
Rights Obligations
has already recovered the amount it
● Right to receive ● To obtain a paid from its reinsurer, it has no more
premium certificate of right of subrogation. [Pioneer v. CA,
payment (Sec. authority from 175 SCRA 668 (1989)]
77) the office of the
● Right to be Insurance B. Insured
subrogated to Commission
the rights of the ● Honor the The person in whose favor the contract is
insured upon insurance policy operative and who is indemnified against or is
payment of the and promptly to receive a sum upon the happening of a
claim (Art. 2207, settle the claim specified event.
Civil Code) (within 60 days in
● Right to cancel case of policy Requisites in Order that a Person May Be
the non-life payable upon Insured Under a Contract of Insurance:
insurance policy death, or within (CIP) (Insurance Code, Sec. 3)
in cases covered 30 days in case 1. He must be competent to enter into a
by Sec. 64 of NL policy; See contract;
● Right not to Sec. 248 and 2. He must possess an insurable interest in
renew the non- 249)
the subject of the insurance; and
life insurance
3. He must not be a public enemy (citizen or
policy provided
notice is given at subject of a country with whom the
least 45 days in Philippines is at war) (Insurance Code,
advance (sec. Sec. 7)
66)
Rights Obligations
On Subrogation
● Right to be ● To pay the
● Insurance company which has paid the indemnified by premium
insured is subrogated to the rights of the insurer ● To disclose
the insured as against the wrongdoer. ● Right to change material facts
If the amount paid by the insurance beneficiary in ● To comply with
company does not fully cover the injury Life Insurance representations
or loss, aggrieved party can recover when and warranties
the deficiency from the person who designation is
caused the loss or injury. (Art. 2207, revocable
Civil Code) ● Right to grace
● Insurer steps into the shoes of the period in Life
insured and becomes entitled to claim Insurance
whatever the insured can claim from ● Non-default
the third party responsible for the loss. options in Life
● If the insured did not file a notice of loss Insurance
with the carrier within the time ● Right to reinstate
prescribed by law, no right would be subject to certain
subrogated to the insurer despite its conditions
payment to the insured. [Federal ● Right to refund of
Express v. American Home, 473 SCRA premium (Sec.
50 (2004)] 80-83)
● If the insured releases the party at fault, ● Right to abandon
insurer can no longer have the right of in case of
subrogation. [Manila Mahogany v. CA, constructive total
164 SCRA 652 (1957)]
Page 215 of 494
Rights Obligations C. Beneficiary

loss in marine Person designated to receive proceeds of
insurance policy when risk attaches since it is possible
● Right to assign that the insured may assign the proceeds of the
insurance to someone else.
Effect of War on Existing Insurance
Note: There are only two parties to a contract
Contracts
of insurance, the insured and the insurer. The
beneficiary is NOT a party to the contract
1. Property Insurance
unless he is the party to be insured.
An insurance policy ceases to become valid
and enforceable as soon as the insured IV. Rescission of Insurance
becomes a public enemy.
Contracts
However, premium paid by the insured (public
enemy) shall be returned by the insurer 1. Concealment
(Filipinas Compania de Seguros v. Christern
Huenefield & Co., G.R. No. L-2294, 1951) Concealment is the failure to disclose facts
which the applicant, at the time of application,
2. Life Insurance knows or ought to know and are material to the
insurance applied for [Carale].
The contract is abrogated but the insured is
entitled to the case or reserve value of the A neglect to communicate that which a party
policy (if any), which is the excess of the knows and ought to communicate, is called a
premiums paid over the actual risk carried concealment [Sec. 26].
during the years when the policy had been in
force (Constantino v. Asia Life Insurance, G.R. A concealment, whether intentional or
No. L-1669, 1950) unintentional, entitles the injured party to
rescind a contract of insurance [Sec. 27].
Note: Where the loss occurs after the end of
the war, the contract is not revived. Ratio: The contract of insurance is one of
perfect good faith (uberrimae fides) not for the
Rule on Married Persons insured alone, but equally for the insurer [Qua
Chee Gan v. Law Union & Rock Insurance,
The consent of the spouse is not necessary for G.R. No. L-4611(1955)].
the validity of an insurance policy taken out by
a married person on his or her life or that or his Four primary concerns of parties to an
or her children (Insurance Code, Sec. 3, 2) or insurance contract
that of her husband (Insurance Code, Sec. 10) a. Correct estimation of risk – wherein the
insurer will assume the risk
She may also take out insurance on her b. Precise delimitation of the risk – to
paraphernal or separate property, or on determine the duty to pay of insure
property given to her by her husband (Harding
c. Control of risk by insurer – to guard
v. Commercial Union Assurance, G.R. No. L-
12707, 1918) against the increase of risk and change
of conditions, and
Note: Family Code, Art. 73: While either d. Determining whether loss occurred,
spouse may exercise any legitimate activity and if so, the amount of loss
without the consent of the other, the latter may
object on valid, serious, and moral grounds.
Page 216 of 494

Five devices for ascertaining and 2. Matters which each party are bound to
controlling risk and loss i.e. Risk Limiting know [Sec. 30(b) and Sec. 32];
Devices 3. Matters of which the insurer waives
a. Concealment and representations – communication [Sec. 30(c) and Sec.
developed to enable the insurer to 33];
secure the same information from the 4. Matters which prove or tend to prove
applicant so that he can form a just the existence of a risk excluded by a
estimate of its quality warranty and which are not otherwise
b. Warranties and conditions – created to material [Sec. 30(d)];
make more definite the general words 5. Matters which relate to a risk excepted
to describe the risk as to designation of in the policy, and which are not
specific property interest to be covered otherwise material [Sec. 30(e)];
and the specification of the perils 6. Information of the nature or amount of
c. Exception – also makes more definite the interest of one insured unless if
the coverage by excluding certain inquired upon by the insurer, except if
specified risks that otherwise would required by Sec. 51 [Sec. 34];
have been included under the general 7. Matters of opinion [Sec. 35].
language
d. Executory warranties and conditions – Each party to a contract of insurance is bound
conditions that should no longer exist in to know all the general causes which are open
the future, otherwise, the insurer can to his inquiry, equally with that of the other, and
rescind the contract because he is no which may affect the political or material perils
longer to bear the risk contemplated; and all general usages of trade
e. Conditions precedent – used by the [Sec. 32].
insurer to protect himself from
fraudulent claims of loss c. Requisites
a. Duty to Communicate by the Insured 1. A party knows a fact which he neglects

to communicate or disclose to the
Each party to a contract of insurance must other;
communicate to the other, in good faith, all
2. Such party concealing is duty bound to
facts within his knowledge:
1. Which are material to the contract; disclose such fact to the other;
2. As to which he makes no warrant; and 3. Such party concealing makes no
3. Which the other has not the means of warranty of the fact concealed;
ascertaining [Sec. 28]. 4. The other party has not the means of
ascertaining the fact concealed;
An intentional or fraudulent omission, on the 5. The fact concealed is material.
part of one insured, to communicate
information of matters proving or tending to
Failure of the insured to disclose conditions
prove the falsity of a warranty, entitles the
affecting the risk, of which he is aware, makes
insurer to rescind [Sec. 29].
the contract voidable at the insurer’s option, the
ratio being that a contract of insurance is of
Note: If the applicant is aware of the existence
good faith.
of some circumstance which he knows would
influence the insurer in acting upon his
However, Sec. 27 uses the phrase “injured
application, good faith requires him to disclose
party;” thus, the insured may also rescind the
that circumstance, though unasked [Vance].
contract.
b. Matters which Need Not be Disclosed Concealment may be committed by either the
insurer or the insure [Qua Chee Gan v. Law
1. Matters already known to the insurer Union & Rock Ins. Co. G.R. No. L-4611(1955)].
[Sec. 30(a)];
Page 217 of 494

d. Proof of Fraud in Concealment Exceptions:
1. Concealment after the contract has
General Rule: Fraud need not be proven in become effective, because
order to prove concealment. Good faith is not a concealment must take place at the
defense [Saturnino v. Phil. American Life time the contract is entered into in order
Insurance, G.R. No. L-16163 (1963)]. that the policy may be avoided [Vance];
2. Waiver or estoppel;
Exception: When the concealment is made by 3. In marine insurance, where
the insured in relation to the falsity of a concealment of the following matters
warranty, the non-disclosure must be does not vitiate the entire contract, but
intentional and fraudulent in order that the merely exonerates the insurer from a
contract may be rescinded [Sec. 29]. loss resulting from the risk concealed:
a. The national character of the
Ratio: The insured is under no obligation to insured;
reveal things of which he makes a warrant b. The liability of the thing insured
because it would constitute a superfluity of to capture and detention;
disclosure [Carale]. c. The liability to seizure from
breach of foreign laws of trade;
e. Test of Materiality d. The want of necessary
documents; and
The test of materiality is whether the insurer e. The use of false and simulated
would have agreed to issue the policy had it papers [Sec. 112].
known of the facts concealed or, perhaps, 4. Incontestability clause: stipulates that
impose additional terms or require higher the policy shall be incontestable after
premium [Carale]. two years from its date of issue or of its
last reinstatement. The incontestability
Materiality relates to the probable and clause is a mandatory provision in life
reasonable influence of the facts upon the and endowment policies [Sec. 233 (b)
party to whom the communication should have and Sec. 48].
been made, in:
1. Assessing the risk involved; g. Incontestability Clause
2. Making or omitting to make further
inquiries; and In the case of individual life or endowment
3. Accepting the application for insurance insurance, the policy shall contain a provision
[Sec. 31]. that the policy shall be incontestable.
The test is the effect which the knowledge of After it shall have been in force during the
the fact in question would have on the contract. lifetime of the insured for a period of two (2)
It is sufficient if the knowledge of it would years from its date of issue as shown in the
influence the party in making the contract [De policy, or date of approval of last reinstatement
Leon]. [Sec. 233(b)].
In several cases, the cause of death may have Exceptions:

no relation to the fact or facts concealed 1. Non-payment of premium
[Carale]. 2. Violation of the conditions of the policy
relating to military or naval service in
f. Effects time of war [Sec. 233(b)]
General Rule: Concealment vitiates the Effect

contract and entitles the insurer to rescind, The insurer cannot prove that the policy is void
even if the death or loss is due to a cause not ab initio or is rescindable by reason of the
related to the concealed matter [Sec. 27]. fraudulent concealment or misrepresentation
of the insured or his agent:
Page 218 of 494

1. After a policy of life insurance made h. Concealment in Marine and Ordinary
payable on the death of the insured Private Insurance Distinguished
shall have been in force during the
lifetime of the insured for a period of Marine Ordinary
two (2) years from the date of its issue Insurance Insurance
or of its last reinstatement [Sec. 48]
2. The insurer’s right to rescind a contract Required Exact and Substantial
is not exercised previous to the Disclosure whole truth truth
commencement of an action on the
contract [Sec. 48].
Effect of Concealment Any kind of
The incontestability clause is made for the Concealment of the matters concealme
benefit of the insured, and not the insurer, specified in nt will make
considering that its effect and purpose is to cut Sec. 112 will the insurer
off, after a considerable period, any assertion not entirely not liable.
that the policy is invalid. avoid the
contract but
Defenses, other than concealment, will merely
misrepresentation and breach of warranty are exonerate the
still available to the insurer, subsequent to the insurer from
2-year period [Carale]. losses
resulting from
Grounds still available: the risk
1. Non-payment of premium to make the concealed.
policy effective or remain in force
2. Lack of insurable interest
3. Coverage such that the loss/damage
i. Concealment in Non-Medical
did not arise from the risks covered Insurance
4. Violation of military or naval service
provisions of the policy (also an issue The cause of death is not important because it
of coverage) is well settled that the insured need not die of
5. Failure to commence action within the disease he had failed to disclose to the
reglementary period insurer. It is sufficient that his nondisclosure
6. Failure to comply with conditions (proof misled the insurer in forming his estimates of
of loss, etc.) after the loss; or the risks of the proposed policy or in making
7. The viciousness of the fraud employed inquiries [Sunlife v. Sps. Bacani G.R. No.
by the insured to procure the contract, 105135 (1995)].
such as:
Where the policy was taken Where matters of opinion or judgment are
pursuant to a scheme to murder the called for, answers made in good faith and
insured, or without intent to deceive will not avoid the
the insured substitutes himself with policy even though they are untrue. The reason
another during the medical for this is because the insurer cannot simply
examination. rely on those statements; he must make further
inquiry [Philamcare Health Systems v. CA,
G.R. No. 125678 (2002)].
2. Misrepresentation/Omissions
Representations are factual statements made

by the insured at the time of, or prior to, the
issuance of the policy, which give information
to the insurer and induce him to enter the
Page 219 of 494

insurance contract. It may be about a past, an b. Kinds
existing fact, or a future happening [Carale].
1. Affirmative
A representation:
a. May be oral or written [Sec. 36]. This refers to any allegation as to the existence
b. May be made at the time of or before, or non-existence of a fact when the contract
the issuance of the policy [Sec. 37]. begins [De Leon].
c. May be altered or withdrawn before the
insurance is effected, but not 2. Promissory
afterwards [Sec. 41].
d. Must be presumed to refer to the date This refers to any promise to be fulfilled after
on which the contract goes into effect the contract has come into existence, or any
[Sec. 42]. statement concerning what is to happen during
the existence of the insurance [Sec. 39]. A
Misrepresentation is a false representation promissory representation is substantially a
which the insured states with knowledge that is condition or warranty [De Leon].
untrue, intended to deceive the insurer into
accepting risk. It can be distinguished from c. Test of Materiality
concealment in a sense that it is an active form
of deception, while concealment is the passive The materiality of a representation is
form thereof [Carale]. determined by the same rules as the materiality
of a concealment [Sec. 46].
Just like concealment, misrepresentation is
committed before or at the time of the Materiality is a judicial question and not left to
commencement of the insurance contract. the insurance company’s sole discretion.
After this time, an insured may no longer be
guilty of misrepresentation as the insurer had d. Effects
already been persuaded to assume the risk
[Carale]. General Rule: The injured party is entitled to
rescind from the time when the representation
There is no false representation if the matter is becomes false [Sec. 45].
true at the time the contract takes effect
although false at the time it was Exceptions:
made/represented. 1. Incontestability clause;
2. Misrepresentation after contract takes
a. Requisites of misrepresentation effect;
1. The insured stated a fact which is 3. Waiver, made by acceptance of insurer
untrue; of premium payments despite
2. Such fact was stated with knowledge knowledge of the ground for rescission
that it is untrue and with intent to [Sec. 45];
deceive or which he states positively as 4. A representation of the expectation,
true without knowing it to be true and belief, opinion, or judgment of the
which has a tendency to mislead; insured, although false, and even if
3. Such fact in either case is material to material to the risk [Philamcare Health
the risk. Systems, Inc. v. CA, G.R. No. 125678
(2002)];
Like in concealment, fraud or intent is not 5. Representation by insured based on
essential to entitle the insurer to rescind on the information obtained from third persons
ground of misrepresentation [Sec. 45]. (not his agent), provided the insured:
a. Has no personal knowledge of
the facts;
b. Believes them to be true; and
Page 220 of 494

c. Explains to the insurer that he
Concealment Misrepresentation
does so on the information of
others; Passive form Active form
6. A misrepresentation as to age does not
constitute a ground for rescission. If the
age of the insured was considered in Insured Insured makes
determining the premium and the withholds erroneous statements
benefits under the policy and the age is information of of facts with the intent of
misstated, the amount payable for the material facts from inducing the insurer to
policy shall be as if the policy was the insurer; he enter into the insurance
purchased at the correct age [Sec. maintains silence contract
233(d); Carale]. when he ought to
speak
A representation cannot qualify an express
provision or an express warranty of insurance Materiality
[Sec. 40] because a representation is not part
Determined by the same rules
of the contract but only a collateral inducement
to it. However, it may qualify as an implied
warranty.
Effects
It is sufficient that the representation is
substantially or materially true, and in case of
Same effects on the part of the insured;
promissory representation, it is sufficient that it
insurer has right to rescind
is substantially complied with [Carale].
The insurer is not entitled to rescission for Injured party is entitled to rescind a contract
misrepresentation of age if the birth date on the of insurance on the ground of concealment
policy leads to the conclusion that the insured or false representation, whether intentional
is beyond the age covered. Insurer is deemed or not.
estopped [Edillon v. Manila Bankers Life, G.R.
No. L-34200 (1982)].
3. Breach of Warranties
Despite not answering the questions and
A warranty is a statement or promise by the
keeping blank certain questions in the
insured set forth in the policy itself or
application regarding ailments he has suffered,
incorporated in it by proper reference, the
when the insured signed the pension plan
untruth or nonfulfillment of which in any respect
application, he adopted the written
and without reference to whether the insurer
representations and declarations embodied in
was in fact prejudiced by such untruth or non-
as his own. Therefore, it is clear from these
fulfillment, renders the policy voidable by the
representations that he concealed his chronic
insurer [Vance].
heart ailment and diabetes [Florendo v. Philam
Plans, G.R. No. 186983 (2012)].
Statements or promises agreed upon by both
parties to the insurance contract which are
e. Concealment vs. Misrepresentation
contained in the contract or properly
Concealment Misrepresentation incorporated constitute warranties [Carale].
Who may commit A warranty may:

a. Relate to the past, the present, the
May be committed Committed only by future, or to all of these [Sec. 68]
by either insured insured b. Be made in any form of words [Sec. 69]
or insurer c. Also be made by the insurer [Carale].
Act involved
Page 221 of 494

a. Warranties, Riders, and the person or thing insured or to the risk as a
Endorsements fact [Sec. 71].
A rider is a printed or typed stipulation Thus, it is not enough, for a stipulation to

contained in a slip of paper attached to the become a warranty, that the parties intended it
policy and forming an integral part thereof. as such. It must form part of the contract of
Thus, it does not need to be signed by the insurance.
insured.
2. Implied Warranty
The signature of the insured is required only if
the warranties, or endorsements are in another This is deemed included in the contract
instrument. although not expressly mentioned (e.g. implied
warranty of seaworthiness of the vessel in
For any rider, clause, warranty, or marine insurance and implied warranty not to
endorsement to be binding on the insured [Sec. alter the circumstances of the thing insured).
50]: This is only available for marine insurance.
1. Such rider, clause, warranty or
endorsement, must be pasted or 3. Affirmative Warranty
attached to the policy;
2. The descriptive title or name of the This asserts the existence of a fact or condition
rider, clause, warranty or endorsement at the time it is made.
must also be mentioned and written on
the blank spaces provided in the policy; c. Effect of Breach
3. Such rider, clause, warranty or
endorsement issued after the original 1. Material Warranty
policy must be countersigned by the The violation of a material warranty, or other
insured or owner. material provision of the policy, on the part of
a. Unless the same is applied for either the insured or insurer, entitles the other
by the insured or owner to rescind [Sec. 74].
b. Such countersignature shall be
taken as his agreement to the Breach of a material warranty may either be:
contents of such rider, clause, a. Without fraud, in which case, the
warranty or endorsement insurer will be exonerated from the time
it occurs. If made during the inception,
Notwithstanding the foregoing, the policy may
it will prevent the policy from taking
be in electronic form subject to the pertinent
provisions of Republic Act No. 8792, effect [Sec. 76].
(Electronic Commerce Act) and to such rules b. With fraud, in which case, the policy is
and regulations as may be prescribed by the avoided ab initio and the insured is not
Commissioner. entitled to the return of the premiums
paid [De Leon].
b. Kinds
Exceptions:
1. Express Warranty a. Loss occurs before the time of
performance of the warranty [Sec. 73];
The Code does not prescribe a particular form
b. Performance becomes unlawful [Sec.
for a warranty to be considered as such [Sec.
69]. 73];
c. Performance becomes impossible
However, the Code prescribes a requirement [Sec. 73];
for express warranties. It must be an d. Waiver or estoppel.
agreement contained in the policy or clearly
incorporated therein as part thereof, relating to
Page 222 of 494
2. Immaterial Warranty Warranty Representation
A policy may declare that a violation of Applicability of incontestability clause
specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision Does not apply Applies
does not avoid the policy [Sec. 75].
General Rule: Breach of an immaterial

provision does not avoid the policy [Sec. 75].
Exception: The parties stipulate that violation

of a particular provision, though immaterial,
shall avoid the policy. In effect, the parties
converted the immaterial provision into a
material one [Sundiang and Aquino].
A condition in the policy which requires the

insured to disclose to the insurer of any
insurance that, if violated by the insured, would
ipso facto avoid the contract [Pioneer v. Yap,
G.R. No. L-36232 (1974)].
Insurer is barred by waiver (or estoppel) to

claim violation of the so-called hydrants
warranty when, despite knowing fully that only
2 fire hydrants existed (out of the 11 hydrants
required), it still issued the insurance policies
and received the premiums [Qua Chee Gan v.
Law Union, G.R. No. L-4611 (1955)].
Warranty Representation
Nature
Part of the Mere collateral

contract inducement
Form
Written on the May be written in the

policy, actually or policy or may be oral
by reference
Materiality
Presumed Must be proved to be

material material
Compliance
Must be strictly Requires only

complied with substantial truth and
compliance
Page 223 of 494

TRANSPORTATION LAW
COMMERCIAL LAW
TRANSPORTATION LAW COMMERCIAL LAW
b. Engaged in the business of carrying or
transporting;
TRANSPORTATION LAW c. Passengers or goods or both,
d. By land, water, or air;
e. For compensation,
A. Common Carriers f. Offering their services to the public [Art.
1732, NCC].
1. Common Carriers
Art. 1732, Civil Code makes no distinction:
Contract of Transportation a. Between one whose principal business
A contract of transportation is one whereby a activity is the carrying of persons or
certain person or association of persons goods or both, and one who does such
obligate themselves to transport persons, carrying only as an ancillary activity
things, or news from one to another for a fixed [Fabre v. CA, G.R. No. 111127 (1996)];
price [Crisostomo v. CA, G.R. No. 138334 b. Between a person or enterprise
(2003)]. offering transportation service on a
regular or scheduled basis and one
Parties offering such service on an occasional,
a. Shipper - one who gives rise to the episodic, or unscheduled basis
contract of transportation by agreeing [Loadstar Shipping Co., Inc. v. CA,
to deliver the things or news to be G.R. No. 131621 (1999)];
transported, or to present his own c. Between a carrier offering its services
person or those of other/s in the case to the general public and one who
of transportation of passengers. offers services or solicits business only
b. Carrier (may sometimes be referred to from a narrow segment of the general
as conductor) - one who binds himself population [De Guzman v. CA, G.R.
to transport persons, things, or news, No. L-47822 (1988)];
or one employed in or engaged in the d. Between a carrier that maintains
business of carrying goods for others terminals or issues tickets with fixed
for hire. and publicly known routes and one that
c. Consignee - The party to whom the does not [Asia Lighterage and Shipping
carrier is to deliver the things being v. CA, G.R. No. 147246 (2003)].
transported, or to whom the carrier may
lawfully make delivery in accordance 2. Test for a Common Carrier
with its contract of carriage; the shipper
and the consignee may be the same Whether the undertaking is a part of the activity
person. engaged in by the carrier, which it has held out
to the public as its business or occupation.
Carriers are persons or corporations who a. Determined by the character of the
undertake to transport or convey goods, business carried on by the carrier; Not
property, or persons, from one place to the quantity or extent of the business
another, gratuitously or for hire, and are transacted [Bascos v. Court of
classified as: Appeals, G.R. No. 101089 (1993)].
a. Private or special carriers, who b. If the undertaking is a single
transport or undertake to transport in a transaction, not a part of the general
particular instance for hire or reward business or occupation engaged in, as
[Agbayani, Commercial Laws of the advertised and held out to the general
Philippines (1987)]; and public, the individual or the entity
b. Common or public carriers [Art. 1732, rendering such service is a private, not
Civil Code]. a common, carrier [Perena v. Nicolas,
G.R. No. 157917 (2012)].
Common carriers are:
a. Persons, corporations, firms or
associations;
Page 225 of 494
Test for a Common Carrier services in its resort operations is underscored
a. He must be engaged in the business of by having its own boats [Cruz v. Sun Holidays,
carrying goods for others as a public G.R. No. 186312 (2010)].
employment and must hold himself out
as ready to engage in the Operators of a school bus service were: (a)
transportation of goods for persons engaged in transporting passengers generally
generally as a business and not a as a business, not just as a casual occupation;
casual occupation. (b) undertaking to carry passengers over
b. He must undertake to carry goods of establishing roads by the method by which the
the kind to which his business is business was conducted; and (c) transporting
confined. students for a fee [Teodoro v. Nicolas, G.R. No.
c. He must undertake to carry by the 157917 (2012)].
methods of which his business is
conducted and over his established 3. Common Carrier vs. Private Carrier
roads.
d. The transportation must be for hire Common Carrier Private Carrier
[Agbayani].
Availability
One engaged in the business of transporting
petroleum products from refineries via pipeline Holds himself out in Agrees in some
is a common carrier. It is engaged in the common, that is, to all special case with
business of transporting or carrying goods, i.e., persons who choose some private
petroleum products, for hire as a public to employ him, as individual to carry for
employment. It undertakes to carry for all ready to carry for hire.
persons indifferently, that is, to all persons who hire.
choose to employ its services, and transports
the goods by land and for compensation. The Binding Effect
fact that it has a limited clientele does not
exclude it from the definition of a common
Bound to carry all Not bound to carry
carrier [First Phil. Industrial v. CA, G.R. No.
who offer and tender for any reason, such
125948 (1998)].
reasonable goods as it is
compensation for accustomed to carry,
A customs broker may be regarded as a
carrying them. unless it enters into a
common carrier as long as a person holds itself
special agreement to
to the public for the purpose of transporting
do so.
goods as a business, regardless of if it owns
the vehicle used or has to hire one [Schmitz Diligence Required
Transport v. CA, G.R. No. 150255 (2005)].
A travel agency is not a common carrier. It is Extraordinary Ordinary diligence.

not an entity engaged in the business of diligence.
transporting either passengers or goods and is
therefore neither a private nor a common Governing Law
carrier. Its covenant with its customers is
simply to make travel arrangements on their Civil Code; Code of Law on obligations
behalf [Crisostomo v. CA, G.R. No. 138334 Commerce and and contracts.
(2003)]. special laws, if not
regulated by the Civil
A beach resort may be regarded as a common Code (Art. 1766, Civil
carrier when its ferry services are so Code); law of the
intertwined with its main business as to be country to which the
properly considered ancillary thereto. In this goods are to be
case, the constancy of respondent’s ferry transported, if
Page 226 of 494
2. For the safety of the passengers
Common Carrier Private Carrier
transported by them [Art. 1733, Civil
regarding liability for Code].
loss, destruction, or
deterioration of Extraordinary Diligence
goods (Art. 1753, Requires carrying passengers safely:
Civil Code). 1. As far as human care and foresight can
provide;
Regulation 2. Using the utmost diligence of very
cautious persons;
3. With a due regard for all the
A public service, Not subject to circumstances [Art. 1755, Civil Code].
therefore subject to regulation as a
provisions governing common carrier. Note: A common carrier is not an insurer of the
common carriers and safety of its passengers and is not bound
public utilities. absolutely and at all events to carry them safely
and without injury [Yobido v. CA, G.R. No.
It is not necessary that the carrier be issued a 113003 (1997)].
certificate of public convenience [Loadstar
Shipping Co., Inc. v. CA, G.R. No. 131621 b. Presumption of Negligence
(1999)].
For Carriage of Goods
The owner and driver of a vehicle owe to The mere proof of:
accommodation passengers (passengers 1. Delivery of goods in good order to a
which are merely accommodated and who do carrier; and
not pay fees for the service) or invited guests 2. Their arrival at the place of destination
merely the duty to exercise reasonable care in bad order
so that they may be transported safely to their makes out a prima facie case against the
destination. Thus, the rule is established by carrier, so that if no explanation is given as to
weight of authority that the owner or operator how the injury occurred, the carrier must be
of an automobile owes the duty to an invited held responsible [Ynchausti Steamship v.
guest to exercise reasonable care in its Dexter and Unson, G.R. No. L-15652 (1920)].
operation, and not unreasonably to expose him
to danger and injury by increasing the hazard Effects of Presumption
of travel. [Lara v. Valencia, G.R. No. L-9907 1. Makes out a prima facie case against
(1968)]. In other words, since driver is not a the carrier - i.e., the carrier is presumed
common carrier, he is only required to observe to have been at fault or to have acted
ordinary diligence and not extraordinary negligently;
diligence. 2. Makes it incumbent upon the carrier to
prove that the loss/death/injury was
4. Diligence Required of Common due to some other circumstance
Carrier inconsistent with its liability, or that it
observed extraordinary diligence [Art.
1756, Civil Code; Ynchausti Steamship
a. Standard of Diligence
v. Dexter and Unson, G.R. No. L-15652
(1920)].
Common carriers, from the nature of their
business and for reasons of public policy, are
Burden of Proof
bound to observe extraordinary diligence,
It is incumbent upon the carrier to prove that
according to all the circumstances of each
the loss was due to accident or some other
case:
circumstance inconsistent with its liability
1. In the vigilance over the goods, [Arts.
[Ynchausti Steamship v. Dexter and Unson,
1734, 1735, and 1745, Nos. 5, 6, and
G.R. No. L-15652 (1920)].
7, Civil Code] and
Page 227 of 494
Note: While delay in the delivery of goods is a negligent operation of the vehicle although the
breach of contract of carriage, it does not raise same was already sold [Filcar Transport v.
the presumption of negligence because the Espinas, G.R. No. 174156 (2012)].
goods are not lost, deteriorated, or destroyed
[Art. 1735, Civil Code]. c. Kabit System
For Carriage of Passengers 1. It is an arrangement whereby a person

In case of death of or injuries to passengers, who has been granted a certificate of
common carriers are presumed to have been convenience allows another person
at fault or to have acted negligently, unless they who owns motor vehicles to operate
prove that they observed extraordinary under such franchise for a fee [Lita
diligence as prescribed in Arts 1733 and 1755 Enterprises, Inc. v. IAC, G.R. No. L-
[Art. 1756, Civil Code]. 64693 (1984)].
2. It is invariably recognized as being
Note: Mere failure to reach one’s destination, contrary to public policy and therefore
absent injury or death, does not raise the void and inexistent under Art. 1409.
presumption of negligence because it does not Thus, for the safety of passengers and
involve safety of the passengers. the public, the registered owner of the
vehicle is not allowed to prove that
5. Liabilities of Common Carriers another person has become the owner
so that he may be thereby relieved of
The obligation of the common carrier consists responsibility [Lim v. CA, G.R. No.
in the transportation of passengers or goods or 125817 (2002)].
both [Art. 1732, Civil Code]. 3. One of the primary factors considered
in the granting of a certificate of public
a. Principles Governing the Liability of convenience for the business of public
Common Carriers transportation is the financial capacity
of the holder of the license, so that
1. The liability of a carrier is contractual liabilities arising from accidents may be
and arises upon breach of its duly compensated. The kabit system
obligation. renders illusory such purpose and,
a. There is breach if it fails to exert worse, may still be availed of by the
extraordinary diligence grantee to escape civil liability caused
according to all circumstances by a negligent use of a vehicle owned
of each case; by another and operated under his
2. A carrier is obliged to carry its license [Dizon v. Octavio (1955)].
passenger with the utmost diligence of 4. However, one who has availed of the
a very cautious person, having due kabit system is not precluded from filing
regard for all the circumstances; for damages against another who
3. A carrier is presumed to be at fault or caused the injury, as the policy against
to have acted negligently in case of the kabit system will not be defeated by
loss of goods and/or death of, or injury giving such person standing to sue
to, passengers, it being its duty to [Lim v. CA, G.R. No. 125817 (2002)].
prove that it exercised extraordinary
diligence; and d. Classification of Transport Network
4. The carrier is not an insurer against all Vehicle Services and Transport
risks of travel [Isaac v. A.L. Ammen, Network Companies
G.R. No. L-9671 (1957)].
1. Transport Network Company or TNC is
b. Registered Owner Rule defined as an organization whether a
corporation, partnership, or sole
The person who is the registered owner of a proprietor, that provides pre-arranged
vehicle is liable for any damage caused by the transportation services for
Page 228 of 494
compensation using an internet-based compliance of jurisdictional
technology application or a digital requirements, as may be determined
platform technology to connect by LTFRB. The LTFRB shall also set
passengers with drivers using their the fare for the TNVS after public
personal vehicles [DOTC D.O. No. hearing or in consultation with the
2015-011]. TNCs and TNVS [DOTr D.O. No. 2018-
2. Transport Network Vehicle Service or 012].
TNVS refers to a TNC-accredited
private vehicle owner, which is a Despite the limited market scope of its
common carrier, using the internet- app, Angkas’ bikers offer transportation
based technology application or digital services to willing public consumers
platform technology transporting and these services may be readily
passengers from one point to another, accessed by anyone who chooses to
for compensation. The TNVS cannot download the Angkas app. While they
operate as a common carrier outside of may refuse to offer their service by
or independent from the use of the simply not going online or not logging
internet-based technology of the TNC in, when they do log in, they make their
or TNCs to which they are accredited services publicly available. As such,
[DOTr D.O. No. 2018-012]. DBDOYC (Angkas) is a transportation
provider and its accredited drivers are
TNVs and TNCs are expressly common carriers [LTFRB v.
considered common carriers. They are Valenzuela and DBDOYC, Inc. G.R.
subject to full regulation and No. 242860 (2019)].
supervision by the LTFRB, including
but not limited to: B. Obligations and Liabilities
• Application and approval/ denial of
franchise, 1. Vigilance Over Goods
• Setting of fares, routes, operating
conditions, and The liability of the common carrier with respect
• Imposition of fines, suspension, to vigilance over goods, in general, are as
and cancellation of franchise. follows:
a. Common carriers are responsible for
Note re: (b) setting of fares: In 2017, the loss, destruction, or deterioration of
MyTaxi.PH, Inc. (GRAB) filed a case the goods [Art. 1734, Civil Code]. In
before the LTFRB which did not reach fact, they are liable even in those cases
the Supreme Court, LTFRB held that where the cause of the loss or damage
under D.O. 2015-011 then in force, a is unknown [Agbayani].
TNC is not granted unilateral authority b. If the goods are lost, destroyed, or
to set fares as the same would be deteriorated, common carriers are
constitutive of an undue delegation of presumed to have been at fault or to
legislative authority. Subsequently, have acted negligently [Art. 1735, Civil
D.O. 2017-011 and D.O. 2018-013 Code].
were issued, removing the “confusing
language” of D.O. 2015-011 and Note: Two-pronged analysis in determining
explicitly stating that rate-fixing liability:
authority shall be limited to the LTFRB a. Whether or not the cause of the loss,
in accordance with the law [Case No. destruction, or deterioration is included
CO-EB-2018-04-0039, Accreditation under Art. 1734;
No. 2015-TNC-001]. b. If not, whether the common carrier
exercised extraordinary diligence or
The LTFRB shall grant the TNCs and not.
their accredited TNVS a Certificate of
Public Convenience (CPC) upon full
Page 229 of 494

a. Presumption of Negligence 2. Act of Public Enemy
General Rule: Common carriers are Requisites

responsible for the loss, destruction, or a. The act of the public enemy was
deterioration of the goods. committed either in an international or
civil war [Art. 1734 (2), Civil Code];
Exception: Common carriers are not liable b. The act of the public enemy must have
when such loss, destruction, or deterioration is been the proximate and only cause;
due to any of the following causes only: and
1. Flood, storm, earthquake, lightning, or c. The common carrier must exercise due
other natural disaster or calamity; diligence to prevent or minimize the
2. Act of the public enemy in war, whether loss before, during and after the act of
international or civil; the public enemy causing the loss,
3. Act of omission of the shipper or owner destruction or deterioration of the
of the goods; goods [Art. 1739, Civil Code].
4. The character of the goods or defects
in the packing or in the containers; Thieves, rioters, robbers, and insurrectionists,
5. Order or act of competent public though at war with social order, are not in a
authority [Art. 1734, Civil Code]. legal sense classed as public enemies, but are
merely private depredators for whose acts a
In all other cases of loss, destruction, or carrier is answerable. Pirates on the high seas,
deterioration, the common carrier is presumed however, stand as an exception to this rule.
to have been at fault or to have acted They are considered the enemies of all civilized
negligently, unless they prove that they nations, and indeed of the human race, and
observed extraordinary diligence [Art. 1735, consequently their depredations on a common
Civil Code]. carrier will excuse him from liability [Aquino].
b. Exempting Causes 3. Act or omission of shipper or owner
1. Natural Disaster or Calamity The act or omission of the shipper must have
been the proximate and only cause of the
Requisites: loss, destruction, or deterioration of the goods.
a. The natural disaster must have been
the proximate and only cause of the If the shipper or owner merely contributed to
loss; the loss, destruction or deterioration of the
b. The common carrier must exercise due goods, the proximate cause being the
diligence to prevent or minimize the negligence of the common carrier, the latter
loss before, during and after the shall be liable for the damages, which shall,
occurrence of the flood, storm, or however, be equitably reduced [Art. 1741, Civil
natural disaster [Art. 1739, Civil Code]; Code].
and
c. The common carrier must not have 4. Character of Goods
negligently incurred delay [Art. 1740,
Civil Code]. Requisites
a. The loss, destruction, or deterioration
Fire may not be considered a natural disaster of the goods is due to the character of
or calamity because it arises almost invariably the goods or defects in the packing or
from some act of man or by human means. It in the containers [Art. 1734 (4), Civil
does not fall within the category of an act of Code]; and
God unless caused by lightning or by other b. The common carrier must exercise due
natural disaster or calamity [Eastern Shipping diligence to forestall or lessen the loss
Lines v. IAC, G.R. No. L-69044 (1987)]. [Art. 1742, Civil Code].
Page 230 of 494

If the fact of improper packing is known to the Note: There must be an entire exclusion of
carrier or its servants or apparent upon human agency from the cause of injury or loss.
ordinary observation, but it accepts the goods
notwithstanding such condition, it is not A common carrier may not be absolved from
relieved of liability for loss or injury resulting liability in case of force majeure or fortuitous
therefrom [Southern Lines v. CA, G.R. No. L- event alone. The common carrier must still
16629 (1962)]. prove:
a. That it was not negligent in causing the
5. Order of Competent Authority death or injury resulting from an
accident [Yobido v. CA, G.R. No.
Requisites 113003 (1997)];
a. There must be an order or act of b. That the loss or destruction of the
competent public authority through merchandise was due to accident and
which the goods are seized or force majeure and not fraud, fault, or
destroyed [Art. 1734 (5), Civil Code]; negligence on the part of the captain or
and owner of the ship [Tan Chiong Sian v.
b. The said public authority must have Inchausti, G.R. No. L-6092 (1912)].
had the power to issue the order [Art.
1743, Civil Code]. Loss of a ship and of its cargo, in a wreck due
to accident or force majeure must, as a general
To be exempted from liability, the intervention rule, fall upon their respective owners, except
of the competent public authority must be of a in cases where the wrecking or stranding of the
character that would render impossible the vessel occurred through the malice,
fulfillment by the carrier of the obligation carelessness, or lack of skill on the part of the
[Ganzon v. CA, G.R. No. L-48757 (1988)]. captain or because the vessel put to sea is
insufficiently repaired and prepared.
6. Force Majeure
In order that the exemption due to force
Force majeure – in general, has also been majeure would apply, the carrier must prove
invoked as an exempting cause based on Art. that the loss or destruction of the merchandise
1174, which states that no person shall be was due to accident and force majeure and not
responsible for a fortuitous event which could to fraud, fault, or negligence on the part of the
not be foreseen, or which, though foreseen, captain or owner of the ship [Tan Chiong Sian
was inevitable. v. Inchausti, G.R. No. L-6092 (1912)].
A fortuitous event has the following Requirement of Absence of Negligence

characteristics: If the common carrier is found to have acted
a. The cause of the unforeseen and negligently, it is precluded from invoking the
unexpected occurrence, or the failure exempting causes under Art. 1734, and will be
of the debtor to comply with his liable for damages suffered by the goods it
obligations, must be independent of carried if such damages arise from its
human will; negligence [Agbayani].
b. It must be impossible to foresee the
event which constitutes the caso The exempting circumstance should be the
fortuito, or if it can be foreseen, it must proximate and only cause of the loss,
be impossible to avoid; destruction, or deterioration of the goods for
c. The occurrence must be such as to the common carrier to be exempted from
render it impossible for the debtor to liability on any of the ff. grounds:
fulfill his obligation in a normal manner; a. Natural Disaster/Calamity
and b. Act of Public Enemy
d. The obligor must be free from any c. Character of the Goods [Art. 1739,
participation in the aggravation of the 1742, Civil Code]
injury resulting to the creditor.
Page 231 of 494

When the common carrier’s negligence is the carrier to the consignee or to the
proximate cause of the loss, destruction, or person who has a right to receive them;
deterioration of the goods, the act or omission 2. When goods are temporarily unloaded
of the shipper will only mitigate the carrier’s or stored in transit, unless the shipper
liability [Art. 1741, Civil Code]. or owner has made use of the right of
stoppage in transitu [Art 1737, Civil
Absence of Delay Code];
To be free from responsibility on the ground of 3. During storage in a warehouse of the
natural disaster/calamity, the common carrier carrier at the place of destination, until
should not have negligently incurred in delay consignee has been advised of the
[Art. 1740, Civil Code]. arrival of the goods and has had
reasonable opportunity to remove or
Due Diligence to Prevent or Lessen the dispose them [Art 1738, Civil Code].
Loss In dealing with the contract of common carriage
The common carrier should have exercised of passengers, for purpose of accuracy, there
due diligence to prevent, forestall or lessen the are two (2) aspects of the same, namely:
loss, destruction, or deterioration of the goods, 1. Contract ‘to carry (at some future
to be exempted from liability on any of the ff. time),’ which contract is consensual
grounds: and is necessarily perfected by mere
a. Natural Disaster/Calamity consent; and
b. Act of Public Enemy 2. Contract ‘of carriage’ or ‘of common
c. Character of the Goods [Art. 1739, carriage,’ which should be considered
1742, Civil Code] as a real contract for not until the carrier
is used can the carrier be said to have
Meeting a typhoon head-on falls short of due already assumed the obligation of a
diligence required from a common carrier [Asia carrier [Paras, Civil Code Annotated,
Lighterage and Shipping Inc. v. CA, G.R. No. 11th Ed].
147246 (2000)].
Note: The distinction is important in
c. Contributory Negligence determining when the common carrier is
required to exercise extraordinary
The liability of the common carrier shall be responsibility. The birth of the contract is not
equitably reduced when the loss, destruction, necessarily the birth of the duty to exercise
or deterioration of the goods when: extraordinary responsibility.
1. The negligence of the common carrier
was the proximate cause thereof; and 1. Delivery of Goods to Common Carriers
2. The shipper or owner merely
contributed to such loss, destruction, or Delivery means unconditionally placing the
deterioration [Art. 1741, Civil Code]. goods in the possession of the carrier and the
carrier receiving them for transportation [Art.
d. Duration of Liability 1736, Civil Code].
Instances when carrier has responsibility to Unconditionally placing the goods in the
exercise extraordinary diligence: possession of the carrier means the shipper
1. From the time the goods are cannot get them back from the common carrier
unconditionally placed in the at will.
possession of, and received by the
carrier [Art 1736, Civil Code] or its Thus, the liability of the carrier as common
authorized agent [Compania Maritima carrier and its duty of extraordinary diligence
v. Insurance Co., G.R. No. L-18965 begins with the actual delivery of the goods,
(1964)], until the same are delivered NOT:
actually and constructively by the
Page 232 of 494

a. When the common carrier received the The common carrier remains liable to the
goods not for transportation but only for consignee when the goods were lost because
safekeeping; or the ports authorities released them to
b. When a receipt or bill of lading is unauthorized persons, absent a stipulation in
formally executed, since the issuance the bill of lading [Nedlloyd Lijnen B.V.
of a bill of lading is not necessary to Rotterdam v. Glow Laks Enterprises, Ltd. G.R.
complete delivery and acceptance No. 156330 (2014)].
[Compania Maritima v. Insurance Co.,
G.R. No. L-18965 (1964)]. 3. Temporary Unloading or Storage
2. Actual or Constructive Delivery General Rule: Extraordinary diligence over the

goods remains even when the goods are
The extraordinary responsibility of the common temporarily unloaded or stored in transit.
carrier ends when, subject to Art. 1738, the
goods are delivered actually or Exception: The duty to observe such diligence
constructively by the carrier to: ceases when shipper or owner makes use of
a. The consignee; or the right of stoppage in transitu [Art 1737,
b. The person who has a right to receive Civil Code].
them, such as agents, brokers, and the
like. Stoppage in transitu is the act by which the
unpaid vendor of goods stops their progress
Art. 1738 provides that the extraordinary and resumes possession of them
liability of the common carrier continues to be constructively, while they are during transit
operative even during the time the goods are from him to the purchaser and not yet actually
stored in a warehouse of the carrier at the place delivered to the latter [Agbayani].
of destination, until the consignee has:
a. Been advised of the arrival of the Basis: Under Art. 1530, when the buyer of the
goods; and goods becomes insolvent, the unpaid seller
b. Had reasonable opportunity thereafter who has parted with the possession of the
to remove them or otherwise dispose of goods, at any time while they are in transit, may
them. resume the possession of the goods as he
would have had if he had never parted with the
Delivery of the cargo to the customs authorities possession.
is not delivery to the consignee or “to the
person who has a right to receive them” as When the right of stoppage in transitu is
contemplated in Art. 1736 because in such exercised, the common carrier holds the goods
case the goods are still in the hands of the in the capacity of an ordinary bailee or
government and the owner cannot exercise warehouseman upon the theory that the
dominion over them. However, the parties may exercise of the right of stoppage in transitu
agree to limit the liability of the carrier terminates the contract of carriage. Hence,
considering that the goods still have to go only ordinary diligence is required
through the inspection of the customs [Agbayani].
authorities before they are actually turned over
to the consignee. It is unfair that the carrier be e. Stipulations for Limitation of Liability
made responsible for what may happen during
the interregnum [Lu Do v. Binamira, G.R. No. There are two possible stipulations limiting the
L-9840 (1957)]. liability of the common carrier:
1. Stipulation limiting the common
It is settled in maritime law jurisprudence that carrier’s liability as to the diligence
cargoes while being unloaded generally remain required;
under the custody of the carrier [Asian 2. Stipulation limiting the common
Terminals, Inc. v. Philam Insurance Co., G.R. carrier’s liability as to the amount of
No. 181163 (2013)]. liability.
Page 233 of 494

An agreement limiting the common carrier’s damage occasioned by its own
liability for delay on account of strikes or riots is negligence;
also valid [Art. 1748, Civil Code]. 9. Stipulation providing for an unqualified
limitation of such liability to an agreed
As to Diligence Required stipulation [Heacock v. Macondray,
A stipulation between the common carrier and G.R. No. L-16598 (1921)];
the shipper or owner limiting the liability of the 10. Stipulation which practically leaves the
former for the loss, destruction, or deterioration date of arrival of the subject shipment
of the goods to a degree less than on the sole determination and the will
extraordinary diligence shall be valid, of the carrier [Maersk Line v. CA, G.R.
provided it be: No. 94761 (1993)].
1. In writing, signed by the shipper or
owner; Note: Under Art. 1745 (6), Civil Code, a
2. Supported by a valuable consideration common carrier cannot be held liable where
other than the service rendered by the the thieves or robbers acted with grave or
common carrier; and irresistible threat, violence, or force [De
3. Reasonable, just and not contrary to Guzman v. CA, G.R. No. L-47822 (1988)].
public policy [Art. 1744, Civil Code].
Limitation of Liability to Fixed Amount
Void Stipulations A contract fixing the sum that may be
Any of the following or similar stipulations shall recovered by the owner or shipper for the loss,
be considered unreasonable, unjust and destruction or deterioration of the goods is valid
contrary to public policy: if:
1. That the goods are transported at the 1. It is reasonable and just under
risk of the owner or shipper; circumstances; and
2. That the common carrier will not be 2. It has been fairly and freely agreed
liable for any loss, destruction, or upon [Art. 1750, NCC].
deterioration of the goods;
3. That the common carrier need not While a passenger may not have signed the
observe any diligence in the custody of plane ticket, he is nevertheless bound by the
the goods; provision thereof, regardless of the latter’s lack
4. That the common carrier shall exercise of knowledge or assent to the regulation. It is
a degree of diligence less than that of what is known as a contract of adhesion
a good father of a family, or of a man of wherein one party imposes a ready-made form
ordinary prudence in the vigilance over of contract on the other. The one who adheres
the movables transported; to the contract is free to reject it entirely. A
5. That the common carrier shall not be contract limiting liability upon an agreed
responsible for the acts or omission of valuation does not offend against the policy of
his or its employees; the law forbidding one from contracting against
6. That the common carrier’s liability for his own negligence [Ong Yiu v. CA, G.R. No.
acts committed by thieves, or of L-40597 (1979)].
robbers who do not act with grave or
irresistible threat, violence or force, is [However], the fact that the conditions are
dispensed with or diminished; printed at the back of the ticket stub in letters
7. That the common carrier is not so small that they are hard to read would not
responsible for the loss, destruction, or warrant the presumption that the [shipper] was
deterioration of goods on account of not aware of those conditions such that he had
the defective condition of the car, “fairly and freely agreed” to those conditions
vehicle, ship, airplane or other [Shewaram v. PAL, G.R. No. L-20099 (1966)].
equipment used in the contract of
carriage [Art. 1745, Civil Code];
8. That the common carrier is exempt
from any and all liability for loss or
Page 234 of 494

Factors Affecting Agreement of the carrier [Ong Yiu v. CA, G.R. No. L-
The effect of these stipulations is subject to the 40597(1979)].
following provisions:
1. An agreement limiting the common f. Liability for Baggage of Passengers
carrier’s liability may be annulled by the
shipper or owner if the common carrier Baggage are things that a passenger will bring
refuses to carry the goods unless the with him consistent with a temporary absence
former agreed to such stipulation [Art. from where he lives. Passenger’s baggage
1746, Civil Code]; must have a direct relationship with the
2. If the common carrier, without just passenger who is traveling.
cause, delays the transportation of the
goods or changes the stipulated or For instance, a balikbayan box or suitcase is a
usual route, the contract limiting the passenger’s baggage. However, 500 boxes of
common carrier’s liability cannot be perfume are not considered as passenger
availed of in case of the loss, baggage. They are considered goods and are
destruction, or deterioration of the not part of the contract of carriage [of the
goods [Art. 1747, Civil Code]; passenger]. A separate contract of carriage [or
3. The fact that the common carrier has bill of lading] must be entered into to transport
no competitor along the line or route, or them [Agbayani].
a part thereof, to which the contract
refers shall be taken into consideration There are two kinds of passenger’s baggage,
on the question of whether or not a which are governed differently:
stipulation limiting the common 1. Passenger baggage in the custody of
carrier’s liability is reasonable, just, and the passenger (or carry-on luggage);
in consonance with public policy [Art. and
1751, Civil Code]; 2. Passenger baggage NOT in the
4. Even when there is an agreement custody of the passenger (or checked-
limiting the liability of the common in baggage).
carrier in the vigilance over the goods,
the common carrier is disputably The liability is greater for baggage that is in the
presumed to have been negligent in custody of the carrier (checked-in baggage) as
case of their loss, destruction or compared to those in the possession of the
deterioration [Art. 1752, Civil Code]. passenger.
5. An agreement limiting the common
carrier's liability for delay on account of 1. Checked-In baggage
strikes or riots is valid [Art. 1748, Civil
Code]. The provisions of Arts. 1733-1753 shall not
apply to passenger’s baggage which is not in
Limitation of Liability in Absence of his personal custody or in that of his employee
Declaration of Greater Value [Art. 1754, Civil Code].
A stipulation that the common carrier’s liability
is limited to the value of the goods appearing in In other words, the rules governing the
the bill of lading, unless the shipper or owner responsibility of a common carrier in the
declares a greater value, is binding [Art. 1749, transportation of goods apply. Thus,
Civil Code]. extraordinary diligence is required.
Where the liability has been limited due to a 2. Baggage in Possession of Passengers
stipulation written at the back of a ticket, to the
effect that the liability is limited to a certain As to baggage other than checked-in baggage,
amount unless the passenger declares a they are governed by Arts. 1998 and 2000-
higher valuation, a passenger who did not 2003, concerning the responsibility of
declare a higher valuation, or did not pay hotelkeepers [Art. 1754, Civil Code].
additional charges, cannot increase the liability
Page 235 of 494

Art. 1998, as applied by analogy, the baggage notices to the effect that he is not liable
of passengers in their personal custody or in for the articles brought by the
that of their employees, while being passenger;
transported, are regarded as necessary c. Any stipulation whereby the
deposits. The common carriers are responsible responsibility of the common carrier as
as depositaries, provided that: set forth in Arts. 1998-2001 is
a. Notice was given to them, or to their suppressed or diminished shall be void
employees, of the effects brought by [Art. 2003, Civil Code].
the passengers; and
b. The passengers take the precautions
Checked-In Baggage in
which the common carrier advised
Baggage Custody of
relative to the care and vigilance of
Passenger
their baggage.
Legal Considered Necessary
Note: In one case, the Court held that there Nature of as “Goods” Deposit
was sufficient notice under Art. 1998 when the Baggage
common carrier allowed the passenger to
board the vessel with his belongings without Diligence Extraordinary Ordinary
any protest [Sulpicio Lines v. CA, G.R. No. Required Diligence Diligence
172682 (2016)].
Applicable Arts. 1733 to Arts. 1998,
In case of loss or injury to the baggage of Rules 1735 2000 to 2003
passengers in their personal custody, or in that
of their employees, while being transported,
the carrier is liable if the loss or injury is 2. Safety of Passengers
caused by:
a. His servants; The liability of the common carrier with respect
b. His employees; to the safety of passengers, in general, are as
c. Strangers [Art. 2000, Civil Code]; or follows:
d. A thief or robber, without the use of 1. A common carrier is bound to carry the
arms or irresistible force [Art. 2001, passengers safely as far as human
Civil Code]. care and foresight can provide, using
the utmost diligence of very cautious
The carrier is not liable if loss or injury is persons, with a due regard for all the
caused by: circumstances [Art. 1755, Civil Code];
a. Force majeure [Art. 2000, Civil Code]; 2. In case of death of or injuries to
b. Theft or robbery with the use of arms or passengers, common carriers are
irresistible force [Art. 2001, Civil Code]; presumed to have been at fault or to
c. The acts of the passenger, his family, have acted negligently, unless they
servants, or visitors; prove that they observed extraordinary
d. The character of the baggage [Art. diligence [Art. 1756, Civil Code].
2002, Civil Code].
Note: It is not enough that the accident was
The following provisions also figure in caused by force majeure, the common carrier
determining the liability of the common carrier: must still prove that it was not negligent in
a. The fact that passengers are causing the injuries resulting from such
constrained to rely on the vigilance of accident [Bachelor Express v. CA, G.R. No.
the common carrier shall be 85691 (1990)]. Bachelor Express illustrates
considered in determining the degree that force majeure is not itself a defense; the
of care required of him [Art. 2000, Civil exercise of the diligence required by law is the
Code]; defense.
b. The common carrier cannot free
himself from responsibility by posting Certain instances wherein the common carrier
was held liable:
Page 236 of 494
1. Defects in the automobile – passenger As in the contract of carriage of goods, the
has neither the choice nor control over perfection of the contract of carriage of
the selection and use of the carrier’s passengers does not necessarily coincide with
equipment and appliances [Landingin the commencement of the duty of extraordinary
v. Pantranco, G.R. No. L-28014-15 diligence. It may occur at the same time or
(1970)]. later.
2. Defect in an appliance purchased by
the carrier from a manufacturer – the Based on jurisprudence, the duty that the
manufacturer is considered as an carrier of passengers owes to its patrons
agent of the common carrier [Necesito extends to persons boarding the cars as well
v. Paras, G.R. No. L-10605 (1958)]. as those alighting therefrom [Del Prado v.
3. Injuries suffered by a crew member or Manila Electric Company, G.R. No. L-29462
employee – utmost diligence is not only (1929)].
for the safety of passengers, but also
for the members of the crew or the This is also reflected in Art. 17, Warsaw
complement operating the carrier [PAL Convention, which applies to international air
v. CA, G.R. No. L-46558 (1981)]. carriage. It provides that the liability of a
4. Injuries suffered by an individual whose common carrier for injury to the passenger
presence was called for by the contract lasts from embarkation to disembarkation,
of carriage (e.g. stevedore) [Sulpicio including the period when the passenger is on
Lines v. CA, G.R. No. 106279 (1995)]. board the aircraft.
Note: A common carrier is not liable for its In maritime commerce, Art. 698, Code of
failure to deliver the passenger to the agreed Commerce relates to the period of the voyage:
destination because of sovereign acts [JAL v.
Asuncion, G.R. No. 161730 (2005)]. In case a voyage already begun should be
interrupted:
a. Void Stipulations 1. The passengers shall be obliged to pay
the fare in proportion to the distance
General Rule: The responsibility of a common covered; and
carrier for the safety of passengers cannot be 2. Have the following reliefs:
dispensed with or lessened by stipulation by
the posting of notices, by statements on tickets, Cause of Relief
or otherwise [Art. 1757, Civil Code]. Interruption
Exception: When a passenger is carried An accidental cause Without right to
gratuitously, a stipulation limiting the common of force majeure recover for losses
carrier’s liability for negligence is valid [Art. and damages
1758, Civil Code].
By the captain With a right to
Exception to the exception: Even when a exclusively indemnity
passenger is carried gratuitously, a stipulation
limiting the common carrier’s liability for willful 1. Caused by the 1. He may not be
acts or gross negligence is invalid [Art. 1758, disability of the required to pay
Civil Code]. vessel and any increased
2. A passenger price of passage;
The reduction of fare does not justify any should agree to but
limitation of the common carrier’s liability [Art. await the repairs 2. His living
1758, Civil Code]. expenses during
the stay shall be
b. Duration of Liability for his own
account.
Page 237 of 494

In case of delay in the departure of the vessel, Manila Electric Company, G.R. No. L-
the passengers have: 29462 (1929)].
1. The right to remain on board
2. If the delay is not due to a The extraordinary responsibility of common
fortuitous event or force carriers commences:
majeure, the right to be a. With respect to carriage of passengers
furnished with food for the by trains: The moment the person who
account of the vessel; purchases the ticket from the carrier
3. If the delay should exceed ten presents himself at the proper place
days: and in a proper manner to be
4. Passengers requesting the transported with a bona fide intent to
same shall be entitled to the ride the coach [Aquino citing Vda. De
return of the fare; and Nueca, et . al. v. Manila Railroad
5. If it is due exclusively to the Company].
fault of the captain or ship b. With respect to carriage of passengers
agent, they may also demand by sea: As soon as the person with
indemnity for losses and bona fide intention of taking passage
damages. places himself in the care of the carrier
or its employees and is accepted as
A vessel exclusively devoted to the passenger [Aquino].
transportation of passengers must take them
directly to the port or ports of destination, no 2. Arrival at Destination
matter what the number of passengers may be,
making all the stops indicated in its itinerary. The relation of carrier and passenger does not
cease at the moment the passenger flights
1. Waiting for Carrier or Boarding of from the carrier’s vehicle at a place selected by
Carrier the carrier at the point of destination, but
continues until the passenger has had a
The duty that the carrier of passengers owes to reasonable time or a reasonable opportunity to
its patrons extends to persons boarding the leave the carrier’s premises.
cars as well as those alighting therefrom.
What is a reasonable time or a reasonable
It is the duty of common carriers of passengers delay within this rule is to be determined from
to stop their conveyances at a reasonable all the circumstances such as the kind of
length of time to afford passengers an common carrier, the nature of its business, the
opportunity to bard and enter: customs of the place, and so forth, and
a. Carriers are liable for injuries suffered therefore precludes a consideration of the time
by boarding passengers resulting from element per se without taking into account
the sudden starting up or jerking of their such other factors.
conveyances while they are doing so
[Dangwa Transportation v. CA, G.R. The primary factor to be considered is the
No. 95582 (1991)]. existence of a reasonable cause as will justify
b. However, a person boarding a moving the presence of the victim on or near the
car must be taken to assume the risk of petitioner’s vessel:
injury from boarding the car under the a. A person who, after alighting from a
conditions open to his view. train, walks along the station platform is
Nonetheless, he cannot fairly be held considered still a passenger;
to assume the risk that the motorman, b. A passenger, who has alighted at his
having the situation in view, will destination and is proceeding by the
increase the peril by accelerating the usual way to leave the company’s
speed of the car before he is planted premises, but before actually doing so
safely on the platform [Del Prado v. is halted by the report that his brother,
a fellow passenger, has been shot, and
Page 238 of 494

he in good faith, returns to relieve his of their employees [Art. 1759, Civil
brother, is deemed reasonably and Code];
necessarily delayed and thus b. By stipulation, by the posting of
continues to be a passenger entitled as notices, nor by statements on the
such to the protection of the railroad tickets eliminating or limiting said
and company and its agents [La liability [Art. 1760, Civil Code].
Mallorca v. CA, G.R. No. L-20761
(1996)]; Ratio: The servant is clothed with delegated
c. In the cases of a shipper, the authority and charged with the duty to execute
passengers of vessels are allotted a the carrier’s undertaking to carry the passenger
longer period of time to disembark from safely [Agbayani]. Also, the defense of
the ship than other common carriers diligence in the selection and supervision of
such as a passenger bus, since such employees does not obtain because the liability
vessels are capable of accommodating is not based on quasi-delict, but on culpa
a bigger volume of both passenger and contractual. However, there must be a
baggage as compared to the capacity reasonable connection between the act and
of a regular commuter bus. the contract of carriage.
Consequently, a ship passenger will
need at least an hour as is the usual Note: The employee must be on duty at the
practice, to disembark from the vessel time of the act. It is enough that the assault
and claim his baggage [Aboitiz happens within the course of the
Shipping v. CA, G.R. No. 84458 employee’s duty. It is no defense for the
(1989)]; carrier that the act was done in excess of
d. The carrier necessarily would still have authority or in disobedience of the carrier’s
to exercise extraordinary diligence in orders [Maranan v. Perez, G.R. No. L-22272
safeguarding the comfort, convenience (1967)].
and safety of its stranded passengers
until they have reached their final Exception: A common carrier is not
destination [PAL v. CA, G.R. No. L- responsible for acts falling under force
82619 (1993)]. majeure. When a party is unable to fulfill his
obligation because of force majeure, he cannot
Note: Despite the Court’s pronouncement in be held liable for damages for non-
PAL v. CA, note that common carriers are performance [Japan Airlines v. CA, G.R. No.
bound to observe extraordinary diligence in the 118664 (1998)].
‘safety’ of its passengers. The law does not
mention the words ‘comfort’ and ‘convenience.’ Note: In order to be exempted from liability due
to a fortuitous event, a common carrier must
c. Liability for Acts of Others still prove a complete exclusion of human
agency from the cause of injury or death.
1. Employees Hence, it was held that the explosions of the
new tire may not be considered a fortuitous
General Rule: Common carriers are liable for event as there are human factors involved in
the death of or injuries to passengers through the situation [Yobido v. CA, G.R. No. 113003
the negligence or willful acts of the former’s (1997)].
employees, although such employees may
have acted beyond the scope of their authority 2. Other Passengers and Strangers
or in violation of the orders of the common
carriers. General Rule: A common carrier is not liable
for injuries inflicted by strangers or co-
This liability does not cease: passengers.
a. Even upon proof that they exercised all
the diligence of a good father of a Exception: A common carrier is responsible
family in the selection and supervision for injuries suffered by a passenger on account
Page 239 of 494

of the willful acts or negligence of other It is negligence per se to protrude one’s arm
passengers or of strangers, if the common voluntarily or inadvertently, hand, elbow, or any
carrier’s employees, through the exercise of other part of his body through the window of a
the diligence of a good father of a family, could moving car beyond the outer edge of the
have prevented or stopped the act or omission window or outer surface of the car, so as to
[Art. 1763, Civil Code]. come in contact with objects or obstacles near
the track [Isaac v. A.L. Ammen, G.R. No. L-
Note: The law speaks of injuries suffered by the 9671 (1957)].
passenger but not death. However, there
appears to be no reason why the common d. Liability for Delay in Commencement
carrier should not be held liable under such of Voyage
circumstances. The word “injuries” should be
interpreted to include death [Agbayani]. A “delayed voyage” refers to a voyage
involving:
Under Art. 1763, a tort committed by a stranger 1. Late departure of the ship from its port
which causes injury to a passenger does not of origin; or
accord the latter a cause of action against the 2. Late arrival thereof to its port of
carrier. The negligence for which a common destination for a period of time not
carrier is held responsible is the negligent exceeding twenty-four (24) hours from
omission by the carrier’s employees to prevent the CPC-authorized time of departure
the tort from being committed when the same or arrival of the ship [Maritime Industry
could have been foreseen and prevented by Authority Circular No. 2018-27].
them through the exercise of the diligence of a
good father of a family [Pilapil v. CA, G.R. No. In case of delayed voyages, passengers shall
52159 (1989)]. have the following rights:
Common carriers should be given leeway in 1. Right to Information

assuming that the passengers they take in will Within thirty (30) minutes of knowledge that the
not bring anything that would prove dangerous voyage shall be delayed but not later than one
to himself, as well as his co-passengers, (1) hour before the CPC-authorized departure
unless there is something that will indicate that schedule, the operator shall inform the
a more stringent inspection should be made. passengers of:
[G.V. Florida Transport Inc., v. Heirs of a. The delay;
Battung, G.R. No. 208802 (2015)] b. The cause of the delay;
c. The new departure or expected arrival
Contributory Negligence time [Maritime Industry Authority
The passenger must observe the diligence of a Circular No. 2018-27].
good father of a family to avoid injury to himself
[Art. 1761, Civil Code]. 2. Right to Refund or Revalidation
Should the delay be for more than three (3)
The contributory negligence of the passenger hours, the passenger shall be offered the
does not bar recovery of damages for his death option to request a refund of the ticket price, or
or injuries, if the proximate cause thereof is the for the revalidation of the ticket [Maritime
negligence of the common carrier, but the Industry Authority Circular No. 2018-27].
amount of damages shall be equitably reduced
[Art. 1762, Civil Code]. 3. Right to Amenities
The operator shall provide, free of charge, the
However, when the negligence of the passengers with the following:
passenger was the proximate cause of the a. Snacks or refreshment, or meals
injury, the passenger is barred from recovery, during mealtime;
and the common carrier is exempted from b. Free access to first aid/ relief medicine,
liability. if necessary;
Page 240 of 494

c. Free access to communication facilities to answer for the flaws of its equipment and
or services, if necessary; mechanical defects if such flaws were at all
d. Free, decent, and clean discoverable.
accommodation located near or
accessible from the port; The manufacturer of the defective appliance is
e. Free transportation to and from the port considered in law, as the agent of the carrier,
and the place of accommodation, and the good repute of the manufacturer will
should the delay require a waiting time NOT relieve the carrier from liability.
of more than eight (8) but not
exceeding twenty-four (24) hours Ratio: The passenger has no privity with the
[Maritime Industry Authority Circular manufacturer of the defective equipment.
No. 2018-27]. Hence, he has no remedy against him, while
the carrier usually has [Necesito v. Paras, G.R.
4. Right to Compensation No. L-10605 (1958)].
As an alternative to providing accommodation
or whenever the same is not practicable, the f. Extent of Liability for Damages
operator may offer the passengers
corresponding compensation: Damages recoverable from common carriers,
a. In an amount equivalent to the both in cases of carriage of passengers and
prevailing market price of a decent and goods, shall be awarded in accordance with
clean accommodation in the immediate Title XVIII concerning Damages.
or adjacent locality of the ship’s point of
departure; Art. 2206, on liability, in case of death, for loss
b. Subject to the limitation of a maximum of earning capacity, support, and moral
of three (3) nights per passenger damages for mental anguish, shall also apply
[Maritime Industry Authority Circular to the death of a passenger caused by the
No. 2018-27]. breach of contract by a common carrier [Art.
1764, Civil Code].
5. Right to Remain on Board
In case the departure of the vessel is delayed Thus, the damages recoverable are:
the passengers have a right to remain on board 1. Actual or compensatory damages;
and to be furnished with food for the account of 2. Moral damages;
the vessel, unless the delay is due to an 3. Exemplary damages;
accidental cause or to force majeure [Art. 698, 4. Nominal, temperate, and liquidated
Code of Commerce]. damages;
5. Attorney’s fees
6. Right to Return
If the delay should exceed ten days, the 1. Actual or Compensatory Damages
passengers who request it shall be entitled to
the return of the passage [Art. 698, Code of Actual or compensatory damages refer to
Commerce]. adequate compensation for such pecuniary
loss suffered as duly proved [Art. 2199, Civil
7. Right to Damages Code].
If the delay were due exclusively to the captain
or agent, the passengers may furthermore Under Art. 2201, the liability for damages
demand indemnity for losses and damages Include:
[Art. 698, Code of Commerce]. In case the common carrier acted in good faith:
a. The natural and probable consequence
e. Liability for Defects in Equipment and of the breach of the obligation; and
Facilities b. Those which the parties have foreseen
or could have reasonably foreseen at
While a carrier is not an insurer of the safety of the time the obligation was constituted;
the passengers, it should nevertheless be held
Page 241 of 494

In case of fraud, bad faith, malice or wanton Inattention and lack of care on the part of the
attitude, all damages which may be reasonably carrier, resulting in the failure of the passenger
attributed to the nonperformance of the to be accommodated in the class contracted
obligation. for, amounts to bad faith or fraud which entitles
the passenger to the award of moral damages
In case of death, actual damages also include: in accordance with Art. 2220 [Ortigas v.
a. Loss of earning capacity, unless the Lufthansa, G.R. No. L-28773 (1975)].
deceased had no earning capacity at
the time of death; and Willful and deliberate overbooking on the part
b. Support for a period not exceeding five of the airline carrier constitutes bad faith. Under
years [Art. 2206, Civil Code]. Section 3, Economic Regulations No. 7 of the
Civil Aeronautics Board, overbooking, which
In the absence of a showing that common does not exceed ten percent, is not considered
carrier’s attention was called to the special as deliberate and therefore does not amount to
circumstances requiring prompt delivery of a bad faith [United Airlines v. CA, G.R. No.
passenger’s luggage, the common carrier 124110 (2001)].
cannot be held liable for the cancellation of
passenger’s contracts [for exhibition of films] 3. Exemplary Damages
as it could not have foreseen such an
eventuality when it accepted the luggage for In a contract of carriage, exemplary damages
transit [Pan-Am World Airways v. IAC, G.R. No. may be awarded if the common carrier acted in
70462 (1988)]. a wanton, fraudulent, reckless, oppressive, or
malevolent manner [Art. 2232, Civil Code].
Note: Only substantiated and proven expenses
or those that appear to have been genuinely Exemplary damages serve as an instrument to
incurred in connection with the death, wake, or serve the ends of law and public policy by
burial of the victim will be recognized [Victory reshaping socially deleterious behaviors,
Liner, Inc v. Gammad, G.R. No. 159636 specifically, in the case, to compel the common
(2004)]. carrier to control their employees, to tame their
reckless instincts, and to force them to take
2. Moral Damages adequate care of human beings and their
property [Mecenas v. CA, G.R. No. 88052
Moral damages, though incapable of pecuniary (1989)].
computation, if they are the proximate result of
the common carrier’s wrongful act or omission, 4. Nominal, Temperate, and Liquidated
may be recovered [Art. 2217, Civil Code]. Damages
In cases of breach of contract of carriage, Nominal damages are adjudicated in order

moral damages may be recovered where: that a right of the plaintiff, which has been
a. The common carrier acted fraudulently; violated by the defendant, may be vindicated,
b. The common carrier acted in bad faith or recognized, not for the purpose of
[Art. 2220, Civil Code]; indemnifying the plaintiff for any loss suffered
c. Death of a passenger resulted even in by him [Art. 2221, NCC]. It may be awarded in
the absence of bad faith or fraud [Art. case of breach of contract of carriage and in
2206, Civil Code]. every case where any property right has been
invaded [Art. 2222, Civil Code].
Bad faith contemplates a state of mind
affirmatively operating with furtive design or A violation of the passenger’s right to be
with some motive of self-interest or will or for treated with courtesy in accordance with the
ulterior purpose [Air France v. Carrascoso, degree of diligence required by law to be
G.R. No. L-21438 (1966)]. exercised by every common carrier entitles the
passenger to nominal damages [Saludo v. CA,
G.R. No. 95536 (1922)].
Page 242 of 494

Instances where nominal damages have been a. When exemplary damages are
awarded: awarded;
a. Misplacement of the passenger’s b. When the common carrier’s act or
baggage and failure to deliver at the omission has compelled the plaintiff to
time appointed [Alitalia v. IAC, G.R. No. litigate with third persons or to incur
71929 (1990)]. expenses to protect his interest;
b. Violation of the passenger’s right to be c. Where the common carrier acted in
traded with courtesy [Saludo v. CA, gross and evident bad faith in refusing
G.R. No. 95536 (1992)]. to satisfy the plaintiff’s valid, just and
c. Failure to make the necessary demandable claim;
arrangements to transport the d. In any other case where the court
passengers on the first commercial deems it just and equitable that
flight available after cancellation attorney’s fees and expenses of
[Japan Airlines v. CA, G.R. No. 118664 litigation should be recovered.
(1998)].
d. Rerouting the flight without the C. The Montreal Convention of
passenger’s consent and failure to
allege the necessity to justify the 1999
change [Savellano v. Northwest
Airlines, G.R. No. 151783 (2003)]. 1. Applicability
Temperate or moderate damages, which are The Montreal Convention applies to:
more than nominal but less than compensatory a. All international carriage of persons,
damages, may be recovered when some baggage, or cargo performed by
pecuniary loss has been suffered but its aircraft for reward;
amount cannot, from the nature of the case, be b. Gratuitous carriage by aircraft
proved with certainty [Art. 2224, Civil Code]. performed by an air transport
undertaking [Art. 1(1), Montreal
In the case of Philtranco v. Paras [G.R. No. Convention].
161909 (2012)], the Supreme Court upheld the
award of temperate damages by the CA. Paras International air carriage or international air
failed to show receipts of at least two surgeries transport means any carriage in which,
as well as rehabilitative therapy. Nonetheless, according to the agreement between the
the CA was convinced that Paras should not parties, the place of departure and the place of
suffer from the lack of definite proof of his destination, whether or not there be a break in
actual expenses for the surgeries and the carriage or a transshipment, are situated
rehabilitative therapy. Thus, the CA awarded to either:
him temperate damages of P50,000.00 in the a. Within the territories of two State
absence of definite proof of his actual Parties; or
expenses towards that end. b. Within the territory of a single State
Party if there is an agreed stopping
Liquidated damages are those damages place within the territory of another
agreed upon by the parties to a contract, to be State, even if that State is not a State
paid in case of breach thereof [Art. 2226, Civil Party [Art. 1(2), MC]
Code].
What is not an international carriage:
5. Attorney’s Fees Carriage between two points within the territory
of a single State Party without an agreed
Under Art. 2208, as applicable to a contract of stopping place within the territory of another
carriage, attorney’s fees and expenses of State is not international carriage for the
litigation may be recovered in the following purposes of this Convention. [Art. 1(2), MC]
cases: A carriage to be performed by several
successive air carriers is deemed, for the
purposes of the Convention, to be one
Page 243 of 494
undivided carriage, if it has been regarded by to, cargo upon condition only that the event
the parties as a single operation, whether it had which caused the damage so sustained took
been agreed upon under the form of a single place during the carriage by air. [Art. 18(1),
contract or of a series of contracts and it does MC]
not lose its international character merely
because one contract or a series of contracts Exceptions:
is to be performed entirely within the territory of 1. Inherent defect, quality or vice
the same State. [Art. 1(3), MC]. of that cargo;
2. Defective packing of that cargo
2. Extent of Liability of Air Carrier performed by a person other
than the carrier or his servants
a. Death or Injury of Passengers or agents;
3. An act of war or an armed
The carrier is liable for damage sustained in conflict;
case of death or bodily injury of a passenger 4. An act of public authority
upon condition only that the accident which carried out in connection with
caused the death or injury took place: the entry, exit or transit of the
a. on board the aircraft or cargo [Art. 18(2), MC].
b. in the course of any of the operations
Meaning of carriage by air:
of embarking or disembarking.
• The carriage by air comprises the
c. When there was delay [Arts. 17(1) and
19, MC] period during which the cargo is in
the charge of the carrier. [Art. 18,
MC]
b. Destruction, Loss, or Damage to any
• The period of the carriage by air
Checked Baggage does not extend to any carriage by
land, by sea or by inland waterway
The carrier is liable for damage sustained in performed outside an airport.
case of destruction or loss of, or of damage to,
• If, however, such carriage takes
checked baggage upon condition only that the
place in the performance of a
event which caused the destruction, loss or
contract for carriage by air, for the
damage took place on board the aircraft or
purpose of loading, delivery or
during any period within which the checked
transshipment, any damage is
baggage was in the charge of the carrier. [Art.
presumed, subject to proof to the
17(2), MC] contrary, to have been the result of
an event which took place during
Exception to Damage to Checked Baggage: the carriage by air.
The carrier is not liable when the damage • If a carrier, without the consent of
resulted from inherent defect, quality, or vice of the consignor, substitutes carriage
the baggage by another mode of transport for
the whole or part of a carriage
c. Destruction, Loss, or Damage to any intended by the agreement
Unchecked Baggage between the parties to be carriage
by air, such carriage by another
In the case of unchecked baggage, including mode of transport is deemed to be
personal items, the carrier is liable if the within the period of carriage by air.
damage resulted from its fault or that of its [Art. 18, MC]
servants or agents. [Art. 17(2), MC]
e. Delay
d. Damage to Cargo The carrier is liable for damage occasioned by
delay in the carriage by air of passengers,
The carrier is liable for damage sustained in the baggage or cargo. [Art. 19, MC]
event of the destruction or loss of, or damage
Page 244 of 494
Exception: Prescriptive Period for Claims
1. Nevertheless, the carrier shall not be
liable for damage occasioned by delay if it The right to damages shall be extinguished if
proves that it and its servants and agents an action is not brought within a period of two
took all measures that could reasonably be years, reckoned from the date of arrival at the
required to avoid the damage or that it was destination, or from the date on which the
impossible for it or them to take such aircraft ought to have arrived, or from the date
measures. [Art. 19, MC] on which the carriage stopped. [Art. 35, MC]
The Warsaw Convention does not provide for 2. Limitation of Liability

an exclusive enumeration of instances when
the carrier is liable. General Rule: Any provision tending to relieve
a. It does not provide an absolute limit of the carrier of liability or to fix a lower limit than
liability and it does not preclude the that which is laid down shall be null and void,
application of the Civil Code and other but the nullity of any such provision does not
pertinent local laws in the involve the nullity of the whole contract [Art.
determination of the extent of liability of 23(1), WC as amended by the Hague Protocol
the common carrier [Philippine Airlines (1955)].
v. CA, G.R. No. G.R. No. 119706
(1996)]. Exception: When the loss or damage resulted
b. Hence, a complaint for quasi-delict can from the inherent defect, quality or vice of the
still be filed even if the filing is beyond cargo carried [Art. 23(2), WC as amended by
the prescriptive period provided for the Hague Protocol (1955)].
under the Convention so long as it is
within the prescriptive period of four a. Liability to Passengers
years under the Civil Code
[Villanueva]. Liability Limit: Death/Injury
Notice of Claim 1. For damages not exceeding 100 000 Special

Drawing Rights for each passenger, the carrier
Notice of claim with the international carrier is shall not be able to exclude or limit its liability.
a mandatory or condition precedent under the
Montreal Convention. 2. The carrier shall not be liable for damages to
a. Baggage: within 7 days from receipt. the extent that they exceed for each passenger
b. Cargo: within 14 days from receipt 100 000 Special Drawing Rights if the carrier
proves that:
Note: In case of delay, within 21 days from the
date on which the baggage or cargo have been (a) such damage was not due to the
placed at his disposal [Art. 31, MC]. negligence or other wrongful act or
omission of the carrier or its servants or
If no complaint is made within the times agents; or
aforesaid, no action shall lie against the carrier,
save in the case of fraud on its part. [Art. 31, (b) such damage was solely due to the
MC] negligence or other wrongful act or
omission of a third party. [Art. 21, MC]
Receipt by the person entitled to delivery of
checked baggage or cargo without complaint is General Rule: In the carriage of passengers,
prima facie evidence that the same has been the liability of the carrier for each passenger is
delivered in good condition and in accordance limited to “100,000 Special Drawing Rights
with the document of carriage. [Art. 31, MC] for the aggregate of the claims” in respect of
damage suffered because of death or personal
injury to each passenger [Art. 22(1), WC as
amended by Additional Protocol No. 3 (1975)].
Page 245 of 494

Exception: By special contract, the carrier and delivery at destination. [Art. 22,
the passenger may agree to a higher limit [Art. MC]
22(1), WC].
● This exception has been repealed by General Rule: In the carriage of cargo, the
the amendment introduced by liability of the carrier is limited to a sum of 17
Additional Protocol No. 3(1975). Special Drawing Rights per kilogram [Art.
22(2)(a)].
Note: Special drawing rights are
supplementary foreign exchange reserve Exception: The limit does not apply when the
assets defined and maintained by the consignor has made, at the time when the
International Monetary Fund. package was handed over to the carrier, a
special declaration of the value at delivery and
In case of delay in the carriage of persons, the has paid a supplementary sum if the case so
liability is limited to 4,150 Special Drawing requires.
Rights [Art. 22(1)(b), WC as amended by
Additional Protocol No. 4 (1975)]. In that case, the carrier will be liable to pay a
sum not exceeding the declared sum, unless
When limitation unavailable to the carrier: he proves that that sum is greater than the [Art
1. Passenger embarks without a consignor’s actual interest in delivery at
passenger ticket, with the consent of destination [Art 22(2)(a), WC].
the carrier
2. If the ticket does not include a notice a c. Liability for Hand-Carried Baggage
notice to the effect that, if the
passenger's journey involves an As regards hand-carried baggage, the liability
ultimate destination or stop in a country of the carrier is limited to “332 Special
other than the country of departure, the Drawing Rights per passenger” [Art. 22(3)
Warsaw Convention may be applicable WC, as amended by Additional Protocol No. 2
and that the Convention governs and in (1975)].
most cases limits the liability of carriers
for death or personal injury and in The Guatemala Protocol of 1971 increased the
respect of loss of or damage to limit for passengers to $100,000 and for
baggage [Art. 3(2), WC as amended by baggage to $1,000. However, the Supreme
the Hague Protocol (1955)]. Court noted in Santos III v. Northwest Orient
Airlines [G.R. No. 101538(1992)], that the
b. Liability for Checked Baggage Guatemala Protocol is still ineffective
[Sundiang and Aquino].
Liability Limit: Checked Baggage
The Warsaw Convention should be deemed a
General Rule: In the carriage of baggage, the limit of liability only in those cases where:
liability of the carrier in the case of destruction, 1. The cause of death or injury to person,
loss, damage or delay is limited to 1 000 or destruction, loss or damage to
Special Drawing Rights for each passenger property or delay in its transport is not
attributable to or attended by:
Exception: Unless the passenger has made, a. Any willful misconduct, bad
at the time when the checked baggage was faith, recklessness; or
handed over to the carrier, a special b. Otherwise, improper conduct
declaration of interest in delivery at destination on the part of any official or
and has paid a supplementary sum if the case employee for which the carrier
so requires.
is responsible; and
• In that case the carrier will be liable
2. There is otherwise no special or
to pay a sum not exceeding the
extraordinary form of resulting injury
declared sum, unless it proves that
[Alitalia v. IAC, G.R. No. 71929 (1990)].
the sum is greater than the
passenger’s actual interest in
Page 246 of 494
Note: The Montreal Convention 1999 Note: Under the Warsaw Convention, if the
changed the limits of liability in relation to delay, carrier accepts a passenger without a ticket, or
baggage and cargo as follows: a luggage without luggage check, or goods
1. In the case of damage caused by delay without airway bill, the carrier shall not be
as specified in Article 19 in the carriage entitled to avail himself of those provisions of
of persons, the liability of the carrier for the Convention which exclude or limit his
each passenger is limited to 4,150 liability. This has been deleted by the
Special Drawing Rights; Montreal Convention in Art. 3(5).
2. In the carriage of baggage, the liability
of the carrier in the case of destruction,
loss, damage or delay is limited to
1,000 Special Drawing Rights for each
passenger x x x;
3. In the carriage of cargo, the liability of
the carrier in the case of destruction,
loss, damage or delay is limited to a
sum of 17 Special Drawing Rights per
kilogramme x x x [Art. 22, Montreal
Convention].
d. Liability for Cargo
General Rule: In the carriage of cargo, the

liability of the carrier in the case of destruction,
loss, damage or delay is limited to a sum of 17
Special Drawing Rights per kilogramme,
Exception: Unless the consignor has made, at

the time when the package was handed over to
the carrier, a special declaration of interest in
delivery at destination and has paid a
supplementary sum if the case so requires.
• In that case the carrier will be liable
to pay a sum not exceeding the
declared sum, unless it proves that
the sum is greater than the
consignor’s actual interest in
delivery at destination. [Art. 22,
MC]
e. Liability for Delay

In the case of damage caused by delay in the
carriage of persons, the liability of the carrier
for each passenger is limited to 4 150 Special
Drawing Rights.
3. Willful Misconduct
A common carrier may not avail of the limitation

in the following cases:
a. Willful misconduct;
b. Default amounting to willful misconduct
[Art. 25, WC];
Page 247 of 494

PUBLIC SERVICE ACT

COMMERCIAL LAWS
PUBLIC SERVICE ACT COMMERCIAL LAW
2. Foreign Nationals
PUBLIC SERVICE
Foreign nationals shall not be allowed
ACT to own more than fifty percent (50%) of
the capital of entities engaged in the
COMMONWEALTH operation and management of critical
infrastructure unless the country of
ACT NO. 146 AS such foreign national accords
AMENDED BY R.A. reciprocity to Philippine Nationals [Sec.
25, R.A. No. 11659]
NO. 11659
B. Foreign State-Owned
A. Critical Infrastructure Enterprise
Foreign State-owned Enterprise refers
Critical Infrastructure refers to any public to an entity in which a foreign State:
service which owns, uses, or operates (i) directly or indirectly owns more than
systems and assets, whether physical or fifty-percent (50%) of the capital
virtual, so vital to the Republic of the taking into account both the voting
Philippines that the incapacity or destruction rights and beneficial ownership;
of such systems or assets would have a (ii) control, through ownership
detrimental impact on national security, interests, the exercise of more than
including telecommunications and other such fifty percent (50%) of the voting
vital services as may be declared by the rights; or
President of the Philippines. [Sec. 2(e), R.A. (iii) holds the power to appoint a
No. 11659] majority of members of the board of
directors or any other equivalent
Limitations on the Ownership of management body. [Sec. 2(e), R.A.
Critical Infrastructures: No. 11659]
1. Foreign State-Owned Enterprises

C. Public Service as Public
For investments made after the
effectivity of R.A. No. 11659:
Utility
• An entity controlled by or acting Public Utility refers to a public service that
on behalf of the foreign operates, manages or controls for public use
government or foreign state- any of the following:
owned enterprises shall be 1. Distribution of Electricity;
prohibited from owning capital 2. Transmission of Electricity;
in any public service classified 3. Petroleum and Petroleum Products
as public utility or critical Pipeline Transmission Systems;
infrastructure. 4. Water Pipeline Distribution Systems and
Wastewater Pipeline Systems, including
For investments made prior to the sewerage pipeline systems;
effectivity of R.A. No. 11659: 5. Seaports; and
• Foreign state-owned 6. Public Utility Vehicles.
enterprises which own capital All concessionaires, joint ventures and other
prior to the effectivity of R.A. similar entities that wholly operate, manage or
No. 11659 are prohibited from control for public use the sectors above are
investing in additional capital public utilities.
upon the effectivity of this Act.
Page 249 of 494

No other person shall be deemed a public 4. Water Pipeline Distribution
utility unless otherwise subsequently Systems and Wastewater
provided by law. [Sec. 4, R.A. No. 11659] Pipeline Systems, including
NOTE: Previous definition of “public utility”
under C.A. No. 146, Sec. 13(b) is ejusdem
Sewerage Pipeline Systems
Water Pipeline Distribution Systems and
generis – meaning where general words or
phrases follow a number of specific words or Wastewater Pipeline Systems refer to the
operation and maintenance of water
phrases, the general words are specifically
construed as limited and apply only to persons pipeline distribution systems to ensure an
uninterrupted and adequate supply and
or things of the same kind or class as those
expressly mentioned. Previously, statutes distribution of potable water for domestic
and other purposes and the operation
carve out the exceptions.
Now, under R.A. No. 11659, the enumeration and maintenance of wastewater pipeline
systems to ensure public health and
is exclusive. No entity shall be considered as a
safety. [Sec. 2(o), R.A. No. 11659]
public utility unless included in the list
enumerated under Sec. 4 or unless provided EXCLUSIONS:
a. desludging companies and septic
by law.
tanks [Sec. 2(o), R.A. No. 11659]
Definition of Public Utilities:
5. Seaports
Seaport refers to a place where ships
1. Distribution of Electricity may anchor or tie up for the purpose of
Distribution of Electricity refers to the shelter, repair, loading or discharge of
conveyance of electric power by a passengers or cargo, or for other such
distribution utility through its distribution activities connected with water-borne
system [Sec. 2(f), R.A. No. 11659] commerce, and including all the land and
water areas and the structures,
2. Transmission of Electricity equipment and facilities related to these
Transmission of Electricity refers to the functions, as defined by the charters of
conveyance of electricity through the relevant authorities or agencies, such as
high voltage backbone system. [Sec. the Philippine Ports Authority, Subic Bay
2(n), R.A. No. 11659] Metropolitan Authority, PHIVIDEC
Industrial Estate Authority, Cebu Port
3. Petroleum and Petroleum Authority, local government units, and
Products Pipeline Transmission other similar agencies or government
System bodies; [Sec. 2(l), R.A. No. 11659]
Petroleum and petroleum Product
Pipeline Transmission Systems refer to 6. Public Utility Vehicles
the operation and maintenance of Public Utility Vehicles (PUVs) refer to
pipeline transmission systems to ensure internal combustion engine vehicles that
an uninterrupted and adequate supply carry passengers and/or domestic cargo
and transmission of petroleum and for a fee, offering services to the public,
petroleum products to the public; namely trucks-for-hire, UV express
EXCLUSIONS: service, public utility buses (PUBs),
a. petroleum pipeline systems public utility jeepneys (PUJs), tricycles,
operated exclusively for private or filcabs, and taxis.
own use, or incidental to the
operations of a distinct business NOTE: That transport vehicles
[Sec. 2(i), R.A. No. 11659] accredited with and operating through
transport network corporations shall not
be considered as public utility vehicles
[i.e. Grab, Angkas] [Sec. 2(k), R.A. No.
11659]
Page 250 of 494

NOTE: PUVs shall not include electric 2. Exclusivity
vehicles as the definition refers to
“internal combustion engine vehicles.” No franchise, certificate, or authorization shall
be exclusive in character.
Classification of a Public Service as
Public Utility 3. Fixed Term
Upon the recommendation of the National
Economic and Development Authority (NEDA), No franchise, certificate, or authorization shall
the President may recommend to Congress be for a longer period than fifty years. [Sec. 11,
the classification of a public service as a public Art. XII, Const.]
utility on the basis of the following criteria:
1. The person or juridical entity regularly A toll operation agreement with an original
supplies and transmits and distributes stipulation period of 30 years and which
to the public through a network a granted a maximum extension of 50 years was
commodity or service of public struck down by the court for being in violation
consequence; of Sec. 11, Art, II of the Constitution. The
2. The commodity or service is a natural agreement with the original stipulation period of
monopoly that needs to be regulated 30 years and the maximum extension of 50
when the common good so requires. years would allow a concession of 80 years.
For this purpose, natural monopoly This is a violation of the 50-year franchise
exists when the market demand for a threshold under the Constitution. (Francisco v.
commodity or service can be supplied Toll Regulatory Board, G.R. No. 166910
by a single entity at a lower cost that by (2010))
two or more entities;
3. The commodity or service is necessary 4. Subject to amendment
for the maintenance of life and
occupation of the public; and
Such franchise or right shall be subject to
4. The commodity or service is obligated
amendment, alteration, or repeal by the
to provide adequate service to the
Congress when the common good so requires.
public on demand. [Sec. 4, R.A. No.
[Sec. 11, Art. XII, Const.]
11659]
Limitations on the Ownership, 5. Public participation

Operation, Management, and Control
The State shall encourage equity participation
of Public Utilities in public utilities by the general public. [Sec. 11,
Art. XII, Const.]
1. Ownership
6. Foreign participation
No franchise, certificate, or any other form of
authorization for the operation of a public utility The participation of foreign investors in the
shall be granted except to citizens of the governing body of any public utility enterprise
Philippines or to corporations or associations shall be limited to their proportionate share in
organized under the laws of the Philippines, at its capital, and all the executive and managing
least sixty per centum of whose capital is officers of such corporation or association must
owned by such citizens . [Sec. 11, Art. XII, be citizens of the Philippines. [Sec. 11, Art. XII,
Const.] Const.]
The citizenship requirement is intended to 7. Take over

prevent aliens from assuming control of public
utilities, which may be inimical to the national
In times of national emergency, when the
interest.
public interest so requires, the State may,
during the emergency and under reasonable
Page 251 of 494
terms prescribed by it, temporarily take over or payment of just compensation,
direct the operation of any privately-owned transfer to public ownership utilities
public utility or business affected with public and other private enterprises to be
interest. [Sec. 17, Art. XII, Const.] operated by the Government. [Sec. 17,
Art. XII, Const.]
Section 17, Article XII must be understood as
an aspect of the emergency powers clause. D. Unlawful Acts
The taking over of private business affected
with public interest is just another facet of the
emergency powers generally reposed upon It shall be unlawful for any public service:
Congress. Thus, when Sec. 17 states that “the 1. To provide or maintain any service that
State, may during the emergency and under is unsafe, improper, or inadequate,
reasonable terms prescribed by it, temporarily or withhold or refuse any service
take over or direct the operation of any privately which can reasonably be demanded
owned public utility or business affected with and furnished
public interest,” it refers to Congress, not the 2. To make or give, directly or indirectly,
President. (David v. Arroyo, G.R. No. 171396 by itself or through its agents attorneys
(2006)) or brokers, or any of them, discounts or
rebates on authorized rates, or grant
credit for the payment of freight
8. Transfer to public ownership
charges, or any undue or
unreasonable preference or
The State may, in the interest of national advantage to any person or
welfare or defense, establish and operate vital corporation or to any locality or to any
industries and, upon payment of just particular description of traffic or
compensation, transfer to public ownership service, or subject any particular
utilities and other private enterprises to be person or corporation or locality or any
operated by the Government. [Sec. 18, Art. XII, particular description of traffic to any
Const.] prejudice or disadvantage in any
respect whatsoever; to adopt,
Public Service which is Not a Public maintain, or enforce any regulation,
Utility practice or measurement which shall
be found or determined by the
A public service which is not classified as a Commission to be unjust,
public utility under this Act shall be considered unreasonable, unduly preferential or
a business affected with public interest for unjustly discriminatory, in a final order
purposes of Sections 17 and 18 of Article XII of which shall be conclusive and shall
the Constitution. take effect in accordance with the
provisions of this Act, upon appeal or
Legal Implications for Business otherwise.
Affected with Public Interest 3. To refuse or neglect, when requested
by the Postmaster General or his
authorized representative, to carry
1. In times of national emergency, when
public mail on the regular trips of any
the public interest so requires, the
public land transportation service
State may, during the emergency and
maintained or operated by any such
under reasonable terms prescribed by
public service, upon such terms and
it, temporarily take over or direct the
conditions and for a consideration in
operation of any privately-owned public
such amounts as may be agreed upon
utility or business affected with public
between the Postmaster General and
interest. [Sec. 17, Art. XII, Const.]
the public service carrier or fixed by the
2. The State may, in the interest of
Commission in the absence of an
national welfare or defense, establish
agreement between the Postmaster
and operate vital industries and, upon
General and the carrier. In case the
Page 252 of 494
Postmaster General and the public F. Investments by an Entity
service carrier are unable to agree on
the amount of the compensation to be Controlled by or Acting on
paid for the carriage of the mail, the Behalf of the Foreign
Postmaster General shall forthwith Government, or Foreign State-
request the Commission to fix a just
and reasonable compensation for such owned Enterprises
carriage and the same shall be
promptly fixed by the Commission in Capital Ownership Prohibition on
accordance with section sixteen of this Public Utilities and Critical
Act. Infrastructure:
4. To refuse or neglect, when requested
by the Administrative Agency to For investments made after the effectivity of
urgently use, deliver or render the R.A. No. 11659:
public service for the purpose of
• An entity controlled by or acting on behalf
avoiding further loss on human,
of the foreign government or foreign
material, economic, or environment
state-owned enterprises shall be
during a state of calamity. [Sec. 19,
prohibited from owning capital in any
C.A. No. 146 as amended by Sec. 9,
public service classified as public
R.A No. 11659]
utility or critical infrastructure.
E. Powers of the President to For investments made prior to the effectivity of

Suspend or Prohibit Transaction R.A. No. 11659:
or Investment • Foreign state-owned enterprises which
own capital prior to the effectivity of R.A.
No. 11659 are prohibited from investing
In the interest of national security, the in additional capital upon the effectivity
President, after review, evaluation and of this Act.
recommendation of the relevant government
department or Administrative Agency, may,
EXCEPTION: The sovereign wealth funds and
within sixty (60) days from the receipt of such
independent pensions funds of each state may
recommendation, suspend or prohibit any
collectively own up to thirty percent (30%) of
proposed merger or acquisition transaction,
the capital of such public services.
or any investment in a public service that
In the interest of national security, an entity
effectively results in the grant of control,
controlled by or acting on behalf of the foreign
whether direct or indirect, to a foreigner or
government or foreign- owned enterprises shall
a foreign corporation. [Sec. 23, R.A No.
not make any date or information disclosure,
11659]
nor extend assistance, support or cooperation
to any foreign government, instrumentalities or
National Security refers to the requirements
agents. [Sec. 24, R.A. No. 11659]
and conditions necessary to ensure the
territorial integrity of the country and the safety,
security, and well-being of Filipino citizens. G. Reciprocity Clause
[Sec. 2(h), R.A. No. 11659]
Foreign Ownership Limitation for
Critical Infrastructures
General Rule: Foreign nationals shall not be

allowed to own more than fifty percent (50%) of
the capital of entities engaged in the operation
and management of critical infrastructure
Exception: The country of such foreign
national accords reciprocity to Philippine
Page 253 of 494
Nationals as may be provided by foreign law,
treaty or international agreement. Reciprocity
may be satisfied by according rights of similar
value in other economic sectors. The NEDA
shall promulgate rules and regulations for this
purpose.
Foreign Employment
General Rule: A public service shall employ a

foreign national only after the determination of
non-availability of a Philippine National who is
competent, able and willing to perform the
services for which the foreign national is
desired.
Exception: Unless otherwise provided by law,
or by any international agreement
Any foreign national seeking admission to the
Philippines for employment purposes and any
public service which desires to engage a
foreign national for employment in the
Philippines must obtain an employment
permit pursuant to the Labor Code of the
Philippines.
Public services employing foreign nationals

issued employment permits in industries to be
determined by the Department of Labor and
Employment (DOLE) shall implement an
understudy/skills development program to
ensure the transfer of technology/skills to
Filipinos, whether next-in-rank or otherwise,
with the potential of succeeding the foreign
national in the same establishment or its
subsidiary, within a specific period as may be
determined by the DOLE, upon consultation
with relevant government agencies and
industry experts. [Sec. 25, R.A. No. 11659]
Page 254 of 494

INTELLECTUAL PROPERTY CODE

COMMERCIAL LAW
INTELLECTUAL PROPERTY CODE COMMERCIAL LAW
step, and is industrially applicable [Sec.
21, RA 8293].
INTELLECTUAL f. Utility models – a technical solution,
essentially a device or useful object, in
PROPERTY CODE the mechanical field, that is new and
industrially applicable, and which may
relate to a product, process, or an
I. Intellectual Property Code improvement [Ching v. Salinas Jr.,
G.R. No. 161295 (2005)].
A. In General g. Layout designs (topographies) of
integrated circuits – the three-
dimensional disposition, however
1. Definition
expressed, of the elements, at least
one of which is an active element, and
Intangible property rights granted by law to of some or all of the interconnections of
owners of intellectual creations such as an integrated circuit, or such a three-
inventions, designs, signs, and names used in dimensional disposition prepared for
commerce, and literary and artistic Works. an integrated circuit intended for
manufacture [Sec 112.3, RA 8293].
2. Intellectual Property Rights under h. Protection of undisclosed
the Intellectual Property Code (RA information – refers to information
8293) which:
a. Is a secret in a sense that it is
not, as a body or in the precise
These include the following: configuration and assembly of
a. Copyright and related rights – components, generally known
confined to literary and artistic works among or readily accessible to
which are original creations in the persons within the circles that
literary or artistic domain [Ching v. normally deal with the kind of
Salinas Jr., G.R. No. 161295 (2005)]. information in question;
b. Trademarks and service marks – any b. Has commercial value because
visible sign capable of distinguishing it is a secret;
the goods or services of an enterprise c. Has been subject to
[Sec. 121.1, RA 8293]. reasonable steps under the
c. Geographic indications – identifies a circumstances, by the person
good originating in the territory of a d. lawfully in control of the
TRIPS member, or a region or locality information, to keep it secret
in that territory, where a given quality, [Art. 9, TRIPS].
reputation, or other characteristic of the
good is essentially attributable to its
3. Differences between copyright,
geographical origin [Art. 22, TRIPS].
d. Industrial designs – any composition trademarks, and patents
of lines or colors or any three-
dimensional form, whether or not Scope
associated with lines or colors; Patents Any technical solution of a
provided, that such composition or problem in any field of human
form gives a special appearance to and activity which is new,
can serve as pattern for an industrial involves an inventive step
product or handicraft [Sec. 112, RA and is industrially applicable
8293]. [Sec. 21, RA 8293; Kho v.
e. Patents – any technical solution of a Court of Appeals, 379 SCRA
problem in any field of human activity 410 (2002)].
which is new, involves an inventive Trademarks Any visible sign capable of
distinguishing the goods
Page 256 of 494
Scope ** “At any time during the subsistence of the
(trademark) or services copyright, the owner of the copyright or of any
(service mark) of an exclusive right in the work may, for the purpose
enterprise from that of of completing the records of the National
another and shall include a Library and the Supreme Court Library, register
stamped or marked and deposit with them… two (2) complete
container of goods [Sec. copies or reproductions of the work…
121.1, RA 8293]. Provided, That only works in the field of law
shall be deposited with the Supreme Court
In relation thereto, a trade Library. Such registration and deposit is not a
name means the name or condition of copyright protection." [Sec. 191,
designation identifying or RA 8293 as amended by RA 10372]
distinguishing an enterprise.
Copyrights Literary and artistic Works 4. Jurisdiction of the Intellectual
which are original intellectual Property Office
creations in the literary and
artistic domain protected The threshold in administrative complaints for
from the moment of their violations of laws involving intellectual property
creation [Sec. 172.1, RA rights is two hundred thousand pesos
8293]. (P200,000) or more in total damages claimed.
Where Registered
Patents Intellectual Property Office
Trademarks Intellectual Property Office B. Patents
Copyrights The National Library** [Sec.
191, RA 8293]; Bureau of A patent is an exclusive right granted for an
Copyright and Related invention, which is a product or a process that
Rights of the IPO provides, in general, a new way of doing
something, or offers a new technical solution to
When Protection Starts
a problem. To get a patent, technical
Patents Upon the issuance of the
information about the invention must be
letters of patent by the IPO
disclosed to the public in a patent application
Trademarks Upon issuance of the [World Intellectual Property Organization].
trademark certificate
Copyrights Upon creation 1. Patentable Inventions
Term of Protection
Patents 20 years from the date of A patentable invention is any technical
filing of the patent application solution of a problem in any field of human
Trademarks 10 years from the date of activity which is new, involves an inventive step
registration and is industrially applicable. It may be, or may
Copyrights Generally up to 50 years relate to, a product, or process, or an
after the death of the author improvement of any of the foregoing [Sec. 21,
Mode of Acquisition RA 8293].
Patents Through registration in
accordance with the law Standards or requirements for registrability
[Sec. 50, RA 8293]. 1. It must be novel;
Trademarks Through registration, 2. It must be inventive; and
although well-known marks 3. It must be industrially applicable
are protected even without
[Sec. 122, RA 8293]. a. Novelty
Copyrights Through mere creation [Sec.
172.2, RA 8293]. An invention shall not be considered new if it
forms part of a prior art [Sec. 23, RA 8293].
Page 257 of 494

Prior art shall consist of: new product that employs at least one
1. Everything which has been made new reactant [Sec. 26.2, RA 8293 as
available to the public anywhere in the amended by RA 9502].
world, before the filing date or the
priority date of the application claiming Test of Obviousness
the invention [Sec. 24.1, RA 8293]; If any person possessing ordinary skill in the art
2. The whole contents of an earlier was able to draw the inferences and he
published Philippine application or constructs that the supposed inventor drew
application with an earlier priority date from prior art, then the latter did not really
of a different inventor. [Sec. 24.2, RA invent it.
8293].
c. Industrial Applicability
General Rule: When a work has already been
made available to the public, it shall be non- An invention that can be produced and used in
patentable for absence of novelty. any industry shall be industrially applicable
[Sec. 27, RA 8293].
Exception: The disclosure of the information
contained in the application during the 12 This means an invention is not merely
months preceding the filing date or the priority theoretical, but it also has a practical purpose.
date of the application shall not prejudice the If the invention is a product, it should be able to
applicant on the ground of novelty if such produce a product. If the invention is a process,
disclosure was made by: it should be able to lay out a process [WIPO].
1. the inventor;
2. a patent office that should not have
disclosed the information, and the
2. Non-Patentable Inventions
information was found in another
application by the same inventor or a The following shall be excluded from patent
third party; or protection:
3. a third party who obtained the 1. Discoveries, scientific theories, and
information directly or indirectly from mathematical methods, and in the case
the inventor [Sec. 25, RA 8293]. of drugs and medicines, the mere
discovery of a new form or new
b. Inventive Step property of a known substance which
does not result in the enhancement of
the known efficacy of that substance,
An invention involves an inventive step if,
or the mere discovery of any new
having regard to prior art, it is not obvious to a
property or new use for a known
person skilled in the art at the time of the filing
substance, or the mere use of a known
date or priority date of the application claiming
process unless such known process
the invention [Sec. 26.1, RA 8293, as amended
results in a new product that employs
by RA 9502].
at least one new reactant. Salts, esters,
ethers, polymorphs, metabolites, pure
Cheaper Medicines Act
form, particle size, isomers, mixtures of
In case of drugs and medicines, there is no
isomers, complexes, combinations,
inventive step if the invention results from:
and other derivatives of a known
1. The mere discovery of a new form or
substance shall be considered to be
new property of a known substance
the same substance, unless they differ
which does not result in enhancement
significantly in properties with regard to
of the known efficacy of that substance;
efficacy [Sec. 22.1, RA 8293 as
2. The mere discovery of any new
amended by RA 9502];
property or new use for a known
2. Schemes, rules and methods of
substance; or
performing mental acts, playing games
3. The mere use of a known process
or doing business, and programs for
unless such known process results in a
computers [Sec. 22.2, RA 8293];
Page 258 of 494
3. Methods for treatment of the human or c. Inventions Created Pursuant to a
animal body by surgery or therapy and Commission
diagnostic methods practiced on the
human or animal body. This provision Exception: Inventions created pursuant to
shall not apply to products and employment or a commissioned work:
composition for use in any of these 1. The person who commissions the
methods [Sec. 22.3, RA 8293]; work shall own the patent. [Sec. 30.1,
4. Plant varieties or animal breeds or RA 8293]
essentially biological process for the 2. The employer has the right to the
production of plants or animals. This patent if the invention is the result of the
provision shall not apply to micro- performance of the employee’s
organisms and non-biological and regularly assigned duties. [Sec. 30.2,
microbiological processes [Sec. 22.4, RA 8293].
RA 8293];
5. Aesthetic creations [Sec. 22.5, RA
d. Right of Priority
8293];
6. Anything which is contrary to public
An application for patent filed by any person
order or morality [Sec. 22.6, RA 8293].
who has previously applied for the same
invention in another country which by treaty,
3. Ownership of a Patent convention, or law affords similar privileges to
Filipino citizens, shall be considered as filed as
a. Right to a Patent of the date of filing the foreign application:
Provided, That:
General Rule: The right to a patent belongs to 1. the local application expressly claims
the inventor, his heirs, or assigns. When two or priority;
more persons have jointly made an invention, 2. it is filed within twelve (12) months
the right to a patent shall belong to them jointly. from the date the earliest foreign
[Sec. 28, RA 8293]. application was filed; and
3. a certified copy of the foreign
b. First-to-File Rule application together with an English
translation is filed within six (6) months
RA 8293 changed the basis of ownership of a from the date of filing in the
patent from First-to-Invent to First-to-File. Philippines.
If two or more persons have made the invention 4. Grounds for Cancellation of a
separately and independently of each other, Patent
the right to the patent shall belong to the person
who filed an application for such invention, or Any interested person may petition to cancel
where two or more applications are filed for the the patent or any claim thereof, or parts of the
same invention, to the applicant who has the claim, on any of the following grounds:
earliest filing date or, the earliest priority date. a. That what is claimed as the invention is
[Sec. 29, RA 8293] not new or patentable;
b. That the patent does not disclose the
The filing date of a patent application shall be invention in a manner sufficiently clear
the date of receipt by the Office of at least the and complete for it to be carried out by
following elements: any person skilled in the art; or
1. An express or implicit indication that a c. That the patent is contrary to public
Philippine patent is sought; order or morality [Sec. 61.1, RA 8293].
2. Information identifying the applicant;
and Where the grounds for cancellation relate to
3. Description of the invention and one (1) some of the claims or parts of the claim,
or more claims in Filipino or English
[Sec. 40.1, RA 8293].
Page 259 of 494
cancellation may be effected to such extent Patent owners shall also have the right to
only [Sec. 61.2, RA 8293]. assign, or transfer by succession the patent,
and to conclude licensing contracts for the
5. Remedy of the True and Actual same [Sec. 71.2, RA 8293].
Inventor
7. Limitations of Patent Rights
If a person referred to in Sec. 29, other than the
applicant, is declared by final court order or The owner of a patent has no right to prevent
decision as having the right to the patent, such third parties from performing, without his
person may, within three (3) months after the authorization, the acts referred to in Section 71
decision has become final: (see above) in the following circumstances:
1. Prosecute the application as his own
application in place of the applicant; 1. Owner’s Consent:
2. File a new patent application in respect a. Domestic Exhaustion – using
of the same invention; a patented product which has
3. Request that the application be been put on the market in the
refused; or Philippines by the owner of the
4. Seek cancellation of the patent, if one product, or with his express
has already been issued. [Sec. 67, RA consent, insofar as such use is
8293] performed after that product
has been so put on the said
If a person, who was deprived of the patent market;
without his consent or through fraud, is b. International Exhaustion – a
declared by final court order or decision to be drug or medicine has been
the true and actual inventor, the court shall: introduced anywhere else in
1. Order for his substitution as patentee; the world by the patent owner,
or or by any party authorized to
2. At the option of the true inventor, use the invention [Sec. 72.1,
cancel the patent; and RA 8293 as amended by RA
3. Award actual damages in his favor if 9502].
warranted by the circumstances [Sec 2. Parallel Importation – the right to
68, RA 8293] import the drugs and medicines shall
be available to any government agency
6. Rights Conferred by a Patent or any private third party; [Sec. 72.1,
RA 8293 as amended by RA 9502]
3. Non-commercial – where the act is
Where the subject matter of a patent is a
done privately and on a non-
product
commercial scale or for a non-
The patentee shall have the exclusive rights to
commercial purpose: Provided, That it
restrain, prohibit, and prevent any
does not significantly prejudice the
unauthorized person or entity from making,
economic interests of the owner of the
using, offering for sale, selling or importing that
patent; [Sec. 72.2, RA 8293 as
product. [Sec. 71.1.a, RA 8293].
amended by RA 9502]
4. Experimental Use – where the act
Where the subject matter of a patent is a
consists of making or using exclusively
process
for experimental use of the invention
The patentee shall have the exclusive rights to
for scientific purposes or educational
restrain, prevent or prohibit any unauthorized
purposes and such other activities
person or entity from using the process, and
directly related to such scientific or
from manufacturing, dealing in, using, selling or
educational experimental use; [Sec.
offering for sale, or importing any product
72.3, RA 8293 as amended by RA
obtained directly or indirectly from such
9502]
process [Sec. 71.1.b, RA 8293].
Page 260 of 494

5. Bolar Exception – in the case of drugs b. Use by Government
and medicines, where the act includes
testing, using, making or selling the A government agency or third person
invention including any data related authorized by the government may exploit the
thereto, solely for purposes reasonably invention even without agreement of the patent
related to the development and owner where:
submission of information and 1. The public interest, in particular,
issuance of approvals by government national security, nutrition, health or the
regulatory agencies required under any development of other sectors, as
law of the Philippines or of another determined by the appropriate agency
country that regulates the manufacture, of the government, so requires; [Sec.
construction, use or sale of any product 74.1(a), RA 8293]
[Sec. 72.4, RA 8293]. 2. A judicial or administrative body has
6. Individual Preparation of Medicine – determined that the manner of
where the act consists of the exploitation, by the owner of the patent
preparation for individual cases, in a or his licensee, is anti-competitive;
pharmacy or by a medical professional, [Sec. 74.1(b), RA 8293]
of a medicine in accordance with a 3. In the case of drugs and medicines,
medical shall apply after a drug or there is a national emergency or other
medicine has been introduced in the circumstance of extreme urgency
Philippines or anywhere else in the requiring the use of the invention; [Sec.
world by the patent owner, or by any 74.1(c), RA 8293 as amended by RA
party authorized to use the invention: 9502]
Provided, further, That the right to 4. In the case of drugs and medicines,
import the drugs and medicines there is public non-commercial use of
contemplated in this section shall be the patent by the patentee, without
available to any government agency or satisfactory reason; [Sec. 74.1(d), RA
any private third party; [Sec. 72.5, RA 8293 as amended by RA 9502]
8293 as amended by RA 9502] 5. In the case of drugs and medicines, the
7. Usage in Vessels – where the demand for the patented article in the
invention is used in any ship, vessel, Philippines is not being met to an
aircraft, or land vehicle of any other adequate extent and on reasonable
country entering the territory of the terms, as determined by the Secretary
Philippines temporarily or accidentally: of the Department of Health. [Sec.
Provided, That such invention is used 74.1(e), RA 8293, as amended by RA
exclusively for the needs of the ship, 9502]
vessel, aircraft, or land vehicle and not
used for the manufacturing of anything c. Compulsory Licensing
to be sold within the Philippines. [Sec.
72.6, RA 8293 as amended by RA The Director General of the IPO may grant a
9502] compulsory license to exploit an invention even
without the agreement of the owner (see Letter
a. Prior User b on page 9).
Any prior user, who, in good faith was using the 8. Patent Infringement
invention or has undertaken serious
preparations to use the invention in his Patent infringement is the making, using,
enterprise or business, before the filing date or offering for sale, selling, or importing a
priority date of the application on which a patented product or a product obtained directly
patent is granted, shall have the right to or indirectly from a patented process, or the
continue the use thereof as envisaged in such use of a patented process without the
preparations within the territory where the authorization of the patentee [Sec 76.1, RA
patent produces its effect [Sec. 73.1, RA 8293]. 8293].
Page 261 of 494
Anyone who actively induces the infringement that all three components of such equivalency
of a patent or provides the infringer with a test are met [Smith Klein Beckman Corp. v. CA,
component of a patented product or of a G. R. No. 126627 (2003)].
product produced because of a patented
process knowing it to be especially adopted for b. Defenses in Action for Infringement
infringing the patented invention and not
suitable for substantial non-infringing use shall Invalidity of Patent
be liable as a contributory infringer and shall be The defendant may show the invalidity of the
jointly and severally liable with the infringer patent, or any claim thereof, on any of the
[Sec. 76.6, RA 8293]. grounds on which a petition of cancellation can
be brought under Section 61 (see Number 4 on
a. Tests in Patent Infringement page 4) [Sec. 81, RA 8293].
Literal Infringement Doctrine of File Wrapper Estoppel

In using literal infringement as a test, resort The patentee is precluded from claiming as
must be had in the first instance to the words of part of a patented product that which he had to
the claim. excise or modify in order to avoid patent office
rejection, and he may omit any additions he
To determine whether the particular item falls was compelled to add by patent office
within the literal meaning of the patent claims, regulations [Advance Transformer Co. v.
the court must juxtapose the claims of the Levinson, 837 F.2d 1081 (1988)].
patent and the accused product within the
overall context of the claims and specifications,
to determine whether there is exact identity of 9. Licensing
all material elements [Godinez v. CA, G.R. No.
L-97343 (1993)]. a. Voluntary
The grant by the patent owner to a third person
The test is satisfied if the following are met: of the right to exploit a patent invention.
1. Exactness Rule – the item being sold,
made, or used conforms exactly to the Voluntary licensing encourages the transfer
patent claim of another and dissemination of technology, prevent or
2. Addition Rule – one makes, uses, or control practices and conditions that may in
sells an item that has all the elements particular cases constitute an abuse of
of the patent claim of another plus other intellectual property rights having an adverse
elements effect on competition and trade [Sec 85, RA
8293].
Doctrine of Equivalents
Under the doctrine of equivalents, an To this end, all voluntary technology transfer
infringement occurs when a device: arrangements or licensing contract shall:
a. Appropriates a prior invention by 1. Not contain any of the prohibited
incorporating its innovative concept, clauses for voluntary license contracts
albeit with some modification and under Sec. 87.
change; 2. Contain all of the mandatory provisions
b. Performs substantially the same for voluntary license contracts under
function in substantially the same way; Sec. 88.
and 3. Be approved and registered with the
c. Achieves substantially the same result Documentation, Information and
[Godinez v. CA, G.R. No. L-97343 Technology Transfer Bureau of the
(1993)]. IPOPHL as an exceptional case under
Sec. 91, but only if the agreement fails
The doctrine of equivalents thus requires to comply with Sec. 87 and 88.
satisfaction of the function-means-and-result
test, the patentee having the burden to show
Page 262 of 494

Mandatory Provisions inventions or improvements that may
1. That the laws of the Philippines shall be obtained through the use of the
govern the interpretation of the same licensed technology;
and in the event of litigation, the venue 7. Those that require payment of royalties
shall be the proper court in the place to the owners of patents for patents
where the licensee has its principal which are not used;
office; 8. Those that prohibit the licensee to
2. Continued access to improvements in export the licensed product unless
techniques and processes related to justified for the protection of the
the technology shall be made available legitimate interest of the licensor such
during the period of the technology as exports to countries where exclusive
transfer arrangement. licenses to manufacture and/or
3. In the event the technology transfer distribute the licensed product(s) have
arrangement shall provide for already been granted;
arbitration, the Procedure of Arbitration 9. Those which restrict the use of the
of the Arbitration Law of the Philippines technology supplied after the expiration
or the Arbitration Rules of the United of the technology transfer
Nations Commission on International arrangement, except in cases of early
Trade Law (UNCITRAL) or the Rules of termination of the technology transfer
Conciliation and Arbitration of the arrangement due to reason(s)
International Chamber of Commerce attributable to the licensee;
(ICC) shall apply and the venue of 10. Those which require payments for
arbitration shall be the Philippines or patents and other industrial property
any neutral country; rights after their expiration, termination
4. The Philippine taxes on all payments arrangement;
relating to the technology transfer 11. Those which require that the
arrangement shall be borne by the technology recipient shall not contest
licensor [Sec. 88, RA 8293]. the validity of any of the patents of the
technology supplier;
Prohibited Clauses 12. Those which restrict the research and
1. Those which impose upon the licensee development activities of the licensee
the obligation to acquire from a specific designed to absorb and adapt the
source capital goods, intermediate transferred technology to local
products, raw materials, and other conditions or to initiate research and
technologies, or of permanently development programs in connection
employing personnel indicated by the with new products, processes or
licensor; equipment;
2. Those pursuant to which the licensor 13. Those which prevent the licensee from
reserves the right to fix the sale or adapting the imported technology to
resale prices of the products local conditions, or introducing
manufactured on the basis of the innovation to it, as long as it does not
license; impair the quality standards prescribed
3. Those that contain restrictions by the licensor;
regarding the volume and structure of 14. Those which exempt the licensor for
production; liability for non-fulfillment of his
4. Those that prohibit the use of responsibilities under the technology
competitive technologies in a non- transfer arrangement and/or liability
exclusive technology transfer arising from third party suits brought
agreement; about by the use of the licensed
5. Those that establish a full or partial product or the licensed technology;
purchase option in favor of the licensor; 15. Other clauses with equivalent effects
6. Those that obligate the licensee to [Sec. 87, RA 8293].
transfer for free to the licensor the
Page 263 of 494

Rights of Licensor of the Department of Health; [Sec.
1. Grant further licenses to third persons; 93.6, RA 8293 as amended by RA
2. Exploit the subject matter of the 9502]
technology transfer agreement [Sec. 7. When semi-conductor technology is for
89, RA 8293]. non-commercial use or to remedy anti-
competitive practices [Sec. 96, RA
Rights of Licensee 8293].
1. Exploit the subject matter of the 8. If the invention protected by a patent,
technology transfer agreement during hereafter referred to as the "second
the whole term of the agreement [Sec. patent," within the country cannot be
90, RA 8293]. worked without infringing another
patent, hereafter referred to as the "first
b. Compulsory patent," granted on a prior application
The Director General of the Intellectual or benefiting from an earlier priority, a
Property Office may grant a license to exploit a compulsory license may be granted to
patented invention, even without the the owner of the second patent to the
agreement of the patent owner, in favor of any extent necessary for the working of his
person who has shown his capability to exploit invention, subject to certain conditions;
the invention, under any of the following [Sec. 97, RA 8293]
circumstances: 9. Manufacture and export of drugs and
1. National emergency or other medicines to any country having
circumstances of extreme urgency; insufficient or no manufacturing
[Sec. 93.1, RA 8293 as amended by capacity in the pharmaceutical sector
RA 9502] to address public health problems:
2. Where the public interest, in particular, Provided, That, a compulsory license
national security, nutrition, health or the has been granted by such country or
development of other vital sectors of such country has, by notification or
the national economy as determined by otherwise, allowed importation into its
the appropriate agency of the jurisdiction of the patented drugs and
Government, so requires; [Sec. 93.2, medicines from the Philippines in
RA 8293 as amended by RA 9502] compliance with the TRIPS
3. Where a judicial or administrative body Agreement. [Sec. 93-A.2, RA 8293 as
has determined that the manner of amended by RA 9502]
exploitation by the owner of the patent
or his licensee is anti-competitive; Terms and Conditions of a Compulsory
[Sec. 93.3, RA 8293 as amended by License
RA 9502] 1. The basic terms and conditions
4. In case of public non-commercial use including the rate of royalties shall be
of the patent by the patentee, without fixed by the Director of Legal Affairs;
satisfactory reason; [Sec. 93.4, RA 2. The scope and duration of the license
8293 as amended by RA 9502] shall be limited to its purpose;
5. If the patented invention is not being 3. The license shall be non-exclusive;
worked in the Philippines on a 4. The license shall be non-assignable,
commercial scale, although capable of except with that part of the enterprise
being worked, without satisfactory or business with which the invention is
reason: Provided, That the importation being exploited;
of the patented article shall constitute 5. Use of the subject matter shall be
working or using the patent; [Sec. 93.5, devoted predominantly for the supply
RA 8293 as amended by RA 9502] of the Philippine market, but if the
6. Where the demand for patented drugs ground for approval was the anti-
and medicines is not being met to an competitive practice of the patentee,
adequate extent and on reasonable then this limitation shall not apply;
terms, as determined by the Secretary
Page 264 of 494

6. The license may be terminated upon a. Definitions
proper showing that the circumstances
that led to its grant ceased to exist and Marks
are unlikely to recur; Any visible sign capable of distinguishing the
7. The patentee shall be paid adequate goods (trademark) or services (service mark)
remuneration for the grant or of an enterprise and shall include a stamped or
authorization, but if his practices are marked container of goods [Sec. 121.1, RA
determined to be anti-competitive, then 8293].
the need to correct such will be taken
into account in fixing the amount [Sec. Trademark
100, RA 8293]. Any visible sign which is adopted and used to
identify the source or origin of goods; and
10. Assignment and Transmission of capable of distinguishing them from goods
Rights emanating from a competitor.
The following are the functions of a trademark:

Inventions and any right, title or interest in and
To point out distinctly the origin or ownership of
to patents and inventions covered thereby,
the goods and to which it is affixed;
may be assigned or transmitted by inheritance
To secure him, who has been instrumental in
or bequest or may be the subject of a license
bringing into the market a superior article of
contract [Sec. 103.2, RA 8293].
merchandise, the fruit of his industry and skill;
To assure the public that they are producing
An assignment may be of:
the genuine article;
1. The entire right, title, or interest in and
To prevent fraud and imposition; and
to the patent and the invention covered
To protect the manufacturer against
thereby, or
substitution and sale of an inferior and different
2. An undivided share of the entire patent
article as its product [Mirpuri v. CA, G.R. No.
and invention, in which event the
114508 (1999)].
parties become joint owners thereof.
Service Mark
An assignment may also be limited to a
Any visible sign capable of distinguishing the
specified territory [Sec. 104, RA 8293].
services of an enterprise from the service of
other enterprises.
Rights of Joint Owners
If two or more persons jointly own a patent and
Collective Marks
the invention covered thereby, each joint owner
Any visible sign designated as such in the
shall be entitled to personally make, use, sell,
application for registration and capable of
or import the invention for his own profit.
distinguishing the origin or any other common
characteristic, including the quality of goods or
However, neither of the joint owners shall be
services of different enterprises which use the
entitled to grant licenses or to assign his right,
sign under the control of the registered owner
title or interest or part thereof without the
of the collective mark [Sec. 121.2, RA 8293].
consent of the other owner or owners, or
without proportionally dividing the proceeds
Trade Name
with such other owner or owners. [Sec. 107, RA
The name or designation identifying or
8293]
distinguishing an enterprise [Sec. 121.3, RA
8293].
C. Trademarks
Any individual name or surname, firm name,
1. Marks vs. Collective Marks vs. device or word used by manufacturers,
Trade Names industrialists, merchants, and others to identify
their businesses, vocations or occupations
Page 265 of 494

[Converse Rubber Corp. v. Universal Rubber These must remain in the public domain and
Products, Inc., G.R. No. L-27906 (1987)]. can never be registered as a trademark.
Examples: “SUGAR” for refined sugar, “KAPE”
b. Trademark/Service Mark vs. Trade for instant coffee, “WATER” for bottled water.
Name (Under the IP Code)
Descriptive Marks
Consists exclusively of signs or of indications
Trademark or Trade Name that may serve in trade to designate the kind,
Service Mark quality, quantity, intended purpose, value,
geographical origin, time or production of the
Basis of Ownership goods or rendering of the services, or other
characteristics of the goods or services [Sec.
Registration Prior use in 123(j), RA 8293].
Philippine
commerce These are words that merely describe the
product or service or refer to their quality or
When Protected characteristic.
Upon registration A trade name may General Rule: Descriptive marks are not
be protected even if entitled to protection and are too weak to
unregistered function as a trademark.
Remedies
Exception: Doctrine of Secondary meaning.
A trademark or A trade name owner A word or phrase originally incapable of
service mark owner only has civil and exclusive appropriation with reference to an
can avail of administrative article on the market, because geographically
administrative, civil, remedies or otherwise descriptive, might nevertheless
and criminal have been used so long and so exclusively by
remedies one producer with reference to his article that,
in that trade and to that branch of the
Assignment purchasing public, the word or phrase has
come to mean that the article was his product
A trademark or A trade name can [Arce Sons v. Selecta Biscuits, G.R. No. L-
service mark can be only be assigned 14761 (1961)].
assigned with the business
independent of Example: “YELLOW PAGES” for telephone
business directory having yellow pages.
Suggestive Marks
c. Spectrum of Distinctiveness Marks that hint or suggest the nature or quality
of the good or service without directly
Generic Marks describing it. They are “subtly descriptive” and
Generic Marks are those which constitute the are entitled to protection despite lack of
common descriptive name of an article or distinctiveness.
substance, or comprise the genus of which the
particular product is a species, or are Example: “JAGUAR” for automobile.
commonly used as the name or description of
a kind of goods, or imply reference to every Arbitrary Marks
member of a genus and the exclusion of Common words used as marks but are
individuating characters, or refer to the basic unrelated to the good or service they represent.
nature of the wares or services provided rather They neither describe nor suggest the
than to the more idiosyncratic characteristics of characteristic of the goods or service, though
a particular product. [Societe Des Produits
Nestle v. CA, G.R. No. 112012, 2001].
Page 266 of 494
they are considered highly distinctive for owner shall be excused. However, non-use
purposes of registration. due to lack of funds shall not excuse non-use
of a mark [Sec. 152.1, RA 8293].
Example: “APPLE” for electronic products. The following shall not be grounds for
cancellation or removal of a mark:
Fanciful or “Coined” Marks 1. Use which does not alter its distinctive
These are invented or “coined” words that do character though the use is different from
not have any meaning and are made solely for the form in which it is registered [Sec.
the purpose of the mark. They are considered 152.2, RA 8293].
“strong” marks for purposes of registration and 2. Use of a mark in connection with one or
protection for being inherently distinctive. more of the goods/services belonging to
the class in which the mark is registered
Example: “KODAK” for camera. [Sec. 152.3, RA 8293].
3. Use of the mark by a company related
2. Acquisition of Ownership of Mark to the applicant or registrant [Sec. 152.4,
RA 8293].
a. Concept of actual use 4. Use of the mark by a person controlled
by the registrant [Sec. 152.4, RA 8293].
Actual use pertains to the actual use of the
mark in local (Philippine) commerce and trade Note: The use of a mark by a company related
[Philip Morris v. Fortune Tobacco, G.R. No. with or controlled by the registrant or applicant
158589 (2006)]. shall inure to the latter's benefit: Provided, that
such mark is not used in such manner as to
Prior Use of a Mark as a Requirement deceive the public [Sec.152.4, RA 8293].
While RA 8293 no longer requires prior use
before filing the application, it still requires use b. Effect of registration
of the mark after filing, registration and
renewal. General Rule: The owner of a registered mark
shall have the exclusive right to prevent all third
Before the IP Code parties not having the owner’s consent from
Under the old trademark law or R.A. 166, actual using in the course of trade identical or similar
commercial use of a trademark in the signs or containers for goods or services which
Philippines was required prior to its registration are identical or similar to those in respect of
[Sec. 2-A, RA 166]. which the trademark is registered where such
use would result in a likelihood of confusion.
Under the IP Code In case of the use of an identical sign for
RA 8293 no longer requires prior use before identical goods or services, a likelihood of
filing the application (i.e., it shifted to an intent confusion shall be presumed [Sec. 147.1, RA
to use system). However, the law still requires 8293].
use of the mark after filing.
Exception: In cases of importation of drugs and
To emphasize, following the ruling in Zuneca medicines allowed under Section 72.1 of this
Pharmaceutical v. Natrapharm [G.R. No. Act (see Number 7 on page 5) and of off-patent
211850 (2020)], for marks that are first used drugs and medicines, third parties can import
and/or registered after the effectivity of the IP the same even without the owner’s consent,
Code, ownership is no longer dependent on the provided that:
fact of prior use in light of the adoption of the 1. Said drugs and medicines bear the
first-to-file rule and the rule that ownership is registered marks
acquired through registration. 2. The registered marks have not been
tampered, unlawfully modified, or infringed
Non-Use of Mark; When Excused upon [Sec. 147.1, RA 8293 as amended by
Non-use caused by circumstances arising RA 9502].
independently of the will of the trademark
Page 267 of 494

Registration is a prerequisite before one can Section 3, and who previously duly filed an
file an action for trademark infringement [Sec. application for registration of the same mark in
147.1, RA 8293]. one of those countries, shall be considered as
filed as of the day the application was first filed
The exclusive right of the owner of a well- in the foreign country (Provided, the Philippine
known mark defined in Subsection 123.1(e) application is filed within 6 months from the
(see Letter c on page 17) which is registered in filing of the foreign application) [Sec. 131.1, RA
the Philippines, shall extend to goods and 8293].
services which are not similar to those in
respect of which the mark is registered: No registration of a mark in the Philippines by
Provided, That use of that mark in relation to a person described in this section shall be
those goods or services would indicate a granted until such mark has been registered in
connection between those goods or services the country of origin of the applicant [Sec.
and the owner of the registered mark: Provided 131.2, RA 8293].
further, That the interests of the owner of the
registered mark are likely to be damaged by Note: Any person who is a national or who is
such use [Sec. 147.2, RA 8293]. domiciled or has a real and effective industrial
establishment in a country which is a party to
c. Acquisition any convention, treaty or agreement relating to
intellectual property rights or the repression of
General Rule: To acquire rights in a mark, unfair competition, to which the Philippines is
registration is required [Sec. 122, RA 8293]. also a party, or extends reciprocal rights to
nationals of the Philippines by law, shall be
Exception: Well-known marks are protected entitled to benefits to the extent necessary to
even without registration. give effect to any provision of such convention,
treaty or reciprocal law, in addition to the rights
Note: However, when the well-known mark is to which any owner of an intellectual property
not registered, its protection is limited, as it only right is otherwise entitled by this Act [Sec. 3,
prevents the registration of confusingly similar RA 8293].
marks that are used for identical or similar
goods or services [Sec. 123.1(e), RA 8293]. Significance of Priority Right
A Philippine application filed by another
On Good Faith applicant after the priority date but earlier than
Being the first-to-file registrant in good faith the foreign applicant’s actual filing may be
allows the registrant to acquire all the rights in refused registration if it is identical to the mark
a mark. with a priority date [Agpalo, The Law on
Trademark, Infringement and Unfair
When there are no grounds for cancellation - Competition (2000)].
especially the registration being obtained in
bad faith or contrary to the provisions of the IP 3. Acquisition of Ownership of Trade
Code, which render the registration void - the Name
first-to-file registrant acquires all the rights in a
mark. The ownership of a trade name is acquired
through adoption and use.
In the same vein, prior users in good faith are
also protected in the sense that they will not be Such names shall be protected, even prior to
made liable for trademark infringement even if or without registration, against any unlawful act
they are using a mark that was subsequently committed by third parties [Sec. 165.2 (a), RA
registered by another person. 8293].
Priority Right Any subsequent use of the trade name by a

An application for registration of a mark filed in third party, whether as a trade name or a mark
the Philippines by a person referred to in or collective mark, or any such use of a similar
Page 268 of 494
trade name or mark, likely to mislead the identical or similar goods or services;
public, shall be deemed unlawful [Sec. 165.2 [Sec. 123.1(e), RA 8293]
(b), RA 8293]. f. Is identical with, or confusingly similar
A name or designation may not be used as a to, or constitutes a translation of a well-
trade name: known mark which is registered in the
1. If by its nature or the use to which such Philippines, and used for goods or
name or designation may be put, it is services which are not similar; [Sec.
contrary to public order or morals; and 123.1(f), RA 8293]
2. If, in particular, it is liable to deceive g. Likely to mislead the public, particularly
trade circles or the public as to the nature as to the nature, quality, characteristics
of the enterprise identified by that name or geographical origin of the goods or
[Sec. 165.1, RA 8293]. services; [Sec. 123.1(g), RA 8293]
h. Consists exclusively of signs that are
Any change in the ownership of a trade name generic for the goods or services that
shall be made with the transfer of the enterprise they seek to identify; [Sec. 123.1(h),
or part thereof identified by that name [Sec. RA 8293]
165.4, RA 8293]. i. Consists exclusively of signs or of
indications that have become
4. Non-Registrable Marks customary or usual to designate the
goods or services in everyday
A mark cannot be registered if it: language or in a bona fide and
a. Consists of immoral, deceptive or established trade practice; [Sec.
scandalous matter, or matter which 123.1(i), RA 8293]
may disparage or falsely suggest a j. Consists exclusively of signs or of
connection with persons, living or indications that may serve in trade to
dead, institutions, beliefs, or national designate the kind, quality, quantity,
symbols, or bring them into contempt intended purpose, value, geographical
or disrepute; [Sec. 123.1(a), RA 8293] origin, time or production of the goods
b. Consists of flags, coat of arms or other or rendering of the services, or other
insignia of the Philippines or any characteristics of the goods or
foreign country; [Sec. 123.1(b), RA services; [Sec. 123.1(j), RA 8293]
8293] k. Consists of shapes that may be
c. Consists of a name, portrait or necessitated by technical factors or by
signature identifying a particular living the nature of the goods themselves or
individual except by his written factors that affect their intrinsic value;
consent, or of a deceased President of [Sec. 123.1(k), RA 8293]
the Philippines, during the life of his l. Consists of color alone, unless defined
widow, except by written consent of the by a given form; [Sec. 123.1(l), RA
widow; [Sec. 123.1(c), RA 8293] 8293]
d. Is identical with a registered mark of m. Is contrary to public order or morality.
another or a mark with an earlier filing [Sec. 123.1(m), RA 8293]
or priority date, in respect of:
i. The same goods or services, or Other instances when a mark may be
ii. Closely related goods or registered:
services, or 1. When it is part of a composite mark,
iii. If it nearly resembles such a though there should be a disclaimer
mark as to be likely to deceive and the person who registers them will
or cause confusion; [Sec. not acquire ownership thereto;
123.1(d), RA 8293] 2. If they are contractions of or coined
e. Is identical with, or confusingly similar from generic and descriptive terms;
to, or constitutes a translation of a well- 3. If they are used in a fanciful or arbitrary
known mark, whether or not registered manner;
in the Philippines, and used for
Page 269 of 494

4. If the mark falls under the Doctrine of Although “sakura” refers to the Japanese
Secondary Meaning. flowering cherry and is, therefore, of a generic
nature, such mark did not identify Kensonic's
Doctrine of Secondary Meaning goods unlike the mark in Asia Brewery, Inc., v.
Secondary meaning is acquired when a Court of Appeals. Kensonic's DVD or VCD
descriptive mark or a mark that may serve in players and other products could not be
trade that consists of a shape or color becomes identified with cherry blossoms. Hence, the
distinctive because of its exclusive and mark can be appropriated. [Kensonic, Inc. v.
continuous use in Philippine commerce. Uni-Line Multi Resources, Inc., G.R. Nos.
211820-21 and 211834-35 (2018)]
A word or phrase originally incapable of
exclusive appropriation, might have been used 5. Test to Determine Confusing
so long and so exclusively by one producer Similarity Between Marks
with reference to his article that, in that trade
and to that branch of the purchasing public, the Dominancy Test
word or phrase has come to mean that the
The dominancy test considers the dominant
article was his product. [Ang v. Teodoro, G.R. features in the competing marks in determining
No. L-48226 (1942)]
whether they are confusingly similar.
Disclaimers
Under the dominancy test:
The Office may allow or require the applicant to
• Greater weight is given to the similarity
disclaim an unregistrable component of an
of the appearance of the product
otherwise registrable mark but such disclaimer
arising from the adoption of the
shall not prejudice or affect:
dominant features of the registered
a. The applicant’s or owner’s rights then
mark.
existing or thereafter arising in the
• Minor differences between the
disclaimed matter; nor
registered mark and the mark in
b. The applicant’s or owner’s right on
question are disregarded.
another application of later date if the
• The aural and visual impressions
disclaimed matter became distinctive
created by the marks in the public mind
of the applicant’s or owner’s goods,
are considered.
business or services. [Sec. 126]
• Little weight is given to factors like
prices, quality, sales outlets and
The basic purpose of disclaimers is to make of
market segments. [McDonald’s
record, that a significant element of a
Corporation v. L.C. Big Mak Burger,
composite mark is not being exclusively
Inc., et al., G.R. No. 143993 (2004)]
appropriated by itself apart from the composite.
[Rule 608, Rule on Trademarks]
It is now the controlling test, as the holistic test
has been abandoned since the case of Kolin
Disclaimed Words
Electronics Co., Inc. v. Kolin Philippines
Words in a mark that are not being claimed for
International, Inc. [G.R. No. 228165 (2021)].
exclusive use, including:
1. Generic terms;
The case of Emzee Foods, Inc. v. Elarfoods,
2. Descriptive words; and
Inc.
3. Those that do not function as part of the
Applying the dominancy test to the case at bar,
trademark. [Rule 608, Rule on
it is very obvious that the petitioner's marks
Trademarks].
"ELARZ LECHON" and "ELAR LECHON" bear
an indubitable likeness with respondent's
The case of Kensonic, Inc. v. Uni-Line Multi
"ELARS LECHON."
Resources, Inc.
Can the word “sakura,” a generic word for
As can easily be seen, both marks use the
cherry blossom flowers, be registered for
essential and dominant word "ELAR". The only
trademark for non-flowers? Yes.
difference between the petitioner's mark from
Page 270 of 494
that of respondent's are the last letters Z and 1. The duration, extent and geographical
S, respectively. area of any use of the mark;
However, the letters Z and S sound similar 2. The market share in the Philippines
when pronounced. Thus, both marks are not and other countries of the
only visually similar, but are phonetically and goods/services to which the mark
aurally similar as well. applies;
3. The degree of the inherent or acquired
To top it all off, both marks are used in selling distinction of the mark;
lechon products. Verily, there exists a high 4. The quality-image or reputation
likelihood that the consumers may conclude an acquired by the mark;
association or relation between the products. 5. The extent to which the mark has been
registered in the world;
Likewise, the uncanny resemblance between 6. The exclusivity of the registration
the marks may even lead purchasers to believe attained by the mark in the world;
that the petitioner and respondent are the 7. The extent of use of the mark in the
same entity. [Emzee Foods, Inc., v. Elarfoods, world;
Inc., G.R. No. 220558 (2021)] 8. The exclusivity of use in the world;
9. The commercial value attributed to the
6. Well-Known Marks mark in the world;
10. The record of successful protection of
A well-known mark is a mark which a the rights in the mark;
11. The outcome of litigations dealing with
competent authority of the Philippines has
designated to be well-known internationally the issue of whether the mar is well-
known; and
and in the Philippines, [Sec. 123.1(e), RA
8293]. 12. The presence or absence of identical
or similar test marks validly registered
"Competent authority" for purposes of or used on other similar goods or
services and owned by others [See
determining whether a mark is well-known,
means: Rule 103, Trademark Regulations of
2017].
a. The Court;
b. The Director General;
c. The Director of the Bureau of Legal Note: The determinants need not concur.
Affairs [Rule 101 (d), Trademark
Regulations of 2017]; b. Protection Extended to Well-Known
d. Any administrative agency or office Marks
vested with quasi-judicial or judicial
jurisdiction to hear and adjudicate any The owner of a well-known mark has the right
action to enforce the rights to a mark [Dy v. to be protected, whether or not the mark is
Koninklijke Philips Electronics, N.V. G.R. registered in the Philippines [Sec. 123.1(e), RA
No. 186088 (2017)]. 8293].
In determining whether a mark is well-known, c. Sec. 123.1 (e) vs. Sec. 123.1 (f)
account shall be taken of the knowledge of the
relevant sector of the public, rather than the If the well-known mark is registered or not
public at large, including knowledge in the registered in the Philippines, a mark cannot be
Philippines which has been obtained as a registered if it is identical with, or confusingly
result of the promotion of the mark [Sec. similar to, or constitutes a translation of an
123.1(e), RA 8293]. internationally well-known mark if used for
identical or similar goods or services [Sec.
a. Determinants 123.1(e), RA 8293].
Factors to determine whether a mark is well- If the well-known mark is registered in the
known: Philippines, a mark cannot be registered if it is
Page 271 of 494
identical with, or confusingly similar to, or a. When Such Rights Are Conferred
constitutes a translation of an internationally
well-known mark even if it is used for goods or The rights of the owner are conferred upon
services which are NOT similar to those with registration of the mark, and a mark is deemed
respect to which registration is applied [Sec. registered on the 31st day from the publication
123.1(f), RA 8293]. for purposes of opposition, provided no
opposition is filed:
Other persons or entities cannot use the 1. On the 31st day from the publication for
registered well-known mark even for unrelated purposes of opposition (if no opposition
goods, provided that: is filed)
1. The use of the mark in relation to those 2. On the date the decision or final order
goods or services would indicate a giving due course to the application
connection between those goods or becomes final and executory (if
services, and the owner of the opposition is filed) [See Rule 703,
registered mark; and Trademarks Regulations of 2017].
2. That the interests of the owner of the
registered mark are likely to be Certificate of Registration
damaged by such use [Sec. 123.1(f), A certificate of registration of a mark shall be
RA 8293]. prima facie evidence of:
1. The validity of the registration,
7. Rights Conferred by Registration 2. The registrant's ownership of the mark,
and
The owner of a registered mark shall have the 3. The registrant's exclusive right to use
exclusive right to prevent all third parties not the same in connection with the goods
having the owner's consent from using in the or services and those that are related
course of trade: thereto specified in the certificate [Sec.
a. Identical or similar signs or containers, 138, RA 8293].
b. For goods or services which are
identical or similar to those in respect Duration
of which the trademark is registered, A certificate of registration shall remain in force
c. Where such use would result in a for 10 years from registration and may be
likelihood of confusion. renewed for periods of 10 years at its expiration
upon payment of the prescribed fee and upon
Note: In case of the use of an identical sign for filing of a request [Sec. 145-146, RA 8293].
identical goods or services, a likelihood of
confusion shall be presumed [Sec. 147.1, RA b. Limitations on Such Right
8293 as amended by RA 9502].
Duration
Exception: In cases of importation of drugs and Except that, inasmuch as the registration of a
medicines allowed under Section 72.1 of this trademark could be renewed every 10 years,
Act (see Number 7 on page 5) and of off-patent provided a Declaration of Actual Use is timely
drugs and medicines, third parties can import submitted, a trademark could conceivably
the same even without the owner’s consent, remain registered forever.
provided that:
a. Said drugs and medicines bear the Territorial
registered marks While under the territoriality principle a mark
b. The registered marks have not been must be used in commerce in the Philippines to
tampered, unlawfully modified, or be entitled to protection, internationally well-
infringed upon [Sec. 147.1, RA 8293 as known marks are the exceptions to this rule
amended by RA 9502]. [Fredco Manufacturing Corporation v.
President and Fellows of Harvard College,
G.R. No. 185917 (2011)].
Fair Use
Page 272 of 494
The registration of the mark shall not confer on 1. becomes the generic name for
the registered owner the right to preclude third the goods or services, or
parties from using bona fide their names, 2. has been abandoned, or
addresses, pseudonyms, a geographical 3. has its registration obtained
name, or exact indications concerning the kind, fraudulently or contrary to the
quality, quantity, destination, value, place of provisions of RA 8293, or
origin, or time of production or of supply, of their 4. is being used by, or with the
goods or services; Provided That: permission of, the registrant so
Such use is confined to the purposes of mere as to misrepresent the source
identification or information; and of the goods or services on or
Such use cannot mislead the public as to the in connection with which the
source of the goods or services [Sec. 148, RA mark is used [Sec. 151.1 (b),
8293]. RA 8293].
c. At any time, by virtue of non-use
Prior User without legitimate reason for an
A registered mark shall have no effect against uninterrupted period of three (3) years
any person who, in good faith, before the filing or longer [Sec. 151.1 (c), RA 8293].
date or the priority date, was using the mark for
the purposes of his business or enterprise 9. Trademark Infringement
[Sec. 159.1, RA 8293].
The following shall be liable in a civil action for
Section 159.1, RA 8293, clearly contemplates infringement:
that a prior user in good faith may continue to a. Any person who shall, without the
use its mark even after the registration of the consent of the owner of the registered
mark by the first-to-file registrant in good faith, mark, use in commerce any
subject to the condition that any transfer or reproduction, counterfeit, copy, or
assignment of the mark by the prior user in colorable imitation of a registered mark
good faith should be made together with the or the same container or a dominant
enterprise or business or with that part of his feature thereof:
enterprise or business in which the mark is 1. In connection with the sale,
used. The mark cannot be transferred offering for sale, distribution,
independently of the enterprise and business advertising of any goods or
using it. [Zuneca Pharmaceutical v. services, including other
Natrapharm, G.R. No. 211850 (2020)] preparatory steps necessary to
carry out the sale of any goods
Non-Use or services on; or
Failure to file declaration of actual use 2. In connection with which such
automatically results in the denial of the use is likely to cause confusion,
registration or the cancellation of the or to cause mistake, or to
registration by operation of law [Sec. 124.2, RA deceive [Sec. 155.1, RA 8293].
8293]. b. Any person who shall, without the
consent of the owner of the registered
8. Cancellation of Registration mark:
1. Reproduce, counterfeit, copy
A petition to cancel a registration of a mark may or colorably imitate a registered
be filed with the Bureau of Legal Affairs by any mark or a dominant feature
person who believes that he is or will be thereof; and
damaged by the registration of a mark [Sec. 2. Apply such reproduction,
151.1, RA 8293]: counterfeit, copy or colorable
a. Within five (5) years from the date of imitation to labels, signs, prints,
the registration of the mark [Sec. 151.1 packages, wrappers,
(a), RA 8293]. receptacles, or
b. At any time, if the registered mark:
Page 273 of 494
advertisements, intended to be upon or in connection with such goods,
used in commerce: business or services;
a. In connection with the 4. The use or application of the infringing
sale, offering for sale, mark or trade name is likely to cause
distribution, or confusion or mistake or to deceive
advertising of goods or purchasers or others as to the goods or
services on; or services themselves or as to the
b. In connection with source or origin of such goods or
which such use is likely services or the identity of such
to cause confusion, or business;
to cause mistake, or to 5. It is without the consent of the
deceive [Sec. 155.2, trademark or trade name owner or the
RA 8293]. assignee thereof [Prosource
International, Inc. v. Horphag Research
Note: The infringement takes place at the Management S.A., G.R. No. 180073
moment any of the acts stated in Subsections (2009)].
155.1 or 155.2 are committed, regardless of
whether there is actual sale of goods or Of these, it is the element of likelihood of
services using the infringing material. confusion that is the gravamen of trademark
infringement [McDonald’s Corporation v. L.C.
A mere distributor, and not the owner, cannot Big Mak Burger, Inc., et al., G.R. No. 143993
assert any protection from trademark (2004)].
infringement as it had no right in the first place
to the registration of the disputed trademarks Whether a trademark causes confusion and is
[Superior Commercial Enterprises v. Kunnan likely to deceive the public hinges on
Enterprises, G.R. No. 169974 (2010)]. “colorable imitation” which has been defined
as "such similarity in form, content, words,
Under Sec. 159.1, RA 8293, only the manner sound, meaning, special arrangement or
of use by the prior user in good faith — that is, general appearance of the trademark or trade
the use of its mark tied to its current enterprise name in their overall presentation or in their
or business — is categorically mentioned as an essential and substantive and distinctive parts
exception to an action for infringement by the as would likely mislead or confuse persons in
trademark owner. [Zuneca Pharmaceutical v. the ordinary course of purchasing the genuine
Natrapharm, G.R. No. 211850 (2020)] article" [Mighty Corporation v. E. & J. Gallo
Winery, G.R. No. 154342 (2004)].
a. Elements of Trademark Infringement
Two types of confusion arise from the use of
1. The trademark being infringed is similar or colorable imitation marks, namely –
registered in the Intellectual Property 1. Confusion of goods (product
Office; however in infringement of trade confusion) and
name, the same need not be 2. Confusion of business (source or origin
registered; confusion).
2. The trademark or trade name is
reproduced, counterfeited, copied, or While there is confusion of goods when the
colorably imitated by the infringer; products are competing, confusion of business
3. The infringing mark or trade name is exists when the products are non-competing
used in connection with the sale, but related enough to produce confusion or
offering for sale, or advertising of any affiliation [McDonald’s Corporation v. L.C. Big
goods, business or services; or the Mak Burger, Inc., et al., G.R. No. 143993
infringing mark or trade name is (2004)].
applied to labels, signs, prints,
packages, wrappers, receptacles or Likelihood of confusion is admittedly a relative
advertisements intended to be used term, to be determined rigidly according to the
Page 274 of 494

particular (and sometimes peculiar) the acts have been committed with knowledge
circumstances of each case. In determining that such imitation is likely to cause confusion,
likelihood of confusion, the court must or to cause mistake, or to deceive.
consider:
1. The resemblance between the Such knowledge is presumed if:
trademarks; 1. The registrant gives notice that his
2. The similarity of the goods to which the mark is registered by displaying with
trademarks are attached; the mark the words “Registered Mark”
3. The likely effect on the purchaser; and or the letter R within a circle; or
4. The registrant’s express or implied 2. The defendant had otherwise actual
consent and other fair and equitable notice of the registration [Sec. 158, RA
considerations [Mighty Corporation v. 8293].
E. & J. Gallo Winery, G.R. No. 154342
(2004)]. d. Penalties
b. Doctrine of Natural Expansion of Independent of the civil and administrative

Business sanctions imposed by law, a criminal penalty of
imprisonment from two (2) years to five (5)
The protection to which the owner of a years and a fine ranging from Fifty thousand
trademark is entitled extends to cases in which pesos (P50,000) to Two hundred thousand
the use of by a junior appropriator of a pesos (P200,000), shall be imposed on any
trademark of trade name is likely to lead to a person who is found guilty of committing any of
confusion of source. the acts mentioned in:
• Section 155 (see Number 9 on page
As where prospective purchasers would be 16)
misled into thinking that the complaining party • Section 168 (see Number 10 on page
has extended his business into the field or is in 18); and
any way connected with the activities of the • Subsection 169.1 (on False
infringer; or when it forestalls the normal Designations of Origin; False
potential expansion of the business Description or Representation) [Arts.
[Dermaline v. Myra Pharmaceuticals, Inc., G.R. 188 and 189, Revised Penal Code;
No. 190065 (2010)]. Sec. 170, RA 8293].
It is the fact that the underlying goods and 10. Unfair Competition
services of both marks deal with inasal and
inasal-flavored products which ultimately fixes The following shall be guilty of unfair
the relations between such goods and competition, and shall be subject to an action
services. It is not unlikely that the average therefor:
buyer would be led into the assumption that the a. Any person who shall employ
curls are of petitioner and that the latter has deception or any other means contrary
ventured into snack manufacturing or, if not, to good faith, by which he shall pass off
that the petitioner has supplied the flavorings the goods manufactured by him or in
for respondent's product. Either way, the which he deals, or his business, or
reputation of petitioner would be taken services for those of the one having
advantage of and placed at the mercy of established such goodwill; or
respondent [Mang Inasal Philippines v. IFP b. Any person who shall commit any acts
Manufacturing Corporation, G.R. No. 221717 calculated to produce said result [Sec.
(2017)]. 168.2, RA 8293].
c. Requirement of Notice
The owner of the registered mark shall not be

entitled to recover profits or damages unless
Page 275 of 494
a. Particular Acts of Unfair Competition confusion of goods or business is a relative
concept, to be determined only according to
1. Selling one’s goods and giving them peculiar circumstances of each case. The
the general appearance of goods of element of intent to deceive and to defraud may
another manufacturer or dealer, either: be inferred from the similarity of the
a. As to the goods themselves or appearance of the goods as offered for sale to
in the wrapping of the the public. [also from McDonald’s Corporation
packages in which they are v. L.G. Big Mak Burger, Inc., et al., G.R. No.
contained, or the devices or 143993 (2004)]
words thereon; or
b. In any other feature of their Here, petitioners' product which is a medicated
appearance, which would be facial cream sold to the public is contained in
likely to influence purchasers to the same pink oval-shaped container which
believe that the goods offered had the mark "Chin Chun Su," as that of
are those of a manufacturer or respondent. While petitioners indicated in their
dealer, other than the actual product the manufacturer's name, the same
manufacturer or dealer [Sec. does not change the fact that it is confusingly
168.3(a), RA 8293]. similar to respondent's product in the eyes of
2. Clothing one’s goods with such the public.
appearance as shall deceive the public
and defraud another of his legitimate As aptly found by the appellate court, an
trade, or any subsequent vendor of ordinary purchaser would not normally inquire
such goods or any agent of any vendor about the manufacturer of the product.
engaged in selling such goods with a Petitioners' product and that solely distributed
like purpose [Sec. 168.3(a), RA 8293]. by respondent are similar in the following
3. Using any artifice, or device, or respects "1. both are medicated facial creams;
employing any other means calculated 2. both are contained in pink, oval-shaped
to induce the false belief that such containers; and 3. both contain the trademark
person is offering the services of "Chin Chun Su" x x x The similarities far
another who has identified such outweigh the differences. The general
services in the mind of the public [Sec. appearance of (petitioners') product is
168.3(b), RA 8293]. confusingly similar to (respondent)."
4. Making any false statement in the
course of trade or committing any other Verily, the acts complained of against
act contrary to good faith of a nature petitioners constituted the offense of Unfair
calculated to discredit the goods, Competition and probable cause exists to hold
business or services of another [Sec. them for trial, contrary to the findings of RTC
168.3(c), RA 8293]. Branch 46. [Elidad Kho and Violeta Kho v.
Summerville General Merchandising & Co.,
b. Elements of an Action for Unfair Inc., G.R. No. 213400 (2021)]
Competition
c. Who May File an Action for Unfair
1. Confusing similarity in the general Competition?
appearance of the goods, and
2. Intent to deceive the public and defraud A person who has identified in the mind of the
a competitor. public the goods, business, or services he
manufactures or deals in, whether or not a
The case of Kho v. Summerville General registered mark is employed
Merchandising & Co., Inc.
The confusing similarity may or may not result Ratio: Such person has a property right in the
from similarity in the marks, but may result from goodwill of the said goods, business or
other external factors in the packaging or services so identified, and said right shall be
presentation of the goods. Likelihood of
Page 276 of 494
protected in the same manner as other which refers to every literary, scientific and
property rights [Sec. 168.1, RA 8293]. artistic production [IPOPHL].
d. Trademark Infringement vs. Unfair Note: Sec. 173, RA 8293: Works are protected
Competition as new works: Provided however, that such
new work shall not:
The “true test”, therefore, of unfair competition ● affect the force of any subsisting
has thus been “whether the acts of the copyright upon the original works
defendant have the intent of deceiving or are employed or any part thereof; or
calculated to deceive the ordinary buyer ● be construed to imply any right to such
making his purchases under the ordinary use of the original works, or to secure
conditions of the particular trade to which the or extend copyright in such original
controversy relates” [San Miguel Pure Foods works.
Company, Inc., v. Foodsphere, G.R. No.
217781 (2018)]. Copyright refers to the right granted by a
statute to the proprietor of an intellectual
Trademark Unfair Competition production to its exclusive use and enjoyment
Infringement to the extent specified in the statute [Olaño v.
Unauthorized use of Passing off of one’s Lim Eng Co, G.R. 195835 (2016)].
a trademark or trade goods as those of
name another 1. Basic Principles
Fraudulent intent is Fraudulent intent is
unnecessary essential a. Works are protected by the sole fact
Prior registration of Registration is not of their creation.
the trademark is a necessary
prerequisite to the Principle of Automatic Protection
action Copyright is vested from the very moment of
[In and Out Burger v. Sehwani, G.R. No. creation irrespective of their mode or form of
179127 (2008); Prosource International, Inc. v. expression, as well as of their content, quality,
Horphag Research Management S.A., G.R. and purpose [Sec. 171.1-172.2, RA 8293].
No. 180073 (2009)].
The enjoyment and exercise of copyright,
The law on unfair competition is broader and including moral rights, shall not be the subject
more inclusive than the law on trademark of any formality; such enjoyment and such
infringement. exercise shall be independent of the existence
● The latter is more limited but it of protection in the country of origin of the work
recognizes a more exclusive right [Article 5(2), Berne Convention for the
derived from the trademark adoption Protection of Literary and Artistic Works].
and registration by the person whose
goods or business is first associated b. Protection extends only to the
with it. expression of an idea, not the idea
● Hence, even if one fails to establish his itself.
exclusive property right to a trademark,
he may still obtain relief on the ground No protection shall extend, under this law, to
of his competitor’s unfairness or fraud any idea, procedure, system method or
[Mighty Corporation v. E. & J. Gallo operation, concept, principle, discovery, or
Winery, G.R. No. 154342 (2004)]. mere data as such, even if they are expressed,
explained, illustrated or embodied in a work
D. Copyrights [Sec. 175, RA 8293].
Copyright is the legal protection extended to

the owner of the rights in an “original work”,
Page 277 of 494

c. The copyright is distinct from the 6. Musical compositions, with or without
property in the material object subject words;
to it. 7. Works of drawing, painting,
architecture, sculpture, engraving,
The copyright is distinct from the property in the lithography or other works of art;
material object subject to it. models or designs for works of art;
8. Original ornamental designs or models
Consequently: for articles of manufacture, whether or
1. The transfer or assignment of the not registrable as an industrial design,
copyright shall NOT itself constitute a and other works of applied art;
transfer of the material object 9. Illustrations, maps, plans, sketches,
2. The transfer or assignment of the sole charts and three-dimensional works
copy or of one or several copies of the relative to geography, topography,
work shall NOT imply transfer or architecture or science;
assignment of the copyright [Sec. 181, 10. Drawings or plastic works of a scientific
RA 8293]. or technical character;
11. Photographic works including works
d. Copyright, like other intellectual produced by a process analogous to
photography; lantern slides;
property rights, is a statutory right.
12. Audiovisual works and
cinematographic works and works
Copyright, in the strict sense of the term is
produced by a process analogous to
purely a statutory right.
cinematography or any process for
The rights are limited to what the statute
making audio-visual recordings;
confers.
13. Pictorial illustrations and
It may be obtained and enjoyed only with
advertisements;
respect to the subjects and by the
14. Computer programs; and
persons, and on terms and conditions
15. Other literary, scholarly, scientific and
specified in the statute.
artistic works [Sec. 172.1, RA 8293].
It can cover only the works falling within the
statutory enumeration or description
When a Work is Considered Original
[Pearl and Dean v. Shoemart, G.R. No.
The work is original when:
148222 (2003)].
It is an independent creation of the author; and
It must not be copied from the work of another.
2. Copyrightable works
A person must be the original creator of the
a. Original Works work to be entitled to a copyright. He must
have created it by his own skill, labor, and
Literary and artistic works, hereinafter referred judgment without directly copying or evasively
to as "works", are original intellectual creations imitating the work of another [Ching Kian
in the literary and artistic domain protected Chuan v. CA, G.R. No. 130360 (2001)].
from the moment of their creation and shall
include in particular: Originality is not determined by novelty,
1. Books, pamphlets, articles and other aesthetic merit, or ingenuity but that it is an
writings; independent creation [IPOPHL].
2. Periodicals and newspapers;
3. Lectures, sermons, addresses, Works are protected irrespective of their mode
dissertations prepared for oral delivery, or form of expression [Sec. 172.2, RA 8293].
whether or not reduced in writing or
other material form; b. Derivative Works
4. Letters;
5. Dramatic or dramatico-musical The following derivative works shall also be
compositions; choreographic works or protected by copyright:
entertainment in dumb shows;
Page 278 of 494
1. Dramatizations, translations, The format or mechanics of a TV show is
adaptations, abridgments, not copyrightable as copyright does not
arrangements, and other alterations of extend to ideas, procedures, processes,
literary or artistic works; and systems, methods of operation, concepts,
2. Collections of literary, scholarly, or principles or discoveries regardless of the form
artistic works, and compilations of data in which they are described, explained,
and other materials which are original illustrated or embodied [Joaquin Jr. et al v.
by reason of the selection or Drilon, et al, G.R. No. 108946 (1999)].
coordination or arrangement of their
contents [Sec. 173.1, RA 8293]. No one may claim originality as to facts as
these do not owe their origin to an act of
Derivative works are protected as new works, authorship. The first person to find and report a
provided they shall not: particular fact has not created the same; he has
1. Affect the force of any subsisting merely discovered its existence [Feist
copyright upon the original works Publication v. Rural Telephone Services, 499
employed or any part thereof; or U.S. 340 (1991)].
2. Be construed to imply any right to such
use of the original works, or to secure A compilation is not copyrightable per se,
or extend copyright in such original but it is copyrightable only if its facts have been
works [Sec. 173.2, RA 8293]. selected, coordinated, or arranged in such a
way that the resulting work as a whole
3. Non-Copyrightable works constitutes an original work of authorship.
Otherwise known as the Sweat of the Brow or
a. Unprotected Subject Matter Industrious Collection Test [Feist Publication
v. Rural Telephone Services, 499 U.S. 340
1. Any idea, procedure, system method or (1991)].
operation, concept, principle, discovery
or mere data as such, even if they are b. Works of the Government of the
expressed, explained, illustrated or Philippines
embodied in a work;
2. News of the day and other A work created by an officer or employee of the
miscellaneous facts having the Philippine Government or any of its
character of mere items of press subdivisions and instrumentalities, including
information; government-owned or controlled corporations
3. Any official text of a legislative, as a part of his regularly prescribed official
administrative or legal nature, as well duties [Sec. 171.11, RA 8293].
as any official translation thereof;
4. Pleadings; General Rule: No copyright shall subsist in any
5. Original decisions of courts and work of the Government.
tribunals (Note: This pertains to the
“original decisions” not the SCRA Exceptions:
published volumes since these are 1. When copyright is transferred by
protected under derivative works under assignment or bequest in favor of the
Sec. 173.1) [Sec. 175, RA 8293]. government [Sec. 176.3];
2. Author of speeches, lectures, sermons,
News footages are subject to copyright. addresses and dissertations shall have
Although news or the events themselves are exclusive right of making a collection of
not copyrightable, expression of the news his work. However, prior approval of
particularly when it underwent a creative the government agency or the office
process is entitled to copyright protection wherein the work is created shall be
[ABS-CBN Corp. v. Gozon, G.R. No. 195956 necessary for the exploitation of such
(2015)]. work for profit [Sec. 176.1].
Page 279 of 494

However, prior approval of the government incorporates a design element that is physically
agency or the office wherein the work is or conceptually separable from the underlying
created shall be necessary for the exploitation product [Olaño v. Lim Eng Co, G.R. No.
of such work for profit [Sec. 176.1, RA 8293]. 195835 (2016)].
Publication or republication by the Government Useful Article Doctrine

in a public document of any work in which Works whose sole purpose is utilitarian, and
copyright is subsisting shall not be taken: have no separate artistic value are
noncopyrightable works.
1. To cause any abridgment or annulment
of the copyright; or In contrast, a work of applied art, which has
2. To authorize any use or appropriation utilitarian functions, but has an identifiable
of such work without the consent of the artistic work or creation incorporated thereto,
copyright owner [Sec. 176.3, RA 8293]. can be the subject of a copyright to the extent
that the design features:
Works made by an officer or employee of Can be identified separately from, and
the Government as part of his regularly Are capable of existing independently of the
prescribed duty do NOT enjoy copyright. utilitarian aspects of the article [Brandir Int’l v.
Works made by an employee of the Cascade Pacific, 834 F. 2nd 1142 (2nd Cir.)
government which is not as a part of his (1987)].
regularly prescribed official duties (i.e. not
considered a “Work of the Government”) may Denicola Test: Conceptual Separability
enjoy copyright. (Aesthetics vs. Functionality)
The work cannot be copyrighted if its design
c. Works of the Public Domain elements reflect a merger of aesthetic and
functional considerations, and the artistic
Works of the public domain are aspects of the work cannot be conceptually
noncopyrightable. separable from the utilitarian aspects.
Conceptual separability exists where design
To this class of works belong: elements can be identified as reflecting the
1. Works, whose term of copyright has designer's artistic judgment, exercised
expired; independently of functional influences
2. Works wherein the copyright over them The relevant question should be whether the
are waived by the owner in favor of the design of a useful article, however intertwined
public; and with the article’s utilitarian aspects, causes an
3. Works which did not enjoy copyright ordinary reasonable observer to perceive an
protection in the first place, as in the aesthetic concept not related to the article’s
case of unregistered works made use [Brandir Int’l v. Cascade Pacific, 834 F. 2nd
under previous laws that required the 1142 (2nd Cir.) (1987)].
registration of copyright [See: Santos v.
McCullough Printing Company, G.R. 4. Rights conferred by copyright
No. L-19439 (1964)].
Economic rights vs. moral rights
d. Useful Articles Copyright confers both economic and moral
rights. Economic rights allow right owners to
A “useful article” is defined as an article “having derive financial reward from the use of their
intrinsic utilitarian function that is not merely to works by others. On the other hand, moral
portray the appearance of the article or to rights allow authors and creators to take certain
convey information” is excluded from copyright actions to preserve and protect their link with
eligibility. their work. [Understanding Copyright and
Related Rights, World Intellectual Property
The only instance when a useful article may be Organization (2016)].
the subject of copyright protection is when it
Page 280 of 494

Works are protected by the sole fact of their of the work;
creation, irrespective of their mode or form of 6. Public performance of the work; and
expression, as well as of their content, quality 7. Other communication to the public of
and purpose [Sec. 172.2, RA 8293]. the work [Sec. 177, RA 8293].
Certificate of Registration and Deposit
The issuance of the certificates of registration Publisher’s Copyright
and deposit as provided by Sec. 2, Rule 7 of In addition to the right to publish granted by the
the Copyright Safeguards and Regulations, are author, his heirs, or assigns, the publisher shall
purely for recording the date of registration and have a copyright consisting merely of the right
deposit of the work, and are not conclusive as of reproduction of the typographical
to copyright ownership (nor does it determine arrangement of the published edition of the
the time when copyright vests) [Manly work [Sec.174, RA 8293].
Sportwear v. Dadodette Enterprises, G.R. No.
165306 (2005)]. Copyright in a Work of Architecture
The copyright in any such work shall include
Purpose of Registration and Deposit the right to control the erection of any building
Completing the records of the National Library which reproduces the whole or a substantial
and the Supreme Court Library; provided, that part of the work either in its original form or in
only works in the field of law shall be deposited any form recognizably derived from the original
with the Supreme Court Library [Sec. 191, RA
8293 as amended by RA 10372]. However, it shall not include the right to control
the reconstruction or rehabilitation in the same
Note: The National Library has deputized the style as the original of a building to which that
IPOPHL to receive deposited works on its copyright relates [Sec. 186, RA 8293].
behalf.
Communication to the Public of
a. Economic Rights Copyrighted Works
This includes point-to-point transmission of a
Copyright or economic rights shall consist of work, including:
the exclusive right to carry out, authorize or Video on demand, and
prevent the following acts: Providing access to an electronic retrieval
1. Reproduction of the work or substantial system
portion of the work; Such as computer databases, servers, or
2. Dramatization, translation, adaptation, similar electronic storage devices.
abridgment, arrangement or other
transformation of the work; Broadcasting, rebroadcasting, retransmission
3. The first public distribution of the by cable, and broadcast and retransmission by
original and each copy of the work by satellite are all acts of “communication to the
sale or other forms of transfer of public” within the meaning of the IPC [Rule 11,
ownership; Copyright Safeguards and Regulations].
4. Rental of the original or a copy of:
a. An audiovisual or First Public Distribution of Work
cinematographic work, An exclusive right of first distribution of work
b. A work embodied in a sound includes all acts involving distribution,
recording, specifically including the first importation of an
c. A computer program, original and each copy of the work into the
d. A compilation of data and other jurisdiction of the Republic of the Philippines
materials or a musical work in [Rule 12, Copyright Safeguards and
graphic form Regulations].
e. Irrespective of the ownership of
the original or the copy which is b. Moral Rights
the subject of the rental;
5. Public display of the original or a copy The author of a work shall, independently of the
Page 281 of 494

economic rights in Section 177 (see Letter a on Use of the name of the author, title of his work,
page 26) or the grant of an assignment or or his reputation with respect to any version or
license with respect to such right, have the adaptation of his work, which because of
right: alterations substantially tends to injure the
1. To require that the authorship of the literary or artistic reputation of another author
works be attributed to him, in particular, [Sec. 195.1, RA 8293];
the right that his name, as far as It uses the name of the author in a work that he
practicable, be indicated in a prominent did not create [Sec. 195.1, RA 8293].
way on the copies, and in connection
with the public use of his work [Sec. The right of attribution is waived by contribution
193.1, RA 8293]; to a collective work unless such is expressly
2. To make any alterations of his work reserved [Sec. 196, RA 8293].
prior to, or to withhold it from
publication [Sec. 193.2, RA 8293]; c. Right to Transfer, Assign or License
3. To object to any distortion, mutilation or
other modification of, or other The author has the right to assign or license the
derogatory action in relation to, his copyright and/or the material object in whole or
work which would be prejudicial to his in part, and they allow the owner to derive
honor or reputation [Sec. 193.3, RA financial reward from the use of his works by
8293]; others [Sec. 180.1, RA 8293 as amended by
4. To restrain the use of his name with RA 10372].
respect to any work not of his own
creation or in a distorted version of his Rights of Assignee or Licensee
work [Sec. 193.4, RA 8293]. The assignee or licensee is entitled to all the
rights and remedies which the assignor or
In addition to the right to publish granted by the licensor had with respect to the copyright,
author, his heirs, or assigns, the publisher shall within the scope of the assignment or license
have a copyright consisting merely of the right [Sec. 180.1, RA 8293].
of reproduction of the typographical
arrangement of the published edition of the The copyright is not deemed assigned or
work [Sec.174, RA 8293]. licensed inter vivos, in whole or in part, unless
there is a written indication of such intention
The author of speeches, lectures, sermons, [Sec. 180.2, RA 8293].
addresses, and dissertations mentioned in the
preceding paragraphs shall have the exclusive The submission of a literary, photographic or
right of making a collection of his works [Sec. artistic work to a newspaper, magazine or
176.2, RA 8293]. periodical for publication shall constitute only a
license to make a single publication unless a
Assignment or License of Moral Rights greater right is expressly granted. If two (2) or
Moral rights cannot be assigned or licensed more persons jointly own a copyright or any
[Sec. 198, RA 8293]. part thereof, neither of the owners shall be
entitled to grant licenses without the prior
Waiver of Moral Rights written consent of the other owner or owners
While Moral Rights cannot be assigned or [Sec. 180.3, RA 8293].
licensed, it can be waived [Sec. 198, RA 8293].
Any exclusivity in the economic rights in a work
General Rule: Moral rights can be waived in may be exclusively licensed. Within the scope
writing, expressly stating such waiver [Sec. of the exclusive license, the licensee is entitled
195, RA 8293]. to all the rights and remedies which the licensor
had with respect to the copyright [Sec. 180.4,
Exceptions: Even if made in writing, waiver is RA 8293].
still not valid if:
Page 282 of 494

The copyright owner has the right to regular sound recordings, or audiovisual works or
statements of accounts from the assignee or fixations in any manner or form [Sec. 203.2, RA
the licensee with regard to assigned or 8293, as amended by RA 10372];
licensed work [Sec. 180.5, RA 8293 as The right of authorizing the first public
amended by RA 10372]. distribution of the original and copies of their
performance fixed in the sound recording or
Filing of Assignment or License audiovisual works or fixations through sale or
An assignment or exclusive license may be rental or other forms of transfer of ownership
filed in duplicate with the National Library upon [Sec. 203.3, RA 8293, as amended by RA
payment of the prescribed fee for registration in 10372];
books and records kept for the purpose [Sec. Subject to the provisions of Section 206 (see
182, RA 8293]. Number 7 on page 25)
The right of authorizing the commercial rental
d. Rights to Proceed on Subsequent to the public of the original and copies of their
Transfers (Droit de Suite or Follow Up performances fixed in sound recordings or
Rights) audiovisual works or fixations, even after
distribution of them by, or pursuant to the
In every sale or lease of an original work of authorization by the performer [Sec. 203.4, RA
painting or sculpture or of the original 8293, as amended by RA 10372];
manuscript of a writer or composer, The right of authorizing the making available to
subsequent to the first disposition thereof by the public of their performances fixed in sound
the author, the author or his heirs shall have: recordings or audiovisual works or fixations, by
● an inalienable right to participate in the wire or wireless means, in such a way that
gross proceeds of the sale or lease to members of the public may access them from
the extent of five percent (5%) [Sec. a place and time individually chosen by them
200, RA 8293]. [Sec. 203.5, RA 8293, as amended by RA
10372];
Duration of Right The right to claim to be identified as the
This right shall exist during the lifetime of the performer of his performances, and to object to
author and for 50 years after his death [Sec. any distortion, mutilation or other modification
200, RA 8293]. of his performances that would be prejudicial to
his reputation, as regards his live aural
Works not covered performances or performances fixed in sound
Prints, etchings, engravings, works of applied recordings or audiovisual works or fixations;
art, or works of similar kind wherein the author Exception: Where the omission is dictated by
primarily derives gain from the proceeds of the manner of the use of the performance [Sec.
reproductions [Sec. 201, RA 8293]. 204.1, RA 8293, as amended by RA 10372].
The right to an additional remuneration
e. Related Rights (Neighboring Rights) equivalent to at least five percent (5%) of the
original compensation he or she received for
Rights of Performers the first communication or broadcast, in every
As regards their performances, the right of communication to the public or broadcast of a
authorizing: performance subsequent to the first
The broadcasting and other communication to communication or broadcast thereof by the
the public of their performance; and broadcasting organization [Sec. 206, RA
The fixation of their unfixed performance [Sec. 8293].
203.1, RA 8293]; Unless otherwise provided in the contract.
Such right shall be maintained and exercised
50 years after his death, by his heirs, and in Rights of Producers of Sound Recordings
default of heirs, the government, where The right to authorize the direct or indirect
protection is claimed [Sec. 204.2, RA 8293]; reproduction of their sound recordings, in any
The right of authorizing the direct or indirect manner or form; the placing of these
reproduction of their performances fixed in
Page 283 of 494
reproductions in the market and the right of 5. Ownership of a copyright
rental or lending [Sec. 208.1, RA 8293];
The right to authorize the first public distribution
of the original and copies of their sound Work Ownership
recordings through sale or rental or other forms
Single Creator Belongs to the author of
of transferring ownership [Sec. 208.2, RA
of an Original the work [Sec. 178.1, RA
8293];
Work 8293].
The right to authorize the commercial rental to
the public of the original and copies of their Works of Joint Belongs of the co-
sound recordings, even after distribution by Authorship authors; in the absence
them by or pursuant to authorization by the of agreement, their rights
producer [Sec. 208.3, RA 8293]. shall be governed by the
rules on co-ownership.
Single Equitable Remuneration However, if the work
The right to be paid a single equitable consists of parts that can
remuneration by the user to be shared with the be used separately and
performers equally, in the absence of any identified, the author of
agreement, when a sound recording published each part owns the
for commercial purposes, or a reproduction of copyright of the part he
such sound recording, is: has created [Sec. 178.2,
Used directly for broadcasting or RA 8293].
Used for other communication to the public; or
Publicly performed with the intention of making Work created Belongs to the employee
and enhancing profit [Sec. 209, RA 8293]. during the if the creation is not a part
course of of his regular duties,
Rights of Broadcasting Organizations employment even if he used the time,
The rebroadcasting of their broadcasts [Sec. facilities and materials of
211.1, RA 8293]; the employer. However,
The recording in any manner, including the copyright belongs to the
making of films or the use of video tape, of their employer if the work is in
broadcasts for the purpose of communication the performance of the
to the public of television broadcasts of the employee’s regular
same; [Sec. 211.2, RA 8293]; duties unless there is an
The use of such records for fresh agreement to the
transmissions or for fresh recording [Sec. contrary [Sec. 178.3, RA
211.3, RA 8293]. 8293].
Must-Carry Rule Work The person who

This rule prevents cable television companies commissioned commissioned the work
from excluding broadcasting organization by a person and pays for it holds
especially in those places not reached by other than the ownership of the work
signal. employer per se, but copyright
remains with the creator
Also, the rule prevents cable television unless there was a
companies from depriving viewers in far-flung stipulation to the contrary
areas the enjoyment of programs available to [Sec. 178.4, RA 8293].
city viewers [ABS-CBN Broadcasting v.
Philippine Multi-Media System, G.R. Nos. Audio visual Belongs to the producer,
175769-70 (2009)]. works author of the scenario,
composer of the music,
film director, and author
of the adapted work.
However, subject to
Page 284 of 494

This presumption however is rebuttable and
Work Ownership
cannot be sustained where other evidence in
stipulations, the the record casts doubt on the question of
producers shall exercise ownership [Olaño v. Lim Eng Co, G.R. 195835
the copyright as may be (2016)].
required for the exhibition
of the work, except for Valid copyright ownership denotes
the right to collect license originality of the copyrighted material.
fees for the performance Originality means that the material was not
of musical compositions copied, evidences at least minimum creativity
in the work [Sec. 178.5, and was independently created by the author
RA 8293]. [Olaño v. Lim Eng Co, G.R. 195835 (2016)].
Letters Belongs to the writer, but a. Presumption of Ownership

the court may authorize
their publication or General Rule: The natural person whose name
dissemination of the is indicated on a work in the usual manner as
public good or interest of the author shall, in the absence of proof to the
justice requires, pursuant contrary, be presumed to be the author of the
to Art. 723, New Civil work.
Code [Sec. 178.6, RA
8293]. The person or body corporate, whose name
appears on an audio-visual work in the usual
Anonymous Publishers are deemed manner, shall, in the absence of proof to the
and to represent the authors, contrary, be presumed to be the maker of said
pseudonymous unless the contrary work [Sec. 219, RA 8293].
works appears, the
pseudonyms or adopted Use of Pseudonym
names leave no doubt as This provision shall be applicable even if the
to the author’s identity or name is a pseudonym, where the pseudonym
if the author discloses his leaves no doubt as to the identity of the author
identity [Sec. 179, RA [Sec. 219, RA 8293].
8293].
b. Transfer or Assignment of Copyright
Collective A contributor is deemed
works to have waived his right The copyright may be assigned or licensed in
unless he expressly whole or in part [Sec. 180.1, RA 8293].
reserves it [Sec. 196, RA 1. The copyright is not deemed assigned
8293]. or licensed inter vivos in whole or in
part unless there is a written indication
A person to be entitled to copyright must be of such intention [Sec. 180.2, RA 8293
the original creator of the work. He must as amended by RA 10372];
have created it by his own skill, labor and 2. If two or more persons jointly own a
judgment without directly copying or evasively copyright or any part thereof, neither of
imitating the work of another [Wilson Ong the owners shall be entitled to grant
Ching Kian Chuan v. CA, G.R. 130360 (2001)]. licenses without the prior written
consent of the other owner or owners
Ownership of copyrighted material is [Sec. 180.3, RA 8293].
shown by proof of originality and
copyrightability. While it is true that where the Submitted Work
complainant presents a copyright certificate in General Rule: The submission of a literary,
support of the claim of infringement, the validity photographic, or artistic work to a newspaper,
and ownership of the copyright is presumed. magazine or periodical for publication shall
Page 285 of 494

constitute only a license to make a single 6. Distribution of the abovementioned
publication. collections to the rights holders
[IPOPHL Office Order 13-173 s.2013].
Unless a greater right is expressly granted
[Sec. 180.3, RA 8293]. Filipino Society of Composers, Authors and
Publishers, Inc. (FILSCAP)
c. Collective Management Organizations FILSCAP is a non-profit society of composer,
(CMO) authors, and publishers that owns public
performance rights over the copyrighted
CMOs are entities composed of artists, writers, musical works of its members.
composers and other creators, or
copyright/related rights holders that manage It also owns the right to license public
the bundle of copyrights that their members performances in the Philippines of copyrighted
own by providing the legal platform to efficiently foreign musical works of its members and
enforce their intellectual property rights. affiliate performing rights societies abroad.
The owners of copyright and related rights or It is deputized to enforce and protect the
their heirs may designate a society of artists, copyrighted works of its members or affiliates
writers, composers, and other right-holders to by issuing licenses and collecting royalties
collectively manage their economic or moral and/or license fees from anyone who publicly
rights on their behalf. exhibits or performs music belonging to
FILSCAP’s worldwide repertoire. FILSCAP has
For the said societies to enforce the rights of a legal standing to sue for copyright
their members, they shall first secure the infringement.
necessary accreditation from the Intellectual
Property Office [Sec. 183, RA 8293 as It has the authority to collect royalties and/or
amended by RA 10372]. license fees and sue for copyright infringement.
As an assignee of copyright, it is entitled to all
The primary purpose of a CMO is to collectively the rights and remedies which the assignor had
manage copyright and/or related rights, with respect to the copyright [FILSCAP v.
including any or all of the following activities: Anrey, Inc., G.R. No. 233918 (2022)].
1. Negotiation with and grant of licenses
to users of protected literary, scholarly, 6. Limitations on copyright
scientific and artistic works, derivative
works, performances, sound a. Fair Use
recordings, audiovisual works and
broadcasts; Doctrine of Fair Use
2. Collection of royalties and other forms The fair use of copyrighted work for criticism,
of remuneration for the use of news reporting, teaching (including multiple
protected literary, scholarly, scientific copies for classroom use), research and similar
and artistic works, derivative works, purposes is not an infringement of copyright
performances, sound recordings, [Sec. 185.1, RA 8293].
audiovisual works and broadcasts;
3. Collection of proceeds in subsequent A privilege, in persons other than the owner of
transfers of the originals of paintings, the copyright, to use the copyrighted material
sculptures and manuscripts; in a reasonable manner without his consent,
4. Collection of additional remuneration notwithstanding the monopoly granted to the
for subsequent communication or owner by the copyright. It is meant to balance
broadcast of a performance; the monopolies enjoyed by the copyright owner
5. Collection of single equitable with the interests of the public and of society.
remuneration for the broadcast, other
communication to the public or public
performance of a sound recording; and
Page 286 of 494

Decompilation current events;
Refers to the reproduction of the code and 3. Use solely for the purpose of teaching
translation of the forms of the computer or for scientific research; and
program to achieve the inter-operability of an 4. Fair use of the broadcast subject to
independently created computer program with certain conditions [Sec. 212, RA 8293].
other programs. This may also constitute fair
use [Sec. 185.1, RA 8293]. c. Term of Protection
Factors to consider in determining Fair Use Duration of Copyright

The purpose and character of the use,
Works Term
including whether such use is of a commercial
nature or is for non-profit educational
Original Literary and Lifetime of author
purposes;
Artistic Works and for 50 years
The nature of the copyrighted work;
including after his death
The amount and substantiality of the portion
Posthumous Works [Sec. 213.1, RA
used in relation to the copyrighted work as a
8293]
whole; and
The effect of the use upon the potential market Derivative Works Lifetime of author
for or value of the copyrighted work [Sec. including and for 50 years
185.1, RA 8293 as amended by RA 10372; Posthumous Works after his death
Harper & Row v. Nation Enterprise, 471 US [Sec. 213.1, RA
539 (1985)]. 8293]
The fact that a work is unpublished shall not Joint Authorship Lifetime of the last
by itself bar a finding of fair use if such surviving author
finding is made upon consideration of all the and for 50 years
above factors [Sec. 185.2, RA 8293]. after his death
[Sec. 213.2, RA
Commercial use of the copyrighted work can 8293]
be weighed against fair use [ABS–CBN Corp.
v. Gozon, G.R. No. 195956 (2015)]. Anonymous or 50 years from date
Pseudonymous of first lawful
Parody, like other comment and criticism, Works publication [Sec.
may claim fair use. The more transformative 213.3, RA 8293]
the new work, the less will be the significance
of other factors, like commercialism. The heart Applied Art 25 years from date
of any parodist's claim to quote from existing of making [Sec.
material is the use of some elements of a prior 213.4, RA 8293]
author's composition to create a new one that,
at least in part, comments on that author's work Published 50 years from
[Campbell v. Acuff-Rose Music Inc., 510 U.S. Photographic Works publication [Sec.
569 (1994)]. 213.5, RA 8293]
b. Limitations on Protection of Unpublished 50 years from the

Photographic Works making [Sec.
Neighboring Rights
213.5, RA 8293]
Sections 203, 208 and 209 (see Letter e on Published 50 years from
page 28) shall not apply where the acts Audiovisual Works publication [Sec.
referred to in those Sections are related to: 213.6, RA 8293]
1. The use by a natural person
exclusively for his own personal Unpublished 50 years from the
purposes; Audiovisual Works making [Sec.
2. Using short excerpts for reporting 213.6, RA 8293]
Page 287 of 494
The term of protection subsequent to the A person infringes a right protected under this
death of the author shall run from the date Act when one:
of his death or of publication, but such terms a. Directly commits an infringement;
shall always be deemed to begin on the first b. Benefits from the infringing activity of
day of January of the year following the event another person who commits an
which gave rise to them [Sec. 214, RA 8293]. infringement if the person benefiting:
1. Has been given notice of the
Term of Protection of Moral Rights infringing activity; and
2. Has the right and ability to
Moral Right Term
control the activities of the
Right of Attribution or Lifetime of author other person;
Right of Paternity and in perpetuity c. With knowledge of infringing activity,
(Sec. 193.1) after his death [Sec. induces, causes or materially
198.1, RA 8293 as contributes to the infringing conduct of
amended by RA another [Sec. 216, RA 8293 as
10372]. amended by RA 10372].
Other Moral Rights Coterminous with the It also includes the act of any person who at the
[Sec. 193.2- 193.4] economic rights time when copyright subsists in a work has in
[Sec. 198, RA 8293 his possession an article which he known, or
as amended by RA ought to know, to be an infringing copy of the
10372]. work for the purpose of:
a. Selling, letting for hire, or by way of
trade offering or exposing for sale, or
Term of Protection of Neighboring Rights hire, the article
Works Term b. Distributing the article for purpose of
trade, or for any other purpose to an
For performances 50 years from the extent that will prejudice the rights of
not incorporated in end of the year in the copyright owner in the work; or
recordings which the c. Trade exhibit of the article in public
performance took [Sec. 217.3, RA 8293].
place [Sec. 215.1(a),
RA 8293]. a. What Constitutes Infringement
For sound or image 50 years from the Infringement consists in the doing by any
and sound end of the year in person, without the consent of the owner of the
recordings and for which the recording copyright, of anything the sole right to do which
performances took place [Sec. is conferred by statute on the owner of the
incorporated 215.1(b), RA 8293]. copyright.
therein
It can cover a whole range of acts from
Broadcasts 20 years from the copying, assembling, packaging to marketing,
date the broadcast including the mere offering for sale of
took place [Sec. counterfeit goods [Habana et al v. Robles et al.,
215.2, RA 8293] G.R. No. 131522 (1999)].
7. Copyright infringement Copyright infringement is thus committed by

any person who shall use original literary or
The IP Code was amended to expand artistic works, or derivative works, without the
infringement not only to cover direct copyright owner’s consent in such a manner as
infringement but also third-party infringement. to violate the foregoing copy and economic
rights.
Page 288 of 494

For a claim of copyright to prevail, the In cases of infringement, copying alone is
evidence on record must demonstrate: not what is prohibited. The copying must
a. ownership of a validly copyrighted produce an “injurious effect” [Habana et al v.
material by the complainant; and Robles et al., G.R. No. 131522 (1999)].
b. infringement of the copyright by the
respondent. c. Knowledge not an Element of
Infringement
[W]hat was copyrighted were their
sketches/drawings only, and not the actual Knowledge of infringement is material only
hatch doors themselves. To constitute when a person is charged of aiding and
infringement, the usurper must have copied or abetting a copyright infringement. The
appropriated the original work of an author or liability for copyright infringement is in the
copyright proprietor, absent copying, there can nature of strict liability. It does not require mens
be no infringement of copyright. Absent rea or culpa [ABS–CBN Corp v. Gozon, G.R.
originality and copyrightability as elements of a No. 195956 (2015)].
valid copyright ownership, no infringement can
subsist [Olaño v. Lim Eng Co, G.R. 195835 d. What Does NOT Constitute
(2016)]. Infringement
The free use by commercial establishments of The following shall NOT constitute
radio broadcasts is beyond the normal infringement of copyright:
exploitation of the copyright holder’s creative 1. Recitation or performance of a work
work. This gravely affect the copyright holder’s once it has been made accessible to
market where instead of paying royalties, they the public if
use free radio reception. a. privately done AND free of
charge OR
A radio reception creates a performance b. strictly for a charitable or
separate from the broadcast, which is religious institution [Sec.
otherwise known as the doctrine of multiple 184.1(a), RA 8293];
performances which provides that a radio (or 2. Making of quotations from a published
television) transmission or broadcast can work:
create multiple performances at once. Thus, on a. compatible with fair use,
whether the reception of a broadcast may be b. extent is justified by the
publicly performed, it is immaterial if the purpose,
broadcasting station has been licensed by the c. source and name of the author,
copyright owner because the reception appearing on work, must be
becomes a new public performance requiring mentioned [Sec. 184.1(b), RA
separate protection. 8293];
3. Reproduction or communication to the
Radio reception transmitted through public by mass media of articles on
loudspeakers to enhance profit does not current political, social, economic,
constitute, and is not analogous to, fair use scientific, or religious topic, lectures,
[FILSCAP v. Anrey, Inc., G.R. No. 233918 addresses and other works, delivered
(2022)]. in public:
a. for information purposes,
b. Substantial Reproduction b. not expressly reserved, and
c. source is already indicated
It is not necessarily required that the entire [Sec. 184.1(c), RA 8293];
copyrighted work, or even a large portion of 4. Reproduction and communication to
it, be copied. If so much is taken that the value the public of literary, scientific or artistic
of the original work is substantially diminished, works as part of reports of current
there is an infringement of copyright and to an events by means of photography,
injurious extent, the work is appropriated. cinematography or broadcasting to the
Page 289 of 494
extent necessary for the purpose [Sec. published articles or materials in a
184.1(d), RA 8293]; specialized format exclusively for the
5. Inclusion of a work in a publication, use of the blind, visually- and reading-
broadcast or other communication to impaired persons: Provided, That such
the public, sound recording or film if copies and distribution shall be made
made by way of illustration for teaching on a nonprofit basis and shall indicate
purposes compatible with fair use and the copyright owner and the date of the
the source and the name of the author original publication [Sec. 184.1(l), RA
appearing on work, must be mentioned 8293 as amended by RA 10372].
[Sec. 184.1(e), RA 8293];
6. Recording made in schools, e. Reproduction of Published Work
universities, or educational institutions
of a work included in a broadcast for General Rule: The private reproduction of a
the use of schools, universities or published work in a single copy, where the
educational institutions. Such reproduction is made by a natural person
recording must be deleted within a exclusively for research and private study, shall
reasonable period; such recording may be permitted, without the authorization of the
not be made from audio-visual works owner of copyright in the work [Sec. 187.1, RA
which are part of the general cinema, 8293].
repertoire of feature films except of
brief excerpts of the work [Sec. Exceptions: Such permission shall not extend
184.1(f), RA 8293]; to:
7. Making of ephemeral recordings; 1. A work of architecture in the form of
a. by a broadcasting organization, building or other construction;
b. by means of its work or 2. An entire book, or a substantial part
facilities, thereof, or of a musical work in graphic
c. for use in its own broadcast form by reprographic means;
[Sec. 184.1(g), RA 8293]; 3. A compilation of data and other
8. Use made of a work by or under the materials;
direction or control of the government 4. A computer program except as
for public interest compatible with fair provided in Section 189 (see Letter g
use [Sec. 184.1(h), RA 8293]; on page 36); and
9. Public performance or the 5. Any work in cases where reproduction
communication to the public of a work would unreasonably conflict with a
in a place where no admission fee is normal exploitation of the work or
charged by a club on institution for would otherwise unreasonably
charitable or educational purpose only prejudice the legitimate interests of the
and the aim is not profitmaking [Sec. author [187.2, RA 8293].
184.1(i), RA 8293];
10. Public display of the original or a copy f. Reprographic Reproduction by
of the work not made by means of a Libraries
film, slide, television, image or
otherwise on screen or by means of Any library or archive whose activities are not
any other device or process either the for profit may, without the authorization of the
work has been published, sold, given author of copyright owner, make a single copy
away, or transferred to another person of the work by reprographic reproduction:
by the author or his successor in title 1. Where the work by reason of its fragile
[Sec. 184.1(j), RA 8293]; character or rarity cannot be lent to
11. Use made of a work for the purpose of user in its original form;
any judicial proceedings or for the 2. Where the works are isolated articles
giving of professional advice by a legal contained in composite works or brief
practitioner [Sec. 184.1(k), RA 8293]. portions of other published works and
12. The reproduction or distribution of the reproduction is necessary to supply
Page 290 of 494
them, when this is considered h. Importation for Personal Purposes
expedient, to persons requesting their Sec. 190.2 of RA 8293 that limited the
loan for purposes of research or study importation of books was repealed by RA
instead of lending the volumes or 10372.
booklets which contain them; and
3. Where the making of such a copy is in RA 10372 expressly limited the prohibition to
order to preserve and, if necessary in import or export only to counterfeit goods.
the event that it is lost, destroyed or
rendered unusable, replace a copy, or i. Remedies for Infringement
to replace, in the permanent collection
of another similar library or archive, a a. An injunction restraining such
copy which has been lost, destroyed or infringement [Sec. 216.1(a), RA 8293];
rendered unusable and copies are not b. Actual damages, including legal costs
available with the publisher [Sec. and other expenses, as he may have
188.1, RA 8293 as amended by RA incurred due to the infringement, as
10372]. well as the profits the infringer may
have made due to such infringement;
It shall not be permissible to produce a volume c. In proving profits: The plaintiff shall be
of a work published in several volumes or to required to prove sales only, and the
produce missing tomes or pages of magazines defendant shall be required to prove
or similar works, unless the volume, tome or every element of cost which he claims
part is out of stock: [Sec. 216.1(b), RA 8293];
● Provided, That every library which, by d. Such damages which to the court shall
law, is entitled to receive copies of a appear to be just and shall not be
printed work, shall be entitled, when regarded as penalty, in lieu of actual
special reasons so require, to damages and profits [Sec. 216.1(b),
reproduce a copy of a published work RA 8293];
which is considered necessary for the e. Impounding during the pendency of the
collection of the library but which is out action, upon such terms and conditions
of stock [Sec. 188.2, RA 8293]. as the court may prescribe, sales
invoices and other documents
g. Reproduction of Computer Program evidencing sales, all articles and their
packaging alleged to infringe a
The reproduction in one back-up copy or copyright and implements for making
adaptation of a computer program shall be them [Sec. 216.1(c), RA 8293];
permitted, without the authorization of the f. Deliver under oath for destruction
author of, or other owner of copyright in, a without any compensation all infringing
computer program, by the lawful owner of that copies or devices, as well as all plates,
computer program: Provided, That the copy or molds, or other means for making such
adaptation is necessary for: infringing copies as the court may order
1. The use of the computer program in [Sec. 216.1(d), RA 8293];
conjunction with a computer for the g. Such other terms and conditions,
purpose, and to the extent, for which including the payment of moral and
the computer program has been exemplary damages, which the court
obtained; and may deem proper, wise and equitable
2. Archival purposes, and, for the and the destruction of infringing copies
replacement of the lawfully owned copy of the work even in the event of
of the computer program in the event acquittal in a criminal case [Sec.
that the lawfully obtained copy of the 216.1(e), RA 8293];
computer program is lost, destroyed or h. Criminal liability
rendered unusable [Sec. 189.1, RA
8293]. The copyright owner may elect, at any time
before final judgment is rendered, to recover
Page 291 of 494

instead of actual damages and profits, an 226, RA 8293].
award of statutory damages for all
infringements involved in an action in a sum Criminal Penalties for Infringement
equivalent to the filing fee of the infringement Any person infringing any right secured by
action but not less than Php50,000.00. In provisions of Part IV of this Act or aiding or
awarding statutory damages, the court may abetting such infringement shall be guilty of a
consider the following factors: crime punishable by:
5. The nature and purpose of the a. Imprisonment of one (1) year to three
infringing act; (3) years plus a fine ranging from Fifty
6. The flagrancy of the infringement; thousand pesos (P50,000) to One
7. Whether the defendant acted in bad hundred fifty thousand pesos
faith; (P150,000) for the first offense.
8. The need for deterrence; b. Imprisonment of three (3) years and
9. Any loss that the plaintiff has suffered one (1) day to six (6) years plus a fine
or is likely to suffer by reason of the ranging from One hundred fifty
infringement; and thousand pesos (P150,000) to Five
10. Any benefit shown to have accrued to hundred thousand pesos (P500,000)
the defendant by reason of the for the second offense.
infringement. c. Imprisonment of six (6) years and one
(1) day to nine (9) years plus a fine
In case the infringer was not aware and had no ranging from Five hundred thousand
reason to believe that his acts constitute an pesos (P500,000) to One million five
infringement of copyright, the court in its hundred thousand pesos (P1,500,000)
discretion may reduce the award of statutory for the third and subsequent offenses.
damages to a sum of not more than Ten d. In all cases, subsidiary imprisonment in
thousand pesos (Php10,000.00) [Sec. 216.1, cases of insolvency [Sec. 217.1, RA
RA 8293]. 8293 as amended by RA 10372].
The amount of damages to be awarded shall Determination of Penalty

be doubled against any person who: In determining the number of years of
1. Circumvents effective technological imprisonment and the amount of fine, the court
measures; or shall consider:
2. Having reasonable grounds to know a. The value of the infringing materials
that it will induce, enable, facilitate or that the defendant has produced or
conceal the infringement: manufactured; and
a. Remove or alter any electronic b. The damage that the copyright owner
rights management information has suffered by reason of the
from a copy of a work, sound infringement [Sec. 217.2, RA 8293 as
recording, or fixation of a amended by RA 10372].
performance; or
b. Distribute, import for The respective maximum penalty stated in
distribution, broadcast, or Section 217.1 (see Criminal Penalties on
communicate to the public pages 33-34) for the first, second, third and
works or copies of works subsequent offense, shall be imposed when
without authority, knowing that the infringement is committed by:
electronic rights management 1. The circumvention of effective
information has been removed technological measures;
or altered without authority 2. The removal or alteration of any
[Sec. 216.1(b), RA 8293]. electronic rights management
information from a copy of a work,
However, no damages may be recovered sound recording, or fixation of a
under this Act after the lapse of four (4) years performance, by a person, knowingly
from the time the cause of action arose [Sec. and without authority; or
Page 292 of 494

3. The distribution, importation for
distribution, broadcast, or
communication to the public of works
or copies of works, by a person without
authority, knowing that electronic rights
management information has been
removed or altered without authority
[Sec. 217.2, RA 8293 as amended by
RA 10372].
Page 293 of 494

ELECTRONIC COMMERCE ACT

COMMERCIAL LAW
ELECTRONIC COMMERCE ACT COMMERCIAL LAW
global information networks, with the
necessary and appropriate legal,
II. ELECTRONIC financial, diplomatic and technical
framework, systems and facilities.
COMMERCE ACT [Sec. 2]
The section numbers hereinafter generally The objective of the law is to facilitate domestic
pertain to RA 8792 or the Electronic Commerce and international dealings, transactions,
Act of 2000, unless otherwise indicated. arrangements agreements, contracts and
exchanges and storage of information through
the utilization of electronic, optical and similar
I. Policy of the Law medium, mode, instrumentality and technology
to recognize the authenticity and reliability of
The Electronic Commerce Act shall apply to electronic documents related to such activities
any kind of data message and electronic and to promote the universal use of electronic
document used in the context of commercial transaction in the government and general
and non-commercial activities to include public [Sec. 3].
domestic and international dealings,
transactions, arrangements, agreements
contracts and exchanges and storage of II. Definition of terms
information [Sec. 4].
Electronic Data Messages
The State recognizes: It refers to information generated, sent,
1. The vital role of information and received or stored by electronic, optical or
communications technology (ICT) in similar means [Sec. 5].
nation- building
2. The need to create an information- Electronic Document
friendly environment which supports It refers to information or the representation of
and ensures the availability, diversity information, data, figures, symbols or other
and affordability of ICT products and modes of written expression, described or
services however represented, by which a right is
3. The primary responsibility of the private established or an obligation extinguished, or by
sector in contributing investments and which a fact may be prove and affirmed, which
services in telecommunications and is receive, recorded, transmitted, stored,
information technology; processed, retrieved or produced electronically
4. The need to develop, with appropriate [Sec. 5].
training programs and institutional
policy changes, human resources for Electronic Signature
the information technology age, a labor It refers to any distinctive mark, characteristic
force skilled in the use of ICT and a and/or sound in electronic form, representing
population capable of operating and the identity of a person and attached to or
utilizing electronic appliances and logically associated with the electronic data
computers; message or electronic document or any
5. Its obligation to facilitate the transfer methodology or procedures employed or
and promotion of technology; to ensure adopted by a person and executed or adopted
network security, connectivity and by such person with the intention of
neutrality of technology for the national authenticating or approving an electronic data
benefit; and message or electronic document [Sec. 5].
6. The need to marshal, organize and
deploy national information
infrastructures, comprising in both
telecommunications network and
strategic information services,
including their interconnection to the
Page 295 of 494
b. That document is capable of being
III. Legal Recognition of displayed to the person to whom it is to
Electronic Data Messages, be presented: Provided, that no
provision of this Act shall apply to vary
Documents, and Signatures any and all requirements of existing
laws on formalities required in the
Legal Recognition of Electronic Data execution of documents for their
Messages [Sec. 6] validity.
Information shall not be denied legal effect,
validity or enforceability solely on the grounds For evidentiary purposes, an electronic
that it is in the data message purporting to give document shall be the functional equivalent of
rise to such legal effect, or that it is merely a written document under existing laws.
referred to in that electronic data message.
This Act does not modify any statutory rule
Legal Recognition of Electronic Documents relating to the admissibility of electronic data
[Sec. 7] messages or electronic documents, except the
rules relating to authentication and best
Electronic documents shall have the legal evidence.
effect, validity or enforceability as any other
document or legal writing. Legal Recognition of Electronic Signatures
[Sec. 8]
Where the law (1) requires a document to be in
writing; (2) requires a form of an obligation; (3) An electronic signature on the electronic
provides consequences for the document not document shall be equivalent to the signature
being presented or retained in its original from, of a person on a written document if that
that requirement is met if the electronic signature is proved by showing that a
document maintains its integrity and reliability prescribed procedure, not alterable by the
and can be authenticated so as to be usable for parties interested in the electronic document,
subsequent reference, in that: existed under which:
a. The electronic document has a. A method is used to identify the party

remained complete and unaltered sought to be bound and to indicate said
party's access to the electronic
Apart from: Any endorsement and any document necessary for his consent or
authorized change, or any change approval through the electronic
which arises in the normal course of signature;
communication, storage
and display. b. Said method is reliable and
appropriate for the purpose for which
b. The electronic document is reliable the electronic document was
in the light of the purpose for which it generated or communicated, in the
was generated and in the light of all light of all circumstances, including any
relevant circumstances [Sec. 7]. relevant agreement;
Where the law requires that a document be c. It is necessary for the party sought to
presented or retained in its original form, that be bound, in or order to proceed further
requirement is met by an electronic document with the transaction, to have executed
if: or provided the electronic signature;
and
a. There exists a reliable assurance as
to the integrity of the document from d. The other party is authorized and
the time when it was first generated in enabled to verify the electronic
its final form; and signature and to make the decision to
Page 296 of 494

proceed with the transaction Before any private electronic document offered
authenticated by the same. as authentic is received in evidence, its
authenticity must be proved by any of the
The Court recognized the broadness of what following means:
may be considered an electronic signature. 1. By evidence that it had been digitally
Thus, a machine signature of a Precinct Count signed by the person purported to have
Optical Scan (PCOS) machine may be signed the same;
considered the functional equivalent of a digital 2. By evidence that other appropriate
signature as it represents the identity of the security procedures or devices as may
individual, such digital signature naturally being be authorized by the Supreme Court or
created specifically for the person himself or by law for authentication of electronic
herself inputting the details. [Bagumbayan- documents were applied to the
VNP Movement, Inc. v. COMELEC, (2019)] document; or
3. By other evidence showing its integrity
Original Documents [Sec. 10] and reliability to the satisfaction of the
Where the law (1) requires a document to be in judge. [Sec. 2, Rules on Electronic
writing; (2) requires a form of an obligation; (3) Evidence]
provides consequences for the document not
being presented or retained in its original from, Note: The terms electronic data message
that requirement is met by an electronic data and electronic document, as defined under
message or electronic document if: the Electronic Commerce Act of 2000, do
not include a facsimile transmission.
1. The integrity of the information from the Accordingly, a facsimile transmission cannot
time when it was first generated in its be considered as electronic evidence. It is not
final form, as an electronic data message the functional equivalent of an original under
or electronic document is shown by the Best Evidence Rule and is not admissible
evidence aliunde or otherwise; and as electronic evidence. Since a facsimile
a. Criteria for assessing integrity - transmission is not an electronic data message
whether the information has or an electronic document, and cannot be
remained complete and considered as electronic evidence by the
unaltered, apart from the Court, with greater reason is a photocopy of
addition of any endorsement such a fax transmission not electronic
and any change which arises in evidence. In the present case, therefore, Pro
the normal course of Forma Invoice Nos. ST2-POSTS0401-1 and
communication, storage and ST2-POSTS0401-2, which are mere
display photocopies of the original fax transmittals, are
b. Standard of reliability - not electronic evidence [MCC Industrial Sales
assessed in the light of Corporation v Ssangyong Corporation, G.R.
purposed for which the No. 170633 (2007)].
information was generated and
in the light of all the relevant
circumstances.
IV. Presumption Relating to
Electronic Signatures
Where it is required that information be
resented, that the information is capable of Presumption Relating to Electronic
being displayed to the person to whom it is to Signatures [Sec. 9]
be presented.
In any proceeding involving an electronic
Authentication of Electronic Data signature, it shall be presumed that:
Messages and Electronic Documents 1. The electronic signature is the signature
of the person to whom it correlates; and
Now governed by: A.M. No. 01-7-10-SC –
RULES ON ELECTRONIC EVIDENCE
Page 297 of 494
2. The electronic signature was affixed by
that person with the intention of signing
VI. Obligation of
or approving the electronic document. Confidentiality
Except: When the person relying on the Except for the purposes authorized under this
electronically signed electronic document Act, any person who obtained access to any
knows or has notice of defects in or unreliability electronic key, electronic data message, or
of the signature or reliance on the electronic electronic document, book, register,
signature is not reasonable under the correspondence, information, or other material
circumstances. pursuant to any powers conferred under this
Act, shall not convey to or share the same with
V. Admissibility and any other person [Sec. 32].
Evidential Weight of VII. Punishable Acts &

Electronic Data Message or Penalties
Electronic Document
Hacking or cracking [Sec. 33(a)]
Admissibility Unauthorized access into or interference in a
In any legal proceeding, nothing in the computer system/server or information and
application of the rules on evidence shall deny communication system; or any access in order
the admissibility of an electronic data message to corrupt, alter, steal, or destroy using a
or electronic document in evidence: computer or other similar information and
a. On the sole ground that it is in communication devices, without the knowledge
electronic form; or and consent of the owner of the computer or
b. On the ground that it is not in the information and communication system,
standard written form, and the including the introduction of computer viruses
electronic data message or electronic and the like, resulting in the corruption,
document meeting, and complying with destruction, alteration, theft or loss of electronic
the requirements (under Sections 6 or data messages or electronic documents
7) shall be the best evidence of the
agreement and transaction contained Piracy [Sec. 33(b)]
therein [Sec. 12]. Unauthorized copying, reproduction,
dissemination, distribution, importation, use,
Note: This Act does not modify any statutory removal, alteration, substitution, modification,
rule relating to admissibility of electronic data storage, uploading, downloading,
massages or electronic documents, except the communication, making available to the public,
rules relating to authentication and best or broadcasting of protected material,
evidence [Sec. 7]. electronic signature or copyrighted works
including legally protected sound recordings or
Evidential weight phonograms or information material on
The following shall be given due regard In protected works, through the use of
assessing the evidential weight of an electronic telecommunication networks, such as, but not
data message or electronic document: limited to, the internet, in a manner that
a. the reliability of the manner in which it infringes intellectual property rights
was generated, stored or
communicated, Violations of the RA No. 7394 or the
b. the reliability of the manner in which its Consumer Act [Sec. 33(c)]
originator was identified, and In relation to transactions covered by or using
c. other relevant factors. [Sec. 12] electronic data messages or electronic
documents
Page 298 of 494

Other violations of the provisions of
the Electronic Commerce Act [Sec.
33(d)]
Page 299 of 494

FOREIGN INVESTMENTS
ACT
COMMERCIAL LAW
FOREIGN INVESTMENTS ACT COMMERCIAL LAW
c. Foreign investments shall be
conducted based on the principles of
FOREIGN transparency, reciprocity, equity, and
economic cooperation.
INVESTMENTS ACT
As a general rule, there are no
(R.A. No. 7042, as restrictions on extent of foreign
ownership of export enterprises.
amended by R.A. No.
11647) In domestic market enterprises,
foreigners can invest as much as one
hundred percent (100%) equity except
I. Declaration of Policy [Sec. in areas included in the negative list.
Foreign owned firms catering mainly to
2] the domestic market shall be
encouraged to undertake measures
a. To attract, promote and welcome that will gradually increase Filipino
productive investments from foreign participation in their businesses by
individuals, partnerships, corporations, taking in Filipino partners, electing
and governments, including their Filipinos to the board of directors,
political subdivisions, in activities which implementing transfer of technology to
significantly contribute to sustainable, Filipinos, generating more employment
inclusive, resilient, and innovative for the economy and enhancing skills
economic growth, productivity, global of Filipino workers.
competitiveness, employment
creation, technological advancement,
and countrywide development to the
II. Definitions [Sec. 3]
extent that foreign investment is
allowed in such activity by the 1. Foreign Investment [Sec. 3(c)]
Constitution and relevant laws, and
consistent with the protection of Equity investment made by a non-
national security. Philippine national in the form of
Foreign investments shall be foreign exchange and/or other assets
encouraged in enterprises that actually transferred to the Philippines
significantly expand livelihood and and duly registered with the Bangko
employment opportunities for Filipinos; Sentral ng Pilipinas;
enhance economic value of agricultural
products; promote the welfare of
2. “Doing business” [Sec. 3(d)]
Filipino consumers; expand the scope,
quality and volume of exports and their
access to foreign markets; and/or Includes:
transfer relevant technologies in • Soliciting orders, service contracts,
agriculture, industry and support opening offices, whether called
services. Foreign investments shall be "liaison" offices or branches;
welcome as a supplement to Filipino • Appointing representatives or
capital and technology in those distributors domiciled in the
enterprises serving mainly the Philippines or who in any calendar
domestic market. year stay in the country for a period
or periods totaling 180 days or
b. The State shall promote accountability more
and integrity in public office, as well as • Participating in the management,
the promotion and administration of supervision or control of any
efficient public service to entice foreign domestic business, firm, entity or
investments. corporation in the Philippines; and
Page 301 of 494
• Any other act or acts that imply a It should be kept in mind that the
continuity of commercial dealings determination of whether a foreign
or arrangements, and contemplate corporation is doing business in the
to that extent the performance of Philippines must be judged in light of
acts or works, or the exercise of the attendant circumstances
some of the functions normally [Steelcase, Inc. v. Design International
incident to, and in progressive Selections, Inc., G.R. No. 171995, 18
prosecution of, commercial gain or April 2012]
of the purpose and object of the
business organization. Factors used by the Supreme Court to
determine whether a foreign
Does not include: corporation is doing business in the
• Mere investment as a shareholder Philippines:
by a foreign entity in domestic a. Should be active and continuous;
corporations duly registered to do isolated business transactions or
business, and/or the exercise of occasional, incidental and casual
rights as such investor; transactions are not within the
• Having a nominee director or context of doing business (Antam
officer to represent its interests in Consolidated, Inc. v. CA, G.R. No.
such corporation; and L-61523 (1986)]
• Appointing a representative or b. Intention of an entity to continue the
distributor domiciled in the body of its business in the country;
Philippines which transacts number and quantity are merely
business in its own name and for its evidence of such intention [Eriks
own account. Pte. Ltd. v. CA, G.R. No. 118843
(2007)]
The IRR of RA No. 7042 also states the c. Single act may be considered as
following as not to be deemed “doing business” doing business if it implies a
in the Philippines: continuity of commercial dealings
• Publication of a general and contemplates the performance
advertisement through any print or of acts or the exercise of functions
broadcast media normally incidental to and in the
• Maintaining a stock of goods in the progessive pursuit of its purpose
Philippines solely for the purpose [Magna Ready Mix Concrete
of having the same processed by Corporation v. Andersen Bjornstad
another entity in the Philippines Kane Jacobs, Inc., G.R. No.
• Consignment by a foreign entity of 196158, (2021)]
equipment with a local company to
be used in the processing of Two general tests to determine whether or
products for export not a foreign corporation can be considered
• Collecting information in the as “doing business” in the Philippines:
Philippines 1. Substance Test – whether the
• Performing services auxiliary to an foreign corporation is continuing
existing isolated contract of sale the body of the business or
which are not on a continuing enterprise for which it was
basis, such as installing in the organized or whether it has
Philippines machinery it has substantially retired from it and
manufactured or exported to the turned it over to another
Philippines, servicing the same, 2. Continuity Test – implies
training domestic workers to continuity of commercial dealings
operate it, and similar incidental and arrangements, and
services. contemplates, to that extent, the
performance of acts or works or the
Page 302 of 494

exercise of some of the functions 4. One (1) representative from the
normally incident to, and in the DTI-Philippine Economic Zone
progressive prosecution of, the Authority (PEZA);
purpose and object of its 5. One (1) representative from the
organization [Agilent Technologies Department of Foreign Affairs
v. Integrated Silicon, G.R. No. (DFA),Office of the
156416 (2004)] Undersecretary for Multilateral
Affairs and International Economic
3. Export enterprise [Sec. 3(e)] Relations (OUMAIER);
6. One (1) representative from the
National Economic and
An enterprise wherein a manufacture,
processor or service (including Development Authority (NEDA);
tourism) enterprise exports sixty per
Department of Information and
cent (60%) or more of its output, or
wherein a trader purchases products Communications Technology
(DICT);
domestically and exports sixty per cent
(60%) or more of such purchases. 8. One (1) representative from the
Commission on Higher Education
(CHED);
4. Domestic market enterprise [Sec. Technical Education and Skills
3(f)] Development Authority (TESDA);
and
An enterprise which produces goods 10. Four (4) representatives
for sale, or renders services to the composed of one (1)
domestic market entirely or if exporting representative each from the
a portion of its output fails to National Capital Region, Luzon,
consistently export at least sixty Visayas and Mindanao, to be
percent (60%) thereof. chosen from a list of nominees
prepared and submitted by
5. Negative List [Sec. 3(g)] nationally recognized leading
industry or business chambers,
who shall be of known
List of areas of economic activity
whose foreign ownership is limited to a competence, probity, integrity and
expertise in any of the fields of
maximum of forty percent (40%) of the
equity capital of the enterprises investment, advertising, banking,
finance management and law, with
engaged therein.
at least ten (10) years of
outstanding management or
III. Inter-Agency Investment leadership experience.
Promotion Coordination Powers and Functions of the IIPCC:

Committee (IIPCC) [Sec. 4]
1. To establish both a medium- and
long-term Foreign Investment
The IPCC shall be composed of the: Promotion and Marketing Plan
(FIPMP),coordinating all existing
1. Secretary of the DTI, to preside as investment development plans and
Chairperson; programs under the BOI, PEZA,
2. Secretary/Undersecretary of the and various investment promotion
Department of Finance (DOF) as agencies (IPAs),LGUs, and other
Vice-Chairperson; agencies, as delineated in Section
3. One (1) representative from the 4-B of this Act;
DTI-Board of Investments (BOI);
Page 303 of 494
2. To design a comprehensive
marketing strategy and campaign, Exception: unless participation of non-
promoting the country as a Philippine nationals in the enterprise is
desirable investment area; prohibited or limited to a smaller percentage by
3. To support inbound and outbound existing law and/or under the provisions of this
foreign direct and trade missions Act
for new international markets to
explore the country as a possible The SEC or the DTI, as the case may be, shall
location to do business; not impose any limitations on the extent of
4. To encourage and support foreign ownership in an enterprise additional to
research and development in those provided in this Act: Provided,
priority areas indicated by the however,That any enterprise seeking to avail of
FIPMP; incentives under the Omnibus Investments
5. To monitor actual performance Code of 1987 must apply for registration with
against measurable and time the BOI, which shall process such application
bound targets in the FIPMP, to for registration in accordance with the criteria
include job generation; for evaluation prescribed in said Code.
6. To submit annual evaluation and
reports to the President of the A non-Philippine national intending to engage
Philippines and the Congress in the same line of business as an existing joint
regarding the activities of the venture, in which he or his majority shareholder
IIPCC; is a substantial partner, must disclose the fact
7. To establish and regularly update and the names and addresses of the partners
an online database including a in the existing joint venture in his application for
directory of ready local partners registration with SEC. During the transitory
from priority sectors under the period as provided in Section 15 hereof, SEC
FIPMP, as a tool for promoting shall disallow registration of the applying non-
investments and business Philippine national if the existing joint venture
matching in local supply chains; enterprise, particularly the Filipino partners
and therein, can reasonably prove they are capable
8. To support local government to make the investment needed for the
efforts to promote foreign direct domestic market activities to be undertaken by
investments, expedite compliance the competing applicant. Upon effectivity of this
with national requirements and Act, SEC shall effect registration of any
address other safeguards and enterprise applying under this Act within fifteen
services requested by foreign (15) days upon submission of completed
investors in their different localities requirements."
involved with said foreign
investments. cf. Registration Process Of Philippine
Nationals
IV. Registration of Who are Philippine nationals?

Investments of Non- a. Citizen of the Philippines
b. Domestic partnership or association wholly
Philippine Nationals [Sec. 5] owned by citizens of the Philippines
c. Corporation organized under the laws of the
General Rule: Without prior approval, a non- Philippines of which at least 60% of the capital
Philippine national may do business as defined stock outstanding and entitled to vote is owned
in Sec. 3(d) or invest in a domestic enterprise and held by citizens of the Philippines
up to one hundred percent (100%) of its capital: d. Corporation organized abroad and
• Upon registration with SEC, or registered as doing business in the Philippines
• With the the DTI for single under the Corporation Code of which 100% of
proprietorships
Page 304 of 494
the capital stock outstanding and entitled to "Export enterprises shall register and comply
vote is wholly owned by Filipinos with the export requirements in accordance
e. A trustee of funds for pension or other with Title XIII of the National Internal Revenue
employee retirement, where the trustee is a Code (NIRC),as amended, for purposes of
Philippine national and at least 60% of the fund availing any tax incentive or benefit.
will accrue to the benefit of Philippine nationals
Where a corporation and its non-Filipino VI. Foreign Investments in

stockholders own stocks in a Securities and Domestic Enterprises [Sec.
Exchange Commission (SEC) registered
enterprise, the corporation is a Filipino national 7]
under the following conditions:
a. At least sixty percent (60%) of the capital Non-Philippine nationals may own up to one
stock outstanding and entitled to vote of each hundred percent (100%) of domestic market
of both corporations must be owned and held enterprises unless foreign ownership therein is
by citizens of the Philippines; prohibited or limited by the Constitution and
b. At least sixty percent (60%) of the members existing law or the Foreign Investment
of the Board of Directors of each of both Negative List under Section 8 hereof."
corporations must be citizens of the
Philippines.
VII. Foreign Investment
The control test shall be applied for this
purpose.
Negative List [Sec. 8]
The Foreign Investment Negative List shall
V. Foreign Investments in have two (2) component lists: A and B:
Export Enterprises [Sec. 6] a) List A shall enumerate the areas of
activities reserved to Philippine nationals
by mandate of the Constitution and specific
Foreign investment in export enterprises laws.
whose products and services do not fall within b) List B shall contain the areas of activities
Lists A and B of the Foreign Investment and enterprises regulated pursuant to law:
Negative List provided under Section 8 hereof a. which are defense-related
is allowed up to one hundred percent (100%) activities, requiring prior clearance
ownership. and authorization from Department
of National Defense (DND) to
Export enterprises which are non-Philippine engage in such activity, such as the
nationals shall register with BOI and submit the manufacture, repair, storage
reports that may be required to ensure and/or distribution of firearms,
continuing compliance of the export enterprise ammunition, lethal weapons,
with its export requirement. BOI shall advise military ordnance, explosives,
SEC or DTI, as the case may be, of any export pyrotechnics and similar materials,
enterprise that fails to meet the export ratio unless such manufacturing or
requirement. The SEC or DTI shall thereupon repair activity is specifically
order the non-complying export enterprise to authorized by the Secretary of
reduce its sales to the domestic market to not National Defense; or
more than forty percent (40%) of its total b. which have implications on public
production; failure to comply with such SEC or health and morals, such as the
DTI order, without justifiable reason, shall manufacture and distribution of
subject the enterprise to cancellation of SEC or dangerous drugs, all forms of
DTI registration, and/or the penalties provided gambling, nightclubs, bars, beer
in Section 14 hereof. houses, dance halls, sauna and
steam bathhouses and massage
clinics.
Page 305 of 494
General Rule: Small and medium-sized than once every two (2) years: Provided, That
domestic market enterprises with paid-in equity the NEDA, in consultation and cooperation with
capital less than the equivalent of Two hundred the BOI, DTI, SEC, DICT, IPAs and other
thousand US dollars (US$200,000.00), are pertinent government agencies, shall, every
reserved to Philippine nationals two (2) years, (i) review the Foreign Investment
Negative List, and (ii) submit to Congress an
Exceptions: analysis of foreign investment performance
1. Otherwise provided under RA No. 8762, economic activities of the industries under the
otherwise known as the Retail Trade Foreign Investment Negative List and the
Liberalization Act of 2000 and other reasons for the recommended amendments, if
relevant laws any: Provided, further,That NEDA shall
2. A minimum paid-in capital of One hundred recommend to Congress investment-related
thousand dollars (US$100,000.00) if they matters requiring necessary legislation."
prove:
a. they involve advanced technology as THE TWELFTH REGULAR FOREIGN
determined by the Department of INVESTMENT NEGATIVE LIST
Science and Technology, or EO No. 175, promulgated on June 27,
b. they are endorsed as startup or startup 2022
enablers by the lead host agencies Nationality Industry
pursuant to RA No. 11337, or Requireme
c. a majority of their direct employees are nt
Filipinos, but in no case shall the LIST A: Foreign Ownership is Limited
number of Filipino employees be less by Mandate of the Constitution and
than fifteen (15)
Specific Laws
No Foreign 1. Mass media, except
Registered foreign enterprises employing
Equity recording
foreign nationals and enjoying fiscal incentives
shall implement an understudy or skills
2. Practice of professions,
development program to ensure the transfer of
except in cases specifically
technology or skills to Filipinos. Compliance
allowed by law following the
with this requirement shall be regularly
prescribed conditions stated
monitored by the DOLE.
therein. The Annex on
Professions attached
Nothing in this Act shall operate as a cause for
herewith and forming an
termination of employees hired prior to the
integral part of this
effectivity of this Act. In all cases, the provisions
document, indicates:
of Presidential Decree No. 442, otherwise
a. professions where
known as the "Labor Code of the Philippines"
foreigners are not allowed to
and other applicable laws, rules and
practice in the Philippines,
regulations issued by DOLE shall prevail.
except if subject to
reciprocity as provided in
Who may recommend amendments to List
pertinent laws; and
B:
b. corporate practice of
1. Secretary of National Defense, or
professions with foreign
2. the Secretary of Health, endorsed
equity restrictions under
by the NEDA, or
pertinent laws.
3. upon recommendation motu
proprio, of NEDA, approved by the
3. Retail trade enterprises
President, and promulgated by a
with paid-up capital of less
Presidential Proclamation
than PhP25,000,000.00
Amendments to the Foreign Investment
4. Cooperatives, except
Negative List shall not be made more often
investments of former
Page 306 of 494
THE TWELFTH REGULAR FOREIGN THE TWELFTH REGULAR FOREIGN
INVESTMENT NEGATIVE LIST INVESTMENT NEGATIVE LIST
EO No. 175, promulgated on June 27, EO No. 175, promulgated on June 27,
2022 2022
Nationality Industry Nationality Industry
Requireme Requireme
nt nt
natural born citizens of the Up to 40% 15. Procurement of
Philippines foreign infrastructure projects
equity pursuant to Sec. 23.4.2.1 (b),
5. Organization and (c), and (e) of IRR of RA No.
operation of private 9184
detective, watchmen or
security guards agencies 16. Exploration,
development and utilization
6. Small-scale mining of natural resources
7. Utilization of marine 17. Ownership of private

resources in archipelagic lands except a natural born
waters, territorial sea and citizen who has lost his
exclusive economic zone, as Philippine citizenship and
well as small-scale utilization who has the legal capacity to
of natural resources in rivers, enter into a contract under
lakes, bays and lagoons Philippine laws
8. Ownership, operation and 18. Operation of public

management of cockpits utilities
9. Manufacture, repair, 19. Educational institutions

stockpiling and/or other than those established
distribution of nuclear by religious groups and
weapons mission boards, for foreign
diplomatic personnel and
10. Manufacture, repair, their dependents, and other
stockpiling and/or foreign temporary, or for
distribution of biological, short-term high-level skills
chemical and radiological development that do not
weapons and anti-personnel form part of the formal
mines education system as defined
in Section 20 of Batas
11. Manufacture of Pambansa No. 232
firecrackers and other
pyrotechnic devices 20. Culture, production,
Up to 25% 12. Private recruitment, milling, processing, trading
foreign whether for local or overseas except retailing, of rice and
equity employment corn and acquiring, by
barter, purchase or
13. Contracts for the otherwise, rice and corn and
construction of defense- the by-products thereof ,
related structures subject to period of
Up to 30% 14. Advertising divestment
foreign
equity
Page 307 of 494
THE TWELFTH REGULAR FOREIGN THE TWELFTH REGULAR FOREIGN
INVESTMENT NEGATIVE LIST INVESTMENT NEGATIVE LIST
EO No. 175, promulgated on June 27, EO No. 175, promulgated on June 27,
2022 2022
Nationality Industry Nationality Industry
Requireme Requireme
nt nt
21. Contracts for the supply lead (11), calcium and
of materials, goods and cuprite;
commodities to government- iii. Nitric acid;
owned or -controlled iv. Nitrocellulose;
corporations (GOCCs), v. Perchlorates of
company, agency or ammonium,
municipal corporation potassium and
sodium;
22. Operation of deep sea vi. Dinitrocellulose;
commercial fishing vessels vii. Glycerol;
viii.
23. Ownership of Amorphousphosphoru
condominium units s;
ix. Hydrogen
24. Private radio peroxide;
communications network x. Strontium nitrate
LIST B: Foreign Ownership is Limited powder;
for Reasons of Security, Defense, Risk xi. Toluene; and
to Health and Morals and Protection of f. Telescopic sights, sniper
Small and Medium Scale Enterprises scope and other similar
Up to 40% 1. Manufacture, repair, devices.
foreign storage, and/or distribution However, the manufacture or
equity of products and/or repair of these items may be
ingredients requiring authorized by the Chief of
Philippine National Police the PNP to non-Philippine
(PNP) clearance: nationals; Provided that a
a. Firearms (handguns to substantial percentage of
shotguns), parts of firearms output, as determined by the
and ammunition therefore, said agency, is exported.
instruments or implements Provided further that the
used or intended to be used extent of foreign equity
in the manufacture of ownership allowed shall be
firearms; specified in the said
b. Gunpowder; authority/clearance.
c. Dynamite;
d. Blasting supplies; 2. Manufacture and
e. Ingredients used in distribution of dangerous
making explosives: drugs
i. Chlorates of
potassium and 3. Sauna and steam
sodium; bathhouses, massage clinics
ii. Nitrates of and other like activities
ammonium, regulated by law because of
potassium, sodium risks posed to public health
barium, copper (11), and morals, except wellness
centers
Page 308 of 494
THE TWELFTH REGULAR FOREIGN
INVESTMENT NEGATIVE LIST
EO No. 175, promulgated on June 27,
2022
Nationality Industry
Requireme
nt
4. All forms of gambling

except those covered by
investment agreements with
PAGCOR
5. Micro and small domestic

market enterprises with paid
in equity capital of less than
the equivalent of
US$200,000
6. Micro and small domestic

market enterprises: (i) that
involve advance technology
as determined by the
Department of Science and
Technology (DOST); or (ii)
are endorsed as startup or
startup enablers by the lead
host agencies, namely the
Department of Trade and
Industry, Department of
Information and
Communications
Technology or DOST,
pursuant to RA No. 11337,
otherwise known as the
"Innovative Startup Act"; or
(iii) with a majority of their
direct employees as
Filipinos, but in no case shall
the number of Filipino
employees be less than
fifteen (15), with paid-in
equity capital of less than the
equivalent of US$100,000
Page 309 of 494

TAXATION 1
TAXATION LAW
TAXATION 1 TAXATION LAW

The distinction is important when the one
exercising it is the LGU (mere delegated
I. GENERAL PRINCIPLES authority).
OF TAXATION
Since Congress has the power to exercise the
State inherent powers of Police Power,
A. POWER OF TAXATION AS Eminent Domain and Taxation, the distinction
DISTINGUISHED FROM POLICE between police power and the power to tax xxx
POWER AND EMINENT DOMAI would not be of any moment when Congress
itself exercises the power. [NTC v. CA, G.R.
No. 127937 (1999)]
When the distinction of exercise of
powers is relevant
Taxation Eminent Domain Police Power

May be exercised by:
the government; May be exercised only by:
Authority (who May be exercised only by:
its political subdivisions; the government; or
exercises the the government; or
or may be granted to public its political subdivisions.
Power) its political subdivisions.
service companies or public
utilities.
The use of the property is
“regulated” for the purpose of
promoting the general
The property (generally in the
welfare; it is not
form of money) is taken for
compensable.
the support of the
government. To facilitate the taking of
If the primary purpose is the
Purpose private property for public
regulation of some particular
If the primary purpose is to use.
occupation, calling, or
raise revenue, it represents
activity, it is an exercise of
an exercise of taxing power.
police power even if it
[71 Am. Jur. 2d 395–396]
incidentally produces
revenue. [71 Am. Jur. 2d
395–396]
Operates upon: Operates on: Operates upon:
Persons
a community; an individual as the owner of a community;
Affected
or class of individuals. a particular property. or a class of individuals.
The money contributed There is no transfer of title. At
There is a transfer of the right
Effect becomes part of the public most, there is restraint on the
to property.
funds. injurious use of property.
Protection and benefits he
Market value of the Indirect benefits
receives.
property
The enjoyment of the
The person affected receives
Benefits privileges of living in an
He receives the market value indirect benefits as may arise
Received organized society,
of the property taken from from the maintenance of a
established and safeguarded
him. healthy economic standard of
by the devotion of taxes to
society.
public purpose.
Amount imposed should just
No amount imposed but
Generally, there is no limit on be commensurate to cover
Amount of rather the owner is paid the
the amount of tax that may be the cost of regulation,
Imposition market value of property
imposed. issuance of a license or
taken.
surveillance
Subject to constitutional Inferior to the impairment Relatively free from
Relationship to limitations, including the prohibition; government constitutional limitations and
the Constitution prohibition against cannot expropriate private is superior to the impairment
impairment of the obligation property, which under a of contract provision.
Page 311 of 494


Taxation Eminent Domain Police Power
of contracts. contract had previously
bound itself to purchase from
the other contracting party.
[MAMALATEO, Reviewer on Taxation 2nd Edition (2008), pp. 11-1
B. INHERENT AND character of the tax law, not the number of

persons benefited. [Dimaampao, Tax
CONSTITUTIONAL Principles and Remedies (2015)]
LIMITATIONS OF TAXATION
Tests in Determining Public Purpose:
a. Duty Test – Whether the thing to be
1. Inherent Limitations furthered by the appropriation of public
revenue is something which is the duty of
The following are the inherent limitations of the State as a government to provide.
taxation: b. Promotion of General Welfare Test –
a. Public Purpose Whether the proceeds of the tax will directly
b. Inherently Legislative promote the welfare of the community in
c. Territorial equal measure.
d. International Comity c. Character of the Direct Object of the
e. Exemption of Government Entities, Expenditure – It is the essential character
Agencies, and Instrumentalities of the direct object of the expenditure which
must determine its validity as justifying a
a. Public Purpose tax and not the magnitude of the interests
to be affected nor the degree to which the
The proceeds of the tax must be used: general advantage of the community, and
i. for the support of the State; or thus the public welfare, may be ultimately
ii. for some recognized objects of benefited by their promotion. [Pascual v.
government or directly to promote the Sec. of Public Works, supra]
welfare of the community.
b. Inherently Legislative
Test: Whether the statute is designed to
promote the public interest, as opposed to the General Rule: Delegata potestas non potest
furtherance of the advantage of individuals, delegari. (No delegated powers can be further
although each advantage to individuals might delegated.)
incidentally serve the public. [Pascual v. Sec.
of Public Works, G.R. No. L-10405 (1960)] The power to tax is exclusively vested in the
legislative body and it may not be re-delegated.
The public purpose of a tax may legally exist Judge Cooley enunciates the doctrine in the
even if the motive which impelled the following oft-quoted language: "One of the
legislature to impose the tax was to favor one settled maxims in constitutional law is that the
industry over another. [Tio v. Videogram, G.R. power conferred upon the legislature to make
No. L-75697 (1987)] laws cannot be delegated by that department
to any other body or authority.” [People v. Vera,
Public use is no longer confined to the G.R. No. L-45685 (1937)]
traditional notion of use by the public but held
synonymous with public interest, public benefit, Stated in another way, taxation may
public welfare, and public convenience. exceptionally be delegated, subject to such
(Commissioner of Internal Revenue v. Central well-settled limitations as:
Luzon Drug Corporation, G.R. No. 159647 a. The delegation shall not contravene any
(2005)] constitutional provision or the inherent
limitations of taxation;
It is the purpose which determines the public b. The delegation is effected either by:
Page 312 of 494

§ the Constitution; or b. Delegation to the President
§ by validly enacted legislative 1. Tariff powers by Congress under the
measures or statute; and Flexible Tariff Clause
c. The delegated levy power, except when the
delegation is by an express provision of the The Congress may, by law, authorize
Constitution itself, should only be in favor the President to fix within specified
of the local legislative body of the local or limits, and subject to such limitations
municipal government concerned. [VITUG and restrictions as it may impose, tariff
and ACOSTA] rates, import and export quotas,
tonnage and wharfage dues, and other
For a valid delegation of power, it is essential duties or imposts within the framework
that the law delegating the power must be: of the national development program of
(1) complete in itself, that is, it must set forth the Government. [Sec. 28(2), Art. VI,
the policy to be executed by the delegate 1987 Constitution]
and,
(2) it must fix a standard — limits of which are 2. Emergency Powers [Sec. 23(2), Art. VI,
sufficiently determinate or determinable — 1987 Constitution.
to which the delegate must conform. 3. To enter into Executive agreements;
[Osmeña v. Orbos, G.R. No. 99886 (1993)] and
4. To ratify treaties which grant tax
Legislature has the power to determine the: exemption subject to Senate
a. Nature (kind), concurrence.
b. Object (purpose),
c. Extent (rate), c. Delegation to administrative agencies
d. Coverage (subjects) and Limited to the administrative
e. Situs (place) of taxation. implementation that calls for some degree
of discretionary powers under sufficient
Exceptions standards expressed by law or implied
a. Delegation to local governments from the policy and purposes of the Act.
This exception is in line with the general
principle that the power to create municipal There are certain aspects of the taxing
corporations for purposes of local self- process that are not legislative and they
government carries with it, by necessary may, therefore, be vested in an
implication, the power to confer the power administrative body. The powers which are
to tax on such local governments. (1 not legislative include:
Cooley 190). This is logical for after all, 1. The power to value property for
municipal corporations are merely purposes of taxation pursuant to fixed
instrumentalities of the state for the better rules;
administration of the government in respect 2. The power to assess and collect the
to matters of local concern. [Pepsi-Cola taxes; and
Bottling Co. of the Phil. Inc. v. Mun. of 3. The power to perform any of the
Tanauan, G.R. No. L-31156 (1976)]. innumerable details of computation,
appraisement, and adjustment, and the
Under the new Constitution, however, delegation of such details.
LGUs are now expressly given the power
to create its own sources of revenue and to The exercise of the above powers is really
levy taxes, fees and charges, subject to not an exception to the rule as no
such guidelines and limitations as the delegation of the strictly legislative power
Congress may provide which must be to tax is involved.
consistent with the basic policy of local
autonomy. [Sec 5, Art. X, 1987 The powers which cannot be delegated
Constitution] include:
Page 313 of 494

● The determination of the subjects to be Thus, the property or income of a foreign state
taxed; or government may not be the subject of
● The purpose of the tax, the amount or taxation by another state.
rate of the tax;
● The manner, means, and agencies of Reasons:
collection; and a. In par in parem non habet imperium. As
● The prescribing of the necessary rules between equals there is no sovereign
with respect thereto. (Doctrine of Sovereign Equality among
states under international law). One state
c. Territorial cannot exercise its sovereign powers over
another. All states, including the smallest
Rule: A state may not tax property lying outside and least influential, are also entitled to
its borders or lay an excise or privilege tax upon their dignity and the protection of their
the exercise or enjoyment of a right or privilege honor and reputation. [Dimaampao, Tax
derived from the laws of another state and Principles and Remedies (2015)]
therein exercise and enjoyed. [51 Am.Jur. 87- b. In international law, a foreign government
88]. may not be sued without its consent.
Therefore, it is useless to impose a tax
Reasons: which could not be collected.
a. Tax laws do not operate beyond a c. Usage among states that when a foreign
country’s territorial limits. sovereign enters the territorial jurisdiction
b. Property which is wholly and exclusively of another, there is an implied
within the jurisdiction of another state understanding that the former does not
receives none of the protection for which a intend to degrade its dignity by placing
tax is supposed to be a compensation. itself under the jurisdiction of the other.
Note: Where privity of relationship exists. It e. Exemption of Government Entities,

does not mean, however, that a person outside Agencies, and Instrumentalities
of state is no longer subject to its taxing
powers. The fundamental basis of the right to If the taxing authority is the National
tax is the capacity of the government to provide Government:
benefits and protection to the object of the tax.
A person may be taxed where there is between General Rule: Agencies and instrumentalities
him and the taxing state, a privity of the of the government are exempt from tax. Their
relationship justifying the levy. In these cases, exemption rests on the State's sovereign
the State can exercise its taxing powers over immunity from taxation. The State cannot be
the taxpayer even outside its territorial taxed without its consent and such consent,
jurisdiction, such as the taxation of resident being in derogation of its sovereignty, is to be
citizens for income from sources worldwide. strictly construed. [Gomez v. Palomar, GR No.
The basis of the power to tax is not dependent L-23645, 29 October 1968]
on the source of the income nor upon the
location of the property nor upon the residence Note: Unless otherwise provided by law, the
of the taxpayer but upon his relation as a citizen exemption applies only to government entities
to the state. As such a citizen, he is entitled, through which the government immediately
wherever he may be, inside or outside of his and directly exercises its sovereign powers.
country, to the protection of his With respect to government-owned or
government. controlled corporations performing proprietary
(not governmental) functions, they are
d. International Comity generally subject to tax unless exempted under
Section 27(C) of the Tax Code or, in certain
Comity – respect accorded by nations to each cases, if there is a tax exemption provisions in
other because they are sovereign equals. their charters or the law creating them in line
Page 314 of 494

with the rule that a specific law overrides a There is no constitutional prohibition against
general law. the government taxing itself. [Coll. v. Bisaya
Land Transportation, 105 Phil. 338 (1959)].
If the taxing authority is a local government
unit: RA 7160 expressly prohibits LGUs from 2. Constitutional Limitations
levying tax on the National Government, its
agencies and instrumentalities and other The following are the constitutional limitations
LGUs. [Sec. 133 (o), LGC] of taxation:
Reasons for the exemption: 1. Provisions directly affecting taxation:

a. To levy a tax upon public property would 1. Prohibition against imprisonment for
render necessary new taxes on other non-payment of poll tax;
public property for the payment of the tax 2. Uniformity and equality of taxation;
so laid and thus, the government would be 3. Grant by Congress of authority to the
taxing itself to raise money to pay over for President to impose tariff rates;
itself. 4. Prohibition against taxation of religious,
b. This immunity also rests upon fundamental charitable entities, and educational
principles of government, being necessary entities;
in order that the functions of government 5. Prohibition against taxation of non-
shall not be unduly impeded. [1 Cooley stock, non-profit educational
263.] institutions;
c. The practical effect of an exemption 6. Majority vote of Congress for grant of
running to the benefit of the government is tax exemption;
merely to reduce the amount of money that 7. Prohibition on use of tax levied for
has to be handled by the government in the special purpose;
course of its operations: For these 8. President’s veto power on appropriation,
reasons, provisions granting revenue, tariff bills;
exemptions to government agencies 9. Tax bills should originate exclusively in
may be construed liberally in favor of the House of the Representatives;
non-tax liability of such agencies. 10. Concurrence of at least 2/3 of the
[Maceda v. Macaraig, Jr., G.R. No. 88291 Senate with tax treaties
(1991)]. 11. Non-impairment of jurisdiction of the
Supreme Court;
Exception: Government-owned or controlled 12. Grant of power to the local government
corporations (GOCCs) perform proprietary units to create its own sources of
functions hence, they are subject to taxation. revenue;
[Dimaampao, Tax Principles and Remedies 13. Flexible tariff clause;
(2015)] 14. Exemption from real property taxes;
and
Exception to the Exception: The following 15. No appropriation or use of public
GOCCs are considered tax exempt as money for religious purposes;
provided under Sec. 27(c) of the NIRC, as
amended:
1. Government Service Insurance System 2. Provisions indirectly affecting taxation:
(GSIS) (Sec. 39, RA 8291) 1. Due process
2. Social Security System (SSS) (Sec. 16, RA 2. Equal protection;
8282) 3. Religious freedom;
3. Home Development Mutual Fund 4. Non-impairment of obligations of
(HDMF) (Sec. 19, RA 9679) contracts;
4. Philippine Health Insurance Corporation 5. Freedom of speech and expression;
(PHIC) 6. Presidential power to grant reprieves,
5. Local Water Districts communications, and pardons, and
Page 315 of 494

remit fines and forfeitures after ii. Equality in burden –
conviction by final judgement; and Uniformity implies equality in
7. No taking of private property for public burden, not equality in amount
use without just compensation or equality in its strict and literal
meaning. The reason is simple
a. Provisions directly affecting Taxation enough. If legislation imposes
a single tax upon all persons,
1. Prohibition against imprisonment for properties, or transactions, an
non-payment of poll tax inequality would obviously
result considering that not all
No person shall be imprisoned for debt or persons, properties, and
non-payment of a poll tax. [Sec. 20, Art. III, transactions are identical or
1987 Constitution] similarly situated. Neither does
uniformity demand that taxes
Capitation or poll taxes are taxes of a shall be proportional to the
fixed amount upon all persons, or upon all relative value or amount of the
the persons of a certain class, resident subject thereof. Taxes may be
within a specified territory, without regard progressive.
to their property or the occupations in b. Equity
which they may be engaged. Taxes of a
specified amount upon each person i. Uniformity in taxation is
performing a certain act or engaging in a effected through the
certain business or profession are not, apportionment of the tax
however, poll taxes. [51 Am. Jur. 66-67] burden among the taxpayers
which under the Constitution
2. Uniformity and equality of taxation must be equitable. “Equitable”
means fair, just, reasonable
The rule of taxation shall be uniform and and proportionate to the
equitable. Congress shall evolve a taxpayer’s ability to pay.
progressive system of taxation. [Sec. Taxation may be uniform but
28(1), Art. VI, 1987 Constitution] inequitable where the amount
of the tax imposed is excessive
a. Uniformity – All taxable articles or or unreasonable.
properties of the same class shall be
taxed at the same rate. [City of Baguio ii. The constitutional requirement
v. De Leon, G.R. No. L-24756 (1968)] of equity in taxation also
implies an approach which
i. Uniformity of operation employs a reasonable
throughout tax unit – The rule classification of the entities or
requires the uniform individuals who are to be
application and operation, affected by a tax. Where the
without discrimination, of the “tax differentiation is not based
tax in every place where the on material or substantial
subject of it is found. This differences,” the guarantee of
means, for example, that a tax equal protection of the laws
for a national purpose must be and the uniformity rule will
uniform and equal throughout likewise be infringed.
the country and a tax for a
province, city, municipality, or Taxation does not require identity or
barangay must be uniform and equality under all circumstances, or negate
equal throughout the province, the authority to classify the objects of
city, municipality or barangay. taxation.
Page 316 of 494

Equality and Uniformity distinguished: 3. Grant by Congress of authority to the
President to impose tariff rates
Equality in taxation is accomplished when the
burden of the tax falls equally and impartially Delegation of Tariff powers to the President
upon all the persons and property subject to it. under the flexible tariff clause [Sec. 28(2), Art.
VI, 1987 Constitution], which authorizes the
Uniformity has been defined as that principle President to modify import duties. [Sec. 1608,
by which all taxable articles or kinds of property Customs Modernization and Tariff Act]
of the same class shall be taxed at the same
rate. A tax is uniform when it operates with the 4. Prohibition against taxation of religious,
same force and effect in every place where the charitable entities, and educational
subject of it is found. It does not signify an entities
intrinsic but simply a geographical uniformity
[Churchill v Concepcion, GR No. 11572, 22 Sec. 28(3), Art. VI, 1987 Constitution:
September 1916] a. Charitable institutions, churches and
personages or convents appurtenant
Test of Valid Classification: Classification, to thereto, mosques, non-profit cemeteries,
be valid, must be reasonable and this and all lands, buildings, and improvements,
requirement is not deemed satisfied unless: b. Actually, directly, and exclusively used for
a. It is based upon substantial distinctions religious, charitable, or educational
which make real differences; purposes shall be exempt from taxation.
b. These are germane to the purpose of the c. The tax exemption under this constitutional
legislation or ordinance; provision covers property taxes only and
c. The classification applies not only to not other taxes [Lladoc v. Commissioner,
present conditions but also to future G.R. No. L-19201 (1965)].
conditions substantially identical to those of d. In general, special assessments are not
the present; and covered by the exemption because by
d. The classification applies equally to all nature they are not classified as taxes.
those who belong to the same class. [Apostolic Prefect v. City Treasurer of
[Pepsi-Cola v. Butuan City, G.R. No. L- Baguio, G.R. No. L-47252 (1941)]
22814 (1968)]
To be entitled to the exemption, the
The progressive system of taxation would petitioner must prove that:
place stress on direct rather than indirect taxes, a. It is a charitable institution
on non-essentiality rather than essentiality to b. Its real properties are actually, directly and
the taxpayer of the object of taxation, or on the exclusively used for charitable purposes.
taxpayer’s ability to pay. Example is that
individual income tax system that imposes Revenue or income from trade, business or
rates progressing upwards as the tax base other activity, the conduct of which is not
(taxpayer’s taxable income) increases. A related to the exercise or performance of
progressive tax, however, must not be religious, educational and charitable purposes
confused with a progressive system of or functions shall be subject to internal revenue
taxation. taxes when the same is not actually, directly or
exclusively used for the intended purposes.
While equal protection refers more to like [BIR Ruling 046-2000]
treatment of persons in like circumstances,
uniformity and equity refer to the proper relative
treatment for tax purposes of persons in unlike
circumstances.
Page 317 of 494


“Exclusive" – possessed and enjoyed to the
Test of Use of the property, and not
exclusion of others; debarred from participation
Exemption the ownership [Abra Valley
or enjoyment;
College v. Aquino, G.R. No.
L-39086 (1988)]
"Exclusively" - “in a manner to exclude; as
Nature of Actual, direct and exclusive enjoying a privilege exclusively.”
Use use for religious, charitable
or educational purposes. If real property is used for one or more
[Lladoc v. CIR, supra] commercial purposes, it is not exclusively used
for the exempted purposes but is subject to
Scope of Real property taxes on taxation. The words "dominant use" or
Exemption facilities which are actual, "principal use" cannot be substituted for the
incidental to, or reasonably words "used exclusively" without doing
necessary for the violence to the Constitution and the law. Solely
accomplishment of said is synonymous with exclusively. [Lung Center
purposes such as in the case of the Philippines v. Quezon City, G.R. No.
of hospitals, a school for 144104 (2004)]
training nurses, a nurses’
home, property to provide Note: Lung Center did not necessarily overturn
housing facilities for interns, the case of Abra Valley College v. Aquino, G.R.
resident doctors and other No. L-39086 (1988). Lung Center just provided
members of the hospital a stricter interpretation. In Abra Valley, the
staff, and recreational Court held: The primary use of the school lot
facilities for student nurses, and building is the basic and controlling guide,
interns and residents, such norm and standard to determine tax
as athletic fields. [Abra exemption, and not the mere incidental use
Valley College v. Aquino, thereof. Under the 1935 Constitution, the trial
supra] court correctly held that the school building as
well as the lot where it is built, should be taxed,
not because the second floor of the same is
TEST: Whether an enterprise is charitable or
being used by the Director and his family for
not:
residential purposes (incidental to its
• Whether it exists to carry out a purpose
educational purpose), but because the first
recognized in law as charitable; or
floor thereof is being used for commercial
• Whether it is maintained for gain, profit, or purposes. However, since only a portion is
private advantage. used for purposes of commerce, it is only fair
that half of the assessed tax be returned to the
A charitable institution does not lose its school involved.
character as such and its exemption from taxes
simply because it derives income from paying 5. Prohibition against taxation of non-
patients, whether out-patient, or confined in the
stock, non-profit educational
hospital, or receives subsidies from the institutions
government, so long as the money received is
devoted or used altogether to the charitable Sec. 4, Art. XIV, 1987 Constitution.
object which it is intended to achieve; and no All revenues and assets of non-stock, non-profit
money inures to the private benefit of the educational institutions used actually, directly, and
persons managing or operating the institution exclusively for educational purposes shall be
(including honoraria to members of the board exempt from taxes and duties.
of trustees; BIR Ruling No. 558-18, among
Proprietary educational institutions, including those
others). cooperatively owned, may likewise be entitled to
such exemptions subject to the limitations provided
by law, including restrictions on dividends and
provisions for reinvestment.
Page 318 of 494
Subject to conditions prescribed by law, all grants,

Sec. 28, par. 3, Sec. 4, par. 3,
endowments, donations, or contributions used Art. VI Art. XIV
actually, directly, and exclusively for educational
purposes shall be exempt from tax. Charitable Non-stock, non-profit
institutions, churches educational
This provision covers only non-stock, non- and parsonages or institutions.
profit educational institutions. convents
appurtenant thereto,
The exemption covers income, property, and mosques, non-profit
donor’s taxes, custom duties, and other taxes cemeteries, and all
imposed by either or both the national lands, buildings, and
government or political subdivisions on all improvements,
revenues, assets, property or donations, used actually, directly, and
actually, directly and exclusively for exclusively used for
educational purposes. (In the case of religious religious, charitable,
and charitable entities and non-profit or educational
cemeteries, the exemption is limited to property purposes.
tax.)
Property taxes Income, property,
The exemption does not cover revenues and donor’s taxes
derived from, or assets used in, unrelated and custom duties.
activities or enterprise.
6. Majority vote of Congress for grant of
Revenues derived from assets used in the tax exemption
operation of cafeterias, canteens, and
bookstores are also exempt if they are owned
and operated by the educational institution as Sec. 28, Art. VI, 1987 Constitution.
No law granting any tax exemption shall be passed
ancillary activities and the same are located
without the concurrence of a majority of all the
within the school premises [RMC No. 76-2003] Members of the Congress.
Similar tax exemptions may be extended to

proprietary (for profit) educational Basis: The inherent power of the state to
institutions by law subject to such impose taxes carries with it the power to grant
limitations as it may provide, including tax exemptions.
restrictions on dividends and provisions for
reinvestment. The restrictions are designed to Exemptions may be created by:
ensure that the tax-exemption benefits are a. The Constitution, or
used for educational purposes. b. Statutes, subject to constitutional
limitations
Lands, buildings, and improvements
actually, directly and exclusively used for Vote required for the grant of exemption:
educational purposes are exempt from Absolute majority of the members of Congress
property tax [Sec. 28(3), Art. VI, 1987 (at least ½ + 1 of ALL the members voting
Constitution], whether the educational SEPARATELY)
institution is proprietary or non-profit.
Vote required for withdrawal of such grant
of exemption: Relative majority is sufficient
(MAJORITY of the QUORUM).
The provision guaranteeing equal protection of

the laws and that mandating the rule of taxation
shall be uniform and equitable likewise limit,
Page 319 of 494

although not expressly, the legislative power to Sec. 2, Art. VIII, 1987 Constitution.
grant tax exemption. The Congress shall have the power to define,
prescribe, and apportion the jurisdiction of the
Grants in the nature of tax exemptions: various courts but may not deprive the Supreme
a. Tax amnesties Court of its jurisdiction over cases enumerated in
Section 5 hereof.
b. Tax condonations
c. Tax refunds
Sec. 5(2(b)), Art. VIII, 1987 Constitution. The
Note: Supreme Court shall have the following powers: xxx
a. Local government units may, through (2) Review, revise, modify or affirm on appeal or
ordinances duly approved, grant tax certiorari, as the laws or the Rules of Court may
exemptions, incentives or reliefs under provide, final judgments and orders of lower courts
such terms and conditions as they may in xxx
deem necessary. [Sec. 192, LGC]
(b) all cases involving the legality of any tax, impost,
b. The President of the Philippines may, when assessment or toll or any penalty imposed in relation
public interest so requires, condone or thereto.
reduce the real property tax and interest for
any year in any province or city or a
municipality within the Metropolitan Manila Even the legislative body cannot deprive the
Area. [Sec. 277, LGC] SC of its appellate jurisdiction over all cases
coming from inferior courts where the
7. Prohibition on use of tax levied for constitutionality or validity of an ordinance or
special purpose the legality of any tax, impost, assessment, or
toll is in question. [San Miguel Corp v. Avelino,
All money collected on any tax levied for a G.R. No. L-39699 (1979)]
special purpose shall be treated as a special
fund and paid out for such purpose only. Sec. 30, Art. VI, 1987 Constitution.
No law shall be passed increasing the appellate
If the purpose for which a special fund was jurisdiction of the Supreme Court without its advice
and concurrence.
created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the
general funds of the Government. [Gaston v. Scope of Judicial Review in taxation: limited
Republic Planters Bank, G.R. No. L-77194 only to the interpretation and application of tax
(1988)]. laws. Its power does not include inquiry into the
policy of legislation. Neither can it legitimately
8. President’s veto power on question or refuse to sanction the provisions of
appropriation, revenue, tariff bills any law consistent with the Constitution. [Coll.
v. Bisaya Land Transportation, 105 Phil. 338
Sec. 27(2), Art. VI, 1987 Constitution. (1959)].
The President shall have the power to veto any
particular item or items in an appropriation, 10. Grant of power to the local government
revenue, or tariff bill, but the veto shall not affect the units to create its own sources of
item or times to which he does not object.
revenue
9. Non-impairment of jurisdiction of the LGUs have power to create its own sources of
Supreme Court revenue and to levy taxes, fees and charges,
subject to such guidelines and limitations as
the Congress may provide which must be
consistent with the basic policy of local
autonomy. [Sec. 5, Art. X, 1987 Constitution]
Page 320 of 494


11. Flexible tariff clause methods or procedure prescribed by law.
Delegation of tariff powers to the President Due Process in Taxation requirements:

under the flexible tariff clause [Sec. 28(2), Art. (a) Public purpose
VI, 1987 Constitution] (b) Imposed within taxing authority’s territorial
jurisdiction
Flexible tariff clause: the authority given to the (c) Assessment or collection is not arbitrary or
President, upon the recommendation of NEDA, oppressive
to adjust the tariff rates under Sec. 1608 of the
CMTA in the interest of national economy, The due process clause may be invoked where
general welfare and/or national security. a taxing statute is so arbitrary that it finds no
support in the Constitution, as where it can be
12. Exemption from real property taxes shown to amount to the confiscation of
property. [Sison v. Ancheta, G.R. No. L-
Sec. 28(3), Art. VI, 1987 Constitution. 59431(1984)]
Charitable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit Due process is usually violated where:
cemeteries, and all lands, buildings, and ● The tax imposed is for private, as
improvements, actually, directly, and exclusively distinguished from, public purposes
used for religious, charitable, or educational
● A tax is imposed on property outside the
purposes shall be exempt from taxation.
State, i.e., extra-territorial taxation; or
● Arbitrary or oppressive methods are used
13. No appropriation or use of public in assessing and collecting taxes.
money for religious purposes
But, a tax does not violate the due process
Sec. 29, Art. VI, 1987 Constitution clause, as applied to a particular taxpayer,
No public money or property shall be appropriated, although the purpose of the tax will result in an
applied, paid, or employed, directly or indirectly, for injury rather than a benefit to such taxpayer.
the use, benefit, or support of any sect, church,
denomination, sectarian institution, or system of Due process does not require that the property
religion, or of any priest, preacher, minister, other
subject to the tax or the amount to be raised
religious teacher, or dignitary as such, except when
such priest, preacher, minister, or dignitary is should be determined by judicial inquiry, and a
assigned to the armed forces, or to any penal notice and hearing as to the amount of the tax
institution, or government orphanage or leprosarium. and the manner in which it shall be apportioned
are generally not necessary to due process of
law. [Pepsi-Cola Bottling Co. of the Philippines,
b. Provisions Indirectly Affecting Inc. v. Municipality of Tanauan, G.R. No. L-
Taxation 31156 (1976)]
1. Due process Instances of violations of the due process
clause:
Sec. 1, Art. III, 1987 Constitution. • If the tax amounts to confiscation of
No person shall be deprived of life, liberty, or property;
property without due process of law, nor shall any • If the subject of confiscation is outside the
person be denied the equal protection of the laws.
jurisdiction of the taxing authority;
• If the tax is imposed for a purpose other
Substantive Due Process – An act is done than a public purpose;
under the authority of a valid law or the • If the law which is applied retroactively
Constitution itself. imposes just and oppressive taxes.
• If the law violates the inherent limitations
Procedural Due Process – An act is done on taxation.
after compliance with fair and reasonable
Page 321 of 494

2. Equal protection • This is different from a tax in the income of
one who engages in religious activities or a
Sec. 1, Art. III, 1987 Constitution. tax on property used or employed in
No person shall be deprived of life, liberty, or connection with those activities.
property without due process of law, nor shall any • It is one thing to impose a tax on the
person be denied the equal protection of the laws. income or property of a preacher. It is quite
another thing to exact a tax for the privilege
What the Constitution prohibits is class of delivering a sermon.
legislation which discriminates against some
and favors others. As long as there are rational The Constitution, however, does not prohibit
or reasonable grounds for so doing, Congress imposing a generally applicable tax on the sale
may, therefore, group the persons or properties of religious materials by a religious
to be taxed and it is sufficient “if all of the same organization. [Tolentino v. Secretary of
class are subject to the same rate and the tax Finance, G.R. No. 115455 (1994)]
is administered impartially upon them.” [1
Cooley 608]. 4. Non-impairment of obligations of
contracts
The equal protection clause is subject to
reasonable classification [See requisites for Sec. 10, Art. III, 1987 Constitution.
valid classification, supra]. No law impairing the obligation of contracts shall be
passed.
3. Religious freedom
The Contract Clause has never been thought
Sec. 5, Art. III, 1987 Constitution. as a limitation on the exercise of the State's
No law shall be made respecting an establishment power of taxation save only where a tax
of religion, or prohibiting the free exercise thereof. exemption has been granted for a valid
(Non-establishment clause)
consideration. [Tolentino v. Secretary of
The free exercise and enjoyment of religious Finance, supra]
profession and worship, without discrimination or
preference, shall forever be allowed. (Free exercise REQUISITES OF A VALID TAX
clause) 1. It must be for a public purpose;
2. Rule of taxation should be uniform;
No religious test shall be required for the exercise of 3. The person or property taxed is within the
civil and political rights.
jurisdiction of the taxing authority;
4. Assessment and collection is in
The free exercise clause is the basis of tax consonance with the due process clause;
exemptions. AND
5. The tax must not infringe on the inherent
The imposition of license fees on the and constitutional limitations of the
distribution and sale of bibles and other power of taxation.
religious literature by a non-stock, non-profit
missionary organization not for purposes of TAX AS DISTINGUISED FROM OTHER
profit amounts to a condition or permit for the FORMS OF EXACTIONS
exercise of their right, thus violating the
constitutional guarantee of the free exercise Tariff
and enjoyment of religious profession and Taxes Tariff
worship which carries with it the right to All embracing term A kind of tax
disseminate religious beliefs and information. to include various imposed on articles
[American Bible Society v. City of Manila, G.R. kinds of enforced which are traded
No. L-9637 (1957)] contributions upon internationally
• It is actually in the nature of a condition or persons for the
permit for the exercise of the right.
Page 322 of 494

Taxes Tariff License and
Taxes
attainment of public Regulatory Fee
purposes exceed the
expenses of issuing
Tariff may be used in one of three (3) senses: the license and of
1. A book of rates drawn usually in supervision.
alphabetical order containing the names of Imposed on persons, Imposed only on the
several kinds of merchandise with the property and the right to exercise a
corresponding duties to be paid for the right to exercise a privilege
same; or privilege.
2. The duties payable on goods imported or Failure to pay does Failure to pay makes
exported; or not necessarily the act or business
3. The system or principle of imposing duties make the act or illegal.
on the importation (or exportation of goods) business illegal.
Toll Penalty for non-

Taxes Toll payment:
Paid for the support Paid for the use of Surcharges; or
of the government another’s property. Imprisonment
Demand of Demand of (except poll tax).
sovereignty proprietorship
Generally, no limit on Amount paid License or permit fee is a charge imposed
the amount collected depends upon the under the police power for purposes of
as long as it is not cost of construction regulation.
excessive, or maintenance of
unreasonable or the public License is in the nature of a special privilege,
confiscatory improvement used. of a permission or authority to do what is within
Imposed only by the Imposed by the its terms. It makes lawful an act which would
government government or by otherwise be unlawful. A license granted by the
private individuals or State is always revocable. [Gonzalo Sy Trading
entities. v. Central Bank of the Phil., G.R. No. L-41480
(1976)]
A toll is a sum of money for the use of
something, generally applied to the Importance of the distinctions
consideration which is paid for the use of a 1. It is necessary to determine whether a
road, bridge or the like, of a public nature. [1 particular imposition is a tax or a license fee
Cooley 77] because some limitations apply only to one
and not to the other, and for the reason that
License fee exemption from taxes may not include
License and exemption from license fee.
Taxes 2. The power to regulate as an exercise of
Regulatory Fee
Imposed under the Levied under the police power does not include the power to
taxing power of the police power of the impose fees for revenue purposes.
state for purposes of state. [Progressive Development Corp. v.
revenue. Quezon City, G.R. No. L-36081 (1989)]
Forced contributions Exacted primarily to 3. An exaction, however, may be considered
for the purpose of regulate certain both a tax and a license fee. This is true in
maintaining businesses or the case of car registration fees which may
government occupations. be regarded as taxes even as they also
functions. serve as an instrument of regulation. If the
Generally unlimited Should not purpose is primarily revenue, or if revenue
as to amount unreasonably is, at least, one of the real and substantial
Page 323 of 494

purposes, then the exaction is properly A charge imposed only on property owners
called a tax. [Phil. Airlines, Inc. v. Edu, G.R. benefited is a special assessment rather than
No. L- 41383 (1988)] a tax notwithstanding that the statute calls it a
4. But it is possible that a tax may only have tax. The rule is that an exemption from taxation
a regulatory purpose. The general rule, does not include exemption from special
however, is that the imposition is a tax if its assessment. But the power to tax carries with
primary purpose is to generate revenue, it the power to levy a special assessment.
and regulation is merely incidental; but if
regulation is the primary purpose, the fact Note: The term "special levy" is the name used
that incidentally revenue is also obtained in the present Local Government Code (RA.
does not make the imposition a tax. No. 7160). A province, city, or municipality, or
[Progressive Development Corp. v. the National Government, may impose a
Quezon City, supra] special levy on lands especially benefited by
public works or improvements financed by it.
Primary purpose test (as seen in Progressive [Sec. 240, RA 7160]
Development Corp v. QC, supra):
1. Imposition must relate to an occupation or Debt
activity that so engages the public interest Taxes Debt
in health, morals, safety and development Based on laws Generally based on
as to require regulation for the protection contract, express or
and promotion of such public interest; implied.
2. Imposition must bear a reasonable relation Generally cannot be Assignable
to the probable expenses of regulation, assigned
taking into account not only the costs of Generally paid in May be paid in kind
direct regulation but also its incidental money
consequences as well. Cannot be a subject Can be a subject of
of set off or set off or
Note: Taxes may also be imposed for compensation compensation (see
regulatory purposes. It is called regulatory tax. Art. 1279, Civil
Code)
Special assessment Imprisonment is a A person cannot be
Taxes Special sanction for non- imprisoned for non-
Assessment payment of tax, payment of debt
Levied not only on Levied only on land except poll tax (except when it
land arises from a crime)
Imposed regardless Imposed because of Governed by the Governed by the
of public an increase in value special prescriptive ordinary periods of
improvements of land benefited by periods provided for prescription
public improvement in the NIRC
Contribution of a Contribution of a Does not draw Draws interest when
taxpayer for the person for the interest except only it is so stipulated or
support of the construction of a when delinquent where there is
government public improvement default
It has general Exceptional both as Imposed only by Can be imposed by
application both as to time and locality public authority private individual
to time and place
A tax is not a debt in the ordinary sense of the
A special assessment is not a personal liability word.
of the person assessed, i.e., his liability is
limited only to the land involved. It is based
wholly on benefits (not necessity).
Page 324 of 494


Penalty in performing the act or engaging in the
Taxes Penalty activity which is subject to the excise. The
Violation of tax laws Any sanction term “excise tax” is synonymous with
may give rise to imposed as a “privilege tax” and the two are often used
imposition of penalty punishment for interchangeably (e.g., income tax, value
violation of law or added tax, estate tax, donor’s tax).
acts deemed
injurious 2. As to burden or incidence
Primarily intended to Designed to regulate
raise revenue conduct a. Direct Taxes – taxes which are
May be imposed May be imposed by demanded from persons who also
only by the the government or shoulder them; taxes for which the
government private individuals or taxpayer is directly or primarily liable, or
entities which he cannot shift to another. The
Cannot be a subject Can be a subject of liability for the payment of the tax
of set off or set off or (incidence) and the burden (impact) of the
compensation compensation (see tax falls on the same person. (e.g., income
Art. 1279, Civil tax, estate tax, donor’s tax, community tax)
Code)
b. Indirect Taxes – taxes which are
C. KINDS OF TAXES demanded from one person in the
expectation and intention that he shall
indemnify himself at the expense of
1. As to object another, falling finally upon the ultimate
purchaser or consumer; taxes levied upon
a. Personal, Poll or Capitation Tax – tax of
transactions or activities before the articles
a fixed amount imposed on persons
subject matter thereof, reach the
residing within a specified territory, whether
consumers who ultimately pay for them not
citizens or not, without regard to their
as taxes but as part of the purchase price.
property or the occupation or business in
which they may be engaged (e.g.
Thus, the person who absorbs or bears the
community (formerly residence) tax).
burden of the tax is other than the one on whom
it is imposed and required by law to pay the tax.
b. Property Tax – tax imposed on property,
Practically all business taxes are indirect (e.g.,
real or personal, in proportion to its value
VAT, percentage tax, excise taxes on specified
or in accordance with some other
goods, customs duties).
reasonable method of apportionment (e.g.,
real estate tax). The obligation to pay the
3. As to tax rates
tax is absolute and unavoidable and is not
based upon the voluntary action of the
a. Specific Tax – a tax of a fixed amount
person assessed.
imposed by the head or number or by some
other standard of weight or measurement.
c. Privilege/Excise Tax – it is said that an
It requires no assessment (valuation) other
excise tax is a charge imposed upon:
than the listing or classification of the
i. the performance of an act,
objects to be taxed (e.g., taxes on distilled
ii. the enjoyment of a privilege, or
spirits, wines, and fermented liquors; cigars
iii. the engagement in an
and cigarettes)
occupation, profession, or
business.
b. Ad Valorem Tax – a tax of a fixed
proportion of the value of the property with
The obligation to pay excise tax is based
respect to which the tax is assessed. It
on the voluntary action of the person taxed
requires the intervention of assessors or
Page 325 of 494

appraisers to estimate the value of such 6. As to graduation
property before the amount due from each
taxpayer can be determined. The phrase a. Progressive – The rate of tax increases as
“ad valorem” means literally, “according to the tax base or bracket increases, e.g.,
value.” (e.g., real estate tax, excise tax on income tax on individuals
automobiles, non-essential goods such as
jewelry and perfumes, customs duties. b. Regressive – The rate of tax decreases as
the tax base or bracket increases. There is
c. Mixed – a tax that has both the no regressive tax in the Philippines.
characteristics of specific tax and ad
valorem tax c. Proportionate – The rate of tax is based
on a fixed percentage of the amount of the
4. As to purpose property, receipts or other basis to be
taxed, e.g., real estate tax, VAT, and other
a. General or Fiscal Tax – levied for the percentage taxes.
general or ordinary purposes of the
Government, i.e., to raise revenue for d. Digressive – A fixed rate is imposed on a
governmental needs (e.g., income tax, certain amount and diminishes gradually
VAT, and almost all taxes). on sums below it. The tax rate in this case
is arbitrary because the increase in tax rate
b. Special/Regulatory/Sumptuary Tax – is not proportionate to the increase of tax
levied for special purposes, i.e., to achieve base.
some social or economic ends irrespective
of whether revenue is actually raised or not Regressive/Progressive system of taxation
(e.g., protective tariffs or customs duties on A regressive tax must not be confused with the
imported goods to enable similar products regressive system of taxation.
manufactured locally to compete with such
imports in the domestic market). In a society where the majority of the people
have low incomes, a regressive taxation
Tariff duties intended mainly as a source of system exists when there are more indirect
revenue are relatively low so as not to taxes imposed than direct taxes. Since the low-
discourage imports. income sector of the population as a whole
buys more consumption goods on which the
5. As to scope (or authority imposing indirect taxes are collected, the burden of
the tax) indirect taxes rests more on them than on the
more affluent groups.
a. National – taxes imposed by the national
government, through Congress and A progressive tax is, therefore, also different
administered by the Bureau of Internal from a progressive system of taxation.
Revenue (BIR) or the Bureau of Customs
(BOC) (e.g., national internal revenue Regressivity is not a negative standard for
taxes, customs duties, and national taxes courts to enforce. What Congress is required
imposed by laws). by the Constitution to do is to "evolve a
progressive system of taxation." These
b. Municipal or Local – taxes imposed by provisions are put in the Constitution as moral
local governments, through their respective incentives to legislation, not as judicially
Sanggunians, and administered by the enforceable rights. [Tolentino v. Secretary of
local executive through the local treasurer Finance, GR No. 115455, 25 August 1994]
(e.g., business taxes that may be imposed
under the Local Government Code,
professional tax).
Page 326 of 494


D. DOCTRINES IN TAXATION Tax statutes offering rewards are liberally
construed in favor of informers. [Penid v.
Virata, G.R. No. L-44004 (1983)].
1. Construction and Interpretation of
Tax Laws, Rules, and Regulations Exceptions:
a. The rule of strict construction as against the
General Rules on the Construction of Tax government is not applicable where the
Laws language of the statute is plain and there is
a. Public purpose is always presumed no doubt as to the legislative intent [see 51
b. If the law is clear, apply the law in Am. Jur. 368]. E.g. Word “individual” was
accordance to its plain and simple changed by the law to “person”. This clearly
tenor indicates that the tax applies to both natural
c. A statute will not be construed as and juridical persons, unless otherwise
imposing a tax unless it does so clearly, expressly provided.
expressly and unambiguously b. The rule does not apply where the
· In case of doubt, it is construed taxpayer claims exemption from the tax.
most strongly against the
Government and liberally in favor Tax statutes are to receive a reasonable
of the taxpayer since it is an construction or interpretation with a view to
imposition of a burden (Lifeblood carrying out their purpose and intent. They
Theory). should not be construed as to permit the
d. Tax laws may not be extended by taxpayer easily to evade the payment of tax.
implication beyond the clear import of [Carbon Steel Co. v. Lewellyn, 251 U.S. 201].
their language, nor their operation Thus, the good faith of the taxpayer is not a
enlarged so as to embrace matters not sufficient justification for exemption from the
specifically provided payment of surcharges imposed by the law for
e. Tax laws operate prospectively unless failing to pay tax within the period required by
the purpose of the legislature to give law.
retroactive effect is expressly declared
or may be implied from the language b. Tax Exemption and Exclusion
used
f. Tax laws are special laws and prevail Tax exemptions must be shown to exist clearly
over a general law and categorically, and supported by clear
legal provisions. [NPC v. Albay, G.R. No.
a. Tax Laws 87479 (1990)]
General Rule: Tax laws are construed strictly General Rule:

against the government and liberally in favor of In the construction of tax statutes, exemptions
the taxpayer. [Manila Railroad Co. v. Coll. Of are not favored and are construed strictissimi
Customs, G.R. No. L-30264 (1929)]. juris against the taxpayer. [Republic Flour Mills
v. Comm. & CTA, G.R. No. L-25602 (1970)]
No person or property is subject to taxation a. NPC v. Albay [supra]: Tax exemptions
unless within the terms or plain import of a must be shown to exist clearly and
taxing statute. [see 72 Am. Jur. 2d 44] Taxes, categorically, and supported by clear
being burdens, are not to be presumed beyond legal provisions.
what the statute expressly and clearly b. Floro Cement v. Gorospe [supra]: Claims
declares. [Coll. V. La Tondena, G.R. No. L- for an exemption must be able to point out
10431 (1962)]. some provision of law creating the right,
and cannot be allowed to exist upon a
Thus, a tax payable by “individuals” does not mere vague implication or inference.
apply to “corporations.” c. RCPI v Provincial Assessor of South
Cotabato [G.R. No. 144486 (2005)]:
Page 327 of 494

Exemptions are strictly construed against of legality [Gonzales v. Land Bank, G.R. No.
the taxpayer and liberally in favor of the 76759 (1990)]
taxing authority—it is the taxpayer’s duty to
justify the exemption by words too plain to It is of course axiomatic that a rule or regulation
be mistaken and too categorical to be must bear upon, and be consistent with, the
misinterpreted. provisions of the enabling statute if such rule or
d. CIR v. CA [supra]: Refunds are in the regulation is to be valid. In case of conflict
nature of exemption and must be between a statute and an administrative order,
construed strictly against the the former must prevail. [Fort Bonifacio
grantee/taxpayer. Development Corp v. CIR, GR 175707 (2014)]
e. Quezon City v. ABS-CBN Broadcasting
Corporation [G.R. No. 166408 (2008)]: Requisites for validity and effectivity of
Since taxation is the rule and exemption regulations
the exception, the intention to make an a. Reasonable;
exemption ought to be expressed in clear b. Within the authority conferred;
and unambiguous terms c. Not contrary to law and the Constitution
[Art. 7, NCC]; and
Exceptions: d. Must be published.
a. When the law itself expressly provides for
a liberal construction, that is, in case of Tax regulations whose purpose is to enforce or
doubt, it shall be resolved in favor of implement existing law must comply with the
exemption; following requisites to be effective [RP v.
b. When the exemption is in favor of the Pilipinas Shell Petroleum Corp., G.R. No.
government itself or its agencies, or of 173918 (2008)]:
religious, charitable, and educational a. Be published in a newspaper of general
institutions because the general rule is that circulation [Art. 2, NCC]; AND
they are exempt from tax. b. Filed with the UP Law Center Office of the
c. When the exemption is granted under National Administrative Register (ONAR)
special circumstances to special classes of [Ch 2, Book VII, EO 292]
persons.
d. If there is an express mention or if the Note: Administrative rules and regulations
taxpayer falls within the purview of the must always be in harmony with the provisions
exemption by clear legislative intent, the of the law. In case of conflict with the law or
rule on strict construction does not apply. the Constitution, the administrative rules and
[Comm. V. Arnoldus Carpentry Shop, Inc., regulations are null and void. As a matter of
G.R. No. 71122 (1988)]. policy, however, courts will declare a regulation
or provision thereof invalid only when the
c. Tax Rules and Regulations conflict with the law is clear and unequivocal.
General Rule: Administrative interpretations and opinions

The Secretary of Finance, upon The power to interpret the provisions of the Tax
recommendation of the CIR, shall promulgate Code and other tax laws is under the exclusive
all needful rules and regulations for the and original jurisdiction of the Commissioner of
effective enforcement of the provisions of the Internal Revenue subject to review by the
NIRC. [Sec. 244, NIRC] Secretary of Finance [Sec. 4, par.1, NIRC].
It is an elementary rule in administrative law Revenue regulations are the formal

that administrative regulations and policies interpretation of the provisions of the NIRC and
enacted by administrative bodies to interpret other laws by the Secretary of Finance upon
the law which they are entrusted to enforce the recommendation of the Commissioner of
have the force of law and are entitled to great Internal Revenue.
respect. They have in their favor a presumption
Page 328 of 494

General rule: The Commissioner has the sole 2. Prospectivity of Tax Laws
authority to issue rulings but he also has the
power to delegate said authority to his General rule:
subordinates with the rank equivalent to a Tax laws are prospective in operation.
division chief or higher.
Reason: Nature and amount of the tax under
Exceptions: The Commissioner may not tax laws enacted after the transaction could not
delegate the following: have been foreseen and understood by the
a. The power to recommend the promulgation taxpayer at the time of the transaction.
of rules and regulations by the Secretary of
Finance; Exception:
b. The power to issue rulings of first Tax laws may be applied retroactively provided
impression or to reverse, revoke, or modify it is expressly declared or it is clearly the
any existing ruling of the Bureau; and legislative intent (e.g., increase taxes on
c. The power to compromise or abate any tax income already earned) except when
liability as provided by Sec. 204 and 205 of retroactive application would be so harsh
the NIRC and oppressive. [Republic v. Fernandez, G.R.
No. L-9141 (1956)]
Exception to the exception: BUT
assessments issued by RDOs involving (a) Statutes are prospective and not retroactive in
Php500,000 or less, and (b) minor criminal their operation, laws being the formulation of
violations as determined by the Secretary of rules for the future, not the past. [Curata v.
Finance as recommended by the Philippine Ports Authority, G.R. Nos. 154211-
Commissioner, may be compromised by a 12 (2009)]
Regional Evaluation Board [Sec. 7, NIRC].
The language of the statute must clearly
Decisions of the Supreme Court applying or demand or press that it shall have a retroactive
interpreting existing tax laws are binding on all effect. [Lorenzo v. Posadas, supra]
subordinate courts and have the force and
effect of law. As provided for in Article 8 of the Exception to the exception:
Civil Code, they “form part of the law of the Collection of interest in tax cases is not penal
land.” in nature; it is but a just compensation to the
State. Thus, the constitutional prohibition
d. Penal Provisions of Tax Laws against ex post facto laws is not applicable to
the collection of interest on back taxes. [Central
Penal provisions of tax laws must be strictly Azucarera v. CTA, G.R. No. L-23236 (1967)]
construed. It is not legitimate to stretch the
language of a rule, however beneficent its Non-retroactivity of rulings [Sec. 246, NIRC]
intention, beyond the fair and ordinary meaning General rule:
of its language. Rulings do not have retroactive application if
the revocation, modification, or reversal will be
A penal statute should be construed strictly prejudicial to the taxpayer.
against the State and in favor of the accused.
The reason for this principle is the tenderness Exceptions:
of the law for the rights of individuals and the a. Taxpayer’s deliberate misstatement or
object is to establish a certain rule by omission of facts
conformity to which mankind would be safe, b. BIR’s gathered facts is materially
and the discretion of the court limited. [People different from the facts from which the
v. Purisima, G.R. No. L-42050-66 (1978)] ruling was based on
c. Taxpayer acted in bad faith
Note: The rule on non-retroactivity of rulings

Page 329 of 494

may be applied only if the parties in the ruling
5 YEARS Prescription of collection of tax
involve the taxpayer himself/itself. The
if:
taxpayer cannot invoke the rulings granted in
(1) assessed within the 3-year
favor of the other taxpayers.
and 10-year prescriptive
periods;
3. Imprescriptibility of Taxes (2) assessed within the
extended period agreed upon by
The law on prescription, being a remedial the Commissioner and taxpayer
measure, should be liberally construed in order (waiver of the prescriptive
to afford such protection. As a corollary, the period); and
exceptions to the law on prescription should (3) Collected by distraint, levy,
perforce be strictly construed. [Commissioner or by a proceeding in court.
v. Standard Chartered Bank, G.R. No. 192173 [Sec. 222, NIRC]
(2015)]
Note: The prescriptive period from final
a. Prescriptions found in statutes liquidation (i.e., the ascertainment of the duties
that have to be paid on imported goods) is
(1) National Internal Revenue Code – three (3) years, except in cases of:
statute of limitations in the assessment 1. Tentative liquidation;
and collection of taxes therein 2. Payment under protest;
imposed. 3. Fraud; and
4. Compliance audit.
Summary of prescription on assessment
and collection: (2) Customs Modernization and Tariffs Act
(CMTA)
3 YEARS Prescription of assessment AND
collection from: Under Sec. 430, it provides that “[i]n the
(a) the prescribed last day of absence of fraud and when the goods have
filing of returns (even if the been finally assessed and released, the
return was filed earlier than the assessment shall be conclusive upon all
deadline); OR parties three (3) years from the date of final
(b) the day when the return was payment or duties, or upon completion of the
actually filed if filed later than the post-clearance audit.”
last day of filing [Sec. 203,
NIRC], whichever comes later. (3) Local Government Code
10 Prescription of assessment in The LGC prescribes the following prescriptive
YEARS cases of: periods for the assessment and collection of
(a) false or fraudulent return with local taxes, fees, or charges [Sec. 194, LGC]:
intent to evade tax; OR a. Taxes, fees, and charges shall be
(b) failure or omission to file a assessed five (5) years from the date
return [Sec. 222, NIRC] they become due;
b. Taxes, fees, and charges must be
Counted from the discovery of collected five (5) years from the date of
the fraud, falsity, or omission. assessment by administrative or
judicial action;
c. The prescriptive period for assessment
and collection shall be three (3) years
if the tax accrued before the effectivity
of the Local Government Code [Sec.
194 and 270, LGC].
d. In case of fraud or intent to evade the
Page 330 of 494


payment of taxes, fees, or charges, the imposed by two different states.
same may be assessed within ten (10)
years from the discovery of the fraud or Double taxation, standing alone and not being
intent to evade payment. forbidden by our fundamental law, is not a valid
defense against the legality of a tax measure
The prescriptive period is tolled when: [Pepsi Cola v. Mun. of Tanauan, G.R. No. L-
a. The treasurer is legally prevented from 31156 (1976)].
making the assessment or collection;
b. The taxpayer requests for a Constitutionality of double taxation
reinvestigation and executes a waiver There is no constitutional prohibition
in writing before expiration of the period against double taxation in the Philippines. It is
within which to assess or collect; and something not favored, but is permissible,
c. The taxpayer is out of the country or provided some other constitutional requirement
otherwise cannot be located. is not thereby violated. [Villanueva v. City of
Iloilo, G.R. No. L-26521 (1968)]
4. Double Taxation
If the tax law follows the constitutional rule on
Double taxation means taxing the same uniformity, there can be no valid objection to
property twice when it should be taxed only taxing the same income, business or property
once; that is, “taxing the same person twice by twice. [China Banking Corp. v. CA, G.R. No.
the same jurisdiction for the same thing.” 146749 (2003)]
[Swedish Match Phils., Inc. v. Treasurer, G.R.
No. 181277 (2013)] Double taxation in its narrow sense is
undoubtedly unconstitutional but in the broader
a. Strict sense (Direct Duplicate sense is not necessarily so. [DE LEON, citing
Taxation) 26 R.C.L 264-265]. Where double taxation (in
its narrow sense) occurs, the taxpayer may
The same property must be taxed twice when seek relief under the uniformity rule or the
it should be taxed once. The requisites are: equal protection guarantee. [DE LEON, citing
1. Both taxes must be imposed on the same 84 C.J.S.138].
property or subject matter;
2. For the same purpose; International Double Taxation
3. By the same State, Government, or Double taxation usually takes place when a
taxing authority; person is resident of a contracting state and
4. Within the same territory, jurisdiction or derives income from, or owns capital in, the
taxing district; other contracting state and both states impose
5. During the same taxing period; and tax on that income or capital. In order to
6. Of the same kind or character of tax. eliminate double taxation, a tax treaty resorts
[Swedish Match Phils., Inc. v. Treasurer, to several methods.
supra]
The purpose of these international agreements
b. Broad sense (Indirect Duplicate is to reconcile the national fiscal legislations of
the contracting parties in order to help the
Taxation)
taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax
There is double taxation in the broad sense or
conventions are drafted with a view towards
indirect duplicate taxation if any of the
the elimination of international juridical
elements for direct duplicate taxation is
double taxation, which is defined as the
absent.
imposition of comparable taxes in two or more
states on the same taxpayer in respect of the
It extends to all cases in which there is a
same subject matter and for identical periods.
burden of two or more pecuniary impositions.
For example, a tax upon the same property
Page 331 of 494

The apparent rationale for doing away with 3. Onward shifting - When the tax is shifted
double taxation is to encourage the free flow two or more times either forward or
of goods and services and the movement of backward.
capital, technology and persons between
countries, conditions deemed vital in creating Factors determining tax shifting
robust and dynamic economies. [CIR v. SC
Johnson & Sons, Inc., G.R. No. 127105 (1999)] 1. Elasticity of demand and supply - The
more the elasticity, the lower the incidence
Modes of eliminating double taxation on the sales and the higher the incidence
a. Allowing reciprocal exemption either by law on supply.
or by treaty;
b. Allowance of tax credit for foreign taxes 2. Nature of markets – In an oligopolistic
paid; market (i.e. few sellers and many buyers)
c. Allowance of deductions such as for tax shifting to buyers is high since few
foreign taxes paid, and vanishing sellers can team up to determine the
deductions in estate tax; or market price. In a situation where there are
d. Reduction of Philippine tax rate. many buyers and sellers, a large portion of
tax will be borne by sellers. For a
5. Escape from Taxation monopolistic market, the entire tax burden
falls on the shoulders of the buyer.
a. Shifting of Tax Burden 3. Government policy on pricing – In the
case of government price control, the
Shifting supplier cannot increase prices, hence
The act of transferring the burden of a tax from cannot shift tax burden to buyers and vice
the original payer or the one on whom the tax versa.
was assessed or imposed to someone else.
What is transferred is not the payment of the 4. Geographical location – If taxes are
tax but the burden of the tax. imposed on certain regions, it is hard to
shift them to consumers because
All indirect taxes may be shifted; direct taxes consumers will move to regions with low
cannot be shifted. taxes.
Ways of shifting the tax burden 5. Nature of tax (Direct or Indirect tax) –
Direct tax e.g. PAYE (pay-as-you-earn)
1. Forward shifting - When the burden of the cannot be shifted whatsoever while indirect
tax is transferred from a factor of taxes can be shifted through increase in
production through the factors of prices.
distribution until it finally settles on the
ultimate purchaser or consumer. 6. Rate of tax – If the rate is too high, shifting
● Examples: VAT, percentage tax. can occur backwards or forwards; if the
rate is too low, it may be absorbed by the
2. Backward shifting - When the burden of manufacturer.
the tax is transferred from the consumer or
purchaser through the factors of 7. Time available for adjustment – The
distribution to the factor of production. person who can adjust faster (buyer or
● Example: Consumer or purchaser seller) will be able to shift the tax e.g. if the
may shift tax imposed on him to buyer can shift to substitute goods, the
retailer by purchasing only after the seller will bear the tax burden.
price is reduced, and from the latter
to the wholesaler, and finally to the 8. The tax point
manufacturer or producer.
Page 332 of 494


Taxes that can be shifted government. But, the producers may succeed
1. Value-added Tax in collecting it from the consumers by raising
2. Percentage Tax the price of soap by the amount of tax. In that
3. Excise Tax case, consumers eventually pay the tax and so
the incidence falls upon them.
Meaning of Impact and Incidence of
Taxation Relationship between Impact, Shifting, and
Incidence of a Tax
Impact of taxation is the point where the tax Impact Shifting Incidence
is originally imposed or the one on whom the
tax is formally assessed. [Ingles, Tax Made Initial Intermediate Result
Less Taxing (2018)] In so far as the law is phenomenon process
concerned, the taxpayer, the subject of tax, is
the person who must pay the tax to the Imposition of Transfer of Setting or
government. the tax the tax coming to
rest of the
Incidence of taxation is the point on whom the tax
tax burden finally rests. [INGLES] It takes place
when shifting has been effected from the
Example: Impact in VAT is on the producer who
statutory taxpayer to another.
shifts the burden to the customer who finally
bears the incidence of the tax
Impact Distinguished from Incidence
Impact Incidence b. Tax Avoidance (Tax Minimization)
Initial burden of tax Ultimate burden of
the tax The exploitation by the taxpayer of legally
permissible alternative tax rates or methods of
At the point of At the point of assessing taxable property or income in order
imposition settlement to avoid or reduce tax liability. It is politely
called “tax minimization” and is NOT
Falls upon the Rests on the person punishable by law.
person from whom who pays it
the tax is collected eventually Example: A person refrains from engaging in
some activity or enjoying some privilege in
May be shifted Cannot be shifted order to avoid the incidental taxation or to lower
his tax bracket for a taxable year.
Incidence is the end
of the shifting
process. Sometimes,
c. Tax Evasion (Tax Dodging)
however, when no
shifting is possible, Tax Evasion - is the use by the taxpayer of
as in the case of illegal or fraudulent means to defeat or
income tax or such lessen the payment of a tax. It is also known as
other direct taxes, “tax dodging.” It is punishable by law.
the impact coincides
with incidence on the Example: Deliberate failure to report a taxable
same person. income or property; deliberate reduction of
income that has been received; overstatement
of expenses.
Application: Elements of Tax Evasion
Suppose a tax — excise duty — is imposed on a. The end to be achieved. Example: the
soap. Its impact is on the producers, in the first payment of less than that known by the
instance, as they are liable to pay it to the taxpayer to be legally due, or in paying no
Page 333 of 494

tax when such is due; Tax Avoidance v. Tax Evasion
b. An accompanying state of mind described
Tax Tax
as being “evil,” “in bad faith,” “willful,” or
Avoidance Evasion
“deliberate and not accidental”; and
c. A course of action (or failure of action) Also called Tax Tax
which is unlawful. [CIR v. Estate of Toda, as Minimization Dodging
G.R. No. 147188 (2004)]
Since fraud is a state of mind, it need not be Means Legal Illegal

proved by direct evidence but may be inferred
from the circumstances of the case. Thus:
● The failure of the taxpayer to declare for Outcome of Outcome of
taxation purposes his true and actual tax planning tax fraud
income derived from his business for
two consecutive years has been held as
an indication of his fraudulent intent to Punishable? No Yes
cheat the government of its due taxes.
[Republic v. Gonzales, G.R. No. L-17962
(1965)] Purpose Merely Entirely
● The substantial underdeclaration of minimize escape
income in the income tax returns of the payment of payment of
taxpayer for four (4) consecutive years taxes (tax taxes
coupled with his intentional savings)
overstatement of deductions justifies the
finding of fraud. [Perez v. CTA and d. Transformation
Collector, G.R. No. L-10507 (1958)].
Method of escape in taxation whereby the
Mere understatement of a tax is not itself proof
manufacturer or producer upon whom the tax
of fraud for the purpose of tax evasion. The
has been imposed pays the tax and endeavors
burden of proof is on the prosecution to prove
to recoup himself by improving his process of
beyond reasonable doubt that the accused
production thereby turning out his units of
willfully failed to supply correct and accurate
products at a lower cost. The taxpayer escapes
information. [People v. Judy Ann Santos, CTA
by a transformation of the tax into a gain
Crim. Case No. 0-012 (2013)]
through the medium of production.
The Willful Blindness doctrine states that a
taxpayer can no longer raise the defense that 1. Exemption from Taxation
the errors on their tax returns are not their
responsibility or that it is the fault of the Meaning of exemption from taxation
accountants they hired. Intent to defraud need The grant of immunity to particular persons or
not be shown for a conviction of tax evasion. corporations or to persons or corporations of a
The only thing that needs to be proven is that particular class from a tax which persons and
the taxpayer was aware of his obligation to file corporations generally within the same state or
the tax return but he nevertheless voluntarily, taxing district are obliged to pay. It is an
knowingly, and intentionally failed to file the immunity or privilege; it is freedom from a
required returns. [INGLES citing People v. financial charge or burden to which others are
Kintanar, C.T.A. E.B. No. 006 (2010)] subjected. It is strictly construed against the
taxpayer.
It is a waiver of the government's right to collect

the amounts that would have been collectible
under our tax laws. Thus, when the law speaks
Page 334 of 494

of a tax exemption, it should be understood as of equity. [Davao Gulf Lumber Corp. v. CIR,
freedom from the imposition and payment of a G.R. No. 117359 (1998)]
particular tax. [Secretary of Finance v. Lazatin,
G.R. No. 210588 (2016)] Nature of tax exemption
a. Mere personal privilege – cannot be
Taxation is the rule; exemption is the assigned or transferred without the consent
exception. He who claims exemption must be of the legislature. The legislative consent to
able to justify his claim or right thereto, by a the transfer may be given either in the
grant expressed in terms “too plain to be original act granting the exemption or in a
mistaken and too categorical to be subsequent law.
misinterpreted.” If not expressly mentioned in
the law, it must at least be within its purview by b. General rule: Revocable by the
clear legislative intent. [Jaka Investments Corp. government.
v. CIR, G.R. No. 147629 (2010)] Exception: If founded on a contract which
is protected from impairment. But the
He who claims an exemption must be able to contract must contain the essential
point to some positive provision of law creating elements of other contracts. An exemption
the right; it cannot be allowed to exist upon a provided for in a franchise, however, may
mere vague implication or inference. The right be repealed or amended pursuant to the
of taxation will not be held to have been Constitution [Sec. 11, Art. XII, 1987
surrendered unless the intention to surrender Constitution]. A legislative franchise is a
is manifested by words too plain to be mere privilege.
mistaken, for the state cannot strip itself of the
most essential power of taxation by doubtful c. Implies a waiver on the part of the
words; it cannot, by ambiguous language, be government of its right to collect taxes due
deprived of this highest attribute of sovereignty. to it, and, in this sense, is prejudicial
[Manila Electric Corporation v. Vera, G.R. No. thereto. Hence, it exists only by virtue of an
L-29987 (1975)] express grant and must be strictly
construed.
If there is nothing in a law that points that the
word “exemption” refers to taxes, the d. Not necessarily discriminatory, provided
implication would be that the term would be an it has a reasonable foundation or rational
exemption of something else, such as basis. Where, however, no valid distinction
regulatory or reporting requirements. [Ingles exists, the exemption may be challenged
citing PLDT v. City of Davao, G.R. No. L-29987 as violative of the equal protection
(1975)] guarantee or the uniformity rule.
Grounds for Tax Exemption Kinds of Tax Exemption

a. It may be based on a contract. a. Express or Affirmative - either entirely or
b. It may be based on some ground of public in part, may be made by provisions of the
policy. Constitution, statutes, treaties, ordinances,
c. It may be created in a treaty on grounds of franchises, or contracts.
reciprocity or to lessen the rigors of
international or multiple taxation. b. Implied or Exemption by Omission -
when a tax is levied on certain classes
But equity is NOT a ground for tax exemption. without mentioning the other classes.
While equity cannot be used as a basis or Every tax statute, in a very real sense,
justification for tax exemption, a law may validly makes exemptions since all those not
authorize the condonation of taxes on mentioned are deemed exempted. The
equitable considerations. omission may be either accidental or
intentional.
There is no tax exemption solely on the ground
Page 335 of 494

Exemptions are not presumed, but when against the taxpayer [Luzon Stevedoring
public property is involved, exemption is Co. v. CTA, G.R. No. L-30232 (1988)]
the rule, and taxation is the exception. c. Tax exemptions are strictly construed
against the taxpayer, they being highly
c. Contractual - The legislature of a State disfavored and may almost be said “to be
may, in the absence of special restrictions odious to the law.” [Manila Electric
in its constitution, make a valid contract Company v. Vera, supra]
with a corporation in respect to taxation,
and that such contract can be enforced Revocation of Tax Exemption
against the State at the instance of the General Rule: Revocable by the government.
corporation. [Casanovas v. Hord, G.R. No.
3473 (1907)] Exception: Contractual tax exemptions may
not be unilaterally so revoked by the taxing
In the real sense of the term and where the authority without thereby violating the non-
non-impairment clause of the Constitution impairment clause of the Constitution.
can rightly be invoked, this includes those
agreed to by the taxing authority in 2. Equitable Recoupment
contracts, such as those contained in
government bonds or debentures, lawfully The doctrine of equitable recoupment means
entered into by them under enabling laws that when a refund of a tax illegally or
in which the government, acting in its erroneously collected or overpaid by a
private capacity, sheds its cloak of taxpayer is barred by the statute of limitations
authority and waives its governmental and a tax is being presently assessed against
immunity. said taxpayer, said present tax may be
recouped or set-off against the tax, the refund
These contractual tax exemptions, of which has been barred. [CIR v. University of
however, are not to be confused with tax Santo Tomas, G.R. No. 11274, 104 Phil. 1062,
exemptions granted under franchises. A (1958)]
franchise partakes the nature of a grant
which is beyond the purview of the non- In other words, the doctrine of equitable
impairment clause of the Constitution. recoupment allows a taxpayer whose claim for
[Manila Electric Company v. Province of refund has been barred by prescription to offset
Laguna, G.R. No. 131359 (1999)] such claims against a current assessment.
Rationale of Tax Exemption The doctrine also allows the government to
Such exemption will benefit the body of the offset taxes that have not been collected from
people and not particular individuals or private the taxpayer against a current claim for refund,
interest and that the public benefit is sufficient although the government is time-barred from
to offset the monetary loss entailed in the grant collecting the previous taxes.
of the exemption.
The doctrine finds NO application in this
Principles of Tax Exemption: jurisdiction. [CIR v. University of Santo
a. As the power of taxation is a high Tomas, supra]
prerogative of sovereignty, the
relinquishment is never presumed and 3. Prohibition on Compensation and
any reduction or diminution thereof with
Set-Off
respect to its mode or its rate, must be
strictly construed, and the same must be
General rule: Taxes cannot be subject to
couched in clear and unmistakable terms in
compensation [South African Airways v. CIR,
order that it may be applied. [Floro Cement
G.R. No. 180356 (2010)]
v. Gorospe, G.R. No. L-46787 (1991)
b. When granted, they are strictly construed
Page 336 of 494

Reasons: it, and in this sense, prejudicial thereto,
a. This would adversely affect the particularly to give tax evaders, who wish to
government revenue system [Philex Mining relent and are willing to reform a chance to do
v. CA, G.R. No. 125704 (1998)]. so and become a part of the new society with a
b. The government and the taxpayer are not clean slate. [Republic v. IAC, G.R. No. L-69344
creditors and debtors of each other. There (1991)]
is a material distinction between a tax and
debt. Debts are due to the Government in A tax amnesty, much like a tax exemption, is
its corporate capacity, while taxes are due never favored nor presumed in law. If granted,
to the Government in its sovereign the terms of the amnesty, like that of a tax
capacity. We find no cogent reason to exemption, must be construed strictly
deviate from the aforementioned against the taxpayer and liberally in favor of
distinction. [South African Airways v. CIR, the taxing authority.
supra]
He who claims an exemption (or an amnesty)
Exception: If the claims against the from the common burden must justify his claim
government have been recognized and an by the clearest grant of organic or state law. It
amount has already been appropriated for that cannot be allowed to exist upon a vague
purpose. Where both claims have already implication. If a doubt arises as to the intent of
become: the legislature, that doubt must be resolved in
a. Due, favor of the state. [CIR v. Marubeni Corp., G.R.
b. Demandable, and No. 137377 (2001)].
c. Fully liquidated,
compensation takes place by operation of law Amnesty distinguished from tax exemption
under Art. 1200 in relation to Articles 1279 and
1290 of the NCC, and both debts are Tax amnesty is immunity from all criminal and
extinguished to the concurrent amount. civil obligations arising from non-payment of
[Domingo v. Garlitos, G.R. No. L-18994 (1963)] taxes. It is a general pardon given to all
taxpayers. It applies to past tax periods, hence
4. Compromise and Tax Amnesty of retroactive application. [People v.
Castañeda, G.R. No. L-46881 (1988)]
Definition of Compromise
A contract whereby the parties, by making Tax exemption is immunity from all civil
reciprocal concessions, avoid litigation or put liability only. It is an immunity or privilege, a
an end to one already commenced [Art. 2028, freedom from a charge or burden of which
Civil Code]. It involves a reduction of the others are subjected. [Greenfield v. Meer, C.A.
taxpayer’s liability. No. 156 (1946)]. It is generally prospective in
application [Dimaampao, 2005, p. 111].
Requisites of a tax compromise:
a. The taxpayer must have a tax liability. Tax Amnesty v. Tax Exemption
b. There must be an offer (by the taxpayer or Tax Tax
Commissioner) of an amount to be paid by Amnesty Exemption
the taxpayer.
c. There must be acceptance (by the Benefit Immunity Immunity
Commissioner or the taxpayer, as the case from civil, from civil
may be) of the offer in settlement of the criminal, liability
original claim. administrati (relief from
ve liability paying
Definition of Tax Amnesty arising from taxes)
A tax amnesty partakes of an absolute non-
forgiveness or waiver by the Government of payment of
its right to collect what otherwise would be due
Page 337 of 494

of such ruling, seek its review by the Secretary
Tax Tax
of Finance. The Secretary of Finance may also
Amnesty Exemption
review the rulings motu proprio. [DOF Order
taxes No. 007-02, 7 May 2002]
Coverage Past tax Future tax Taxpayers acting in good faith should not be
liability liability made to suffer for adhering to general
interpretative rules of the Commissioner
Actual Yes None interpreting tax laws, should such interpretation
Revenue Loss later turn out to be erroneous and be reversed
by the Commissioner or this Court. Indeed,
Section 246 of the Tax Code expressly
II. NATIONAL TAXATION provides that a reversal of a BIR regulation or
ruling cannot adversely prejudice a taxpayer
who in good faith relied on the BIR regulation
A. TAXING AUTHORITY or ruling prior to its reversal. [CIR v. San
Roque, G.R. No. 187485 (2013)]
1. Jurisdiction, Power and Functions
of the Commissioner of Internal Power to Decide Tax Cases
Revenue The power to decide (1) disputed
assessments, (2) refunds of internal revenue
a. Powers and Duties of the Bureau of taxes, fees, charges and penalties, or (3) other
Internal Revenue [Sec. 2, NIRC] matters arising under the NIRC or other laws
administered by the BIR is vested in the CIR,
1. To assess and collect all national internal subject to the exclusive appellate jurisdiction of
revenue taxes, fees, and charges; the CTA. [Sec. 4, NIRC]
2. To enforce all forfeitures, penalties and
fines connected therewith; c. Non-retroactivity of rulings (Sec. 246,
3. To execute judgment in all cases decided NIRC)
in its favor by the CTA and the ordinary
courts; and General Rule: Any revocation, modification or
4. To give effect to and administer the reversal of (1) rules and regulations
supervisory and police powers conferred promulgated in accordance with the NIRC, or
upon it by the Tax Code or other special (2) any rulings or circulars promulgated by the
laws. CIR shall not be given retroactive
application if the revocation, modification, or
b. Interpreting Tax Laws and Deciding reversal is prejudicial to the taxpayers.
Tax Cases
Exceptions:
Power to Interpret 1. Where the taxpayer deliberately misstates
The power to interpret provisions of the NIRC or omits material facts from his return or
and other tax laws shall be under the exclusive any document required of him by the BIR;
and original jurisdiction of the CIR, subject to 2. Where the facts subsequently gathered by
review by the Secretary of Finance. [Sec. 4, the BIR are materially different from the
NIRC] facts on which the ruling is based; or
3. Where the taxpayer acted in bad faith.
A ruling by the CIR that interprets provisions of
the NIRC and other tax laws shall be presumed Under Sec. 246, taxpayers may rely upon a
valid unless modified, reversed or superseded rule or ruling issued by the CIR from the time
by the Secretary of Finance. A taxpayer who the rule or ruling is issued up to its reversal by
receives an adverse ruling from the CIR may, the CIR or this Court. The reversal is not given
within thirty (30) days from the date of receipt retroactive effect. There must, however, be a
Page 338 of 494

rule or ruling issued by the Commissioner that Provided, however, that notwithstanding the
is relied upon by the taxpayer in good faith. A other provisions of this Code prescribing the
mere administrative practice, not formalized place of filing of returns and payment of taxes,
into a rule or ruling, will not suffice because the CIR may, by rules and regulations require
such a mere administrative practice may not be that the tax returns, papers and statements and
uniformly and consistently applied. [CIR v. San taxes of large taxpayers be filed and paid,
Roque, supra]. respectively, through collection officers or
through duly authorized agent banks:
2. Rule-Making Authority of the
Secretary of Finance Provided, further, That the CIR can exercise
this power within six (6) years from the
a. Authority of the Secretary of Finance to approval of R.A. 7646 (An Act Authorizing the
Promulgate Rules and Regulations [Sec. CIR to Prescribe the Place for Payment of
244, NIRC] Internal Revenue Taxes by Large Taxpayers)
or the completion of its comprehensive
The Secretary of Finance, upon computerization program, whichever comes
recommendation of the CIR, shall promulgate earlier. For the purpose of this Section, 'large
all needful rules and regulations for effective taxpayer' means a taxpayer who satisfies any
enforcement of the provisions of the Code. of the following criteria:
a. Value-Added Tax (VAT) – Business
b. Specific Provisions to be Contained in establishment with VAT paid or payable of
Rules and Regulations [Sec. 245, NIRC] at least P100,000 for any quarter of the
preceding taxable year;
1. The manner in which revenue shall be b. Excise tax – Business establishment with
collected and paid, the instrument, document excise tax paid or payable of at least
or object to which revenue stamps shall be P1,000,000 for the preceding taxable year;
affixed, the mode of cancellation of the same, c. Corporate Income Tax - Business
the manner in which the proper books, records, establishment with annual income tax paid
invoices and other papers shall be kept and or payable of at least P1,000,000 for the
entries therein made by the person subject to preceding taxable year; and
the tax, as well as the manner in which licenses d. Withholding tax - Business establishment
and stamps shall be gathered up and returned with withholding tax payment or remittance
after serving their purposes; of at least P1,000,000 for the preceding
taxable year.
2. The manner in which tax returns, information
and reports shall be prepared and reported and Provided, however, That the Secretary of
the tax collected and paid, as well as the Finance, upon recommendation of the CIR,
conditions under which evidence of payment may modify or add to the above criteria for
shall be furnished the taxpayer, and the determining a large taxpayer after considering
preparation and publication of tax statistics; such factors as inflation, volume of business,
wage and employment levels, and similar
3. The manner in which internal revenue taxes, economic factors.
such as income tax, including withholding tax,
estate and donor's taxes, value-added tax, The penalties prescribed under Sec. 248 shall
other percentage taxes, excise taxes and be imposed on any violation of the rules and
documentary stamp taxes shall be paid regulations issued by the Secretary of Finance,
through the collection officers of the BIR or upon recommendation of the CIR, prescribing
through duly authorized agent banks which are the place of filing of returns and payments of
hereby deputized to receive payments of such taxes by large taxpayers.
taxes and the returns, papers and statements
that may be filed by the taxpayers in connection
with the payment of the tax:
Page 339 of 494

B. Income Tax Philippines.
1. Definition, Nature and General a. Criteria in Imposing Philippine

Principles Income Tax
Definition Citizenship
A citizen of the Philippines is subject to

Income Tax is defined as a tax on all yearly
profits arising from property, professions, Philippine income tax:
trades, or offices, or as a tax on the person’s
income, emoluments, profits and the like. It a. On his worldwide income, if he resides in
the Philippines; or
may be succinctly defined as a tax on income,
whether gross or net, realized in one taxable b. Only on his income from sources within the
Philippines, if he qualifies as a non-resident
year. [DE LEON citing CJS and AmJur]
citizen. [MAMALATEO]
Nature
Income tax is generally classified as an excise Residence
tax. It is not levied upon persons, property,
funds or profits but upon the right of a person A resident alien is liable to pay Philippine
income tax only on his income from sources
to receive income or profits. [DE LEON]
within the Philippines but is exempt from tax on
his income from sources outside the
General Principles [Sec. 23, NIRC]
Philippines. [MAMALATEO]
1. A resident citizen of the Philippines is
Source
taxable on all income derived from sources
within and without the Philippines;
An alien is subject to Philippine income tax
2. A nonresident citizen is taxable only on
income derived from sources within the because he derives income from sources
within the Philippines. Thus, a non-resident
Philippines
3. An individual citizen of the Philippines alien or non-resident foreign corporation is
liable to pay Philippine income tax on income
who is working and deriving income
from abroad as an overseas contract from sources within the Philippines, such as
dividend, interest, rent, or royalty, despite the
worker is taxable only on income derived
from sources within the Philippines: fact that he has not set foot in the Philippines.
[MAMALATEO]
Provided, That a seaman shall be treated
as an overseas contract worker if he (1) is
a citizen of the Philippines, and (2) receives b. Types of Philippine Income Tax
compensation for services rendered
abroad as a member of the complement of There are several types of income tax under
a vessel engaged exclusively in the NIRC, namely: [MAMALATEO]
international trade; i. Graduated income tax and fixed tax on
4. An alien individual, whether a resident gross sales or receipts for individuals;
or not of the Philippines, is taxable only ii. Normal corporate income tax on
on income derived from sources within the corporations;
Philippines; iii. Minimum corporate income tax on
5. A domestic corporation is taxable on all corporations;
income derived from sources within and iv. Special income tax on certain
without the Philippines; and corporations;
6. A foreign corporation, whether engaged v. Capital gains tax on sale or exchange
or not in trade or business in the of unlisted shares of stock of a
Philippines, is taxable only on income domestic corporation classified as
derived from sources within the capital assets;
Page 340 of 494

vi. Capital gains tax on sale or exchange Rosario, Jr., G.R. No. 109289 (1994)]
of real property located in the
Philippines classified as a capital ii. Schedular
asset;
vii. Final withholding tax on certain passive Under a schedular tax system, different types
investment income paid to residents; of income are subject to different sets of
viii. Final withholding tax on income graduated or flat income tax rates. The
payments made to non-residents; applicable tax rate(s) will depend on the
ix. Fringe benefits tax on fringe benefits of classification of the taxable income and the
supervisory or managerial employees; basis could be gross income or net income.
x. Branch profit remittance tax; Separate income tax returns (or other types of
return applicable) are filed by the recipient of
Income Tax can also be simplified into three (3) income for the particular types of income
kinds: received. [MAMALATEO]
A schedular approach in taxation is one where
1. Net Income Tax – certain deductions the income tax treatment varies and is made to
and/or exemptions are deducted from depend on the kind or category of taxable
the gross income and the tax is income of the taxpayer. [Tan v. Del Rosario,
computed based on the resulting net Jr., supra]
income or taxable income,
2. Gross Income Tax – no deductions Global System Schedular System
and/or exemptions are allowed to be A personal tax based
A tax on income-
deducted, hence, the tax is computed on the income of the
producing activities.
based on the gross or the aggregate taxpayer.
amount earned. Emphasizes
3. Final Income Tax – no deductions Emphasizes the
revenue and
and/or exemptions are allowed to be burden allocation
administrative
deducted. Hence the tax is computed aspects.
aspects.
based on the gross or passive income Because of its
but as a distinction, it is subject to the Most equitable
multiple rates, the
withholding or final tax as provided system yet
tax burden of a
under Section 57(A) of the Code developed for
person does not
[CHAVEZ, 2022]. distributing tax
correspond to his
burden. The burden
income but rather
c. Income Tax Systems of an individual is
falls fortuitously on
closely related to his
the type of his
resources and his
i. Global income. It is fixed
ability to pay.
and final.
Under a global tax system, it does not matter It serves as a means This function is alien
whether the income received by the taxpayer is for redistributing to schedular system
classified as compensation income, business income and wealth. where in times of
or professional income, passive investment Big income earners plenty or in times of
income, capital gain, or other income. All items are subject to higher need, people pay the
of gross income, deductions, and personal and taxes than small same fixed tax on
additional exemptions, if any, are reported in income earners. their income.
one income tax return, and one set of tax rates Administration is not
are applied on the tax base. The administration is
quite as easy as
simple, being
schedular because
A global tax system is one where the tax confined to each
one has to consider
treatment views indifferently the tax base and transaction or
all income from
generally treats in common all categories of activity.
whatever source.
taxable income of the taxpayer. [Tan v. Del
Page 341 of 494

iii. Semi-schedular or Semi-global Tax 3. Taxable Period
System
"Taxable year" means the calendar year, or
All compensation income, business or the fiscal year ending during such calendar
professional income, capital gain and passive year, upon the basis of which the net income is
income that are not subject to final tax, and computed. Taxable year includes, in the case
other income are added together to arrive at of return made for a fractional part of a year
the gross income, and after deducting the sum under the provisions of Title II (Tax on Income),
of allowable deductions, the taxable income is the period for which such return is made [Sec.
subjected to one set of graduated tax rates or 22 (P), NIRC].
normal corporate income tax. With respect to
such income the computation is global. a. Calendar Year – An accounting period of
For those other income not mentioned above, 12 months ending on the last day of
they remain subject to different sets of tax rates December.
and covered by different returns. [Mamalateo] b. Fiscal Year – An accounting period of 12
months ending on the last day of any month
Note: The Philippines, under the NIRC, follows other than December [Sec. 22(Q), NIRC].
a semi-schedular and semi-global tax system. c. Short Period – An accounting period
which starts after the first month of the tax
2. Features of the Philippine Income year or ends before the last month of the
Tax Law tax year (less than 12 months). Instances
whereby short accounting period arises:
1. Direct Tax – The tax burden is borne i. When a corporation is newly
by the income recipient upon whom the organized.
tax is imposed. ii. When a corporation is dissolved.
2. Progressive – The tax rate increases [Sec. 52(c), NIRC]
as the tax base increases. It is founded iii. When a corporation changes its
on the ability to pay principle and is accounting period. [Sec 46, NIRC]
consistent with Sec. 28, Art. VI, 1987 iv. When the taxpayer dies.
Constitution.
3. Comprehensive – The Philippines has General rule: Taxable income shall be
adopted the most comprehensive computed based on the taxpayer’s annual
system of imposing income tax by accounting period, which may be fiscal year or
adopting the citizenship principle, the calendar year
residence principle, and the source
principle. Any of the three principles is Exception: Taxable income shall be computed
enough to justify the imposition of based on the basis of calendar year only:
income tax on the income of a resident a. If the taxpayer's annual accounting period
citizen and a domestic corporation that is other than a fiscal year;
are taxed on a worldwide income. b. If the taxpayer has no annual accounting
4. Semi-Schedular or Semi-Global Tax period;
System – The Philippines follows the c. If the taxpayer does not keep books of
semi-schedular or semi-global system accounts; or
of income taxation, although certain d. If the taxpayer is an individual [Sec. 43,
passive investment incomes and NIRC].
capital gains from sale of certain capital
assets (namely: (a) shares of stock of 4. Kinds of Taxpayers
domestic corporations, and (b) real
property) are subject to final taxes at Taxpayer – any person subject to tax imposed
preferential tax rates [MAMALATEO]. by Title II of the Tax Code. [Sec. 22(N), NIRC]
Person – means an individual, a trust, estate

Page 342 of 494

or corporation. [Sec. 22(A), NIRC] satisfaction of the CIR the fact of his
physical presence abroad with a
For income tax purposes, taxpayers are definite intention to reside therein.
classified generally as follows: 2. PH citizen who leaves the Philippines
a. Individuals during the taxable year to reside
b. Corporations abroad, either as an immigrant or for
c. Estates and Trusts employment on a permanent basis.
d. Partnerships (General Partnership and 3. PH citizen who works and derives
General Professional Partnerships) income from abroad and whose
employment thereat requires him to be
Primary physically present abroad most of the
Sub-Classification(s)
Classification time during the taxable year. To be
Citizens Resident citizens considered physically present abroad
of the
Philippi Non-resident citizens
most of the time during the taxable
nes year, a contract worker must have
Residents been outside the PH for not less than
Engaged in 183 days during such taxable year.
Trade or [BIR R.R. 1-79, Sec. 2]
Business in 4. PH citizen previously considered as a
the
non-resident citizen and who arrives
Non- Philippines
Aliens during the taxable year to reside
Individuals residen Not
ts Engaged in permanently in the PH - Treated as
Trade or NRC with respect to his income derived
Business in from sources abroad until his arrival in
the the PH
Philippines
Special
Classes
Note: The term ‘residence’ is to be understood
of Minimum Wage Earner not in its common acceptation as referring to
Individu ‘dwelling’ or ‘habitation,’ but rather to ‘domicile’
als or legal residence, that is, ‘the place where a
Domestic Corporations party actually or constructively has his
Resident permanent home, where he, no matter where
Corporation
he may be found at any given time, eventually
s
Corporations Foreign intends to return and remain (animus
Non-
Corporations manendi). [Japzon v. COMELEC, G.R. No.
resident
Corporation 180088 (2009)]
s
Estates and c. Overseas Contract Worker (OCW) – an
Trusts individual citizen of the PH who is working
General Partnership
Partnerships and deriving income from abroad as an
General Professional Partnership
overseas contract worker is taxable only on
income derived from sources within the PH
i. Individual Taxpayers
Provided, that a seaman who is a citizen of
the PH and who receives compensation for
CITIZENS
services rendered abroad as a member of
the complement of a vessel engaged
a. Resident Citizens (RC)
exclusively in international trade shall be
A citizen of the PH residing therein is
treated as an overseas contract worker [
taxable on all income derived from sourced
Sec 23(C)]
with and without the Philippine [Sec 23 (A)].
b. Non-resident Citizens (NRC) [Sec. 22 (E),
NIRC]
1. PH citizen who establishes to the
Page 343 of 494

ALIENS projects or (2) engaging in petroleum, coal,
geothermal and other energy operations
1. Resident Alien – An alien actually present pursuant to an operating or consortium
in the Philippines who is not a mere agreement under a service contract with the
transient or sojourner is a resident for government. [Sec. 22 (B), NIRC]
income tax purposes.
a. No/Indefinite Intention = RESIDENT: Law of Incorporation Test
If he lives in the Philippines and has no
definite intention as to his stay, he is a To determine the residence of a corporation,
resident. A mere floating intention the Philippines adopted the Law of
indefinite as to time, to return to Incorporation test under which a corporation is
another country is not sufficient to considered domestic if it is organized or
constitute him a transient. created in accordance with or under the laws of
b. Definite Intention = TRANSIENT: the Philippines and foreign if it is organized or
One who comes to the Philippines for a created in accordance with or under the laws of
definite purpose, which in its nature a foreign country. [MAMALATEO]
may be promptly accomplished, is a
transient. Domestic corporations
Exception: Definite Intention but such cannot A corporation created and organized in the
be promptly accomplished; If his purpose is of Philippines or under its laws. [Sec. 22 (C),
such nature that an extended stay may be NIRC]
necessary for its accomplishment, and thus the
alien makes his home temporarily in the Foreign corporations
Philippines, then he becomes a resident.
A corporation which is not domestic. [Sec. 22
2. Non-resident Alien (D), NIRC]
a. Engaged in trade or business within 1. Resident foreign corporations – Foreign

the Philippines - If the aggregate corporation engaged in trade or business
period of his stay in the Philippines is within the Philippines. [Sec. 22 (H), NIRC]
more than 180 days during any 2. Non-resident foreign corporations –
calendar year. [Sec. 25(A)(1), NIRC] Foreign corporation not engaged in trade
b. Not engaged in trade or business or business within the Philippines. [Sec. 22
within the Philippines - If the (I), NIRC]
aggregate period of his stay in the
Philippines does not exceed 180 days. DOING BUSINESS – implies a continuity of
commercial dealings and arrangements, and
ii. Corporations contemplates, to that extent, the performance
of acts or works or the exercise of some of the
Includes all types of corporations (even one functions normally incident to, and in
person corporations), partnerships (no matter progressive prosecution of commercial gain or
how created or organized), joint stock for the purpose and object of the business
companies, joint accounts (cuentas en organization. [CIR v. BOAC, G.R. No. L-65773
participacion), associations, or insurance (1987)]
companies, whether or not registered with the
SEC. [MAMALATEO] Includes:
1. soliciting orders, service contracts

Excludes general professional partnerships 2. opening offices, whether called "liaison"
(GPP); joint ventures or consortiums formed for offices or branches
the purpose of (1) undertaking construction 3. appointing representatives or distributors
Page 344 of 494

domiciled in the Philippines or who in any c. Income received by estates of
calendar year stay in the country for a deceased persons during the
period totaling 180 days or more period of administration or
4. participating in the management, settlement of the estate
supervision or control of any domestic d. Income, which in the discretion of
business, firm, entity or corporation in the the fiduciary, may either be
Philippines. distributed to the beneficiaries or
accumulated.
Excludes:
Exceptions: (1) Employee’s trust [Sec. 60,
1. mere investment as a shareholder in NIRC]; (2) Revocable trusts [Sec. 63, NIRC];
domestic corporations, and/or the exercise (3) Income for Benefit of Grantor [Sec. 64,
of rights as such investor NIRC]
2. having a nominee director or officer to
represent its interests in such corporation Taxable income of the estate or trust is
3. appointing a representative or distributor computed in the same manner as an individual,
domiciled in the Philippines which subject to certain special rules [Sec 61, NIRC]
transacts business in its own name and for
its own account. [RA 7042, Foreign Estate
Investments Act]
Refers to all the property, rights and obligations
Taxability of income: of a person which are not extinguished by his
death and those which have accrued thereto
Taxpayer Within Without since the opening of the succession. [DE
Resident Citizen √ √ LEON citing Arts. 776 and 781 NCC]
Non-resident Citizen
√ X Trust
and OCW
Resident Alien √ X
Non-resident Alien √ X An arrangement created by will or an
Domestic Corporation √ √ agreement under which legal title to property is
Foreign Corporation √ X passed to another for conservation or
investment with the income therefrom and
iii. Estates and Trusts ultimately the corpus (principal) to be
distributed in accordance with the directions of
the creator as expressed in the governing
Income tax imposed on individuals shall apply
instrument. [DE LEON]
to income of estates or of any kind of property
held in trust. [Sec. 60 (A), NIRC]
iv. Partnerships, Joint Ventures, Co-
In Sec 60 of the Tax Code, it provides that the
ownership
tax imposed upon individuals shall apply to the
income of estates or of any kind of property
General Partnerships
held in trust, including:
A partnership which is not a general
a. Income accumulated in trust for the
professional partnership. Treated as a
benefit of unborn or unascertained
corporation.
person or persons with contingent
interests, and income accumulated
General Professional Partnerships (GPP)
or held for future distribution under
the terms of the will or trust.
A partnership formed by persons for the sole
b. Income which is distributed
purpose of exercising their common
currently by a guardian of an infant
profession, no part of the income of which is
which is to be held of distributed as
derived from engaging in any trade or
the court may direct
Page 345 of 494

business. [Sec. 22 (B), NIRC] Income is a gain derived from labor or capital,
or both labor and capital; and includes the gain
The partners themselves, not the partnership, derived from the sale or exchange of capital
shall be liable for income tax in their separate assets. [DE LEON]
and individual capacities. Each partner shall
report as gross income his distributive share, Income includes earnings, lawfully or
actually or constructively received, in the net unlawfully acquired, without consensual
income of the partnership. [Sec. 26, NIRC] recognition, express or implied, of an obligation
to repay and without restriction as their
Joint venture and consortium disposition. [James v. US, 366 US 213 (1961)]
Income may be received in the form of cash,
Essential factors of a joint venture or property, service, or a combination of the three.
consortium:
1. Each party must make a contribution, not Income v. Capital
necessarily of capital but by way of
services, skill, knowledge, material or "The essential difference between capital and
money; income is that capital is a fund; income is a
2. Profits must be shared among the parties; flow. A fund of property existing at an instant of
3. There must be a joint proprietary interest time is called capital. A flow of services
and right of mutual control over the subject rendered by that capital by the payment of
matter of the enterprise; money from it or any other benefit rendered by
4. There is a single business transaction. a fund of capital in relation to such fund through
a period of time is called income." [Madrigal v.
A joint venture or consortium is treated as a Rafferty, G.R. No. 12287 (1918)]
corporation, except those formed for the
purpose of: Unless otherwise specified, it means cash or its
1. Undertaking construction projects, or equivalent. Income can also be thought of as a
2. engaging in petroleum, coal, geothermal flow of the fruits of one[s] labor.” [Association
and other energy operations pursuant to an of Non-Profit Clubs v BIR, G.R. No. 228539,
operating consortium agreement under a 26 June 2019].
service contract with the Government.
Income Capital
Co-ownership Denotes a flow of
Fund or property
wealth during a
existing at one
There is co-ownership whenever the definite period of
distinct point in time.
ownership of an undivided thing or right time.
belongs to different persons. [Art. 484, NCC] Service of wealth Wealth itself
Return of capital is
Co-ownerships are not subject to tax as a Subject to tax
not subject to tax
corporation if the activities of the co-owners are Fruit Tree
limited to the preservation of the property and
the collection of the income therefrom, in which Classification of Income
case each co-owner is taxed individually on his
distributive share in the income of the co- 1. Compensation Income
ownership. [DE LEON citing Sec. 210 Regs] Means all remuneration for services
performed by an employee for his
5. Income employer under an employer-employee
relationship, unless explicitly excluded by
a. Definition the Tax Code of special law.
[MAMALATEO]
Income means all wealth which flows to the
taxpayer other than a mere return of capital.
Page 346 of 494

2. Profession or Business Income the form of actual receipt of cash or may occur
The value derived from an exercise of as a constructive receipt of income. [Valencia
profession, business or utilization of capital and Roxas]
including profit and gain derived from sale
or conversion of assets. Examples are net Mere increase in the value of property without
income from business and gain from the actual realization, either through sale or other
sale of assets used in trade or business. disposition, is not taxable. [De Leon]
3. Passive Income Stock Dividends are Not Income Until

An income in which the taxpayer merely Realized
waits for the amount to come in. Examples
are royalty, interest, prizes, and winnings. Income in tax law is an amount of money
coming to a person within a specified time,
4. Capital Gain whether as payment for services, interest or
An income derived from sale of assets not profit from investment.” It means cash or its
used in trade or business. Examples are equivalent. It is gain derived and severed from
sale of family home and other capital capital, from labor or from both combined, so
assets. [VALENCIA AND ROXAS] that to tax a stock dividend would be to tax a
capital increase rather than the income.
b. When Income is Taxable
In a loose sense, stock dividends issued by the
In Section 31 of the NIRC, as amended by corporation are considered unrealized gain,
TRAIN, taxable income means the pertinent and cannot be subjected to income tax until
items of gross income specified in this Code, that gain has been realized.
less the deductions, if any, authorized for such
types of income by this Code, or other special Before the realization, stock dividends are
laws [CHAVEZ, 2022]. nothing but a representation of an interest in
the corporate properties.
Existence of Income
As capital, it is not yet subject to income tax.
Requisites for income to be taxable [DE
LEON] Increase in the Value of Shares Not an
1. There is INCOME, gain or profit Income
2. RECEIVED or REALIZED during the
taxable year Since a mere advance in the value of the
3. NOT EXEMPT from income tax by law or property of a person or corporation is no sense
treaty constitute the income specified in the revenue
law, it has been held in the early case of Fisher
Certainly, an income tax is arbitrary and v Trinidad [43 Phi. 973, 981(1922)] that it
confiscatory if it taxes capital because capital constitutes and can be treated merely as an
is not income. In other words, it is income, not increase of capital. Hence, there was no factual
capital, which is subject to income tax. and legal basis in assessing income tax on the
[Chamber of Real Estate and Builders’ increase in the value until the same is actually
Associations, Inc. v The Hon. Executive sold at a profit [CIR v Filinvest Development
Secretary Alberto Romulo, G.R. No. 160756, Corporation, G.R. No. 163653, 19 July 2011]
09 March 2010.
Campaign Contributions
Realization of Income
In the course of an election period, various
Income is realized when there is a gain or profit contributions are given the candidates, “for the
derived from a closed and completed purpose of influencing the result of the
transaction. The realization of gain may take elections.” The final paragraph of Section 13 of
Page 347 of 494

RA7166 provides that such campaign Examples of Constructive receipt:
contributions in cash or in kind to any
candidate, duly reported to COMELEC are 1. Interest credited on savings bank deposit;
exempt from Donor’s Tax. 2. Matured interest coupons not yet collected
by the taxpayer;
However in instances when these campaign 3. Dividends applied by the corporation
are not fully utilized by a candidate for against the indebtedness of a stockholder;
campaign purposes, there is a need to clarify 4. Share in the profit of a partner in a general
the treatment of these excess campaign funds, professional partnership, although not yet
for tax purposes. distributed, is regarded as constructively
received; or
GR: not taxable since they are not for the 5. Intended payment deposited in court
personal expenditure of the candidate (consignation).
The doctrine of constructive receipt is designed
EX: unutilized/excess campaign funds to prevent the taxpayer using the cash basis
(contributions net of the campaign from deferring or postponing the actual receipt
expenditures) are subject to income tax. of taxable income. Without the rule, the
taxpayer can conveniently select the year in
Plus: Any candidate, winning or losing, who which he will report the income. [DIMAAMPAO]
fails to file with the COMELEC the appropriate
Statement of expenditures will be precluded Recognition of Income
from claiming expenditures as deductions. The
entire amount becomes directly subject to Income realized pertains to the accrual basis of
income tax [Excerpts accounting.
from RR 7-2011]
Recognition of income in the books is when it
Ordinary Income is realized and expenses are recognized when
incurred. It is the right to receive and not the
In Section 22(Z) of the NIRC, the term ordinary actual receipt that determines the inclusion of
income includes any gain from the sale or the amount in gross income
exchange of property which is not a capital
asset or property described in Section 39(A) Examples:
(1). Any gain from the sale or exchange of i. Interest or rent income earned but not
property which is treated or considered, under yet received
other provisions of this Title, as ordinary ii. Rent expense accrued but not yet paid
income, shall be treated as gain from the sale iii. Wages due to workers but remaining
or exchange of property which is not a capital unpaid
asset as defined in Section 39(A)(A).
[CHAVEZ, 2022] c. Tests in Determining Whether Income
is Earned for Tax Purposes
Actual v. Constructive receipt
1. Realization Test
4 Actual receipt – Income is actually
reduced to possession. The realization of No taxable income until there is a separation
gain may take the form of actual receipt of from capital of something of exchangeable
cash. value, thereby supplying the realization or
5 Constructive receipt – An income is transmutation which would result in the receipt
considered constructively received when it of income [Eisner v. Macomber, 252 U.S. 189,
is credited to the account of, or segregated 190 (1920)]. Thus, stock dividends are not
in favor of, a person. income subject to income tax on the part of the
stockholder when he merely holds more shares
representing the same equity interest in the
Page 348 of 494

corporation that declared stock dividends Hence, the increase in value of an asset is not
[Fisher v. Trinidad, supra]. income as it has not yet been exchanged or
transferred for something else. Once the asset
Income is recognized when both of the is exchanged, then a severance of the gain
following conditions are met: (a) the earning is from its original value takes place, resulting into
complete or virtually complete; and (b) an taxable income. [Ingles]
exchange has taken place. [INGLES]
d. Tax-Free Exchanges
2. Claim of Right Doctrine Tax-free exchanges refer to those instances
enumerated in Section 40(C)(2) of the NIRC of
a.k.a. Doctrine of Ownership, command, or 1997, as amended, that are not subject to
control Income Tax, Capital Gains Tax, Documentary
Stamp Tax and/or Value-added Tax, as the
In the claim-of-right doctrine, if a taxpayer case may be.
receives money or other property and treats it
as its own under the claim of right that the In general, there are two kinds of tax-free
payments are made absolutely and not exchange: (1) reorganization; and (2) transfer
contingently, such amounts are included in the to a controlled corporation.
taxpayer's income, even though the right to the
income has not been perfected at that time. It Reorganization
does not matter that the taxpayer's title to the No gain or loss shall be recognized on a
property is in dispute and that the property may corporation or on its stock or securities if such
later be recovered from the taxpayer. [CIR v. corporation is a party to a reorganization and
Meralco, C.T.A. EB No. 773 (2012)] exchanges property in pursuance of a plan of
reorganization solely for stock or securities in
3. Economic Benefit Test, Doctrine of another corporation that is a party to the
Proprietary Interest reorganization.
A reorganization is defined as:

Any economic benefit to the employee that
(a) A corporation, which is a party to a merger
increases his net worth, whatever may have
or consolidation, exchanges property solely for
been the mode by which it is effected, is
stock in a corporation, which is a party to the
taxable. Thus, in stock options, the difference
merger or consolidation; or
between the fair market value of the shares at
(b) The acquisition by one corporation, in
the time the option is exercised and the option exchange solely for all or a part of its voting
price constitutes additional compensation stock, or in exchange solely for all or part of the
income to the employee at the time of exercise voting stock of a corporation which is in
(not upon the grant or vesting of the right). control of the acquiring corporation, of stock of
another corporation if, immediately after the
Anything that benefits a person materially or acquisition, the acquiring corporation has
economically in whatever way is taxable. control of such other corporation whether or
However, note that a mere increase in the not such acquiring corporation had control
value of property without actual realization is immediately before the acquisition; or
not taxable. [INGLES] (c) The acquisition by one corporation, in
exchange solely for all or a part of its voting
4. Severance Test stock or in exchange solely for all or part of the
voting stock of a corporation which is in
Under the severance test of income, in order control of the acquiring corporation, of
that income may exist, it is necessary that there substantially all of the properties of another
be a separation from capital of something of corporation. In determining whether the
exchangeable value. The income requires a exchange is solely for stock, the assumption by
realization of gain. the acquiring corporation of a liability of the
others shall be disregarded; or
Page 349 of 494

(d) A recapitalization, which shall mean an are not deducted until paid. [DE LEON]
arrangement whereby the stock and bonds of
a corporation are readjusted as to amount, N.B. “received” here includes actual
income, or priority or an agreement of all and constructive receipt.
stockholders and creditors to change and
increase or decrease the capitalization or • Accrual method – income, profits and
debts of the corporation or both; or gains are included in gross income
(e) A reincorporation, which shall mean the when earned, whether received or not,
formation of the same corporate business with and expenses are allowed as
the same assets and the same stockholders deductions when incurred, although
surviving under a new charter. not yet paid. It is the right to receive and
not the actual receipt that determines
Transfer to a controlled corporation the inclusion of the amount in gross
no gain or loss shall be recognized if property income. [DE LEON]
is transferred to a corporation by a person,
alone or together with others, not exceeding
• Hybrid method – income and
four (4) persons, in exchange for stock or unit
expenses are reported by employing
of participation in such a corporation of which
the combination of cash and accrual
as a result of such exchange the transferor or
method. Example: where a taxpayer is
transferors, collectively, gains or maintains
control of said corporation. engaged in more than one trade or
business, he may use a different
LEGAL REFERENCE method of accounting for each trade or
Section 40(C)(2) to 40(C)(6) of the NIRC of business. [DE LEON]
1997, as amended.
b. SPECIAL METHODS:
TAX TREATMENT OF EXCHANGES OF
PROPERTIES MADE PURSUANT TO SECTION 1. Installment Basis [Sec. 49, NIRC]
40(C)(2) OF THE NIRC, AS AMENDED Taxpayer reports as income only a part of
The transfers of properties in exchange for the gross profit to be realized from the sale
shares of stocks made pursuant to Section on the instalment plan equivalent to that
40(C)(2) of the NIRC, as amended, shall be proportion of the instalments received
exempt from the following taxes: every year which the gross profit realized
1. Capital Gains Tax (CGT); or to be realized when payment is
2. Creditable Withholding Tax (CWT); completed bears to the contract price.
3. Income Tax (IT); Gross
Income to be
4. Donor’s Tax (DT); Instalment Profit
reported for = ×
5. Value-Added Tax (VAT); and Received Contract
the year
6. Documentary Stamp Tax (DST) on Price
conveyances of real properties and shares
of stocks Installment basis is available to:
7. Dealers in personal property [Sec 49
However, the original issuance of shares in (A), NIRC]; Casual Sellers of personal
exchange for the properties transferred shall property [Sec 49 (B), NIRC]; and
be subject to the DST under Section 174 of the Sellers of real property [Sec 49 (B) &
same Code. (C), NIRC]
Methods of Accounting Personal Property Real Property

a. Principal Methods: Dealer
● Installment ● Installment
• Cash method – income, profits and method method if initial
gains earned are not included in gross ● Person who payments do
income until received, and expenses regularly not exceed
Page 350 of 494

Personal Property Real Property year of sale is the difference between
sells/disposes of 25% of the the selling or contract price and the
personal gross selling cost of the property, even though the
property on price entire purchase price has not been
instalment plan ● Deferred actually received in the year of sale.
● Held as ordinary payment c. The obligations of the purchaser
asset method if initial received by the vendor are considered
● Regardless of payments as equivalent of cash.
amount of exceed 25% of
percentage of the gross 3. Percentage of completion [Sec. 48,
initial payments selling price NIRC]
● Held as Income from long-term contracts is
inventory reported for tax purposes on the basis of
Casual Sale percentage of completion. “Long-term
● Installment contracts” means building, installation or
method if :(1) construction contracts covering a period in
Selling price excess of 1 year.
exceeds P1k
and (2) Initial Gross income already earned though not
payments do not yet received, based on estimates of
exceed 25% of architects or engineers duly certified by
selling price them, is reported in a taxable year; and all
● Deferred deductions relating to such gross income
payment for the taxable year, even if not yet paid are
method if taken into account. [DE LEON]
neither of the 2
conditions are Completed contract method – No longer
met allowed since January 1, 1998 as per RA
● Personal 8424. Cost of the contract is accumulated
property not during the years of construction and
considered deducted from the income of the contract in
inventory the year it is completed.
Sale by Individuals
● Installment e. Situs of Income
method
provided; initial Income Situs
payments do not Interest Residence of the debtor
exceed 25% of Dividends • From DC
selling price Income within
● Held as capital • From Foreign
asset Corporation
1) Income within if 50%
Initial payments mean the payments received or more of the gross
in cash or property (other than evidence of income of the FC for
indebtedness of the purchaser) by the seller the preceding 3
during the taxable year of the disposition of the years prior to the
real property. [Sec 49(B), NIRC] declaration of
dividend was derived
2. Deferred Payment Sales from sources within
a. Applicable when the initial payments the Philippines [ but
exceed 25% of the selling price only to the amount
b. The income to be reported during the
Page 351 of 494

Income Situs profession;
that bears with the • Gains derived from dealings in property;
percentage.] interests; rents; royalties; dividends;
2) Income without if less annuities; prizes and winnings; pensions;
than 50% subject to and partner's distributive share from the net
the same condition. income of the general professional
[Use also in other partnership.
unallocated
income/expenses] The list here is NOT exclusive.
The definition of gross income is broad enough

Services Place of performance to include all passive income subject to specific
Rentals Location of the property rates or final taxes. However, since these
Royalties Place of use or exercise passive incomes are already subject to
Sale of Real Location of realty in the different rates and taxed finally at source, they
Property Philippines are no longer included in the computation of
Sale of ● Tangible gross income which determines taxable
Personal ▪ Manufactured w/in income. [CIR v. PAL, GR 160628 (2006)]
Property and sold w/o: Partly
w/in and partly w/o Two Kinds of Gross Income Mentioned in
the PH the Tax code
▪ Manufactured w/o
and sold w/in: Partly 1) Gross income for MCIT purposes under
w/in and partly w/o Sec 27(E)(4) of the NIRC.
the PH
▪ Purchased w/in but “Gross Income” shall mean gross sales less
sold w/o: Place of sales returns, discounts, and allowances and
Sale cost of goods sold.
▪ Purchased w/o but
sold w/in: Place of “Cost of Goods Sold” shall include all business
sale expenses directly incurred to produce the
● Intangible merchandise to bring them to their present
▪ General rule: Place location and use.
of Sale
Exception: Shares of stock of 2) Gross receipts for VAT purposes under
domestic corporations: Place Sec 108(A) of the NIRC.
of incorporation-Philippines
6. Gross Income “Gross receipts” means the total amount of
money or its equivalent representing the
a. Definition contract price, compensation, service fee,
rental or royalty, including the amount charged
Gross Income [Sec. 32(A)] for materials supplied with the services and
deposits and advance payment actually or
Gross Income means all income derived from constructively received during the taxable
whatever source, including (but not limited to) quarter for the services performed or to be
the following items: performed for another person, excluding VAT.
• Compensation for services in whatever
form paid, including, but not limited to fees, b. Concept of Income from Whatever
salaries, wages, commissions, and similar Source Derived
items;
• Gross income derived from the conduct of While it has been held that the phrase “from
trade or business or the exercise of a whatever source derived” indicated a
Page 352 of 494

legislative policy to include all income not 9. Pensions, retirement benefits, or
expressly exempted within the class of taxable separation pay.
income under our laws, the term income has 10. Income from any source
been variously interpreted to mean “cash
received or its equivalent,” the amount of 1. Compensation Income
money coming to a person within a specific
time,” or “something distinct from principal or All remunerations for services performed by an
capital.” employee for his employer under an employer-
employee (ER-EE) relationship, unless
Otherwise stated, there must be a proof of the excepted under the provisions of the NIRC are
actual, or, at the very least, probable receipt or considered as compensation income. [RR No.
realization by the controlled taxpayer of the 02-98, Sec 2.78.1]
item of gross income sought to be distributed.
[ICR Filinvest Development Corporation, GR. It includes, but is not limited to, salaries and
163653, 19 July 2011] wages, honoraria and emoluments, allowances
(e.g., transportation, representation,
c. Gross Income vs. Net Income vs. entertainment), commissions, fees (including
Taxable Income directors’ fees, if the director is, at the same
time, an employee of the payor-corporation),
Gross income – The total income of a tips, taxable bonuses, fringe benefits except
taxpayer subject to tax. It includes the gains, those subject to Fringe Benefit Tax (FBT)
profits, and income derived from whatever under Section 33 of the Tax Code, and taxable
source, whether legal or illegal. [Sec. 32(A), pensions and retirement pay (e.g., retirement
NIRC] It does not include income excluded by benefits earned without meeting the conditions
law, or which are exempt from income tax. for exemption thereof, such as retirement of
[Sec. 32(B), NIRC] less than 50 years of age.)
Net income – Means gross income less The term wages does NOT include
statutory deductions and exemptions. [Sec. 31, remuneration paid:
NIRC ] a. For agricultural labor paid entirely in
products of the farm where the labor is
Taxable income – means the pertinent items performed
of gross income specified in the Tax Code, less b. For domestic service in a private home
the deductions and/or personal and additional c. For casual labor not in the course of the
exemptions, if any, authorized for such types of employer's trade or business
income by the Tax Code or other special laws d. For services by a citizen or resident of the
[Sec. 31, NIRC ]. It is synonymous to the term Philippines for a foreign government or an
“net income.” [VALENCIA and ROXAS] int’l organization. [Sec. 78(A), NIRC]
d. Sources of Income Subject to Tax The term “remuneration for domestic

services” refers to remuneration paid for
The following sources of income subject to tax services of a household nature performed by
are the following. an employee in or about the private home of
1. Compensation income; the person whom he is employed. The services
2. Fringe benefits; of household personnel furnished to an
3. Professional income; employee (except rank and file employees) by
4. Income from business; an employer shall be subject to the fringe
5. Income from dealings in property; benefits tax pursuant to Sec. 33 of the Tax
6. Passive investment income; Code.
7. Annuities, proceeds from life insurance or
other types of insurance; The term “casual labor” includes labor which
8. Prizes and awards; is occasional, incidental or regular. “Not in the
Page 353 of 494

course of the employer’s trade or business” kind, in addition to basic salaries, to an
includes labor that does not promote or individual employee, except a rank and file
advance the trade or business of the employer. employee [RR No. 03-98, Sec 2.23b]
General Rule: Compensation income Fringe benefit means includes but not limited to
including overtime pay, holiday pay, night shift the following:
differential pay, and hazard pay, earned by • Housing
MINIMUM WAGE EARNERS (MWE) who has • Expense Account
no other returnable income are NOT taxable • Vehicle of any kind
and not subject to withholding tax on wages • Household personnel, such as maid, driver
[RA 9504]; and others
• Interest on loan at less than market rate to
Exception: If he receives/earns additional the extent of the difference between the
compensation such as commissions, market rate and actual rate granted.
honoraria, fringe benefits, benefits in excess of • Membership fees, dues and other
the allowable statutory amount of P90,000 expenses borne by the employer for the
[RA 10963], taxable allowance, and other employee in social and athletic clubs and
taxable income other than the statutory similar organizations
minimum wage (SMW), holiday pay, overtime • Expenses for foreign travel
pay, hazard pay and night shift differential pay. • Holiday and vacation expenses
• Educational assistance to the employee or
FORMS OF COMPENSATION AND HOW his dependents; and
THEY ARE ASSESSED • Life or health insurance and other non-life
insurance premiums or similar amounts on
Cash – If compensation is paid in cash, the full excess of what the law allows. [Sec. 33(B)]
amount received is the measure of the income
subject to tax. Tax Rate and Tax Base
Medium other than money – If services are Tax base is based on the grossed-up
paid for in a medium other than money (e.g., monetary value (GMV) of fringe benefits.
shares of stock, bonds, and other forms of
property), the fair market value (FMV) of the Rate is generally 35%, since this is the
thing taken in payment is the amount to be headline or the highest tax rate for individual
included as compensation subject to tax. If the income taxpayers.
services are rendered at a stipulated price, in
the absence of evidence to the contrary, such FBT is calculated using the GMV multiply by
price will be presumed to be the FMV of the the 35%. [Sec. 33 (A), NIRC]
remuneration received.
GMV represents
If meals, living quarters, and other facilities and i. the whole amount of income realized by
privileges are furnished to an employee for the the employee which includes the net
convenience of the employer, and incidental to amount of money or net monetary value of
the requirement of the employee’s work or property that has been received; and
position, the value of that privilege need not be ii. the amount of fringe benefit tax due from
included as compensation [Henderson v. the employee which has been withheld
Collector, G.R. No. L-12954 (1961)] and paid by the employer for and in behalf
of his employee.
2. Fringe Benefits
How GMV is determined
Definition
Fringe benefit means any goods, services, or GMV is determined by dividing the actual
other benefit furnished or granted in cash or in monetary value of the fringe benefit by 65%
Page 354 of 494

[100% - tax rate of 35%]. insurance and hospitalization benefit
plans;
For example, the actual monetary value of the c. Benefits given to the rank-and-file
fringe benefit is P1,000. The GMV is equal to employees, whether granted under a
P1,538.46 [P1,000 / 0.65]. The fringe benefit collective bargaining agreement or not;
tax, therefore, is P538.46 [P1538.46 x 35%]. and
d. Fringe benefits granted for the
Special Cases: convenience of the employer;
e. De minimis benefits
For fringe benefits received by non-resident
alien not engaged in trade of business in the If the Fringe Benefit is exempted from the FBT,
Philippines (NRANETB), the tax rate is 25% of the same may, however, still form of the
the GMV. The GMV is determined by dividing employee’s gross compensation income which
the actual monetary value of the fringe benefit is subject to income tax; hence, likewise
by 75% [100% - 25%]. subject to withholding tax on compensation
income payment.
What is the tax implication if the employer
gives ‘fringe benefits’ to rank-and-file De Minimis Benefits
employees?
De Minimis Benefits are facilities and privileges
Fringe benefits given to a rank-and-file furnished or offered by an employer to his
employee are treated as part of his employees that are relatively small value and
compensation income subject to normal tax are offered or furnished by the employer
rate and withholding tax on compensation merely as means of promoting health, goodwill,
income, except de minimis benefits and contentment, and efficiency of his employees
benefits provided for the convenience of the [RR No. 3-98, Sec 2.23c]
employer.
The following De Minimis Benefits are exempt
Payor of Fringe Benefit Tax (FBT): The from income tax and withholding tax on
employer withholds and pays the FBT but the compensation income of BOTH managerial
law allows him to deduct such tax from his and rank and file EEs [as provided by R.R. No.
gross income. 11-2018/ R.R. No. 5-2011 / R.R. No. 8-2012/
R.R. No. 1-2015 and RR No. 11-2018]
Taxable and non-taxable fringe benefits 1. Monetized unused vacation leave credits of
PRIVATE employees not exceeding ten
Fringe Benefits NOT subject to Tax (10) days during the year. Note that the
monetization of unused VL credits in
Fringe benefits not considered as gross excess of 10 days and monetization of SL
income – if it is required or necessary to the even if not exceeding 10 days are subject
business of employer; if it is for the to tax; [RR No. 5-2011]
convenience or advantage of employer 2. Monetized value of vacation and sick leave
credits paid to GOVERNMENT officials
Fringe Benefit that is not taxable under Sec. 32 and employees. Note that there is no limit
(B) – Exclusions from Gross Income as to the number of credits; [RR No. 5-
2011]
Fringe benefits not subject to Fringe Benefit 3. Medical cash allowance to dependents of
Tax: employees, not exceeding P1,500 per
a. Fringe Benefits which are authorized and employee per semester or P250 per
exempted from income tax under the Code month; [RR No. 11-2018]
or under special laws; 4. Rice subsidy of P2,000 or one (1) sack of
b. Contributions of the employer for the 50 kg. rice per month amounting to not
benefit of the employee for retirement, more than P2,000; [RR No. 11-2018]
Page 355 of 494

5. Uniform and Clothing allowance not Fringe Benefit
exceeding P6,000 per annum; [RR No. 11- Tax Base
Housing Privilege
2018] (Monetary
6. Actual medical assistance, e.g. medical Value)
allowance to cover medical and healthcare residential use of where MV =
needs, annual medical/executive check- employees monetary value
up, maternity assistance, and routine of the FB
consultations, not exceeding P10,000.00 Assignment of MV= [5% (FMV
per annum; [RR No. 5-2011] residential property or ZV, whichever
7. Laundry allowance not exceeding P300 per owned by employer for is higher) x 50%]
month; [RR No. 5-2011] use of employees
8. Employees achievement awards, e.g., for Purchase of residential MV= 5% x
length of service or safety achievement, property in installment acquisition cost
which must be in the form of a tangible basis for the use of the exclusive of
personal property other than cash or gift employee interest x 50%
certificate, with an annual monetary value Purchase of residential MV= FMV or ZV,
not exceeding P10,000 received by the property and ownership whichever is
employee under an established written is transferred in the higher
plan which does not discriminate in favor of name of the employee
highly paid employees; [RR No. 5-2011] ZV = Zonal Value = value of the land or
9. Gifts given during Christmas and major improvement, as declared in the Real Property
anniversary celebrations not exceeding Declaration Form
P5,000 per employee per annum; [RR No.
5-2011] FMV = Fair Market Value = FMV as determined
10. Daily meal allowance for overtime work by the Commissioner of Internal Revenue
and night/graveyard shift not exceeding
twenty-five percent (25%) of the basic Non-taxable housing fringe benefit:
minimum wage on a per region basis; [RR a. Housing privilege of the Armed Forces of
No. 3-98] the Philippines (AFP) officials – i.e. those of
11. Benefits received by an employee by virtue the Philippine Army, Philippine Navy, or
of a collective bargaining agreement (CBA) Philippine Air Force
and productivity incentive schemes b. A housing unit, which is situated inside or
provided that the total monetary value adjacent to the premises of a business or
received from both CBA and productivity factory – maximum of 50 meters from
incentive schemes combined do not perimeter of the business premises
exceed P10,000.00 per employee per c. Temporary housing for an employee who
taxable year. [RR No 1-2015] stays in housing unit for three months or
less
All other benefits given by employers which are
not included in the above enumeration shall Motor Vehicle
NOT be considered as "de minimis" benefits
and hence, shall be subject to withholding tax Fringe Benefit
on compensation (rank and file employees) Tax Base
and FBT (managerial/supervisory employees). Motor Vehicle
(Monetary
Value)
Housing Purchased in the name MV = acquisition
Fringe Benefit of the employee cost
Tax Base Cash given to employee MV = cash
Housing Privilege
(Monetary to purchase in his own received by
Value) name employee
LEASE of residential MV= 50% of
property for the lease payments,
Page 356 of 494

Fringe Benefit the practice of his profession, provided that
Tax Base there is NO employer-employee relationship
Motor Vehicle
(Monetary between him and his clients.
Value)
Purchase on MV = acquisition It includes the fees derived from engaging in an
installment, in the name cost exclusive of endeavor requiring special training as
of employee interest professional as means of livelihood, which
Employee shoulders includes, but is not limited to, the fees of CPAs,
MV = amount doctors, lawyers, engineers, and the like [RR
part of the purchase
shouldered by No. 2-98].
price, ownership in the
employer
name of employee
Employer owns and The existence of employee-employer
maintains a fleet of relationship is the distinguishing factor
MV = (AC/5) x between compensation income versus
motor vehicles for use
50% professional income.
of the business and of
employees
Employer leases and 4. Income from Business
maintains a fleet for the MV = 50% of
use of the business and rental payment Any income derived from doing business.
of employees
Doing business: The term implies a continuity
Pure Compensation Earner of commercial dealings and arrangements, and
(Minimum Wage Earner, Rank & File, contemplates, to that extent, the performance
Executive) of acts or works or the exercise of some of the
Minimum functions normally incident to, and in
Managerial or progressive prosecution of, the purpose and
Wage Rank and File
Supervisory
Earner object of its organization.
Basic Compensation
Taxable Taxable 5. Income from Dealings in Property
Exempt
Compensation Compensation
Holiday Pay, OT, Nightshift Pay, Hazard Dealings in property such as sales or
Pay exchanges may result in gain or loss. The kind
Taxable Taxable of property involved (i.e., whether the property
Exempt
Compensation Compensation is a capital asset or an ordinary asset)
13th Month Pay up to P90,000 determines the tax implication and income tax
Exempt Exempt Exempt treatment, as follows:
Other Benefit in Excess of P90,000
N/A (with Taxable Taxable Net Capital
caveat) Compensation Compensation Taxable Ordinary Gains (other
Fringe Benefit Net Net than those
Subject to = +
Taxable Income Income subject to
Fringe Benefit final CGT)
Compensation
Tax
N/A Tax
Tax
shouldered by
shouldered by
employee Ordinary Asset Capital Asset
employer
De Minimis Benefit
Gain from sale, exchange or other
Exempt Exempt Exempt disposition
Ordinary Gain (part
Capital Gain
3. Professional Income of Gross Income)
Loss from sale, exchange, or other
Refers to fees received by a professional from disposition
Page 357 of 494


Ordinary Asset Capital Asset whether a property is an ordinary asset or a
Ordinary Loss (part capital asset. [BIR Ruling No. DA 212-07, April
of Allowable 3, 2007]
Capital Loss
Deductions from
Gross Income) b. Types of Gains
Excess of Gains over Losses
Part of Gross Income Net Capital Gain ORDINARY INCOME VIS-À-VIS CAPITAL
Excess of Losses over Gains GAIN.
Part of Allowable
Deductions from Net Capital Loss a. If the asset involved is classified as
Gross Income ordinary, the entire amount of the gain
from the transaction shall be included in
a. Capital v. Ordinary Asset the computation of gross income [Sec
32(A)], and the entire amount of the loss
shall be deductible from gross income.
Ordinary Assets Capital Assets
[Sec 34(D)]. (See Allowable Deductions
1. Stock in trade of Property held by the
from Gross Income – Losses
the taxpayer/ taxpayer, whether
other property of or not connected
b. If the asset involved is a capital asset, the
a kind which with his trade or
rules on capital gains and losses apply in
would properly business which is
the determination of the amount to be
be included in not an ordinary
included in gross income. (See Capital
the inventory of asset.
Gains and Losses).
the taxpayer if on
hand at the close
These rules do not apply to:
of the taxable
a. real property with a capital gains tax (final
year.
tax), or
2. Property held by
b. shares of stock of a domestic corporation
the taxpayer
with a capital gains tax (final tax).
primarily for sale
to customers in
ACTUAL GAIN VIS-À-VIS PRESUMED GAIN
the ordinary
course of his
Presumed Gain: In the sale of real property
trade or
located in the Philippines, classified as capital
business.
asset, the tax base is the gross selling price or
3. Property used in
fair market value, whichever is higher. The law
the trade or
presumes that the seller makes a gain from
business of a
such sale.
character which
is subject to the
Thus, whether or not the seller makes a profit
allowance for
from the sale of real property, he has to pay 6%
depreciation, or
capital gains tax.
4. Real property
used in the trade
Actual Gain: The tax base in the sale of real
or business of
property classified as an ordinary asset is the
the taxpayer,
actual gain.
including
property held for
rent.
Note in ordinary assets, that the list is

EXCLUSIVE. The actual use determines
Page 358 of 494

Computation of the amount of gain or loss any bond, debenture, note, certificate or other
evidence of indebtedness issued by any
Amount realized from sale or other corporation (including one issued by a
disposition of property government or political subdivision thereof)
Less: Basis or Adjusted Basis with interest coupons or in registered form, any
______________________________ loss resulting from such sale shall not be
NET GAIN (LOSS) subject to the foregoing limitation and shall not
be included in determining the applicability of
c. Special rules pertaining to income or such limitation to other losses [Sec. 39(C),
loss from dealings in property classified NIRC].
as capital asset
Net loss carry-over rule (applicable only to
Long Term Capital Gain Vis-À-Vis Short individuals)
Term Capital Gain If an individual sustains in any taxable year a
net capital loss, such loss (in an amount not in
Long-term capital gain: Capital asset is held excess of the net income for the year) shall be
for more than twelve months before it is sold. treated in the succeeding taxable year as a loss
Only 50% of the gain is recognized. from the sale or exchange of a capital asset
held for not more than 12 months [Sec. 39(D),
Short-term capital gain: Capital asset is held NIRC].
for 12 months or less, 100% of the gain is
subject to tax. d. Tax free exchanges [Sec. 40 (c)(2)]
Note: If the taxpayer is a corporation, 100% of Merger or Consolidation

the gain is recognized regardless of the holding No gain or loss shall be recognized if in
period. pursuance of a plan of merger or consolidation
a. A corporation, which is a party to a merger
Net Capital Gain Vis-À-Vis Net Capital Loss or consolidation, exchanges property
solely for stock in a corporation, which is a
Net Capital Gain: Excess of the gains over the party to the merger or consolidation; or
losses on sales or exchange of capital assets b. A shareholder exchanges stock in a
during the taxable year. corporation, which is a party to the merger
or consolidation, solely for the stock of
Net Capital Loss: Excess of the losses over another corporation also a party to the
the gains on sales or exchanges of capital merger or consolidation; or
assets during the taxable year. [Sec. 39 (A), c. A security holder of a corporation, which is
NIRC] a party to the merger or consolidation,
exchanges his securities in such
Income Tax Treatment of Capital Loss corporation, solely for stock or securities in
such corporation, a party to the merger or
Capital loss limitation rule (applicable to both consolidation.
corporations and individuals)
Both corporations in the aforementioned cases
General Rule: Losses from sales or must be parties to a merger or consolidation.
exchanges of capital assets shall be allowed
only to the extent of the gains from such sales Merger occurs when one corporation acquires
or exchanges [Sec. 39(C), NIRC]. all or substantially all the properties of another
corporation. Consolidation occurs when two or
Exception for Banks and Trust Companies: more corporations merge to form one
If a bank or trust company incorporated under corporation.
the laws of the Philippines, a substantial part of
whose business is the receipt of deposits, sells Substantially all the properties of another
Page 359 of 494

corporation means the acquisition of at least Roxas]
80% of the assets, including cash, of another
corporation which has the element of If one is a domestic and resident corporation
permanence and not merely momentary with principal offices in Manila, the residence of
holding [Banggawan citing BIR Gen.Circ. V- the obligor who pays the interest rather than
253 (1957)] the physical location of the securities, bonds,
or notes or the place of payment, is the
Initial Acquisition of Control determining factor of the source of interest
No gain or loss shall also be recognized if income. Nothing in the law speaks of the act or
property is transferred to a corporation by a activity of non-resident corporations in the
person in exchange for stock or unit of Philippines, or place where the contract is
participation in such a corporation of which as signed [National Development Cooperation v
a result of such exchange said person, alone CIR, G.R. No. 53961, 30 June 1987).
or together with others, not exceeding four (4)
persons, gains control of said corporation: Dividend Income
Provided, That stocks issued for services shall A form of earnings derived from the distribution
not be considered as issued in return for made by a corporation out of its earnings or
property. profits and payable to its stockholders, whether
in money or in property.
6. Passive Investment Income
The following are the classification of
Under Sec 24(B) of the Tax Code, a final tax is dividends:
imposed upon gross passive income of citizen 1. Cash dividends
and resident aliens. An income is considered 2. Stock dividends
passive if the taxpayer merely waits for it to be 3. Property dividends; and
realized. 4. Liquidating dividends.
Sources Cash dividends

Dividends are subject to final tax under the
The following are the sources of passive NIRC. However, dividends received by a
income subject to final tax domestic corporation from another domestic
a. Interest income; corporation, and dividends received by a
b. Dividend Income; resident foreign corporation from a domestic
c. Royalty Income; and corporation are exempt from income tax.
d. Rental Income.
Stock dividends
Note that these sources of income are NOT Stock dividend is generally exempt from
added to other income in the determination of income tax, EXCEPT:
ordinary income tax liability. a. If a corporation cancels or redeems stock
issued as a dividend xxx the amount so
Passive income is only subject to final tax if the distributed in redemption or cancellation of
source is within the Philippines. the stock shall be considered as taxable
income to the extent that it represents a
It is not the signing of the contract, the distribution of earnings or profits [Sec.
construction on the vessels, the payment of the 73(B), NIRC]; or
stipulated price and their delivery to the obligor b. Where there is an option that some
even if done abroad that determines the source stockholders could take cash or property
of income. dividends instead of stock dividends; some
stockholders exercised the option to take
Interest Income cash of property dividends; and the exercise
An earning derived from depositing or lending of option resulted in a change of the
of money, goods or credits [Valencia and stockholders’ proportionate share in the
Page 360 of 494

outstanding share of the corporation. Leasehold improvements by lessee
Property dividends Rent Income from leasehold improvements:

Property dividends are subject to tax at the 1. Outright method- lessor shall report as
preferential rate under the NIRC. income FMV of the buildings or
improvements subject to the lease in the
Liquidating dividends year of completion.
Represents distribution of all the property or 2. Spread-out method- lessor shall spread
assets of a corporation in complete liquidation over the remaining term of the lease the
or dissolution. It is strictly not dividend income, estimated depreciated (book) value of
but rather is treated in effect, a return of capital such buildings or improvements at the
to the extent of the shareholder’s investment. termination of the lease, and reports as
income for each remaining term of the
The difference between the cost or other basis lease an aliquot part thereof.
of the stock and the amount received in
liquidation of the stock is a capital gain or a Estimated BV at the end of the lease contract/
capital loss. Where property is distributed in remaining lease term = Income per year
liquidation, the amount received is the FMV of
such property. The income is subject to 7. Annuities, Proceeds from Life
ordinary income tax rates. It is subject neither insurance or Other Types of Insurance
to the FWT on dividends nor to the CGT on sale
of shares. It refers to periodic installment payments of
income or pension by insurance companies
Royalty Income during the life of a person or for a guaranteed
Where a person pays royalty to another for the fixed period of time, whichever is longer, in
use of its intellectual property, such royalty is consideration of capital paid by him. It is paid
generally a passive income of the owner annually, monthly, or periodically, computed
thereof subject to withholding tax. upon the amount paid yearly, but necessarily
for life. [Peralta v. Auditor General, G.R. No. L-
Rental Income 8480 (1957)]
Refers to earnings derived from leasing real
estate as well as personal property. Aside from The annuity payments represent a part that is
the regular amount of payment for using the taxable and not taxable. If part of annuity
property, it also includes all other obligations payment represents interest, then it is a taxable
assumed to be paid by the lessee to the third income. If the annuity is a return of premium, it
party in behalf of the lessor (e.g., interest, is not taxable.
taxes, loans, insurance premiums, etc.) [RR
19-86] 8. Prizes and Awards
Lease of personal property A prize is a reward for a contest or a

Rental income on the lease of personal competition. Such payment constitutes gain
property located in the Philippines and paid to derived from labor.
a non-resident taxpayer shall be taxed as
follows: The EXCEPTIONS are as follows:
1. Prizes and awards made primarily in
NRA- recognition of religious, charitable,
NRFC
NETB scientific, educational, artistic, literary or
Vessel 4.5% 25% civic achievements are EXCLUSIONS
Aircraft, 7.5% 25% from gross income if:
machineries and 2. The recipient was selected without any
other Equipment action on his part to enter a contest or
Other assets 30% 25% proceedings; and
Page 361 of 494

3. The recipient is not required to render a. Recovery of Accounts Previously
substantial future services as a condition Written-off
to receiving the prize or award.
4. Prizes and awards granted to athletes in Bad debts claimed as a deduction in the
local and international sports competitions preceding year(s) but subsequently recovered
and tournaments held in the Philippines shall be included as part of the taxpayer’s gross
and abroad and sanctioned by their income in the year of such recovery to the
national associations shall be EXEMPT extent of the income tax benefit of said
from income tax. deduction. There is an income tax benefit when
the deduction of the bad debt in the prior year
9. Pensions, Retirement Benefit, or resulted in lesser income and hence tax
Separation Pay savings for the company. [Sec. 4, RR 5-99]
A stated allowance paid regularly to a person Illustration:

on his retirement or to his dependents on his Case A Case B Case C
death, in consideration of past services, Year 1
meritorious work, age, loss or injury. Gross
[VALENCIA] 500,000 400,000 500,000
Income
Less:
10. Income from Any Source Allowable
Deduction
Inclusion of all income not expressly exempted s (before
(200,00 (480,00 (495,00
within the class of taxable income under the write-off of
0) 0) 0)
laws irrespective of the voluntary or involuntary Uncollecti
action of the taxpayer in producing the gains, ble
and whether derived from legal or illegal Accounts/
sources Debts)
Taxable
Condonation of Indebtedness Income
(Net Loss)
The cancellation of indebtedness may have 300,000 (60,000) 5,000
before
any of three possible consequences: write-off
1. It may amount to payment of income. If, for Deduction
example, an individual performs services for
to or for a creditor, who, in consideration Accounts
thereof, cancels the debt, income in that Receivabl (2,000) (2,000) (6,000)
amount is realized by the debtor as e written
compensation for personal services. off
2. It may amount to a gift. If a creditor wishes Taxable
merely to benefit the debtor, and without Income
any consideration therefore, cancels the (Net Loss) 298,000 (62,000) (1,000)
debt, the amount of the debt is a gift to the after write-
debtor and need not be included in the off
latter’s report of income. Year 2
3. It may amount to a capital transaction. If a Recovery
corporation to which a stockholder is of
indebted forgives the debt, the transaction 2,000 2,000 6,000
Amounts
has the effect of a payment of dividend. Written Off
Taxable
Income on
2,000 - 5,000
the
Recovery
Page 362 of 494

In Case A, the entire amount recovered enumeration of tax payments that are not
(P2,000) is included in the computation of deductible from gross income.
gross income in Year 2 because the taxpayer If a tax is not an allowable deduction from gross
benefited by the same extent. Prior to the write- income when paid (no reduction of taxable
off, the taxable income was P300,000; after the income, hence no tax benefit), the refund is not
write-off, the taxable income was reduced to taxable.
P298,000.
e. Exclusions
In Case B, none of the P2,000 recovered would
be recognized as gross income in Year 2. Note Exclusions from gross income refer to income
that even without the write-off, the taxpayer received or earned but is not taxable as income
would not have paid any income tax anyway. because it is exempted by law or by treaty.
The “taxable income” before the write-off was
actually a net loss. Such tax-free income is not to be included in
the income tax return unless information
In Case C, only P5,000 of the P6,000 regarding it is specifically called for. Receipts
recovered would be recognized as gross which are not in fact income are, of course,
income in Year 2. It was only to this extent that excluded from gross income.
the taxpayer benefited from the write-off. The
taxpayer did not benefit from the extra P1,000 The exclusion of income should not be
because at this point, the P1,000 was already confused with the reduction of gross income by
a net loss. the application of allowable deductions. While
exclusions are simply not taken into account in
b. Receipt of tax refunds or credit determining gross income, deductions are
subtracted from gross income to arrive at net
General rule: A refund of a tax related to the income. [DE LEON]
business or the practice of profession, is
taxable income (e.g., refund of fringe benefit Exclusions v Exemptions
tax) in the year of receipt to the extent of the
income tax benefit of said deduction. Both in their nature and in their effect, there is
no difference between tax exemption and tax
Exceptions: However, the following tax exclusion. Exemption is immunity or privilege;
refunds are not to be included in the it is freedom from a charge of burden to which
computation of gross income: others are subjected.
1. Philippine income tax, except the fringe
benefit tax Exclusion is the removal of otherwise taxable
2. Income tax imposed by authority of any items from the reach of taxation, e.g.
foreign country, if the taxpayer claimed a exclusions from gross income and allowable
credit for such tax in the year it was paid or deductions. It is also therefore an immunity or
incurred. privilege which frees a taxpayer from a charge
3. Estate and donor’s taxes to which others are subjected.
4. Taxes assessed against local benefits of a
kind tending to increase the value of the Consequently the rule that tax exemption
property assessed (Special assessments) should be applied strictly against the taxpayer
5. Value Added Tax and liberally in favor of the government, equally
6. Fines and penalties due to late payment of applies to tax exclusions [PLDT v Province of
tax Laguna, 467 SCRA 93(2005)].
7. Final taxes
8. Capital Gains Tax Items of Exclusions representing return of
capital
Note: The enumeration of tax refunds that are
not taxable (income) is derived from an Amount of capital is generally recovered
Page 363 of 494

through deduction of the cost or adjusted basis Exclusion Taxpayer
of the property sold from the gross selling price All taxpayers unless
Already subject to
or consideration, or through the deduction from provided that income
internal revenue tax
gross income of depreciation relating to the is to be included.
property used in trade or business before it is As expressly
sold. Express exclusion
provided.
It may also relate to indemnities, such as 2. Exclusions Distinguished from

proceeds of life insurance paid to the insured’s Deductions and Tax Credit
beneficiaries and return of premiums paid by
the insurance company to the insured under a Exclusions from gross income refer to flow of
life insurance, endowment or annuity contract. wealth to the taxpayer which are not treated as
part of gross income for purposes of computing
Damages, in certain instances, may also be the taxpayer’s taxable income, due to the
exempt because they represent return of following reasons: (1) it is exempted by the
capital. Constitution or a statute; or (2) it does not come
within the definition of income.
Items of Exclusion because it is subject to
another internal revenue tax Deductions, on the other hand, are the
amounts which the law allows to be subtracted
The value of property acquired by gift, bequest, from gross income in order to arrive at net
devise or descent is exempt from income tax income.
on the part of the recipient because the receipt
of such property is already subject to transfer Exclusions pertain to the computation of gross
taxes (estate tax or donor’s tax). income, while deductions pertain to the
computation of net income.
Items of Exclusions because they are
expressly exempt from income tax Exclusions are something received or earned
a. Under the Constitution by the taxpayer which do not form part of gross
b. Under a tax treaty income while deductions are something spent
c. Under special laws or paid in earning gross income.
Rationale Tax Credit refers to amounts subtracted from

the computed tax in order to arrive at taxes
The term “exclusions” refers to items that are payable.
not included in the determination of gross
income because: 3. Exclusions Under the Constitution
a. They represent return of capital or are not
income, gain or profit; Income derived by the government or its
b. They are subject to another kind of internal political subdivisions from the exercise of any
revenue tax; essential governmental function
c. They are income, gain or profit expressly
exempt from income tax under the Also, all assets and revenues of a non-stock,
Constitution, tax treaty, Tax Code, or a non-profit private educational institution used
general or special law. [MAMALATEO] directly, actually and exclusively for private
educational purposes shall be exempt from
1. Taxpayers Who May Avail taxation.
Exclusion Taxpayer 4. Exclusions Under the Tax Code [Sec.

All taxpayers since 32(b), NIRC]
Return of capital
there is no income.
Page 364 of 494


Proceeds of life insurance policies assignment or otherwise, of a life insurance,
endowment, or annuity contract, or any interest
The proceeds of life insurance policies paid to therein, only the actual value of such
his estate or to any beneficiary (but not a consideration and the amount of the premiums
transferee for a valuable consideration), and other sums subsequently paid by the
directly or in trust, upon the death of the transferee are exempt from taxation.
insured, are excluded from the gross income of
the beneficiary. Value of property acquired by gift, bequest,
devise or descent
However, if such amounts are held by the
insurer under an agreement to pay interest Gifts, bequests and devises (which are subject
thereon, the interest payments received by the to estate or gift taxes) are excluded from gross
insured shall be included in gross income. The income, BUT not the income from such
interest income shall be taxed at the graduated property. If the amount received is on account
income tax rates. of services rendered, whether constituting a
demandable debt or not, or the use or
Return of premium paid opportunity to use of capital, the receipt is
income [Pirovano v. Commissioner, G.R. No.
General rule: The amount received by the L-19865, July 31, 1965]
insured as a return of premiums paid by him
under life insurance, endowment, or annuity Amount received through accident or
contracts, either during the term or at the health insurance (Compensation for
maturity of the term mentioned in the contract damages)
or upon surrender of the contract is a return of
capital and not income. As a rule, amounts received through accident
or health insurance or under workmen’s
This refers to the cash surrender value of the compensation acts, as compensation for
contract. personal injuries or sickness, plus the amount
of any damages received, whether by suit or
Exception: If the amounts received by the agreement, on account of such injuries or
insured (when added to the amounts already sickness are excluded from gross income.
received before the taxable year under such
contract) exceed the aggregate premiums or Examples of non-taxable and taxable
considerations paid (whether or not paid during damages recoveries are:
the taxable year), then the excess shall be Non-taxable – Taxable –
included in gross income. compensation for compensation for
damages on damages on
Amounts received under life insurance, account of account of
endowment or annuity contracts Actual damages for
Personal (physical)
loss of anticipated
injuries or sickness
Amounts received (other than amounts paid by profits
reason of the death of the insured and interest Any other damages Moral and exemplary
payments on such amounts) under a life recovered on damages awarded
insurance, endowment or annuity contracts are account of personal as a result of break
excluded from gross income, but if such injuries or sickness of contract
amounts (when added to amounts already Exemplary and
received before the taxable year under such moral damages for Interest for non-
contract) exceed the aggregate premiums of out-of-court taxable damages
considerations paid (whether or not paid during settlement, including above
the taxable year), then the excess shall be attorney’s fees
included in gross income. However, in the case
of a transfer for valuable consideration, by
Page 365 of 494

Non-taxable – Taxable – RA 7641 RPBP
compensation for compensation for more than 65 years old at the time of
damages on damages on of age at the time of retirement
account of account of retirement
Alienation of Any damages as Retiring employee
affection, or breach compensation for shall not have
Availed of only once,
of promise to marry unrealized income previously availed of
and only when there
Any amount the privilege under a
is no RPBP
received as a return retirement benefit
of capital or plan of the same or
reimbursement of another employer
expenses Plan must be
reasonable. Its
Income exempt under tax treaty implementation must
be fair and equitable
Income of any kind, to the extent required by for the benefit of all
any treaty obligation binding upon the employees (e.g.
Government of the Philippines. from president to
laborer)
Retirement benefits, pensions, gratuities, Plan must be
etc. approved by BIR
These are: A 'reasonable private benefit plan' means a

• Retirement benefits under RA 7641, RA pension, gratuity, stock bonus or profit-sharing
4917, and Section 60(B) of the NIRC plan maintained by an employer for the benefit
• Terminal pay of some or all of his employees wherein
• Retirement Benefits from foreign contributions are made by such employer, or
government agencies employees, or both for the purpose of
• Veterans benefits distributing to such employees the earnings
• Benefits under the Social Security Act and principal of the fund thus accumulated by
• GSIS benefits the trust in accordance with such plan (trust
fund)
Retirement benefits received under RA
7641(The Retirement Pay Law) and those Further, it should be provided in the plan that at
received by officials and employees of private no time prior to the satisfaction of all liabilities
firms under a reasonable private benefit plan with respect to employees under any trust,
(RPBP) maintained by the employer under RA shall any part of the corpus or income of the
4917 (now Section 32(B)(6)(a) of NIRC) are fund be used for, or be diverted to, any purpose
excluded from gross income subject to income other than for the exclusive benefit of his
tax. employees.
RA 7641 RPBP Terminal pay/Separation pay

Retiring employee Any amount received by an employee or by his
Retiring official or heirs from the employer as a consequence of
must be in the
employee must have separation of such official or employee from the
service of same
been in the service of service of the employer because of death,
employer
the same employer sickness, other physical disability or for any
CONTINUOUSLY
for at least ten (10) cause beyond the control of the employee. The
for at least five (5)
years. phrase “for any cause beyond the control of the
years
Retiring employee Retiring official or said official or employee” means that the
must be at least sixty employee must be at separation of the employee must be
(60) years old but not least fifty (50) years involuntary and not initiated by him.
Page 366 of 494

The separation must not be of his own making. sports associations shall not be included in
gross income and shall be tax exempt. [Sec. 32
Notes: B7d, NIRC]
a. Sickness must be life-threatening or one
which renders the employee incapable of Prizes and awards made primarily in
working recognition of charitable, literary, educational,
b. Retrenchment of the employee due to artistic, religious, scientific, or civic
unfavorable business conditions or achievement are not taxable, provided
financial reverses is considered as recipient was selected without any action on
involuntary. his part to enter the contest or proceeding; and
c. BIR Ruling 143-98: The “terminal leave recipient is not required to render substantial
pay” (amount paid for the commutation of future services as a condition to receiving the
leave credits) of retiring government prize or award
employees is considered not part of the
gross salary, and is exempt from taxes. 7. Deductions from Gross Income
[Commissioner v. CA and Castaneda,
G.R. 96016 (1991)]. Deductions are items or amounts authorized by
law to be subtracted from the pertinent items of
Retirement BENEFITS from foreign gross income to arrive at taxable income.
government agencies – The social security
benefits, retirement gratuities, pensions and Deductions from income tax purposes partake
other similar benefits received by resident or of the nature of tax exemptions; hence, if tax
non-resident citizens or aliens who come to exemptions are to be strictly construed, then it
reside permanently in the Philippines from follows that deductions must also strictly
foreign government agencies and other construed. [CIR v. Isabela Cultural Co., G.R.
institutions, private or public; No. 172231 (2007)]
Payments of VETERANS benefits under However, if there is an express mention in the

U.S. Veterans Administration – Payments of law or if the taxpayer falls within the purview of
benefits due or to become due to any person the exemption by clear legislative intent, the
residing in the Philippines under the laws of the rule on strict construction will not apply.
United States administered by the United [Commissioner v. Anoldus Carpentry Shop,
States Veterans Administration G.R. No. 71122 (1988)]
Social Security Act benefits – Payments of Types of Deductions

benefits received under the Social Security Act
of 1954 [RA 8282], as amended, e.g., Maternity There are four (4) types of deductions from
Benefits gross income:
1. itemized deductions in Section 34(A) to (J)
GSIS benefits – Benefits received from GSIS and (M) available to all kinds of taxpayers
under the GSIS Act of 1937, as amended, and engaged in trade or business or practice of
the retirement gratuity received by government profession in the Philippines;
officials and employees are not taxable. [Sec. 2. optional standard deduction in Section
32B6., NIRC; Sec. B1, RR 2-98] 34(L) available only to individual taxpayers
deriving business, professional, capital
h. Winnings, prizes and award, including gains and passive income not subject to
those in sports competitions final tax, or other income; and
3. optional standard deduction available to
All prizes and awards granted to athletes in corporations under Section 34(L) of the
local and international sports competitions and Tax Code (introduced by RA No. 9504)
tournaments whether held in the Philippines or 4. the special deductions in Sections 37 and
abroad, AND sanctioned by their national 38 of the NIRC, and in special laws like the
Page 367 of 494

BOI law (E.O. 226). Costs of goods purchased for resale, with
proper adjustment for opening and closing
General Rules inventories, are deducted from gross sales in
computing gross income [Sec. 65, Rev. Reg. 2]
1. Deductions must be paid or incurred in
connection with the taxpayer’s trade, Sale of inventory of goods by manufacturers
business or profession and dealers of properties: In sales of goods
2. They must be paid or incurred during the representing inventory, the amount received by
taxable year the seller consists of return of capital and gain
3. The tax required to be withheld has been from sale of goods or properties. That portion
deducted and paid of the receipt representing return of capital is
4. Deductions must be supported by not subject to income tax. Accordingly, cost of
adequate receipts or invoices (except goods manufactured and sold (in the case of
standard deduction) manufacturers) and cost of sales (in the case
5. Has direct connection or relation to the of dealers) is deducted from gross sales and is
development, management, operation, reflected above the gross income line in a profit
and/or conduct of the trade, business, or and loss statement.
profession of the taxpayer or in the pursuit
of trade or business. Sale of stock in trade by a real estate dealer
6. The expense incurred must not be contrary and dealer in securities: Real estate dealers
to law, morals, public policy, or public order and dealers in securities are ordinarily not
7. The amount must be reasonable allowed to compute the amount representing
8. The taxpayer must be duly registered return of capital through cost of sales. Rather
before the BIR. they are required to deduct the total cost
specifically identifiable to the real property or
The requisite that it must have been paid or shares of stock sold or exchanged.
incurred during the taxable year is further
qualified by Section 45 of the NIRC, which Sale of services: Their entire gross receipts are
provides, “the deductions provided for in this treated as part of gross income.
Title shall be taken for the taxable year in which
paid or accrued or paid or incurred dependent b. Distinguish: Itemized Deductions
upon the method of accounting upon the basis and Optional Standard Deductions
of which the net income is computed.
Itemized Deductions
Revenue Audit Memorandum Order No. 1- • Expenses
2000, provides that under the accrual method • Interest
of accounting, expenses not being claimed as • Taxes
deductions by a taxpayer in the current year • Losses
when they are incurred cannot be claimed as • Bad debts
deduction from income for the succeeding • Depreciation
year. Thus, a taxpayer who is authorized to • Depletion of oil and gas wells and mines
deduct certain expenses and other allowable • Charitable and other contributions
deductions for the current year, but failed to do
• Research and development
so cannot deduct the same for the next year.
• Pension trusts
a. Concept of Return of Capital Timing of Claiming Deductions
A taxpayer has the right to deduct all
Income tax is levied by law only on income; authorized allowances for the taxable year. As
hence, the amount representing return of a rule, if he does not within any year deduct
capital should be deducted from proceeds from certain of his expenses, losses, interest, taxes
sales of assets and should not be subject to or other charges, he cannot deduct them from
income tax. the income of the next of any succeeding year
Page 368 of 494

[Sec. 76, Income Tax Regulations] Substantiation requirement –
Expenses Sec. 34(A)(1)(b), NIRC: No deduction from

Business expenses deductible from gross gross income shall be allowed unless the
income include the ordinary and necessary taxpayer shall substantiate with sufficient
expenditures directly connected with or evidence, such as official receipts or other
pertaining to the taxpayer’s trade or business. adequate records: (1) the AMOUNT of the
The cost of goods purchased for resale, with expense being deducted, and (2) the DIRECT
proper adjustment for opening and closing CONNECTION or relation of the expense
inventories, is deducted from gross sales in being deducted to the development,
computing gross income. management, operation and/or conduct of the
trade, business or profession of the taxpayer.
Requisites for deductibility
a. Ordinary AND necessary Possible Kinds of Business Expenses
(deductible and not deductible)
ORDINARY - normal and usual in relation to
the taxpayer's business and surrounding a. Salaries, wages and other forms of
circumstances; need not be recurring compensation for personal services
actually rendered, including the grossed-
NECESSARY - appropriate and helpful in up monetary value of the fringe benefit
the development of taxpayer's business or subjected to fringe benefit tax which tax
are proper for the purpose of realizing a should have been paid
profit or minimizing a loss b. Travelling expenses
c. Cost of materials
b. Paid or incurred during the taxable year; d. Rentals and/or other payments for use or
c. Paid or incurred in carrying on or which are possession of property
directly attributable to the development, e. Repairs and maintenance
management, operation and/or conduct of f. Expenses under lease agreements
the trade, business or exercise of g. Expenses for professionals
profession; h. Entertainment expenses
d. Substantiated by adequate proof – i. Training expenses
documented by official receipts or adequate j. Others
records, which reflect the amount of
expense deducted and the connection or Salaries, Wages, and Other Compensation
relation of the expense to the Forms
business/trade of the taxpayer);
e. Legitimately paid (not a BRIBE, kickback, or a. To be deductible, salaries, wages and other
otherwise contrary to law, morals, public forms of compensation for personal services
policy); actually rendered, including the grossed-up
f. If subject to withholding tax, the tax required monetary value of the fringe benefit subjected
to be withheld on the expense paid or to fringe benefit tax which tax should have been
payable is shown to have been properly paid
withheld and remitted to the BIR on time;
g. Amount must be reasonable. Given for personal services must be actually
rendered and reasonable.
Note: The expenses allowable to a non-
resident alien or a foreign corporation consist For income payment to be allowed as
of only such expenses as are incurred in deduction, the withholding tax must have been
carrying on any business or trade conducted paid [RR No. 12-2013].
within the Philippines exclusively. [Sec. 77 RR
2]
Bonuses are deductible when:
Page 369 of 494

1. made in good faith deductible when it is incurred and paid.
2. given as additional compensation for [VALENCIA and ROXAS]
personal services actually rendered
3. such payments, when added to the Repairs and maintenance
stipulated salaries, do not exceed a Incidental or ordinary repairs are deductible.
reasonable compensation for the Repairs which neither materially add to the
services rendered value of the property nor appreciably prolong
its life, but keep it in an ordinarily efficient
Traveling expenses working condition, may be deducted as
This include transportation expenses and expenses, provided the plant or property
meals and lodging [Secs. 65 and 66, Rev. Reg. account is not increased by the amount of such
No. 2] expenditure. [Visayan Transportation Co. v.
CTA, CTA Case No. 1119, (1964)]
Expenses must be reasonable and necessary.
Extraordinary repairs are not deductible – they
Must be incurred or paid “while away from are capital expenditures
home;” tax home is the principal place of
business, when referring to “away from home” Repairs which add material value to the
property or appreciably prolong its life
Incurred or paid in the conduct of trade or Repairs in the nature of replacement, to the
business. extent that they arrest deterioration and
appreciably prolong the life of the property,
Note: However, necessary transportation should be charged against the depreciation
expenses of the taxpayer in its “tax home” are reserves if such account is kept. [Sec. 68, Rev.
deductible. Thus, a taxpayer operating its Regs. 2]
business in Manila is allowed transportation
expenses from its office to its customers’ place All maintenance expenses on account of non-
of business and back. But the transportation depreciable vehicles for taxation purposes are
expenses of an employee from his residence to disallowed in its entirely. [RR No. 12-2012]
its office and back are not deductible as they
are considered personal expenses. Expenses under lease agreements
Since the rentals are considered as income of
Cost of materials the lessor (owner of the property), such lessor
Deductible only to the amount that they are may deduct all ordinary and necessary
actually consumed and used in operation expenses paid or incurred during the taxable
during the year for which the return is made, year to the earning of the income (Sec. 2.01,
provided that their cost has not been deducted RR No. 19-86). Among such deductions may
in determining the net income for any previous be cost of repairs and maintenance, salaries
year. and wages of employees attendant to such
lease, interest payment, property taxes, and
Rentals and/or other payments for use or more others.
possession of property
a. Required as a condition for continued use Expenses for professionals
or possession of property. Deductible in the year the professional services
b. For purposes of trade business or are rendered, not in the year they are billed,
profession. provided that the “all events” is present.
c. Taxpayer has not taken or is not taking title
to the property or has no equity other than “All events test” requires:
that of lessee, user, or possessor. 1. Fixing a right to income or liability to pay;
d. On the accrual basis, rent is deductible as and
expense when liability is incurred during 2. The availability of reasonably accurate
the period of use. On cash basis, rent is determination of such income or liability.
Page 370 of 494

The “all-events test” does not demand that the the industry, trade, business, or
amount of income or liability be known profession of the taxpayer.
absolutely; it only requires that a taxpayer has
at its disposal the information necessary to Exclusions from EAR expenses:
compute the amount with reasonable 1. Expenses which are treated as
accuracy, which implies something less than compensation or fringe benefits for
an exact or completely accurate amount. services rendered under an employer-
[Commissioner v. Isabela Cultural Corporation, employee relationship
G.R. No. 172231 (2007)] 2. Expenses for charitable or fund raising
events
A professional may claim as deductions the 3. Expenses for bona fide business
cost of supplies used by him in the practice of meeting of stockholders, partners or
his profession, expenses paid in the operation directors
and repair of transportation equipment used in 4. Expenses for attending or sponsoring an
making professional calls, dues to professional employee to a business league or
societies and subscriptions to professional professional organization meeting
journals. [MAMALATEO] 5. Expenses for events organized for
promotion marketing and advertising,
Entertainment/Representation expenses including concerts, conferences,
These are entertainment, amusement and seminars, workshops, conventions and
recreation (EAR) expenses incurred or paid other similar events; and
during the year that are directly connected to 6. Other expenses of a similar nature.
the development, management and operation
of the trade, business or profession of the Political campaign expenses
taxpayer. Amount expended for political campaign
purposes or payments to campaign funds are
Requisites for deductibility: NOT deductible either as business expenses
1. Reasonable in amount. or as contribution [CTA Case No. 695, April 30,
2. Paid or incurred during the taxable 1969, citing Mertens]
period.
3. Directly connected to the development, Training expenses
management, and operation of the trade, Organization and pre-operating expenses of a
business or profession of the taxpayer, corporation (including training expenses) are
or that are directly related to or in considered as capital expenditures and are
furtherance of the conduct thereof. therefore, not deductible in the year they are
4. Not to exceed 0.50% of net sales for paid or incurred.
sellers of goods or properties or 1% of
net revenues for sellers of services, But taxpayers who incur these expenses and
including taxpayers engaged in the subsequently enter the trade or business to
exercise of profession and use or lease which the expenditures relate can elect to
of properties) amortize these expenditures over a period not
5. Not incurred for purposes contrary to less than sixty (60) months. [BIR Ruling 102-
law, morals, public policy or public order. 97, Sept. 29, 1997]
6. Must be substantiated with sufficient
evidence such as receipts and/or This rule, however, does not apply to a
adequate records. situation where an existing corporation incurs
7. Not exceed such ceiling as the Secretary these same expenditures for the purpose of
of Finance may, by rules and regulations expanding its business in a new line of trade,
prescribe, upon recommendation of the venture or activity.
Commissioner, taking into account the
needs as well as the special
circumstances, nature and character of
Page 371 of 494

OTHERS exercise of profession, the same was not
treated as a capital expenditure,
Expenses Allowable to Private Educational
Institutions Non-deductible interest expense
Interest paid in advance by the taxpayer who
In addition to the expenses allowable as reports income on cash basis shall only be
deductions under the NIRC, a private allowed as deduction in the year the
proprietary educational institution may at its indebtedness is paid.
OPTION, elect either:
a. To deduct expenditures otherwise If the indebtedness is payable in periodic
considered as capital outlays or amortizations, only the amount of interest
depreciable assets incurred during the which corresponds to the amount of the
taxable year for the expansion of school principal amortized or paid during the year shall
facilities, OR be allowed as deduction in such taxable year.
b. To deduct allowances for depreciation
thereof. Interest payments made between related
taxpayers.
Thus, where the expansion expense has been
claimed as a deduction, no further claims for Interest on indebtedness incurred to finance
yearly depreciation of the school facilities are petroleum exploration.
allowed.
Related Taxpayers
Advertising Expenses a. Between members of the family, i.e.
The media advertising expenses which were brothers and sisters (whether by the whole
found to be inordinately large and thus, not or half-blood), spouse, ancestor, and lineal
ordinary, and which were incurred in order to descendants; or
protect the taxpayer’s brand franchise which is • Except in case of distributions in
analogous to the maintenance of goodwill or liquidation, between an individual and a
title to one’s property, are not ordinary and corporation, where the individual owns
necessary expenses but are capital directly or indirectly more than 50% of
expenditures, which should be spread out over the outstanding stock of the
a reasonable period of time. [CIR v. General corporation
Foods Phils. Inc, G.R. No. 143672 (2003)] • Except in the case of distributions in
liquidation, between two corporations
Interest where:
Requisites for deductibility i. Either one is a personal holding
1. There is a valid and existing indebtedness. company of a foreign personal
2. The indebtedness is that of the taxpayer holding company with respect to the
3. The indebtedness is connected with the taxable year preceding the date of
taxpayer‘s trade, profession, or business. the sale of exchange; and
4. The interest must be legally due. ii. More than 50% of the outstanding
5. The interest must be stipulated in writing. stock of each is owned, directly or
6. The taxpayer is LIABLE to pay interest on indirectly, by or for the same
the indebtedness. individual; or
7. The indebtedness must have been paid or b. Between parties to a trust – Grantor and
accrued during the taxable year. Fiduciary; or
8. The interest payment arrangement must c. Fiduciary of a trust and fiduciary of another
not be between related taxpayers trust if the same person is a grantor with
9. The interest must not be incurred to finance respect to each trust; or
petroleum operations. d. Fiduciary and Beneficiary
10. In case of interest incurred to acquire
property used in trade, business or
Page 372 of 494

INTEREST SUBJECT TO SPECIAL RULES Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred
Interest paid in advance to acquire property used in trade, business or
No deduction shall be allowed if within the exercise of profession may be allowed as a
taxable year an individual taxpayer reporting deduction or treated as capital expenditure.
income on cash basis incurs an indebtedness
on which an interest is paid in advance through Taxes
discount or otherwise. Taxes Proper: Refers to national and local
taxes
But the deduction shall be allowed in the year
the indebtedness is paid. Requisites for deductibility
a. Paid or incurred within the taxable year;
Interest periodically amortized b. Paid or incurred in connection with the
If the indebtedness is payable in periodic taxpayer‘s trade, profession or business;
amortizations, the amount of interest which c. Imposed directly on the taxpayer;
corresponds to the amount of the principal d. Not specifically excluded by law from
amortized or paid during the year shall be being deducted from the taxpayer‘s gross
allowed as deduction in such taxable year. income.
Interest expense incurred to acquire The following taxes are deductible:

property for use in a. Import duties;
trade/business/profession b. Business tax;
At the option of the taxpayer, interest expense c. Professional/occupation tax;
on a capital expenditure may be allowed as d. Privilege and excise tax;
a. A deduction in full in the year when e. DST;
incurred; f. Motor vehicle registration fees;
b. A capital expenditure for which the g. Real property tax;
taxpayer may claim only as a deduction h. Electric energy consumption tax; and
the periodic amortization of such i. Interest on delinquent taxes.
expenditure.
Non-deductible taxes
Should the taxpayer elect to deduct the interest a. Philippine income tax, except Fringe
payments against its gross income, the Benefit Taxes;
taxpayer cannot at the same time capitalize the b. Income tax imposed by authority of any
interest payments. In other words, the taxpayer foreign country, if taxpayer avails of the
is not entitled to both the deduction from gross Foreign Tax Credit (FTC)
income and the adjusted (increased) basis for
determining gain or loss and the allowable However, when the taxpayer does NOT signify
depreciation charge. [Paper Industries Corp. v. his desire to avail of the tax credit for taxes of
Commissioner, G.R. Nos. 106949-50 (1995)] foreign countries, the amount may be allowed
as a deduction from gross income of citizens
Reduction of interest expense/interest and domestic corporations subject to the
arbitrage limitations set forth by law.
The taxpayer's allowable deduction for interest
expense shall be reduced by an amount equal Treatments of surcharges/interests/fines
to the percentages of the interest income for delinquency
subjected to final tax, twenty percent (20%) of The amount of deductible taxes is limited to the
interest income subjected to final tax effective basic tax and shall not include the amount for
1 July 2020. This is known as the Tax Arbitrage any surcharge or penalty on delinquent taxes.
Rule. However, interest on delinquent taxes,
although not deductible as tax, can be
deducted as interest expense at its full amount.
Page 373 of 494

[CIR v. Palanca, G.R. No. L-16626 (1966)] Foreign Tax Credit Tax Deduction
against Philippine
Treatment of special assessment income tax.
Special assessments and other taxes
assessed against local benefits of a kind The following may claim foreign tax credits:
tending to increase the value of the property a. Resident citizens
assessed are non-deductible from gross b. Domestic corporations, which include all
income. partnerships except general professional
partnerships
Tax credit vis-à-vis deduction c. Members of general professional
partnerships
A tax credit reduces the tax due, including d. Beneficiaries of estates or trusts
whenever applicable, the income tax that is
determined after applying the corresponding The following may NOT claim foreign tax
tax rates to taxable income. credits:
a. Non-resident citizens
A tax deduction, on the other, reduces the b. Aliens, whether resident or non-resident
income that is subject to tax in order to arrive c. Foreign corporations, whether resident on
at taxable income. A tax credit is used only non-resident
after the tax has been computed; a tax Note: Tax credits for foreign taxes are allowed
deduction, before. only for income derived from sources outside
the Philippines. The above taxpayers are not
Since a tax credit is used to reduce directly the entitled to tax credit; they are taxable only on
tax that is due, there ought to be a tax liability income derived from Philippine sources.
before the tax credit can be applied.
Otherwise, the application is useless If a net loss is reported by, and no other taxes
[CHAVEZ, 2020]. are currently due from a business
establishment, there will obviously be no tax
Foreign Tax credit – amount allowed by law liability against which any tax credit can be
to reduce the Philippine income tax due, applied. [CIR v Central Luzon Drug Corp., GR.
subject to limitations, on account of taxes paid No. 159647, 15 April 2005]
or accrued to a foreign country
Limitations on Tax Credit.
Foreign tax credits are confined to resident and
domestic corporations. Meanwhile, the Per Country Limit
withholding creditable tax at source under The amount of tax credit shall not exceed the
Section 57(B) may be availed of by resident same proportion of the tax against which such
taxpayers. credit is taken, which the taxpayer's taxable
income from sources within such country bears
Foreign Tax Credit Tax Deduction to his entire taxable income for the same
Taxes are Taxes are deductible taxable year; and
deductible from the from gross income in
Phil. Income tax computing the Worldwide Limit
itself taxable income The total amount of the credit shall not exceed
Effect: Reduces the same proportion of the tax against which
Effect: Reduces
taxable income upon such credit is taken, which the taxpayer's
Philippine income
which the tax liability taxable income from sources without the
tax liability
is calculated Philippines taxable bears to his entire taxable
Sources: Only income for the same taxable year.
Sources: Deductible
foreign income
taxes (e.g. business
taxes may be
tax, excise tax)
claimed as credits
Page 374 of 494

Formula: transaction;
Limit #1 Per Country Limit f. Not compensated for by insurance or other
Taxable form of indemnity;
Income Per g. Not claimed as a deduction for estate tax
Foreign purposes;
Country Phil. Limit on h. In case of casualty loss, filing of notice of
x Income = amount of loss with the BIR within 45 days from the
Worldwide Tax tax credit date of the event that gave rise to the
Taxable casualty; and
Income i. The taxpayer must prove the elements of
the loss claimed, such as the actual nature
and occurrence of the event and amount
Limit #2 World Limit of the loss.
Limit #2 World Limit
Taxable In case a non-depreciable vehicle is sold at a
Income Per loss, the loss incurred from the sale of non-
Foreign Limit on
depreciable vehicle is not allowed as a
Country Phil. deduction. [RR No. 2-2013]
amount
x Income =
of tax
Worldwide Tax No loss is recognized in the following:
credit
Taxable a. Merger, consolidation, or control securities
Income (where no gains are recognized either);
b. Exchanges not solely in kind;
c. Related taxpayers (see above – (c)
Note: Computation of FTC: Limit #2 applies Interest expense incurred to acquire
where taxes are paid to two or more foreign property for use in
countries. Allowable tax credit is the lower trade/business/profession)
between the tax credit computed under Limit d. Wash sales;
#1 and that computed under Limit#2. e. Illegal transactions
FTC Limitations – the lowest FTC among OTHER TYPES OF LOSSES

the three shall be applied: a. Capital losses
1. Actual FTC b. Incurred in the sale or exchange of capital
2. For taxes paid to one foreign country assets (allowable only to the extent of
3. For taxes paid to 2 or more foreign capital gains, except for banks and trust
countries companies under conditions in Sec. 39 of
NIRC where loss from such sale is not
Losses subject to the foregoing limitation)
c. Resulting from securities becoming
Requisites for deductibility worthless and which are capital assets
a. Loss must be that of the taxpayer (e.g., (considered loss from sale or exchange)
losses of the parent corp. cannot be on last day of the taxable year
deducted by its subsidiary); d. Losses from short sales of property;
b. Actually sustained and charged off within e. Losses due to failure to exercise privileges
the taxable year; or options to buy or sell property.
c. Incurred in trade, business or profession;
d. Of property connected with the trade, Securities becoming worthless
business, or profession, if the loss arises Loss in shrinkage in value of stock through
from fires, storms, shipwreck or other fluctuation in the market is not deductible from
casualties, or from robbery, theft, or gross income. (To be deductible, the loss must
embezzlement; be actually suffered when the stock is disposed
e. Sustained in a closed and completed of.)
Page 375 of 494

Exception: If the stock of the corporation of incentives provided for under EO No. 226
becomes worthless, the cost or other basis (Omnibus Investments Code) incurred in any of
may be deducted by its owner in the taxable the first ten (10) years of operation may be
year in which the stock became worthless, carried over as a deduction from taxable
provided a satisfactory showing of its income for the next five (5) years immediately
worthlessness be made, as in the case of bad following the year of such loss.
debts.
Requisites for NOLCO
Losses on wash sales of stocks or securities a) The taxpayer was not exempt from income
tax the year the loss was incurred;
Wash Sale - a sale or other disposition of stock b) There has been no substantial change in
or securities where substantially identical the ownership of the business or enterprise
securities (substantially the same as those wherein:
disposed of) are acquired or purchased (or a. AT LEAST 75% of nominal value of
there was an option to acquire, and the outstanding issued shares is held
acquisition or option should be by purchase or by or on behalf of the same
exchange upon which gain or loss is persons; or
recognized under the income tax law) within a b. AT LEAST 75% of the paid up
61-day period, beginning 30 days before the capital of the corporation is held by
sale and ending 30 days after the sale or on behalf of the same persons.
General rule: Not deductible from gross Taxpayers Entitled to NOLCO

income Individuals engaged in trade or business or in
the exercise of his profession (including
Exception: If by a dealer in securities in the estates and trusts);
course of ordinary business, it is deductible.
Note: An individual who avails of 40% OSD
Wagering losses shall not simultaneously claim deduction of
Losses from wagering (gambling) are NOLCO. However, the three-year
deductible only to the extent of gains from such reglementary period shall continue to run
transactions. A wager is made when the during such period notwithstanding the fact that
outcome depends upon CHANCE. the aforesaid taxpayer availed of OSD during
the said period.
Net Operating Loss Carry Over (NOLCO)
Net operating loss (NOL) is the excess of Domestic and resident foreign corporations
allowable deductions over gross income for subject to the normal income tax or preferential
any taxable year immediately preceding the tax rates under the Code (e.g., private
current taxable year. educational institutions, hospitals, and regional
operating headquarters) or under special laws
NOLCO: The NOL of the business or (e.g., PEZA-registered companies)
enterprise which had not been previously offset
as deduction from gross income shall be Note: Domestic and resident foreign
carried over as a deduction from gross income corporations taxed during the taxable year with
for the next three (3) consecutive taxable years Minimum Corporate Income Tax cannot enjoy
immediately following the year of such loss, the benefit of NOLCO. However, the three-year
provided however, that any net loss incurred in period for the expiry of the NOLCO is not
a taxable year during which the taxpayer was interrupted by the fact that the corporation is
exempt from income tax shall not be allowed subject to MCIT during such three-year period.
as a deduction. [Sec. 34(3)(D), NIRC]
Exception: Mines other than oil and gas wells,

where a net operating loss without the benefit
Page 376 of 494

NOLCO Incurred During COVID-19 likelihood of recovery at any time in the future.
Under RMC 138-2020, issued on 22 December Requisites for deductibility

2020, RR 25-2020 issued on 30 September a. Valid and legally demandable debt due to
2020 implementing Sec. 4 (bbbb) of RA No. the taxpayer
11494 or the Bayanihan Act to Recover as One b. Debt is connected with the taxpayer's
Act relative to the NOLCO, incurred by trade, business or practice of profession;
businesses for taxable years 2020 and 2021, c. Debt was not sustained in a transaction
provided that unless otherwise disqualified entered into between related parties;
from claiming the deduction, the business or d. Actually ascertained to be worthless and
enterprise which incurred net operating loss for uncollectible as of the end of the taxable
the two years shall be allowed to carry over the year (taxpayer had determined with
same as deduction from its gross income for reasonably degree of certainty that the
the next five (5) consecutive taxable years claim could not be collected despite the
immediately following the year of such loss. fact that the creditor took reasonable steps
to collect); and
The regulation also provides that net operating e. Actually charged off the books of accounts
loss for said taxable years may be carried over of the taxpayer as of the end of the taxable
as a deduction even after the expiration of RA year
11494, provided the same are claimed within
the next five (5) consecutive taxable years General rule: Taxpayer must ascertain and
immediately following the year of such loss. demonstrate with reasonable certainty the
uncollectibility of debt
Losses sustained by NRA and Foreign
Corporation Exceptions:
a. Banks as creditors – BSP Monetary Board
In the case of a non-resident alien individual or shall ascertain the worthlessness and
foreign corporation, the losses deductible shall uncollectibility of the debt and shall
be those: approve the writing off
• Actually sustained during the year b. Receivables from an insurance or surety
incurred in business, trade, exercise of company (as debtor) may be written off as
profession conducted within the bad debts only when such company is
Philippines declared closed due to insolvency or
• Such losses are not compensated for similar reason
by insurance or other forms of
indemnity The taxpayer must show that the debt is indeed
• Submit a declaration of loss sustained uncollectible even in the future. He must prove
from casualty or from robbery, theft or that he exerted diligent efforts to collect:
embezzlement furing the taxable year a. Sending of statement of accounts
not be less than 30 days nor more than b. Collection letters
90 days from the discovery. c. Giving the account to a lawyer for
collection
Bad debts d. Filing the case in court [Phil. Refining
Debts resulting from the worthlessness or Corp. v. CA, G.R. No. 118794 (1996)]
uncollectibility, in whole or in part, of amounts
due the taxpayer actually ascertained to be Rev. Reg. No. 5-1999
worthless and the corresponding receivable “Actually ascertained to be worthless” –
should have been written off or charged off Determination of worthlessness must depend
within the taxable year. upon the particular facts and circumstances of
the case. A taxpayer may not postpone a bad
A debt is worthless when after taking debt deduction on the basis of a mere hope of
reasonable steps to collect it, there is no ultimate collection or because of a continuance
Page 377 of 494

of attempts to collect, where there is no helicopters, airplanes and/or aircrafts, and land
showing that the surrounding circumstances vehicles which exceed the threshold amount of
differ from those relating to other notes which P2,400,000, unless the taxpayer’s main line of
were charged off in a prior year. business is transport operations or lease of
transportation equipment and the vehicles
Accounts receivable may be written off as bad purchased are used in the operations. [RR No.
debts even without conclusive evidence that 12-2012]
they had definitely become worthless when:
a. the amount is insignificant; and Methods of computing depreciation
b. collection through court action may be allowance
more costly to the taxpayer. (cost- salvage
Straight-line value) ÷
“Actually charged off from the taxpayer’s book estimated life
of accounts” – Receivable which has actually Cost x Rate of
become worthless at the end of the taxable Depreciation*
year has been cancelled and written off. Mere
recording in the books of account of estimated *rate = (1÷
uncollectible accounts does not constitute a estimated life) x
write-off. multiplier
applicable
EFFECT OF RECOVERY OF BAD DEBTS ex. Double
Declining balance
declining balance
Tax Benefit Rule on Bad Debts multiplier is 200%
Bad debts claimed as deduction in the
preceding year(s) but subsequently recovered Note: depreciation
shall be included as part of the taxpayer‘s gross allowance should
income in the year of such recovery the extent not cause the asset
of the income tax benefit of said deduction. to be valued below
Also called the equitable doctrine of tax benefit. its salvage value
(remaining life ÷
Depreciation Sum-of-the-year- SYD) x (cost-
An annual reasonable allowance to reduce the digit (SYD) salvage value)
wasteful value of the tangible fixed assets
resulting from wear and tear and normal
obsolescence Charitable and other contributions
For intangible assets, the annual allowance to Requisites for deductibility

reduce their useful value is called amortization. a) Actually PAID or made to the ENTITIES or
institutions specified by law;
Requisites for Deductibility b) Made within the TAXABLE year.
a. It must be reasonable. c) It must be EVIDENCED by adequate
b. It must be charged off during the year. receipts or records.
c. The asset must be used in profession, d) For Contributions Other than Money: The
trade or business. amount shall be BASED on the acquisition
d. The asset must have a limited useful life. cost of the property (i.e., not the fair market
value at the time of the contribution).
The depreciable asset must be located in the e) For Contributions subject to the statutory
Philippines if the taxpayer is a nonresident limitation: It must NOT EXCEED 10%
alien or a foreign corporation. [VALENCIA and (individual) or 5% (corporation) of the
ROXAS] taxpayer‘s taxable income before
charitable contributions
No depreciation shall be allowed for yachts,
Page 378 of 494

Amount that May Be Deducted must not exceed 30% of total expenses for the
taxable year
Kinds of Contributions:
a. Contributions deductible in full; Contributions subject to the Statutory
b. Contributions subject to the statutory limit. Limit:
These contributions are not deductible in full as
Contributions Deductible in Full: specified by the law or such deduction has not
1. Donations to the Government of the met the requirements to be deducted in full.
Philippines, or to any of its agencies, or
political subdivisions, including fully Those made to:
owned government corporations a. Government or any of its agencies or
2. Exclusively to finance, provide for, or to be political subdivisions exclusively for public
used in undertaking priority activities in purposes (contributions for non-priority
3. Education activities)
4. Health b. Accredited domestic corporation or
5. Youth and sports development associations organized exclusively for
6. Human settlements c. Religious
7. Science and culture, and d. Charitable
8. Economic development e. Scientific
9. in accordance with a National Priority Plan f. youth and sports development
determined by NEDA (otherwise, subject g. cultural
to statutory limit) h. educational purposes or
10. Donations to Certain Foreign Institutions i. rehabilitation of veterans
or International Organizations which are j. Social welfare institutions
fully deductible in compliance with k. Non-government organizations: No part of
agreements, treaties or commitments the net income of which inures to the
entered into by the Government of the benefit of any private stockholder or
Philippines and the foreign institutions or individual
international organizations or in
pursuance of special laws Statutory Limit:
11. Donations to Accredited Non-government a. 10% in the case of an individual (individual
Organizations subject to conditions set donor), and
forth in RR No. 13-98 – NGO means a b. 5% in the case of a corporation (corporate
non-stock non-profit domestic corporation donor), of the taxpayer's/donor’s income
or organization: derived from trade, business or profession
a. Organized and operated exclusively computed before the deduction for
for: contributions and donations
i. scientific,
ii. research, The amount deductible is the actual
iii. educational, contribution or the statutory limit computed,
iv. character-building and youth and whichever is lower.
sports development,
v. health, Contributions to pension trusts
vi. social welfare, Based on the Code, An employer establishing
vii. cultural or or maintaining a pension trust to provide for the
viii. charitable purposes, or payment of reasonable pensions to his
ix. a combination thereof, employees shall be allowed as a deduction (in
addition to the contributions to such trust during
No part of the net income of which inures to the the taxable year to cover the pension liability
benefit of any private individual accruing during the year, allowed as a
deduction under Subsection (A) (1) of this
Administrative expense, on an annual basis, Section ) a reasonable amount transferred or
Page 379 of 494

paid into such trust during the taxable year in over a period of no less than 60 months (RA
excess of such contributions, but only if such 8424, Section 34, I)
amount (1)has not theretofore been allowed as
a deduction, and (2) is apportioned in equal Requisites:
parts over a period of ten (10) consecutive a. The expenditure is paid or incurred by
years beginning with the year in which the the taxpayer in connection with the
transfer or payment is made taxpayer’s trade, business, or
profession;
Contribution to a pension trust may be claimed b. The expenditure is not treated as a
as deduction as follows: current expense; and
a. Amount contributed for the present/normal c. The expenditure is chargeable to a
service cost – 100% deductible capital account but not chargeable to
i. Deductible under “ordinary and property that is subject to depreciation
necessary” expenses or depletion
b. Amount contributed for the past service
cost – 1/10 of the amount contributed is Optional Standard Deduction
deductible in year the contribution is
made, the remaining balance will be Individuals, except non-resident aliens
amortized equally over nine consecutive May be taken by an individual in lieu of itemized
years deductions except those earning purely
compensation income.
General Rule: An employer establishing or
maintaining a pension trust to provide for the If an individual opted to use OSD, he is no
payment of reasonable pensions to his longer allowed to deduct cost of sales or cost
employees shall be allowed as a deduction, a of services.
reasonable amount transferred or paid into
such trust in excess of the contributions to such Amount: 40% of gross sales or gross receipts
trust made during the taxable year. (under RA 9504, effective July 6, 2008)
Requisites:
Requisites for deductibility of payments to a. Taxpayer is a citizen or resident alien;
pension trusts b. Taxpayer’s income is not entirely from
a. There must be a pension or retirement compensation;
plan established to provide for the c. Taxpayer signifies in his return his
payment of reasonable pensions to intention to elect this deduction; otherwise
employees; he is considered as having availed of the
b. The pension plan is reasonable and itemized deductions;
actuarially sound; d. Election is irrevocable for the year in which
c. It must be funded by the employer; made; however, he can change to
d. The amount contributed must no longer be itemized deductions in succeeding years.
subject to the employer’s control or
disposition; and Corporations, except non-resident foreign
e. The payment has not theretofore been corporations
allowed before as a deduction. The option to elect Optional Standard
Deduction granted is now granted to
Research and Development Expenses corporations by virtue of RA 9504. The OSD is
40% of its gross income.
The Philippines grants a tax deduction for
qualifying R&D expenditure. Such expenditure Corporations availing of OSD are still required
may be treated as ordinary and necessary to submit their financial statements when they
expenses that are fully deductible from gross file their annual ITR and to keep such records
income in the year paid or incurred, or deferred pertaining to its gross income. [RR 2-2010].
and allowed as a deduction ratably distributed
Page 380 of 494

Partnerships covering the life of any officer, employee,
For purposes of taxation, the Code considers or any person financially interested in the
general co-partnerships as corporations. trade or business carried on by the
Hence, rules on OSD for corporations are taxpayer, individual or corporate, when the
applicable to general co-partnerships. taxpayer is directly or indirectly a
beneficiary under such policy
General professional partnerships e. Interest expense and bad debts between
For purposes of computing the distributive related parties [Sec. 36(B), NIRC)]
shares of the partners, the net income of the f. Losses from sales or exchanges of
GPP shall be computed in the same manner as property between related taxpayers.
a corporation. [Sec. 26, NIRC] g. Non-deductible interest – should the
taxpayer elect to deduct interest payments
As such, a GPP may likewise claim either against its gross income, he cannot at the
itemized deductions or it can opt to avail of the same time capitalize such interest and
OSD allowed to corporations in claiming the claim depreciation on the undepreciated
deductions in an amount not exceeding 40% of cost which includes the interest. [PICOP v.
its gross income. Commissioner, G.R. No. 106949-50
(1995)]
The net income determined by either claiming h. Non–deductible taxes
the itemized deduction or OSD from the GPP’s i. Non-deductible losses
gross income is the distributable net income j. Losses on Wash Sales (except if by dealer
from which the share of each partner is to be in securities in ordinary course of exempt
determined. Each partner shall report as gross corporations) These are:
income his distributive share, actually or k. Proprietary Educational Institutions and
constructively received, in the net income of hospitals
the partnership. [RR No. 2-2010] l. Government owned and controlled
corporations
c. Items Not Deductible m. Others
General rule: In determining deductions, one Relevant points regarding related taxpayers
of the general rules is that deductions must be a. Payment of interest is not deductible.
paid or incurred in connection with the b. Bad debts are not deductible.
taxpayer’s trade, business or profession. c. Losses from sales or exchanges of
Capital expenditures (e.g. acquisition cost of a property are not deductible.
building) are also not deductible, because
these are not expenses, but form part of Related Parties [Sec. 34(B), NIRC]
assets. a. Between members of a family (which shall
include only his brothers and sisters,
Exceptions: In computing taxable net income, spouse, ancestors and lineal
no deduction shall be allowed with respect to: descendants)
a. Personal, living or family expenses b. Between an individual and a corporation
b. Any amount paid out for new buildings or more than 50% in value of the outstanding
for permanent improvements (capital stock of which is owned, directly or
expenditures), or betterments made to indirectly, by or for such individual –
increase the value of any property or except in the case of distributions in
estate liquidation
c. Any amount expended in restoring c. Between two corporations more than 50%
property (major repairs) or in making good in value of the outstanding stock of each
the exhaustion thereof for which an of which is owned, directly or indirectly by
allowance [for depreciation or depletion] is or for the same individual
or has been made d. Between the grantor and the fiduciary of a
d. Premiums paid on any life insurance policy trust
Page 381 of 494

e. Between the fiduciary of a trust and the performed by an employee for his
fiduciary of another trust if the same employer, including the cash value of all
person is a grantor with respect to each non-cash remuneration. [Sec. 78(A), NIRC]
trust
f. Between the fiduciary of a trust and a Separation pay/retirement benefit not
beneficiary of such trust [Section 36(B), exempt
NIRC]
Retirement pay – a lump sum payment
8. Income Tax on Individuals received by an employee who has served
a company for a considerable period of
Summary Table for Taxation of Individuals time and has decided to withdraw from
(all individual taxpayers, including non- work into privacy. [Sec. 2(b), RR No. 6-82]
resident aliens)
Tax General rule: Retirement pay is taxable
Classification Taxable Income
Rates
Income from Exceptions:
Resident sources within and i. SSS or GSIS retirement pays [Sec.
0%-35%
Citizen outside the
32(B)(6), NIRC]
Philippines
Income from ii. Retirement benefit under R.A.
Non-Resident 7641 provided the following
sources within the 0%-35%
Citizen
Philippines requirements are met:
Income from a. Retirement program is
Resident Alien sources within the 0%-35% approved by the
Philippines Commissioner;
Non-resident b. Retirement benefit is pursuant
Income from
Alien Engaged
in Trade or
sources within the 0%-35% to a reasonable private benefit
Philippines plan
Business
Non-resident c. Retiree employed for 10 years
Alien Not Income from by the employer;
Engaged in sources within the 25% d. Retiree should have been 50
Trade or Philippines years old or above at the time
Business
of retirement; and
e. Retirement benefit availed only
a. Resident Citizens, Non-Resident once [Sec. 32 (B)(6)(a), NIRC].
Citizens and Resident Aliens [Sec.
24(A)(1)] Separation pay
General Rule: Separation pay taxable
1. Inclusions and Exclusions for if voluntarily availed of.
Taxation on Compensation Income
Exception: if due to causes such as
a. Inclusions death, sickness, disability,
reorganization or bankruptcy of the
1. Monetary compensation – If company or for any other cause
compensation is paid in cash, the full beyond the control of the said
amount received is the measure of the employee.
income subject to tax.
3. Bonuses, 13th month pay, and other
2. Regular salary/wage benefits not exempt
Salary – earnings received periodically for
a regular work other than manual labor, Tips and Gratuities – those paid directly
such as monthly salary of an employee. to the employee (usually by employer’s
Wages – all remuneration for services customer) which are not accounted for by
Page 382 of 494

the employee to the employer. (taxable [DOMONDON]
income but not subject to withholding tax)
[Sec. 2.78.1, RR No. 2-98] Convenience of the employer Rule
If meals, living quarters, and other facilities
13th month pay – taxable only for the part and privileges are furnished to an
which exceeds P90,000 [Sec. 32(7)(e), employee for the convenience of the
NIRC] employer, and incidental to the
requirement of the employee’s work or
Overtime Pay – premium payment position, the value of that privilege need not
received for working beyond regular hours be included as compensation [Henderson
of work which is included in the v. Collector (1961)]
computation of gross salary of employee.
2. De minimis benefits
4. Directors’ fees, allowances and Facilities or privileges of relatively small
bonuses value furnished by an employer to his
employees and are as a means of
General Rule: taxable as compensation promoting the health, goodwill,
income when the recipient director has an contentment, or efficiency of his employees
employee-employer relationship with the [RR No. 11-18].
corporation which pays the same
These are exempt from both fringe benefit
Exception: not taxable as compensation tax and compensation income tax [Sec. 33
income when recipient director’s duties is (C)(4), NIRC].
confined to attendance and participation
only in the meetings of the Board of (See Gross Income, supra for the
Directors, but taxable as income arising discussion of de minimis benefits)
from exercise of profession [R.M.C 34-08].
3. 13th month pay and other benefits and
5. Non-monetary compensation – measure payments specifically excluded from
of income subject to tax is the equivalent taxable compensation income
value in money. Gross benefits received by employees up
to P90,000 (amounts in excess are
b. Exclusions considered compensation income)
1. Fringe benefit subject to tax Benefits include:

(See Gross Income, supra for the a) Benefits received by government
discussion of Taxable and Non-taxable employees under RA 6686;
fringe benefits) b) Benefits received by employees
pursuant to PD 851 (13th Month Pay
If the recipient of the fringe benefits is a Decree);
rank and file employee, and the said fringe c) Benefits received by employees not
benefit is not tax-exempt, then the value of covered by PD 851 as amended by
such fringe benefit shall be considered as Memorandum Order No. 28; and,
part of taxable compensation income. d) Other benefits such as productivity
[DOMONDON] incentives and Christmas bonus.
Where the recipient of the fringe benefit is 2. Taxation of Business Income/Income

not a rank and file employee, and the said from Practice of Profession
benefit is not tax-exempt, then the value of
such fringe benefit shall not be included in All income obtained from doing business or
the taxable compensation income. It is exercising of profession shall be included in the
instead levied upon the employer. computation of gross income.
Page 383 of 494

Individuals earning purely business or Interest income
professional income • on any currency bank deposit, yield or any
Individuals earning income purely from self- other monetary benefit from deposit
employment and/or practice of profession, substitutes, trust funds and similar
whose gross sales/receipts and other non- arrangements - 20% final tax
operating income does not exceed the VAT • under the expanded foreign currency
threshold as provided under Sec. 109 (BB) of deposit system (EFCDS) - 15% final tax
the Tax Code, as amended, shall have the for residents, exempt if non-residents
option to avail of:
a. The graduated rates under Sec. 24 Treatment of income from long-term
(A)(2)(a) of the Tax Code, as amended; deposits
OR On long-term deposit or investment certificates
b. An eight percent (8%) tax on gross sales (LTDIC) in banks (e.g., savings, common or
or receipts and other non-operating individual trust funds, deposit substitutes,
income in excess of two hundred fifty investment management accounts and other
thousand pesos (P250,000.00) in lieu of investments, which have maturity of 5 years or
the graduated income tax rates under Sec. more) – exempt
24 (A) and the percentage tax under Sec.
116 of the NIRC if income does not exceed Should LTDIC holder pre-terminate LTDIC
the VAT threshold. before the 5th year, a final tax shall be imposed
on the entire income based on the remaining
Individuals earning mixed income maturity:
For mixed income earners, the income tax
rates applicable are: 4 years to less than 5 5%
a. The compensation income shall be subject years
to the tax rates prescribed under Section 3 years to less than 4 12%
24 (A)(2)(a); AND years
b. The income from business or practice of less than 3 years 20%
profession shall be subject to the following:
c. If the gross sales/receipts and other non- Any income of nonresidents, whether
operating income do not exceed the VAT individuals or corporations, from transactions
threshold, the individual has the option to with depository banks under the expanded
be taxed at: system shall be exempt from income tax.
d. The aforementioned graduated taxable
income rates; OR For interest from foreign currency loans
e. The aforementioned optional 8% gross granted by FCDUs to residents other than
income tax. Offshore Banking Units (OBUs) or other
If the gross sales/receipts and other non- depository banks under the expanded system
operating income exceeds the VAT threshold, – tax rate is 10% if payors are RESIDENTS,
the individual shall be subject to the graduated whether individuals or corporations.
income tax rates.
Royalties
3. Taxation of Passive Income (See summary table, infra)
Passive Income Subject to Final Tax Dividends from domestic corporation

“Final tax” means tax withheld from source, a. cash and/or property dividends actually or
and the amount received by the income earner constructively received by an individual
is net of the tax already. The income having from
been tax-paid already, it need not be included b. a domestic corporation
in the gross income in the yearly submission of c. a joint stock company
ITR. d. insurance or mutual fund companies
e. regional operating headquarters of
Page 384 of 494

multinational companies 4. Taxation of Capital Gains
f. share of an individual in the distributable
net income after tax of a partnership Income from sale of shares of stock of a
(except a general professional Philippine corporation
partnership) of which he is a partner
g. share of an individual member or co- Shares traded and listed in the stock exchange
venturer in the net income after tax of an – CGT-exempt, but subject to business tax
association, a joint account, or a joint
venture or consortium taxable as a The transaction is exempt from income tax
corporation regardless of the nature of business of the
seller or transferor. However, it is subject to a
Rate: business tax of six-tenths of one percent
a. 10% for residents (RC, RA) and non- (0.6%) of the gross selling price [Sec. 127 (A),
resident citizens (NRC); NIRC].
b. 20% for non-resident aliens engaged in
trade or business (NRAETB) Shares not listed and traded in the stock
exchange – subject to final tax
However, if a corporation cancels or redeems
stock issued as a dividend at such time and in On sale, barter, exchange or other disposition
such manner as to make the distribution and of shares of stock of a domestic corporation not
cancellation or redemption, in whole or in part, listed and traded through a local stock
essentially equivalent to the distribution of a exchange, held as a capital asset
taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be On the net capital gain: Final Tax of 15%
considered as taxable income to the extent that
it represents a distribution of earnings or Net capital gain: selling price less cost
profits. [Sec. 73 (B), NIRC] Selling price: consideration on the sale OR fair
market value of the shares of stock at the time
In other words, stock dividends are generally of the sale, whichever is higher
not subject to tax as long as there are no Cost: original purchase price
options in lieu of the shares of stock.
Income from the sale of real property situated
On the other hand, a stock dividend constitutes in the Philippines
income if it gives the shareholder an interest
different from that which his former Note: The FMV is taken into consideration in
stockholdings represented. determining if there is donor's tax due. If FMV
is higher than selling price, the excess is
Prizes and other winnings considered a donation. However, with the
Prizes and other winnings - 20%, except advent of Republic Act (RA) No. 10963, or the
a. Prizes amounting to P10,000 or less, which Tax Reform for Acceleration and Inclusion
shall be subjected to the graduated rates (TRAIN) Law, Section 100 of the National
under Subsection A of Section 24; and Internal Revenue Code (NIRC) was amended.
b. Philippine Charity sweepstakes / lotto Section 100 imposes donor’s tax on the
winnings which does not exceed P10,000 - transfer of property for less than adequate or
exempt ; full consideration in money or money’s worth.
c. Prizes excluded from gross income. The amendment leads to an exception to this.
In this case, a transaction that is bona fide, at
Prize, differentiated from winnings: arm’s length, and free from any donative intent
A prize is the result of an effort made (e.g., shall be deemed made for an adequate and full
prize in a beauty contest), while winnings are consideration, even if the selling price is lower
the result of a transaction where the outcome than the FMV.
depends upon chance (e.g., betting).
Page 385 of 494

What property covered sale]
Property located in the PH classified as capital
assets The historical cost or adjusted basis of the real
property sold or disposed shall be carried over
What transactions covered to the new principal residence built or acquired.
Sales, exchanges, or other disposition of real
property (classified as capital assets), including Computation for the basis of new principal
pacto de retro sales and other forms of residence:
conditional sales of the following: citizens,
resident aliens, NRAETB, NRANETB, Historical cost of old principal
domestic corporations. residence XXX
Add: Additional cost to acquire
Tax rate new principal residence* XXX
General rule: 6% of —whichever is higher of: Adjusted cost basis of the new
GSP, or FMV in accordance with Sec. 6 (E). principal residence XXX
Exception: *Additional cost to acquire new

a. In case of sales made to the government, principal residence:
any of its political subdivisions or Cost to acquire new principal
agencies, or to GOCCs, it can be taxed residence XXX
either: Less: Gross selling price of old
b. Under Sec. 24 (D)(1) – 6% CGT, or principal residence (XXX)
c. Under Sec. 24 (A), at the option of the Additional cost to acquire new
taxpayer. principal residence XXX
d. In case of the sale of or disposition of their
principal residence by natural persons a. Income from the sale, exchange, or other
disposition of other capital assets
Requirements:
a. Sale or disposition by a natural person of Other personal properties shall be subject
his principal residence, to income tax
b. The proceeds of which is fully utilized in a. At the graduated income tax rates, if the
acquiring/constructing a new principal seller is an individual
residence, b. Long-term capital gains: only 50% is
c. Such acquisition/construction taking place recognized.
within 18 calendar months from the date of c. Short-term capital asset transactions:
sale or disposition, 100% subject to tax [Sec. 39(B), NIRC].
d. The taxpayer notifies the Commissioner
within 30 days from the sale/disposition Note: if real property is an ordinary asset then
through a prescribed return of his intention gain is computed and graduated rates apply.
to avail of the exemption,
e. The tax exemption can only be availed of Determination of whether short- or long-
once every 10 years. term: Short-term if held for 12 months or less;
otherwise, it is a long-term capital gain.
Tax treatment of sale of principal residence:
Exempt from capital gains tax (CGT). If there is At 30% corporate income tax, if the seller is a
no full utilization of the proceeds of sale or corporation.
disposition, the portion of the gain presumed to
have been realized from the sale or disposition Rule: Capital gain/loss is recognized in full.
shall be subject to CGT. Capital assets shall refer to all real properties
held by a taxpayer, whether or not connected
How taxable portion and tax determined: with his trade or business, and which are not
[HIGHER of Gross selling price or FMV @ included among the real properties considered
Page 386 of 494

as ordinary assets under Section 39(A)(1). d. An insurance or mutual fund company;
e. A regional operating headquarters of
5. Capital Asset vs. Ordinary Asset multinational company;
f. The share of a nonresident alien individual
Capital Asset in the distributable net income after tax of
The term ‘capital assets’ means property held a partnership (except a general
by the taxpayer (whether or not connected with professional partnership) of which he is a
his trade or business), but does not include partner;
stock in trade of the taxpayer or other property g. The share of a nonresident alien individual
of a kind which would properly be included in in the net income after tax of an
the inventory of the taxpayer if on hand at the association, a joint account, or a joint
close of the taxable year or property held by the venture taxable as a corporation of which
taxpayer primarily for sale to customers in the he is a member or a co-venturer;
ordinary course of his trade or business, or h. Interests
property used in the trade or business, of a i. Royalties (in any form); and
character which is subject to the allowance for j. Prizes (except prizes amounting to Ten
depreciation provided in Subsection (F) of thousand pesos (P10,000) or less which
Section 34; or real property used in trade or shall be subject to graduated tax) and
business of the taxpayer. (Sec. 39(A), NIRC) other winnings (except PCSO/lotto
winnings which shall not exceed P10,000)
Ordinary assets
It shall refer to all real properties specifically Except:
excluded from the definition of capital assets The following Royalties shall be subject to
under Section 39(A)(1), NIRC, namely: a final tax of ten percent (10%) on the total
a. Stock in trade of a taxpayer or other real amount thereof:
property of a kind which would properly be a. On books as well as other literary works;
included in the inventory of the taxpayer if and
on hand at the close of the taxable year; or b. On musical compositions
b. Real property held by the taxpayer c. Cinematographic films and similar works
primarily for sale to customers in the shall be subject to twenty-five percent
ordinary course of his trade or business; or (25%) of the gross income
c. Real property used in trade or business d. Interest income from long-term deposit or
(i.e., buildings and/or improvements) of a investment in the form of savings,
character which is subject to the allowance common or individual trust funds, deposit
for depreciation provided for under Sec. substitutes, investment management
34(F) of the Code; or accounts and other investments
Real property used in trade or business of the evidenced by certificates in such form
taxpayer prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the
b. Income Tax on Non-Resident Aliens tax
Engaged in Trade or Business
But should the holder of the certificate pre-
General Rule: Subject to income tax in the terminate the deposit or investment before the
same manner as an individual citizen and a fifth (5th) year, a final tax shall be imposed on
resident alien individual on taxable income the entire income and shall be deducted and
from all sources within the Philippines. withheld by the depository bank from the
proceeds of the long-term deposit or
The following shall be subject to an income investment certificate based on the remaining
tax of 20% on the total amount thereof: maturity thereof:
a. Cash and/or property dividends from: a. Four (4) years to less than five (5) years -
b. A domestic corporation; 5%;
c. A joint stock company; b. Three (3) years to less than four (4) years
Page 387 of 494

- 12%; and e. Individual Taxpayers Exempt from
c. Less than three (3) years - 20%. Income Tax
Capital gains All individuals and entities claiming exemption

Capital gains realized from sale, barter or from imposition of taxes on income and,
exchange of shares of stock in domestic consequently, from withholding taxes are
corporations not traded through the local stock required to provide a copy of a valid, current
exchange, and real properties shall be subject and subsisting tax exemption certificate or
to the similar tax prescribed on citizens and ruling, as per existing administrative issuances
resident aliens. and any issuance that may be issued from time
to time, before payment of the related income.
Sale, barter or exchange of Shares of stock in
domestic corporation not traded through the The tax exemption certificate or ruling must
stock exchange – 15% of net capital gains explicitly recognize the grant of tax exemption,
as well as the corresponding exemption from
Sale, barter or exchange of real properties – imposition of withholding tax. Failure on the
6% of gross selling price or current FMV part of the taxpayer to present the said tax
whichever is higher exemption certificate or ruling as herein
required shall subject him to the payment of
c. Income Tax on Non-Resident Aliens appropriate withholding taxes due on the
Not Engaged in Trade or Business transaction. [RMC No. 8-14]
There shall be levied, collected, and paid for Senior Citizens

each taxable year upon the entire income
received from all sources within the PH by Under RA 9994, otherwise known as the
every NRANETB within the PH as interest, “Senior Citizens Act of 2010,” which took effect
cash and/or property dividends, rents, salaries, on February 15, 2010, senior citizens who are
wages, premiums, annuities, compensation, considered to be minimum wage earners in
remuneration, emoluments, or other fixed or accordance with RA 9504 shall also be treated
determinable annual or periodic or casual as exempt from the payment of individual
gains, profits, and income, and capital gains, a income tax.
tax equivalent to 25% of such income.
Minimum Wage Earners
d. Aliens Employed by Regional
Headquarters, Regional Operating Rule: they shall be exempt from payment of
Headquarters, Offshore Banking income tax on their taxable income.
Units, and Petroleum Service
Limit: However, if he receives “other benefits”
Contractors
in excess of the allowable statutory amount of
P90,000, then he shall be taxable on the
The preferential tax treatment of 15% shall no
exceeds benefits as well as his salaries,
longer be applicable to employees of regional
wages, and allowances, just like an employee
headquarters (RHQs), regional operating
receiving compensation income beyond the
headquarters (ROHQs), offshore banking units
statutory minimum wage.
(OBUs) or petroleum service contractors and
subcontractors. They are now subject to
The treatment of bonuses and other benefits
regular income tax rates [Sec. 25 (F)]. [Note
that [a minimum wage earner] receives from
item A of veto message of the President on
the employer in excess of the [₱90,000] ceiling
TRAIN Law]
cannot but be the same as the prevailing
treatment prior to R.A. 9504 - anything in
excess of ₱30,000 is taxable; no more, no less.
The treatment of this excess cannot operate to
Page 388 of 494

disenfranchise the MWE from enjoying the Exemptions Granted Under International
exemption explicitly granted by R.A. 9504. Agreements
[Soriano v. Secretary of Finance, G.R. No.
184450 (2017)] See RMC No, 31-2013, April 12, 2013 –
taxation of compensation income of Philippine
The minimum wage shall be exempt from the nationals and alien individuals employed by
payment of income tax on their taxable income: foreign governments/embassies/diplomatic
Provided, further, That the holiday pay, missions and international organizations
overtime pay, night shift differential pay and situated in the Philippines.
hazard pay received by such minimum wage
earners shall likewise be exempt from income The Government of the Philippines is a
tax. signatory of certain international agreements
and a party to different tax treaties which
Compensation income including overtime pay, specifically provide for the exemption of certain
holiday pay and hazard pay, earned by persons or entities from taxes imposed by the
minimum wage earners who have no other Philippines.
returnable income are NOT taxable and not
subject to withholding tax on wages [RA 9504]. Examples of these tax exemptions are those
accorded to diplomats or ambassadors of other
countries here in the Philippines. The World
Health Organization is also tax exempt upon an
international agreement [CIR v. Gotamco, G.R.
No. L-31092 (1987)
SUMMARY TABLES OF RATES

Citizens,
Interest, Royalties, Prizes and Other Winnings NRAETB NRANETB
Residents
Interest from any currency bank deposit 20% 20% 25%
Yield or any other monetary benefit from deposit substitute 20% 20% 25%
Yield or any other monetary benefit from trust funds and
20% 20% 25%
similar arrangements
Royalties, in general 20% 20% 25%
Royalties on books as well as other literary works and musical
10% 10% 25%
compositions
Prizes exceeding P10,000 20% 20% 25%
Other winnings (except Philippine Charity Sweepstakes and
20% 20% 25%
Lotto winnings not exceeding P10,000)
15%
Interest incomes received from a depositary bank under Note: NRC –
Exempt Exempt
expanded foreign currency deposit system exempt (RR 1-
11)
Interest income from long-term deposit or investment
evidenced by certificates prescribed by BSP. If preterminated
Exempt Exempt 25%
before fifth year, a final tax shall be imposed based on
remaining maturity
4 years to less than 5 years 5% 5% 25%

3 years to less than 4 years 12% 12% 25%
Less than 3 years 20% 20% 25%
Citizens,
Cash and/or Property Dividends NRAETB NRANETB
Residents
Cash and/or property dividends actually or constructively
received from a domestic corp. or from a joint stock corp., 10% 20% 25%
insurance or mutual fund companies and regional operation
Page 389 of 494

headquarters of multinational companies (beginning Jan. 1,
2000)
Share of an individual in the distributable net income after tax
of a PARTNERSHIP (other than a general professional 10% 20% 25%
partnership) (beginning Jan. 1, 2000)
Share of an individual in the net income after tax of an
ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE
10% 20% 25%
or CONSORTIUM taxable as a corporation, of which he is a
member or a co-venturer (beginning Jan. 1, 2000)
Sec. 24 (C). Capital Gains Tax from Sale of Shares

Citizens,
of Stock of a domestic corporation NOT TRADED NRAETB NRANETB
Residents
in the Stock Exchange
Tax base: Net Capital Gain 15% 15% 15%
Sec. 24 (D). Capital Gains Tax from Sale of Real Citizens,

NRAETB NRANETB
Property Classified as Capital Asset Residents
Tax base: Gross selling price or current fair market
value, whichever is higher
Tax Rate 6% 6% 6%
Resident Non-Resident
Citizen Alien Citizen NRAETB NRANETB
Category of income
Within the Within the Within the Within the
All sources
Philippines Philippines Philippines Philippines
Based on Taxable (i.e. Net) Income
Schedular Income Tax Rates (i.e. 0% to 35% (Sec. 24) (See table
below)
Compensation/ Business/
Profession
For those earning purely business or professional income or mixed
income not exceeding the threshold gross sales/receipts for the year
Prizes of P10,000 or less
of P3,000,000, the taxpayer can opt to avail of the 8% tax on gross
sales/receipts in lieu of graduated income tax rates and percentage
tax – for the business/professional income portion – upon the option
of the taxpayer
Interest from any currency bank
deposit, etc.
Gross Income Within the Philippines (GIW) – 20% Final Withholding
Royalties, in general GIW – 25%
Tax
Winnings/ Prizes (except prizes
P10,000 and below)
Royalties from books, literary
GIW – 10% Final Withholding Tax
works, musical compositions
EXEMPT; However:
Interest from long-term deposit or In case of pre-termination, with remaining maturity of:
investment certificates, which have 4 years to less than 5 years -5% on entire income
a maturity of 5 years or more 3 years to less than 4 years – 12% on entire income
less than 3 years – 20% on entire income
Cash/ Property Dividends from a
domestic corporation, etc., OR share
in the distributed net income after tax GIW – 10% Final Withholding Tax GIW – 20%
of a partnership (except a general
professional partnership), etc.
Interest (Expanding Foreign
GIW – 15% Final Withholding Tax Exempt
Currency Deposit System)
Prizes Subject to schedular rates if not exceeding P10,000
Winnings on Philippine
Exempt if P10,000 and below
Sweepstakes/ Lotto
Capital Gains on Sale of Shares
Net capital gains: 15% Final Tax
of Domestic Corp (not traded in a
domestic stock exchange
Page 390 of 494

Capital Gains on Sale of Real
Gross Selling Price or FMV, whichever is higher – 6% Final Withholding Tax
Property in the Philippines
0.6 of 1% of the Selling Price (Stock Transaction Tax)
Sale of Shares of Domestic Corp.
(traded in a domestic stock
Note: Stock Transaction Tax is not an income tax, but a business (percentage)
exchange)
tax
Sale of Real Property located Schedular/Graduated Income Tax Rates (i.e. 0% to 35%) (Sec. 24)
Abroad For those earning purely business or professional income or mixed income, the
Sale of Shares of Foreign Corp. taxpayer can opt to avail of the 8% tax on gross sales/receipts in lieu of
graduated rates – for the business/professional income portion – upon the option
Passive Income from Abroad
of the taxpayer
SCHEDULE OF INCOME TAX RATES FOR INDIVIDUAL CITIZENS, RESIDENTS, AND NRAETB
RANGE OF TAXABLE INCOME TAX DUE (a+b)

Basic Amount (a) Additional Rate (b)
0 to 250,000 - -
Over 250,000 but not more than 400,000 - 20% of excess over 250,000
Over 400,000 but not more than 800,000 30,000 25% of excess over 400,000
Over 800,000 but not over 2,000,000 130,000 30% of excess over 800,000
32% of excess over
Over 2,000,000 but not over 8,000,000 490,000
2,000,000
35% of excess over
Over 8,000,000 2,410,000
8,000,000
Computations [RR 08-2018] Pure Compensation Income
Illustration: Mr. CSO earned, aside from his basic wage, additional pay of P140,000.00 which consists
of the overtime pay — P80,000.00, night shift differential — P30,000.00, hazard pay — P15,000.00,
and holiday pay — P15,000.00. He has P5,000 mandatory contributions (SSS, Pag-Ibig, Phil-health,
etc.) and P11,000 non-taxable benefits.
Total Compensation Income P135,000.00

Add: Overtime, night shift differential, hazard, and holiday pay 140,000.00
–––––––––––
Total Income P275,000.00
Less: Mandatory contributions P5,000.00
Non-taxable benefits 11,000.00 16,000.00
––––––––––– –––––––––––
Net taxable income P259,000.00
Tax due (20% in excess of P250,000) 1,800
Mixed-income (i.e. compensation income and business income/income from the practice of
profession – opted to avail of 8% tax on business/professional income)
Illustration: Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation in 2018
of P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a
convenience store, with gross sales of P2,400,000. His cost of sales and operating expenses are
P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00.
a. His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent
(8%) income tax rate on his gross sales for his income from business:
Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits (max) 90,000.00
Page 391 of 494

––––––––––––
Taxable Compensation Income P1,410,000.00
Tax due:
1. On Compensation:
On P800,000.00 P130,000.00
On excess (P1,410,000 - P800,000) x 30% 183,000.00
––––––––––––
Tax due on Compensation Income P313,000.00
––––––––––––
2. On Business Income:
Gross Sales P2,400,000.00
Add: Non-operating Income 100,000.00
––––––––––––
Taxable Business Income P2,500,000.00
Multiplied by income tax rate 8%
––––––––––––
Tax Due on Business Income P200,000.00
––––––––––––
Total Income Tax Due (Compensation and Business) P513,000.00
* The option of 8% income tax rate is

applicable only to taxpayer's income from
business, and the same is in lieu of
the income tax under the
graduated income tax rates and the
percentage tax under Section 116 of
the Tax Code, as amended.
* The amount of P250,000.00 allowed as
deduction under the law for taxpayers
earning solely from self-
employment/practice of profession, is not
applicable for mixed income earner under
the 8% income tax rate option.
* The P250,000.00 mentioned above is
already incorporated in the first tier of the
graduated income tax rates applicable to
compensation income.
|||
Mixed-income (i.e. compensation income and business income/income from the practice of
profession)
Illustration: Same facts for Mr. MAG. His tax due for 2018 shall be computed as follows if he did not
opt for the eight percent (8%) income tax based on gross sales/receipts and other non-operating
income:
Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits-max 90,000.00
––––––––––––
Taxable Compensation Income P1,410,000.00
Add: Taxable Income from Business —
Gross Sales P2,400,000.00
Less: Cost of Sales 1,000,000.00
–––––––––––
Gross Income P1,400,000.00
Less: Operating Expenses 600,000.00
Page 392 of 494

–––––––––––
Net Income from Operation P800,000.00
Add: Non-operating Income 100,000.00 900,000.00
––––––––––– ––––––––––––
Total Taxable Income P2,310,000.00
Tax Due:
On P2,000,000.00 P490,000.00
On excess (P2,310,000 - 2,000,000) x 32% 99,200.00
––––––––––––
Total Income Tax P589,200.00
* The taxable income from both compensation and business shall be combined for purposes of
computing the income tax due if the taxpayer chose to be subject under the
graduated income tax rates.
Pure Business/Professional Income (Opted income tax rates under subsection (A) hereof
to be taxed at 8% of gross sales or receipts) and percentage tax due, by express provision
Illustration: Ms. EBQ operates a convenience of law.
store while she offers bookkeeping services to
her clients. In 2018, her gross sales amounted Pure Business/Professional Income (Opted
to P800,000.00, in addition to her receipts from to be taxed at schedular rates)
bookkeeping services of P300,000.00. She Illustration: Ms. EBQ above, failed to signify
already signified her intention to be taxed at 8% her intention to be taxed at 8% income tax rate
income tax rate in her 1st quarter return. on gross sales in her initial Quarterly Income
Her income tax liability for the year will be Tax Return, and she incurred cost of sales and
computed as follows: operating expenses amounting to P600,000.00
and P200,000.00, respectively, or a total of
Gross Sales — Convenience P800,000.00, the income tax shall be
Store P800,000.00 computed as follows:
Gross Receipts — Bookkeeping 300,000.00
–––––––––––
Gross Sales/Receipts P1,100,000.00
–
Less: Cost of Sales 600,000.00
Total Sales/Receipts P1,100,000.00
–––––––––––
Less: Amount allowed as
–
deduction under Sec. 24 (A) (2)
Gross Income P500,000.00
(b) 250,000.00
Less: Operating Expenses 200,000.00
–––––––––––
–––––––––––
–
–
Taxable Income P850,000.00
Taxable Income P300,000.00
Tax Due:
Tax Due:
8% of P850,000.00 P68,000.00
On excess (P300,000 - P250,000)
x 20% P10,000.00
* The total of gross sales and gross receipts is
below the VAT threshold of P3,000,000.00.
* Taxpayer's source of income is purely from
self-employment, thus she is entitled to the
amount allowed as deduction of P250,000.00
under Sec. 24 (A) (2) (b) of the Tax Code, as
amended.
* Income tax imposed herein is based on the

total of gross sales and gross receipts.
* Income tax payment is in lieu of the graduated
Page 393 of 494

9 . Income Tax on Corporations RA 11534, also known as the Corporate
Recovery and Tax Incentives for Enterprises
a. Income Tax on Domestic (CREATE Act) revised the rate of corporate
Corporations and Resident Foreign income tax. The law took effect on April 11,
Corporations 2021.
The effectivity of the revised RCIT rates under

Domestic Corporations
the CREATE Act shall be as follows:
A corporation created and organized in the
Philippines or under its laws (the law of § Domestic Corporations and Resident
Foreign Corporations – July 1, 2020
incorporation test) [Sec. 22 (C), NIRC].
§ Non-Resident Foreign Corporations –
January 1, 2021
Taxable on all income derived from sources
within and without the Philippines; and
Prior to July 1, 2020, the income tax rate of
Resident Foreign Corporations corporations was at 30% of taxable income.
A corporation organized under the laws of a
foreign country, which is engaged in trade or General rule: RCIT rate for domestic
corporations and resident foreign corporations
business in the Philippines. [See “Doing
Business” definition under the FIA above] under the CREATE act shall be 25% of taxable
income.
Taxable only on income derived from
Exception: if the domestic corporation is
sources within the Philippines.
classified as Micro Small and Medium
Enterprises (MSME), the RCIT shall be 20%
A Philippine branch of a foreign corporation
of taxable income.
duly licensed by the SEC is considered a
resident foreign corporation. Thus, only the
MSME are domestic corporation with:
income of the Philippine branch from sources
within the Philippines is subject to Philippine a. Net taxable income of NOT more than
P5,000,000; AND
income tax.
b. Assets of NOT more than P100,000,000,
excluding the land on which the particular
As general rule, the head office of a foreign
corporation is the same juridical entity as its business entity’s office, plant, and
equipment are situated during the taxable
branch in the Philippines following the single
entity concept. Thus, the income from sources year for which the tax is imposed.
within the Philippines of the foreign head office
shall thus be taxable to the Philippine branch. Note: the 20% income tax rate for MSME is
NOT applicable to foreign corporations
But, when the head office of a foreign (resident or non-resident)
corporation independently and directly
invested in a domestic corporation without the Normal/Regular Corporate Income Tax Rate:
funds passing through its Philippine branch, 25% of Taxable Income, except MSMEs
subject to 20% of Taxable Income.
the taxpayer, with respect to the tax on
dividend income, would be the non-resident
Gross Income xxx
foreign corporation itself and the dividend
Less: Allowable Deductions xxx
income shall be subject to the tax similarly
imposed on non- resident foreign corporations. Taxable Income xxx
[Marubeni v. Commissioner, G.R. No. 76573
(1989)] Minimum Corporate Income Tax (MCIT)
1. Taxation in General a. Applies to domestic corporations and

RFCs:
(a) Regular Corporate Income Tax (RCIT) i. whenever such corporations have
Page 394 of 494

zero or negative taxable income, or where the goods are actually sold including
ii. whenever the MCIT is greater than insurance while the goods are in transit.
the normal income tax due.
b. Imposed beginning the fourth taxable year Manufacturing – include all costs of
from the taxable year the corporation production of finished goods, such as raw
commenced its business operations. For materials used, direct labor and manufacturing
purposes of MCIT, the taxable year in overhead, freight cost, insurance premiums
which business operations commenced and other costs incurred to bring the raw
shall be the year when the corporation materials to the factory or warehouse.
registers with the BIR (not in which the
corporation started commercial Gross Receipts xxx
operations). Less: Sales Returns xxx
c. Tax rates: Sales Discounts xxx
i. TRAIN Law (beginning Jan. 1, 2018):
Allowances xxx
2% of gross income
ii. CREATE Law Cost of Services xxx xxx
§ From July 1, 2020 to June 30, 2023: Gross Income xxx
1% of gross income Direct cost of services all direct costs and
§ Beginning July 1, 2023: 2% of gross expenses necessarily incurred to provide the
income services required by the customers and clients
including (i) salaries and employee benefits of
Gross Income personnel, consultants and specialists directly
Gross Sales xxx rendering the service and (ii) cost of facilities
Less: Sales Returns xxx directly utilized in providing the service such as
Sales Discounts xxx depreciation or rental of equipment used and
Allowances xxx cost of supplies. In the case of banks, it
includes interest expense.
Cost of Goods Sold xxx xxx
Gross Income xxx MCIT is in the nature of a tax credit, not an
allowable deduction.
If apart from deriving income from core
business activities there are other items of It addresses the previously rampant practice of
gross income realized or earned by the some corporations not declaring their actual
taxpayer which are subject to the normal income or bloating their expenses.
corporate income tax, they must be included as
part of gross income for computing MCIT. [Sec. There is no MCIT on the first three taxable
27 (E), NIRC; RR 12-07] years as incentive to do business.
This means that the term “gross income” will What amount of income tax is paid by the
also include all items of gross income corporation to the BIR?
enumerated under Section 32(A), except: (a) Whichever is higher between the normal tax
income exempt from income tax, and (b) and the minimum corporate income tax.
income subjected to FWT.
Coverage
Cost of goods sold The MCIT covers domestic and resident
In general – includes all business expenses foreign corporations which are subject to the
directly incurred to produce the merchandise to regular income tax. Corporations subject to a
bring them to their present location and use. special corporate tax system do not fall within
the coverage of the MCIT.
Trading or merchandising – includes invoice
cost of the goods sold, plus import duties, These special corporations include Proprietary
freight in transporting the goods to the place educational institutions, nonprofit hospitals,
Page 395 of 494

OBUs, FCDUs, ROHQs, firms registered in
PEZA/BCDA/other ecozones, International
Carriers .
For corporations whose operations or activities

are partly covered by regular income tax and
special income tax system, MCIT shall apply
on operations covered by the regular corporate
income tax system.
Page 396 of 494


Illustration:
E Co., a domestic trading corporation, in its fourth year of operations had a gross income from sales
of P300,000 and net taxable income of P100,000. How much was the income tax paid by the
corporation for the year?
MCIT (P300,000 x 2%) P6,000

Normal Income Tax (P100,000 x 25%) P25,000
Income Tax to be paid for the year (whichever is higher) P25,000
Carry forward of excess minimum tax

Any excess of the minimum corporate income tax over the normal income tax shall be carried forward
on an annual basis. The excess can be credited against the normal income tax in the next three (3)
succeeding taxable years only [Sec. 27(E)(2), NIRC]. In the year to which it was carried forward, the
normal tax should be higher than the MCIT.
Sample Computation of MCIT Carry Forward:

A domestic corporation had the following data on computations of the normal tax (NT) and the
minimum corporate income tax (MCIT) for five years.
Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
MCIT 80K 50K 30K 40K 35K
NT 20K 30K 40K 20K 70K
The excess MCIT over NT carried-forward as follows:
Year 4 Year 5 Year 6 Year 7 Year 8

MCIT 80,000 50,000 30,000 40,000 35,000
NT 20,000 30,000 40,000 20,000 70,000
Excess MCIT over 60,000(a) 20,000(b) n/a 20,000(c) n/a

NT
(MCIT – NT)
Income Tax to be 80,000 50,000 40,000 40,000 70,000

paid
(Higher of MCIT or
NT)
Less: MCIT carry n/a n/a (40,000) (a) n/a (20,000) (a)
forward
(20,000) (b)
Tax Due 80,000 50,000 0 40,000 30,000
(a) 60k excess MCIT from year 4 is credited against the normal tax to be paid in year 6 and 8.
(b) 20k excess MCIT from year 5 is credited against the normal tax to be paid in year 8.
(c) 20k excess MCIT from year 7 will be credited against future normal tax to be paid.
Page 397 of 494


Relief from MCIT [Sec. 27 (E)(3), NIRC] quarterly normal income tax payments, (c)
The Secretary of Finance may suspend excess MCIT in the prior year/s (subject to the
imposition of MCIT on any corporation which prescriptive period allowed for its creditability),
sustained substantial losses on account of (d) CWTs in the current year, (d) excess CWTs
(LMB): in the prior year.
a. Prolonged labor dispute (losses from a
strike staged by employees that lasts for If in the computation of annual income tax due,
more than 6 months and caused the the computed annual MCIT due is higher than
temporary shutdown of operations), or the annual normal income tax due, the
b. Force majeure (acts of God and other following may be credited against the annual
calamity; includes armed conflicts like war income tax: (a) quarterly MCIT payments of
or insurgency), or current taxable quarter, (b) quarterly normal
c. Legitimate business reverses (substantial income tax payments in current year, (c) CWTs
losses due to fire, robbery, theft or other in the current year, (d) excess CWTs in the
economic reasons). prior year.
Quarterly MCIT Computation Excess MCIT from the previous taxable year/s
The computation and the payment of MCIT shall not be allowed to be credited against the
shall likewise apply at the time of filing the annual MCIT due as the same can only be
quarterly corporate income tax. In the applied against normal income tax.
computation of the tax due for the taxable
quarter, if the quarterly MCIT is higher than the Manner of Filing and Payment.
quarterly normal income tax, the tax due to be The MCIT shall be paid in the same manner
paid for such taxable quarter at the time of filing prescribed for the payment of the normal
the quarterly corporate income tax return shall corporate income tax which is on a quarterly
be the MCIT. and on a yearly basis.
Items allowed to be credited against quarterly a. Taxation of Passive Income

MCIT due: (a) CWT, (b) Quarterly income tax
payments under the normal income tax; and (c) Interest from deposits and yield or any other
MCIT paid in the previous taxable quarter(s). monetary benefit from deposit substitutes and
from trust funds and similar arrangements and
Excess MCIT from the previous taxable year/s royalties
shall not be allowed to be credited against the a. 20% final tax on:
quarterly MCIT tax due. i. interest on any currency bank deposit,
ii. yield or any other monetary benefit
Annual Income Tax Computation. from deposit substitutes,
The final comparison between the normal iii. yield or any monetary benefir from trust
income tax payable and the MCIT shall be funds and similar arrangements, and
made at the end of the taxable year. The iv. Royalties
payable or excess payment in the Annual b. same for Domestic Corporations and
Income Tax Return shall be computed taking Resident Foreign Corporations
into consideration corporate income tax c. Collected as Final Withholding Tax [Sec.
payment made at the time of filing of quarterly 57, NIRC]
corporate income tax returns whether this be
MCIT or normal income tax.
In the computation of annual income tax due, if

the normal income tax due is higher than the
computed annual MCIT, the following shall be
allowed to be credited against the annual
income tax: (a) quarterly MCIT payments, (b)
Page 398 of 494

Interest Income derived by a domestic capital gains [Sec. 28 (A)(6)(c), NIRC].
corporation from depository bank under the
expanded foreign currency deposit system Capital gains realized from the sale,
[Section 27 (D)(1), NIRC] exchange, or disposition of lands and/or
a. 15% final income tax buildings [Sec. 27 (D)(5)]
b. same for Domestic Corporations and a. Imposed on the sale, exchange or
Resident Foreign Corporations disposition of lands and/or buildings which
c. Collected as Final Withholding Tax [Sec. are not actually used in the business of a
57, NIRC] corporation and are treated as capital
assets
Inter-corporate dividends b. A final tax of 6% on the gross selling price,
a. Dividends received from a domestic or the current fair market value at the time
corporation by another domestic of the sale, whichever is higher;
corporation or resident foreign corporation c. The capital gains tax is applied on the
- Exempt gross selling price, or the current fair
b. Dividends received from a domestic market value at the time of the sale,
corporation by a non-resident foreign whichever is higher. Any gain or loss on
corporation (NRFC): 25% of the amount of the sale is immaterial because there is a
cash and/or property dividend; provided conclusive presumption by law that the
that it may be reduced to 15% of the sale resulted in a gain.
amount of cash and/or property dividend, d. Applicable to domestic corporations only.
if the country in which the NRFC is e. Tax treatment is similar to that of
domiciled shall allow a credit against the individuals.
tax due from the NRFC deemed to have
been paid in the Philippines equivalent to 2. Branch Profit Remittance Tax
15%, which represents the difference a. Applies only to a resident foreign
between the regular income tax of 30% corporation which is a branch of a non-
and the 15% tax sparing rate. resident foreign corporation. Imposed on
profits remitted by the Philippine branch to
Stock dividends are exempt if there is no the head office.
change in proportionate interest. b. Collected as Final Withholding Tax [Sec.
57, NIRC]
Taxation of Capital Gains
Taxable transaction – any profit remitted by a
Capital gain from sale of shares of stock not branch to its head office
traded in the stock exchange.
Tax Rate and Base – 15% final tax based on
Final tax on net capital gains realized by a the total profits applied or earmarked for
domestic corporation during the taxable year remittance without any deduction for the tax
from the sale, barter, exchange or other component (except those activities registered
disposition of shares of stock in a domestic with PEZA).
corporation not listed and traded through a
local stock exchange: 15% of net capital gains The following are not treated as branch profits
[Sec. 27 (D)(2), NIRC]. unless effectively connected with the conduct
of trade or business in the Philippines:
Final tax on net capital gains realized by a. Interests, dividends, rents, royalties
Resident Foreign Corporations and (including remuneration for technical
Nonresident Foreign Corporations during the services),
taxable year from the sale, barter, exchange or b. salaries, wages,
other disposition of shares of stock in a c. premiums, annuities, emoluments, or
domestic corporation not listed and traded d. other fixed or determinable annual,
through a local stock exchange: 15% of net periodic or casual gains, profits, income
Page 399 of 494

and capital gains received during each
taxable year from all sources within the Once the election to avail of OSD or
Philippines itemized deduction is signified in the
taxpayer’s return, it shall be irrevocable for
3. Itemized Deductions vs. Optional the taxable year for which the return is
Standard Deductions made.
A taxpayer engaged in business or in the
practice of profession shall choose either the General partnerships and general
optional or itemized deduction (described professional partnerships may likewise
below) deduction. claim either itemized deductions or it can
opt to avail of the OSD allowed to
Itemized Deductions corporations in claiming the deductions in
There shall be allowed as deduction from an amount not exceeding 40% of its gross
gross income all the ordinary and income.
necessary expenses paid or incurred
during the taxable year in carrying on or The net income determined by either
which are directly attributable to, the claiming the itemized deduction or OSD
development, management, operation from the GPP’s gross income is the
and/or conduct of the trade, business or distributable net income from which the
exercise of a profession including a share of each partner is to be determined.
reasonable allowance for salaries, travel, Each partner shall report as gross income
rental and entertainment expenses. his distributive share, actually or
Itemized deduction includes also interest, constructively received, in the net income
taxes, losses, bad debts, depreciation, of the partnership. [RR No. 2-2010]
depletion, charitable and other
contributions, research and development, b. Income Tax on Non-Resident Foreign
pension trust, premium payments on health Corporations
and/or hospitalization insurance.
Optional Standard Deductions 1. Taxation of NRFC in general

In the case of a corporation subject to tax
under Sections 27(A) and 28 (A)(1), it may A corporation organized under the laws of a
elect a standard deduction in an amount foreign country, which is not engaged in trade
not exceeding forty percent (40%) of its or business in the Philippines. [See “Doing
gross income as defined in Section 32 of Business” definition under the FIA in B.7.2.
the NIRC. [Sec. 34 (L), NIRC] Corporations]
“Gross income” shall mean the gross sales Taxable only on income derived from sources
less sales returns, discounts and within the Philippines.
allowances, and cost of goods sold. “Cost
of goods sold” shall include the purchase Income taxes on nonresident foreign
price or cost to produce the merchandise corporations are collected as Final Withholding
and all expenses directly incurred in Tax under Sec. 57, NIRC.
bringing them to their present location and
use. General rule
The tax is 25% of gross income received
Unless the taxpayer signifies in his return during each taxable year beginning January 1,
his intention to elect the optional standard 2021 from all sources within the Philippines
deduction, he shall be considered as
having availed himself of the itemized This includes: interests, dividends, rents,
deductions allowed in Sec. 34(A) to (J) of royalties, salaries, premiums (except
the NIRC. reinsurance premiums), annuities,
emoluments or other fixed or determinable
Page 400 of 494

annual, periodic or casual gains, profits and exchange or other disposition of shares of
income, and capital gains (except capital gains stock in a domestic corporation not listed and
on the sale of shares not traded in the stock traded through a local stock exchange: 15% on
exchange) the net capital gains
2. NRFCs subject to preferential tax c. Income Tax on Special Corporations

rates
1. Proprietary Educational
Non-resident cinematographic film owner, Institutions and Non-profit
lessor or distributor – 25% of gross income Hospitals [Sec. 27(B), NIRC]
from all sources within the Philippines
Tax Rates and Base:
Non-resident owner or lessor of vessels § Under TRAIN Law – 10% on taxable
chartered by Philippine nationals – 4.5% of
income
gross rentals, lease or charter fees from leases § Under CREATE Law
or charters to Filipino citizens or corporations,
a. From July 1, 2020 to June 30,
as approved by the Maritime Authority 2023 – 1% on taxable income
b. Beginning July 1, 2023 – 10% on
Non-resident owner or lessor of aircraft, taxable income
machineries and other equipment – 7.5% of
gross rentals, charters or other fees The above rates shall be imposed on taxable
income (except on income subject to capital
3. Tax on Certain Income Received gains tax and passive income subject to final
by the NRFC tax) within and without the Philippines
Tax on Interest on Foreign Loans Caveat: If gross income from unrelated trade or
Tax on Interest on foreign loans: contracted on business or other activity exceeds 50% of total
or after August 1, 1986 – 20% final withholding gross income derived from all sources, the tax
tax [Sec. 28 (B)(5)(a), NIRC] rate of 30% shall be imposed on the entire
taxable income.
Tax on Inter-corporate dividends
Inter-corporate Dividend – 15% on dividends Unrelated trade, business or other activity –
received from domestic corporations, if the any trade, business or other activity, the
country in which the nonresident foreign conduct of which is not substantially related to
corporation is domiciled allows a tax credit of at the exercise or performance by such
least 15% for taxes “deemed paid” in the educational institution or hospital of its primary
Philippines purpose or function.
The 15% foreign tax credit represents the Proprietary educational institution – any private
difference between the regular income tax of school maintained and administered by private
30% on corporations and the 15% tax on individuals or groups with an issued permit to
dividends (“tax sparing credit”) operate from DepEd, CHED or TESDA [Sec.
27 (B), NIRC].
If the country within which the NRFC is
domiciled does NOT allow a tax credit, the tax 2. Government-owned or Controlled
is 25% on dividends received from a domestic Corporations, Agencies,
corporation.
Instrumentalities [Sec. 27(C),
NIRC]
Tax on Capital gain from sale of shares of
stock not traded in the stock exchange
GOCCs
Final tax on net capital gains realized during
General rule: GOCCs are taxable as any other
the taxable year from the sale, barter,
Page 401 of 494

corporation engaged in similar business, from:
industry or activity
Foreign currency transactions with
Exceptions: nonresidents, offshore banking units in the
a. Government Service Insurance System Philippines, local commercial banks, including
(GSIS) branches of foreign banks authorized by the
b. Social Security System (SSS) BSP to transact business with foreign currency
c. Philippine Health Insurance Corporation depository system units and other depository
(PHIC) banks under the EFCDS – exempt from income
d. Local water districts (LWDs) [Sec. 27 (C), tax
NIRC]
Except net income from transactions specified
Government agencies or instrumentalities by the Secretary of Finance upon
General rule: The government is exempt from recommendation by the Monetary Board –
tax. subject to regular income tax payable by banks
Exception: When it chooses to tax itself. Foreign currency loans granted to residents
Nothing can prevent Congress from decreeing (other than offshore banking units in the
that even instrumentalities or agencies of the Philippines) – interest income subject to a final
government performing governmental tax of 10%
functions may be subject to tax. Where it is
done precisely to fulfill a constitutional mandate Income of nonresidents, individuals or
and national policy, no one can doubt its corporations, from transactions with depository
wisdom. [Mactan Cebu Airport v Marcos banks under the EFCDS – exempt from income
(1996)] tax
3. Foreign Currency Deposit Units Same for Domestic and Resident Foreign
[Sec. 27(D)(3), NIRC] Corporations.
Income derived by a depository bank under the Similar treatment to OBUs.

expanded foreign currency deposit system
Summary of Tax Bases and Rates of Corporations

Type of Corporation The higher between RCIT or MCIT rates
Regular MCIT (Gross Income)
Rate Effectivity Rate Effectivity
Domestic Corporation:
Domestic Corporations, in general 25% of taxable July 1, 2020 1% July 1, 2020 –

income June 30, 2023
(within and without)
July 1, 2023
2%
For corporations with net taxable 20% of taxable July 1, 2020 1% July 1, 2020 –
income not exceeding Five Million income June 30, 2023
Page 402 of 494

Pesos (P5,000,000) AND total

assets not exceeding One Hundred July 1, 2023
Million (P100,000,000), excluding
the land on which the particular 2%
business entity's office, plant and
equipment are situated
Proprietary Educational Institutions 1% of taxable July 1, 2020 – Not Applicable

and Hospitals income June 30, 2023
July 1, 2023
10% of taxable
income
Government Owned or Controlled 20% / 25% of July 1, 2020 Not Applicable

Corporations taxable income
Exempt if SSS,
GSIS, HDMF,
PHIC, local water
districts, [Sec.
27(C), NIRC]
Foreign Corporation [on taxable income (e.g., net or gross income, as applicable) derived from all sources
within the Philippines]:
Resident Foreign Corporation 25% of taxable July 1, 2021 1% July 1, 2020 –

income June 30, 2023
(within)
July 1, 2023
2%
International Carriers 2.5% of Gross

Philippine Billings
Offshore Banking Unit (OBUs) 25% taxable Upon the 1% Upon the
(Note: OBUs shall now be taxed as income effectivity of effectivity of
resident foreign corporation upon the CREATE the CREATE
effectivity of the CREATE) (Apr. 11, 2022) until June 30,
2023
2% July 1, 2023
Regional Operating Headquarters 25% taxable Jan. 1, 1% Jan. 1, 2022

(ROHQ) income 2022
Page 403 of 494

– June 30,
2023
2% July 1, 2023
Offshore Gaming Licensees 25% taxable Oct. 9, 2021 1% Oct. 9, 2021

income – June 30,
2023
2% July 1, 2023
Non-Resident Foreign 25% of gross Jan. 1, 2021 Not applicable

Corporation income
(within)
Non-Resident Cinematographic 25% of Jan. 1, 2021 Not applicable

Film Owners, Lessor or Distributor gross income from
all sources within
the Philippines
Non-Resident Owner or Lessors of 4.5% Jan. 1, 2021 Not applicable

Vessels Chartered by Philippine of gross rentals,
Nationals lease or charter
fees from leases or
charters to Filipino
citizens or
corporations
Non-Resident Owner or Lessors of 7.5% of gross Jan. 1, 2021 Not applicable

Aircraft, Machineries and Other rentals, charters or
Equipment other fees
Page 404 of 494

TAXATION 1 COMMERCIAL LAW
d. Exemptions from Tax on activities conducted for profit regardless of the
Corporations disposition made of such income, shall be
subject to tax imposed under the NIRC.
Tax exempt corporations [Sec. 30, NIRC]
a. Labor, agricultural or horticultural N.B. This means capital gains tax, tax on
organization – non-profit passive income, etc. applies to these otherwise
b. mutual savings bank or cooperative bank exempt organizations.
– non-stock, non-profit, operated for
mutual purposes Tax on Other Entities: General Partnerships,
c. Beneficiary society, order, or association – General Professional Partnerships, Co-
operating for the exclusive benefits of their ownerships, Joint Ventures, and Consortia
members; includes: fraternal organization
operating under the lodge system; or General Partnerships
mutual aid association or a nonstock Partnerships where all or part of their income is
corporation organized by employees derived from the conduct of trade or business;
providing life, sickness, accident, or other it is treated as a corporation [Sec. 22 (B),
benefits exclusively to the members NIRC].
d. Cemetery company – owned and
operated exclusively for the benefit of its General rule: The partnership is subject to the
members same rules and rates as corporations.
e. Non-stock corporation or association
organized and operated exclusively for Exceptions: A partner’s share in the
religious, charitable, scientific, athletic, or partnership’s distributable net income is
cultural purposes or for the rehabilitation of deemed actually or constructively received by
veterans, provided that no part of its the partners in the same taxable year [Sec. 73
income or asset belong to or inure to the (D), NIRC]. Consequently:
benefit of any individual a. such share will be subjected to dividend
f. Business league, chamber of commerce, tax (10%) whether actually distributed or
or board of trade – Non-profit; no part of not.
net income inures to the benefit of an b. there can never be an instance of
individual improperly accumulated taxable income;
g. Civic league or organization – Non-profit; note that RR 2-01 provides that IAET does
operating exclusively for the promotion of not apply to taxable partnerships.
social welfare
h. Non-stock and non-profit educational Distributable net income of the partnership is
institutions its taxable income less the normal corporate
i. Government educational institutions income tax (25%).
j. Organizations of a purely local character
whose income consists solely of A partner’s contribution to the general
assessment, duties and fees collected partnership fund is a capital investment and is
from their members to meet expenses; not taxable income of the partnership.
includes: farmers’ or other mutual typhoon
or fire insurance company, mutual ditch or General Professional Partnerships
irrigation company and mutual or Partnerships formed by persons for the sole
cooperative telephone company purpose of exercising their common
k. Farmers’, fruit growers’, and like profession, no part of the income of which is
association – whose primary function is to derived from engaging in any trade or
market the product of their members business. [Sec 22 (B), NIRC]
Notwithstanding the provisions in the A GPP as such shall not be subject to the
preceding paragraphs, the income of the income tax. It is not a taxable entity for income
foregoing organizations from (1) their tax purposes.
properties, real or personal, or from (2) their
Page 405 of 494
GPP is not a taxable entity belongs to different persons. [Art. 484, NCC] It
The GPP is deemed to be no more than a mere may be created by succession or donation.
mechanism or a flow-through entity in the
generation of income by, and the ultimate When Co-ownership is not subject to tax
mechanism distribution of such income to the When the co-ownership’s activities are limited
individual partners [Tan v. Commissioner, G.R. merely to the preservation of the co-owned
No. 109289 (1994)]. property and to the collection of the income
from the property. Each co-owner is taxed
But the partnership itself is required to file individually on his distributive share in the
income tax returns for the purpose of furnishing income of the co-ownership. [De Leon]
information as to the share in the gains or
profits which each partner shall include in his When Co-ownership is subject to tax
individual return [RR 2-98]. The following circumstances would render a
co-ownership subject to a corporate income
The share of an individual partner in the net tax:
profit of a general professional partnership is a. When a co-ownership is formed or
deemed to have been actually or constructively established voluntarily, or upon
received by the partner in the same taxable agreement of the parties;
year in which such partnership net income was b. When the individual co-owner reinvested
earned, and shall be taxed to them in their his share, and
individual capacities, whether actually c. When the inherited property remained
distributed or not, at the graduated income tax undivided for more than ten years, and no
ranging from 5% to 35%. attempt was ever made to divide to same
among the co-heirs, nor was the property
Because the principle of constructive receipt is under administration proceedings nor held
applied to undistributed profits of GPPs, the in trust, the property should be considered
actual distribution to the partners of such tax- as owned by an unregistered partnership.
paid profits in another year should no longer be [Valencia and Roxas]
liable to income tax. [MAMALATEO]
Automatically converted into an unregistered
A GPP may claim either the itemized partnership the moment the said common
deductions allowed under Section 34 of the properties and/or the incomes derived from
Code or in lieu thereof, it can opt to avail of the them are used as a common fund with intent to
OSD allowed to corporations in claiming the produce profits for the heirs in proportion to
deductions in an amount not exceeding forty their respective shares in the inheritance as
percent (40%) of its gross income. determined in a project partition either duly
executed in an extrajudicial settlement or
The distributable net income of the partnership approved by the court in the corresponding
may be determined by claiming either itemized testate or intestate proceeding. [Ona v. CIR,
deductions or OSD. The share in the net G.R. No. L-19342 (1972)]
income of the partnership, actually or
constructively received, shall be reported as Joint Ventures and Consortiums
taxable income of each partner. The partners To constitute a” joint venture,” certain factors
comprising the GPP can no longer claim further are essential. Each party to the venture must
deduction from their distributive share in the make a contribution, not necessarily of capital,
net income of the GPP and are not allowed to but by way of services, skill, knowledge,
avail of the 8% income tax rate option since material or money; profits must be shared
their distributive share from the GPP is already among the parties; there must be a joint
net of cost and expenses. [RR No. 08-2018] proprietary interest and right of mutual control
over the subject matter of the enterprise; and
Co-ownerships usually, there is single business transaction.
There is co-ownership whenever the
ownership of an undivided thing or right General rule: An unincorporated joint venture
Page 406 of 494

is taxed like a corporation. The share of the Every withholding agent required to deduct and
joint venture partners will no longer be taxable withhold taxes under Section 57 shall submit to
to them because they partake in the nature of the Commissioner an annual information return
inter-corporate dividends. containing the list of payees and income
payments, amount of taxes withheld from each
Exception: an unincorporated joint venture payee and such other pertinent information as
formed for the purpose of undertaking a may be required by the Commissioner [Sec. 58
construction project or engaging in petroleum (C), NIRC].
operations pursuant to the consortium
agreement with the Philippine Government is Every employer required to deduct and
not subject to the corporate income tax. Only withhold the taxes in respect of the wages of
the joint venture partners will be taxed on their his employees shall, on or before January 31st
respective shares in the income of the joint of the succeeding year, submit to the
ventures. [Sec. 22 (B), NIRC] Commissioner an annual information return
containing a list of employees, the total amount
Two elements necessary to exempt a joint of compensation income of each employee, the
venture or consortium from tax total amount of taxes withheld therefrom during
a. The joint venture must be an unincorporated the year, accompanied by copies of the
entity formed by two or more persons statement referred to in the preceding
b. The joint venture was formed for the paragraph, and such other information as may
purpose of undertaking a construction be deemed necessary [Sec. 83 (B), NIRC].
project, or engaging in the petroleum and
other energy operations with operating a. Individual Return
contract with the government.
1. Who are required to file; Exceptions
e. Period Within Which to File Income [Sec. 51(A), NIRC]
Tax Return of Individuals and
Corporations General Rule: The following are required to file
income tax return:
Tax Return a. Resident citizen
Tax return refers to a formal report prepared by b. Non-resident citizen, on income from
the taxpayer or his agent in a prescribed form sources within the Philippines
showing an enumeration of taxable amounts c. Resident alien, on income from sources
and description of taxable transactions, within the Philippines
allowable deductions, amount of tax and tax d. Non-resident alien engaged in trade or
payable to the government. business or in the exercise of profession in
the Philippines, on income from sources
Examples of tax returns are: within the Philippines
a. BIR Form Nos. 1700 and 1701 – Annual
Income Tax Returns for Individual Exceptions: The following shall not be
b. BIR Form No. 1702 – Annual Income Tax required to file income tax return:
Return for Corporations and Partnerships a. Individuals whose gross income does not
c. BIR Form No. 1800 – Donor’s Tax Return exceed P250,000 except citizen and alien
d. BIR Form No. 1801 – Estate Tax Return individuals engaged in business or
practice of profession within the
Information Return Philippines who shall file income tax
Any individual not required to file an income tax returns regardless of the amount of gross
return may nevertheless be required to file an income.
information return pursuant to rules and b. Individuals with respect to pure
regulations prescribed by the Secretary of compensation income from sources within
Finance, upon recommendation of the the Philippines, the income tax on which
Commissioner. [Sec. 51(A)(3), NIRC] has been withheld; except when such
compensation has been derived from
Page 407 of 494

more than one employer. by the BIR, shall be tantamount to the
c. Individuals whose sole income has been substituted filing of income tax returns by the
subjected to final withholding tax employee [Sec. 51-A, NIRC].
(pursuant to Sec. 57 (A)).
d. Minimum wage earner (as defined in Sec. 3. When and Where to File
22 (HH))
e. Individuals who are exempt from income Income tax return of an individual who is not on
tax pursuant to the provisions of the Tax a substituted basis shall be filed on or before
Code and other laws. April 15 of each year covering income of the
preceding taxable year. [Sec. 51 (C)(1), NIRC]
Special Provisions
Married individuals (whether citizens, resident Individuals subject to capital gains tax [Sec.
or nonresident aliens) who do not derive 51 (C)(2), NIRC]:
income purely from compensation, shall file a. Sale of shares not traded thru a local stock
only one consolidated return to cover the exchange – file a return within 30 days
income of both spouses for the taxable year, from the transaction, and a final
but where it is impracticable for the spouses to consolidated return on or before April 15
file one return, each spouse may file a separate of each year covering all stock
return of income but the returns so filed shall transactions of the preceding taxable year
be consolidated by the BIR for verification [Sec. b. Sale of real property – file a return within
51 (D), NIRC]. 30 days from each sale
The income of unmarried minors is a tax liability Individuals deriving self-employment

of the minor but where such income is derived income (as sole source of income or mixed) –
from property received from a living parent, the must file quarterly return of summary
income shall be included in the return of the declaration of gross income and deductions,
parent except (a) when the donor’s tax has and a final or adjustment [Sec. 74 (A), NIRC].
been paid on such property, or (b) when the
transfer of such property is exempt from the Due Date for Filing
donor’s tax [Sec. 51 (E), NIRC]. Period
Return
Q1 Return May 15 of the same year
If the taxpayer is unable to make his return, August 15 of the same
such as when he suffers from disability, the Q2 Return
year
return may be made by his duly authorized November 15 of the same
agent or representative or by the guardian or Q3 Return
year
other person charged with the care of the April 15 of the following
taxpayer or his property; the principal and his Annual Return
year
representative or guardian assuming
responsibility for penalties for erroneous, false Self-employment income consists of earnings
or fraudulent returns [Sec. 51 (F), NIRC]. derived by the individual from the practice of
profession or conduct of trade or business, as
2. Substituted Filing a sole proprietor or as a member in a general
professional partnership. [Sec. 74 (A), NIRC]
Applicable to individual taxpayers:
a. receiving purely compensation income, Filing of these returns shall be in lieu of filing of
regardless of amount a declaration of estimated income under Sec.
b. from only one employer in the Philippines 74, primarily for the reason that the procedure
for the calendar year, and prescribed in Sec. 74 may not reasonably
c. the income tax of which has been withheld approximate the correct amount of tax to be
correctly by the employer paid. [DE LEON citing RR No. 2-93]
The certificate of withholding filed by their Where to File

respective employers, duly stamped ‘received’ Except in cases where the CIR otherwise
Page 408 of 494
permits, the return shall be filed with an authorized agent bank, Revenue District
authorized agent bank, Revenue District Officer, Collection Agent or duly authorized
Officer, Collection Agent or duly authorized Treasurer of the city or municipality having
Treasurer of the city or municipality in which jurisdiction over the place where the
such person has his legal residence or corporation’s principal office is located and
principal place of business in the Philippines, where its books of accounts and other data are
or if there be no legal residence or place of kept; otherwise, the returns shall be filed and
business in the Philippines, with the Office of the tax paid thereon with the Office of the
the Commissioner [Sec. 51 (B), NIRC]. Commissioner of Internal Revenue [Sec. 77
(A), NIRC].
b. Corporate Returns
Payment of Income Tax
1. Quarterly Income Tax General rule: The total amount of tax imposed
by this Title (Tax on Income) shall be paid by
All corporations subject to income tax shall the person subject thereto at the time the return
render quarterly income tax returns and a final is filed.
or adjustment return, except foreign
corporations not engaged in trade or business Exception: When the tax due is in excess of
in the Philippines. P2,000, the taxpayer other than a corporation
may elect to pay the tax in 2 equal installments:
The return shall be filed by the President, Vice- the first installment paid at the time the return
President or other principal officer, and shall be is filed and the second installment, on or before
sworn to by such officer and by the treasurer or October 15 following the close of the calendar
assistant treasurer. year. [Sec. 56 (A)(2), NIRC]
2. When and Where to File Return of Corporations Contemplating

Dissolution or Reorganization
Domestic corporations and resident foreign Within 30 days after the adoption of the plan for
corporations shall file quarterly corporate dissolution or reorganization (including
income tax returns within 60 days after the end corporations notified of possible involuntary
of the calendar or fiscal quarter used, and dissolution by the SEC), render a correct return
annual corporate income tax return on or to the CIR, verified under oath, setting forth the
before the 15th day of the fourth month terms of such plan and such other information
following the close of the calendar year or fiscal required by rules and regulations. Prior to the
year, as the case may be [Sec. 77]. issuance by the SEC of the Certificate of
Dissolution or Reorganization, the corporation
The filing of the tax returns by a corporation shall secure a certificate of tax clearance from
using the calendar year: the BIR which shall be submitted to the SEC.
[Sec. 52 (C), NIRC]
Period Due Date for Filing Return
Period Due Date for Filing c. Return on Capital Gains Realized
Return from Sale of Shares of Stock and
Q1 Return May 30 of the same year Real Estate
Q2 Return August 29 of the same
year Return on Capital Gains Realized from Sale of
Q3 Return November 29 of the same Shares of Stock not Traded in the Local Stock
year Exchange – file a return within 30 days from the
Annual Return April 15 of the following transaction, and a final consolidated return on
year or before the 15th day of the fourth month
following the close of the taxable year [Sec. 52
Where to File (D), NIRC]
Except in cases where the CIR otherwise
permits, the return shall be filed with an
Page 409 of 494
d. Failure to File Returns the payee is the taxpayer, the person on whom
There shall be imposed and collected as part the tax is imposed, while the payor, a separate
of the tax: entity, acts no more than an agent of the
1. A surcharge of twenty five percent (25%) for government for the collection of the tax in order
each of the following violations: to ensure its payment.
(a) Failure to file any return and pay the
amount of tax or installment due on or The duty to withhold is different from the duty
before the due dates; to pay income tax. The revenue officers
(b) Filing a return with a person or office generally disallow the expenses claimed as
other than those with whom it is deduction from gross income, if no withholding
required to be filed; of tax as required by law or the regulations was
(c) Failure to pay the full or part of the withheld and remitted to the BIR within the
amount of tax shown on the return, or prescribed dates.
the full amount of tax due for which no
return is required to be filed, on or In addition, the withholding tax that should
before the due date; have been withheld and remitted to the BIR as
(d) Failure to pay the deficiency tax well as the penalties for non-, late or erroneous
within the time prescribed for its payment of the withholding tax such as
payment in the notice of Assessment surcharges and deficiency interest are
(Delinquency Surcharge) assessed by the BIR. [MAMALATEO]
2. A surcharge of fifty percent (50%) of the tax b. Creditable vs. Withholding Taxes
or of the deficiency tax, in case any payment
has been made on the basis of such return
Creditable Withholding Tax
before the discovery of the falsity or fraud, for Under the creditable withholding tax system,
each of the following violations:
taxes withheld on certain income payments are
(a) Willful neglect to file the return within the
intended to equal or at least approximate the
period prescribed by the Code or by rules
tax due of the payee on said income.
and regulations; or
(b) In case a false or fraudulent return is
The income recipient is still required to file an
willfully made.
income tax return, to report the income and/or
pay the difference between the tax withheld
3. Interest at the rate of double the legal
and the tax due on the income. Taxes withheld
interest rate for loans or forbearance of any
on income payments covered by the expanded
money in the absence of an express stipulation
withholding tax and compensation income are
as set by the Bangko Sentral ng Pilipinas from
creditable in nature.
the date prescribed for payment until the
amount is fully paid. [Sec. 249(A), NIRC]
Final Withholding Tax
Note: the current interest rate imposed by the The amount of income tax withheld by the
BIR is 12% or double the legal interest rate of withholding agent is constituted as a full and
6% as prescribed by the BSP. final payment of the income tax due from the
payee on the said income.
4. Compromise penalty.
The liability for payment of the tax rests
primarily on the payor as withholding agent.
10. Withholding Taxes Thus, in case of his failure to withhold the tax
or in case of under withholding, the deficiency
a. Concept tax shall be collected from the
payor/withholding agent. The payee is not
Withholding tax is a method of collecting required to file an income tax return for the
income tax in advance from the taxable income particular income.
of the recipient of income.
In the operation of the withholding tax system,
Page 410 of 494
Expanded Withholding Tax
1. Withholding Tax at Source [Sec 57,

NIRC]
Withholding of final tax of certain income –
Subject to rules and regulations the Secretary
of Finance may promulgate, upon the
recommendation of the CIR, the tax imposed
or prescribed by the NIRC on certain specified
items of income shall be withheld by payor-
corporation and/or person.
N.B. Sec. 57 contains an extensive list of taxes.

These items of income include taxes on certain
passive incomes (interest, dividends), capital
gains tax (shares not traded, real property),
branch profit remittance tax, and certain
payments to nonresident aliens /foreign
corporations.]
2. Withholding of creditable tax at

source
The Secretary of Finance may, upon the
recommendation of the CIR, require the
withholding of a tax on the items of income
payable to natural or juridical persons, residing
in the Philippines, by payor-
corporation/persons as provided for by law, at
the rate of not less than 1% but not more than
32%, which shall be credited against the
income tax liability of the taxpayer for the
taxable year. Provided, That, beginning
January 1, 2019, the rate of withholding shall
not be less than one percent (1%) but not more
than fifteen percent (15%) of the income
Page 411 of 494

TAXATION 2
TAXATION LAW

of service in the Philippines, or importation
of good
I. NATIONAL 2. The subject matter must be taxable goods
or properties or services
TAXATION 3. The sale must be made by a taxable
person in the course of trade or business
or in the furtherance of one’s profession.
A. Value – Added Tax (VAT)
Meaning of “in the course of trade or
1. Concept and Elements of VATable business” (Rule of Regularity)
Transactions
The regular conduct or pursuit of a commercial
a. Tax on value added or economic activity, including transactions
incidental thereto, by any person regardless of
It is imposed only on the value added of a whether or not the person engaged therein is a
taxpayer. “Value added” is the difference nonstock, nonprofit private organization
between total sales of the taxpayer and his total (irrespective of the disposition of its net income
purchases for the same period subject also to and whether or not it sells exclusively to
VAT. [MAMALATEO] members or their guests), or government
entity. [Sec. 105, NIRC; Section 4.105-3, RR
b. Sales Tax 16-2005]
The taxpayer (seller) determines his tax liability Exceptions:

by computing the tax on the gross selling price 1. Services rendered by non-resident foreign
on sale of goods or properties or gross receipts persons shall be considered as being
on sale of services (output tax), and rendered in the course of trade or
subtracting or crediting the VAT on the business, even if the performance of
purchase (or importation) of goods or services services is not regular. [Section 4.105-3,
(input tax) against the tax due on his own sale. RR 16-2005]
2. Importation are subject to VAT whether or
VAT rate: 12% standard rate; 0% on certain not made in the course of trade or business
sales or transactions [Sec. 4.105-1, RR 16-2005]
3. Any business where the gross sales or
VAT base: gross selling price or gross receipts receipts do not exceed P100,000 during
the 12-month period shall be considered
c. Tax on Consumption principally for subsistence or livelihood and
not in the course of trade or business.
VAT is a consumption tax imposed at every Thus, they are exempt from VAT and
stage of the distribution process on (i) the sale, percentage tax. [RMC 7-2014 in relation to
barter, exchange, or lease of goods or RR 7-2012]
properties, (ii) rendition of services in the
course of trade or business, and (iii) the 2. Impact and Incidence of Tax
importation of goods, whether or not such
imported goods are for use in business. [Sec.
4.105-2, RR 16-2005] Impact Incidence
Refers to the statutory Refers to the buyer /

d. Elements of a Vat-Taxable taxpayer (i.e., the final consumer, the
Transaction in General seller/importer), the one who ultimately
1. There must be a sale, barter, exchange, or one who collects tax
lease of goods or properties, performance
Page 413 of 494
Impact Incidence 4. Imposition of VAT on Transfer of

Goods by Tax Exempt Persons
and pays to the bears the burden of
government taxation Transfer of Goods by Tax-Exempt Persons
(Technical Importation):
a. If the importer is tax-exempt, the
3. Destination Principle and Cross- subsequent purchasers, transferees or
Border Doctrine recipients who are non-exempt persons
shall be considered as importers who shall
General rule: The VAT system uses the be liable for VAT due on such importation.
destination principle as a basis for the b. The tax due on such importation shall
jurisdictional reach of the tax. Goods and constitute a lien on the goods superior to all
services are taxed only in the country where charges or liens on the goods, irrespective
they are consumed. Thus, exports are zero- of the possessor thereof. [Sec. 107(B),
rated, while imports are taxed. [CIR v. NIRC]
American Express International, G.R. No.
152609 (2005)] 5. Transactions deemed sale
Exception: Zero-rated services under Sec. Rate: 12% VAT
108(b)(1)[1] and (2)
Basis: Market value of the goods deemed sold
Requisites for the exception to apply: as of the time of the occurrence of the
1. The service is performed in the Philippines; transactions
2. The service falls under any of the
categories provided in Section 108(b) of However, in case of retirement or cessation of
the Tax Code; and business, the tax base shall be the acquisition
cost or the current market price of the goods or
Note: The recipient of such services must properties, whichever is lower.
be doing business outside the Philippines.
[CIR v. Burmeister, G.R. No. 153205 In the case of a sale where the gross selling
(2007)] price is unreasonably lower than the FMV, the
actual market value shall be the tax base. The
3. It is paid for in acceptable foreign currency gross selling price is unreasonably lower than
that is accounted for in accordance with the the actual market value if it is lower by more
regulations of the BSP. [CIR v. American than 30% of the actual market value of the
Express International, G.R. No. 152609 same goods of the same quantity and quality
(2005)] sold in the immediate locality on or nearest the
date of sale. [Sec. 4.106-7, RR 16-2005]
In a zero-rated service, the place where the
service is rendered determines the The following are transactions deemed sale:
jurisdiction to impose the VAT. The place of [Sec. 106(B), NIRC]
payment is immaterial; much less is the place a. Transfer, use or consumption not in the
where the output of the service will be further course of business of goods or properties
or ultimately used. [ibid.] originally intended for sale or for use in the
course of business [Sec. 4.106-7(a)(1), RR
16-2005]
Example: when a VAT-registered person

withdraws goods from his business for his
personal use
Page 414 of 494

Note: Transmission of property to a trustee, 6. Zero-rated and Effectively Zero-
if such property is one for sale, lease or use rated sales of goods or properties,
in the ordinary course of trade or business and services
and the transfer constitutes a completed
gift, is subject to VAT as a deemed sale
Rate: 0% VAT
transaction. [Sec. 4.106-3, RR 16-2005]
Concept: A zero-rated sale of goods,
b. Distribution or transfer to:
properties, or services by a VAT-registered
person is a taxable transaction for VAT
(i) shareholders or investors as share in
purposes but shall not result in any output
the profits of the VAT-registered tax. However, the input tax on purchases of
person; or
goods, properties or services, related to such
(ii) creditors in payment of debt. [Sec. zero-rated sale, shall be available as tax credit
4.106-7(a)(2), RR 16-2005]
or refund.
c. Consignment of goods if actual sale is not
The following transactions are subject to VAT
made within 60 days following the date at 0%
such goods were consigned
7) Export sales
8) Sales of goods or property to persons or
Note: Consigned goods returned by the
entities who are tax-exempt (Effectively
consignee within the 60-day period are not Zero-Rated Sales)
deemed sold. [Sec. 4.106-7(a)(3), RR 16-
9) Zero-rated sale of services
2005] 10) Sales to offshore gaming licensees subject
to gaming tax under Section 125-A of NIRC
d. Retirement from or cessation of business
[RA No. 11590]
with respect to goods on hand
Provided that the 0% VAT shall only apply
This covers ALL goods on hand, whether if the OGLs are paying the 5% gaming tax
capital goods, stock-in-trade, supplies or
[RR 20-2021]
materials, as of the date of such retirement
or cessation, whether or not the business
Provided further, that in cases wherein the
is continued by the new owner or goods supplied are used in non-gaming
successor. [Sec. 4.106-7(a)(3), RR 16-
operations, the 0% shall NOT apply.
2005] [RR 20-2021]
Examples: Export Sales [Sec. 106(A)(2)(a), NIRC]
(i) change of ownership of the business
1. The (i) sale and actual shipment of goods
(e.g., when a sole proprietorship from the Philippines to a foreign country
incorporates, or the sole proprietor
AND (ii) paid for in acceptable foreign
sells his entire business) currency or its equivalent in goods or
(ii) dissolution of a partnership and services, AND (iii) accounted for in
creation of a new partnership which
accordance with the rules and regulations
takes over the business of the BSP
2. The (i) sale of raw materials or packaging
materials to a nonresident buyer (ii) for
delivery to a resident local export-oriented
enterprise (iii) to be used in manufacturing,
processing, packing or repacking in the
Philippines of the said buyer's goods AND
(iv) paid for in acceptable foreign currency
Page 415 of 494

AND (v) accounted for in accordance with manufactured, assembled or repacked
the rules and regulations of the BSP products, whether paid for in foreign
3. Sale of raw materials or packaging currency or not [Sec. 4.106-5(a)(4), RR
materials to export-oriented enterprise 16-2005]
whose export sales exceed 70% of total
annual production Notes:
a. Export sales of registered export
Export-oriented enterprise – any traders shall include commission
enterprise whose export sales exceed 70% income.
of the total annual production of the b. The exportation of goods on
preceding taxable year [Sec. 4.106-5(a)(3), consignment shall not be deemed
RR 16-2005] export sales until the export products
consigned are in fact sold by the
4. Those considered export sales under the consignee.
Omnibus Investment Code of 1987, and c. Sales by a VAT-registered supplier to a
other special laws (e.g. Bases Conversion manufacturer/producer whose
& Development Act of 1992) products are 100% exported are
considered export sales. A certification
Considered Export Sales under the to this effect must be issued by the
Omnibus Investment Code (EO 226): Board of Investment (BOI) which shall
a. Philippine port F.O.B. value be good for 1 year unless subsequently
determined from invoices, bills of re-issued [Sec. 4.106-5(a)(4), RR 16-
lading, inward letters of credit, landing 2005]
certificates, and other commercial
documents, of export products 5. The sale of goods, supplies, equipment
exported directly by a registered export and fuel to persons engaged in
producer; OR international shipping or international air
b. Net selling price of export products sold transport operations: Provided, That the
by a registered export producer to goods, supplies, equipment and fuel shall
another export producer, or to an be used exclusively for international
export trader that subsequently exports shipping or air transport operations [as
the same (only when actually exported amended by Train Law; Sec. 2, RR 13-
by the latter) as evidenced by landing 2018]
certificates. a. Limited to goods, supplies,
equipment and fuel to be used in
Constructive Exports (without actual the transport of goods and
exportation): passengers from a port in the
a. Sales to bonded manufacturing Philippines directly to a foreign
warehouses of export-oriented port, or vice versa without docking
manufacturers or stopping at any other port in the
b. Sales to export processing zones [R.A. Philippines unless it is for
7916, R.A. 7922, R.A. 7903 and other unloading passengers and/or
similar export zones]; cargoes originating abroad, or to
c. Sales to registered export traders load passengers and/or cargoes
operating bonded trading warehouses bound for abroad
supplying raw materials in the b. If any portion of such fuel, goods,
manufacture of export products; supplies or equipment is used for
d. Sales to diplomatic missions and other purposes other than that
agencies and/or instrumentalities mentioned, such portion shall be
granted tax immunities, of locally subject to 12% VAT [Sec. 4.106-5,
Page 416 of 494

RR 16-2005 as amended by RR services directly and exclusively used
13-2018] in the registered project or activity.
Note: items (2), (3), and (4) above shall be
subject to the 12% VAT and no longer be “Customs Territory” shall mean the national
considered export sales subject to 0% VAT territory of the Philippines outside of the
rate upon satisfaction of the following proclaimed boundaries of the ECOZONES
conditions: except those areas specifically declared by
1. The successful establishment and other laws and/or presidential
implementation of an enhanced VAT proclamations to have the status of special
refund system that grants refunds of economic zones and/or free ports. [Sec.
creditable input tax within 90 days from 2(g), Rule 1, Part I, RA 7916-IRR]
the filing of the VAT refund application
with the Bureau; and ii) Revenue Regulations (RR) No. 21-2021:
2. All pending VAT refund claims as of "direct and exclusive use in the registered
December 31, 2017 shall be fully paid project or activity" refers to such "raw
in cash by December 31, 2019. materials, supplies, equipment, goods.
packaging materials, services,
The Department of Finance shall establish a including provision of basic
VAT refund center in the BIR and in the BOC infrastructure, utilities, and
that will handle the processing and granting of maintenance, repair and overhaul of
cash refunds of creditable input tax. [Sec. equipment, and other expenditures"
106(A), NIRC] that must be "directly attributable to the
registered project or activity without
Effectively Zero-Rated Sales [Sec. which the registered project or activity
106(A)(2)(b), NIRC] cannot be carried out"
This refers to (i) the local sale of goods and
properties (ii) by a VAT-registered person (iii) iii) RMC No. 24-2022: expenses for
to a person or entity who was granted direct administrative purposes are excluded from
and indirect tax exemption under special laws the definition and that registered export
or international agreement (e.g., PEZA, Asian enterprises should adopt a method for
Development Bank, International Rice allocating local purchases between those
Research Institute). [MAMALATEO; RR 4- used in the registered export enterprise's
2007] registered project or activity and for
administrative purposes.
ECOZONES
If the local purchases are used in both the
Ecozones shall be managed and operated by registered export enterprise's registered
PEZA as a separate customs territory [Sec. 8, project or activity and for administrative
RA 7916 or the “Special Economic Zone Act of purposes and the proper allocation cannot
1995”]. be made, the local purchase will be subject
to the 12% VAT.
Tax Treatment of Sales to and by PEZA-
registered Enterprises [RMC 21-21; RMC Zero Rated Sale of Services [Sec. 108 (B),
24-22]: NIRC]
i) Incentives to Registered Enterprises under
the provisions of CREATE (Rationalization The following services performed in the
of Incentives) include Value-added tax Philippines by a VAT-registered person shall
exemption on importation and VAT zero- be subject to 0% VAT:
rating on local purchases of goods and i) Processing, manufacturing or repacking
goods for other persons doing business
Page 417 of 494

outside the Philippines which goods are Note: Gross receipts of international air or
subsequently exported, where the services shipping carriers doing business in the
are paid for in acceptable foreign currency Philippines derived from transport of
and accounted for in accordance with the passengers and cargo from the Philippines
rules and regulations of the BSP; to another country shall be subject to the
3% percentage tax. [Sec. 118, NIRC]
ii) Services other than those mentioned in the
preceding paragraph, rendered to a person vii) Sale of power or fuel generated through
engaged in business conducted outside the renewable sources of energy such as, but
Philippines or to a nonresident person not not limited to, biomass, solar, wind,
engaged in business who is outside the hydropower, geothermal, ocean energy,
Philippines when the services are and other emerging energy sources using
performed, the consideration for which is technologies such as fuel cells and
paid for in acceptable foreign currency and hydrogen fuels.
accounted for in accordance with the rules
and regulations of the BSP; viii) Services rendered to offshore gaming
licensees subject to gaming tax under
Note: The 0% VAT on services performed in Section 125-A of this Code by service
the Philippines is an exception to the providers, including accredited service
destination principle, which states that providers as defined in Section 27 (G) of
goods and services are taxed only in the this Code [RA 11590]
country where they are consumed. [CIR v.
American Express International, G.R. No. Provided that the 0% VAT shall only apply
152609 (2005)] if the OGLs are paying the 5% gaming tax
[RR 20-2021]
iii) Services rendered to persons or entities
whose exemption under special laws or Provided further, that in cases wherein the
international agreements to which the goods supplied are used in non-gaming
Philippines is a signatory effectively operations, the 0% shall NOT apply.
subjects the supply of such services to 0% [RR 20-2021]
rate;
Note: Items (1) and (5) above shall be subject
iv) Services rendered to persons engaged in to the 12% VAT and no longer be considered
international shipping or international air export sales subject to 0% VAT rate upon
transport operations, including leases of satisfaction of the following conditions:
property for use thereof: Provided, That 1. The successful establishment and
these services shall be exclusively for implementation of an enhanced VAT
international shipping or air transport refund system that grants refunds of
operations [as amended by TRAIN Law]; creditable input tax within 90 days from the
filing of the VAT refund application with the
v) Services performed by subcontractors Bureau; and
and/or contractors in processing, 2. All pending VAT refund claims as of
converting, or manufacturing goods for an December 31, 2017 shall be fully paid in
enterprise whose export sales exceed 70% cash by December 31, 2019. [Sec. 108(B),
of total annual production; NIRC]
vi) Transport of passengers and cargo by

domestic air or sea vessels from the
Philippines to a foreign country [as
amended by TRAIN Law]; and
Page 418 of 494

Difference between Zero-rated and VAT- Note: The VAT-registered person may elect
exempt that the exemption not apply to its sale of goods
or properties or services; provided that the
election made shall be irrevocable for a period
Zero-rated VAT-exempt
of three (3) years from the quarter the election
It is a taxable Not subject to output was made [Sec. 4.109-2, RR 16-2005 as
transaction and result tax amended by RR 13-2018].
in an output tax at
zero-percent Exempt Transactions
The following transactions are exempt from

The input VAT The seller is not VAT: [Sec. 109, NIRC]
attributable to zero- entitled to any input 1. Sale or importation of agricultural and
rated sales may be tax on his purchases marine food products in their original
allowed as tax credits despite the issuance state, livestock and poultry of a kind
or refund. of a VAT invoice or generally used as, or yielding or producing
receipt. foods for human consumption, and
breeding stock and genetic materials
therefor;
Persons engaged in VAT-exempt persons • Products in their original state remain
zero-rated shall register as non- as such even if they have undergone
transactions are VAT taxpayers. Some the simple processes of preparation or
required to register as VAT exempt persons preservation for the market, such as
VAT taxpayers may opt to register as freezing, drying, salting, broiling,
a VAT taxpayer, and roasting, smoking or stripping,
then be subject to including those using advanced
VAT. Eg. Gross technological means of packaging,
annual sale of goods, such as shrink wrapping in plastics,
properties, or services vacuum packing, tetra-pack, and other
that do not exceed similar packaging methods.
PhP3Million (Sec. 109 • Polished and/or husked rice, corn grits,
CC). raw cane sugar and molasses, ordinary
salt, AND COPRA shall be considered
in their original state
7. Value-added Tax-exempt • Livestock or poultry do not include
Transactions fighting cocks, race horses, zoo
animals and other animals generally
VAT-exempt transactions refer to the sale of considered as pets. [Sec. 4.109-
goods or properties and/or services and the 1(B)(1)(a), RR 16-2005]
use or lease of properties that is NOT subject 2. Sale or importation of fertilizers, seeds,
to VAT (output tax) and the seller is not allowed seedlings and fingerlings, fish, prawn,
any tax credit of VAT (input tax) on purchases. livestock and poultry feeds including
[Sec. 4.109-1(A), RR 16-2005] ingredients, whether locally produced or
imported, used in the manufacture of
The person making the exempt sale of goods, finished feeds (except specialty feeds for
properties or services shall not bill any output race horses, fighting cocks, aquarium fish,
tax to his customers. [Sec. 4.109-1(A), RR 16- zoo animals, and other animals generally
2005] considered as pets);
3. Importation of personal and household
effects belonging to (i) Philippine residents
Page 419 of 494

returning from abroad and (ii) non-resident 7. Medical, dental, hospital and veterinary
citizens coming to resettle in the services, except those rendered by
Philippines; provided, that such goods are professionals;
also exempt from customs duties under the a. Laboratory services are exempted. If
Tariff and Customs Code of the the hospital or clinic operates a
Philippines; pharmacy or drugstore, the sale of
4. Importation of professional instruments drugs and medicine is subject to VAT.
and implements, tools of trade, occupation [Sec. 4.109-1(B)(1)(g), RR 16-2005]
or employment, wearing apparel, domestic b. Note: R.A. 9337 removed the VAT-
animals, and personal household effects: exemption previously granted to
a. belonging to persons coming to doctors and lawyers.
settle in the Philippines, or Filipinos 8. Educational services (i) rendered by
or their families and descendants private educational institutions, duly
who are now residents or citizens accredited by DepEd, CHED, TESDA, and
of other countries (i.e., overseas (ii) those rendered by government
Filipinos educational institutions;
b. in quantities and of the class 9. Services rendered by individuals pursuant
suitable to the profession, rank or to an employer-employee relationship;
position of the persons importing 10. Services rendered by regional or area
said items headquarters established in the Philippines
c. for their own use and not for barter by multinational corporations which act as
or sale, supervisory, communications and
d. accompanying such persons, or coordinating centers for their affiliates,
arriving within a reasonable time subsidiaries or branches in the Asia-Pacific
[as amended by TRAIN Law] Region and do not earn or derive income
from the Philippines;
Note: The Bureau of Customs may, upon 11. Transactions which are exempt under
production of satisfactory evidence that international agreements to which the
such persons are actually coming to settle Philippines is a signatory or under special
in the Philippines and that the goods are laws, except those under PD No. 529
brought from their former place of abode, (Petroleum Exploration Concessionaires
exempt such goods from payment of duties under the Petroleum Act of 1949);
and taxes [as amended by TRAIN Law]; 12. Sales by agricultural cooperatives duly
registered with the Cooperative
Exception: Vehicles, vessels, aircrafts, Development Authority (CDA) to their
machineries, and other goods for use in members, as well as sale of their produce,
manufacturing shall be subject to duties, whether it is original state or processed
taxes and other charges. form, to non-members; their importation of
direct farm inputs, machineries and
5. Services subject to percentage tax; (see equipment, including spare parts thereof,
Percentage Tax, infra) to be used directly and exclusively in the
6. Services by agricultural contract growers production and/or processing of their
and milling for others of palay into rice, corn produce;
into grits, and sugar cane into raw sugar; a. Sale by agricultural cooperatives to
1) Agricultural contract growers refer to non-members are exempted from VAT
those producing for others poultry, if the producer is the cooperative itself.
livestock or other agricultural and If not (e.g., trader), then only those
marine food products in their original sales to its members shall be
state. [Sec. 4.109-1(B)(1)(f), RR 16- exempted from VAT. [RR 4-2007]
2005]
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13. Gross receipts from lending activities by under RA 7279, and other related
credit or multi-purpose cooperatives duly laws, such as RA 7835 and RA
registered with the CDA; 8763, wherein the price ceiling per
14. Sales by non-agricultural, non-electric and unit is P480,000 for a horizontal
non-credit cooperatives duly registered socialized housing with a minimum
and in good standing with the CDA; floor area of 24sq.m, and P700,000
Provided, that the share capital (if within NCR and nearby areas) or
contribution of each member does not P600,000 (in other areas) for
exceed P15,000 and regardless of the socialized vertical/condominium
aggregate capital and net surplus ratably projects with a minimum floor area
distributed among the members; of 22sq.m. [HUDCC Resolution
a. However, their importation of Nos. 1 and 2, series of 2018]
machineries and equipment, including • Socialized housing refers to
spare parts thereof, to be used by them housing programs and projects
are subject to VAT. [Sec. 4.109- covering houses and lots or
1(B)(1)(n), RR 16-2005] home lots only undertaken by
15. Export sales by persons who are not VAT- the Government or the private
registered; sector for the underprivileged
16. Sale of real properties as follows: and homeless citizens which
a. Sale of real properties NOT shall include sites and services
primarily held for sale to customers development, long-term
or held for lease in the ordinary financing, liberated terms on
course of trade or business. interest payments, and such
b. Sale of real properties utilized for other benefits. [RR 13-2018]
low-cost housing as defined by d. Sale of residential lot valued at
R.A. 7279 (Urban Development P1.5M and below, or house & lot
and Housing Act of 1992) and other and other residential dwellings
related laws (e.g., R.A. 7835, R.A. valued at P2.5M and below, as
8763; adjusted in 2011 using the 2010
• Low-cost housing refers to Consumer Price Index values.
housing projects intended for a. If two or more adjacent
homeless low-income family residential lots are sold or
beneficiaries, undertaken by disposed of in favor of one
the Government or private buyer (even if covered by
developers, which may either separate titles or tax
be a subdivision or a declarations or separate
condominium registered and deeds of conveyance), for
licensed by the Housing and the purpose of utilizing the
Land Use Regulatory Board / lots as one residential lot,
Housing (HLURB) under BP the sale shall be exempt
220, PD 957 or any other from VAT only if the
similar law, wherein the unit aggregate value of the lots
selling price is within the selling does not exceed P1.5M.
price ceiling per unit as set by [RR 13-2018]
the Housing and Urban b. Sale of parking lots shall
Development Coordinating not be considered a sale of
Council (HUDCC). [RR 13- residential lot. Hence, it
2018] shall be subject to VAT
c. Sale of real properties utilized for regardless of its selling
socialized housing as defined price. [RR 13-2012]
Page 421 of 494

d. Unit means an apartment unit in the
Note: Beginning January 1, 2021, case of apartments, house in the case
the VAT exemption shall only apply of residential houses; per person in the
to (i) sale of real properties not case of dormitories, boarding houses
primarily held for sale to customers and bed spaces; and per room in case
or held for lease in the ordinary of rooms for rent. [RR 13-2018]
course of trade or business, (ii) sale 18. Sale, importation, printing or publication of
of real property utilized for books and any newspaper, magazine,
socialized housing as defined by review or bulletin which appears at regular
RA No. 7279, (iii) sale of house and intervals with fixed prices for subscription
lot, and other residential dwellings and sale and which is not devoted
with selling price of not more than principally to the publication of paid
P2,000,000, as adjusted to advertisements;
P3,199,200 in 2011 using the 2010 19. Transport of passengers by international
Consumer Price Index values. carriers; [added by TRAIN Law]
[Sec. 109(1)(P), NIRC, as 1. Note: Transport of cargoes by
amended by TRAIN Law; RR 8- international carriers doing business in
2021] the Philippines is likewise exempt from
17. Lease of residential units with a monthly VAT, but subject to 3% percentage tax
rental per unit not exceeding P15,000; under Sec. 118 of the NIRC.
a. If more than P15,000 but the aggregate 20. Sale, importation or lease of passenger or
rentals of the lessor during the year do cargo vessels and aircraft, including
not exceed P3M, the lease shall be engine, equipment and spare parts thereof
exempt from VAT, but subject to 3% for domestic or international transport
percentage tax. operations;
b. Where a lessor has several residential A. The exemption from VAT on the
units for lease, his tax liability will be as importation and local purchase of
follows: passenger and/or cargo vessels shall
i. Gross receipts from rentals not be subject to the requirements on
exceeding P15,000 shall be restriction on vessel importation and
exempt from VAT and percentage mandatory vessel retirement program
tax regardless of the aggregate of the Maritime Industry Authority
annual gross receipts. (MARINA). [RR 13-2018]
ii. Gross receipts from rentals 21. Importation of fuel, goods, and supplies by
exceeding P15,000 shall be persons engaged in international shipping
subject to VAT IF the aggregate or air transport operations: Provided, That
annual gross receipts from said the fuel, goods, and supplies shall be used
units only exceed P3M. Otherwise, for international shipping or air transport
the gross receipts will be subject to operations [as amended by TRAIN Law];
the 3% tax imposed under Sec. 116 1. The said fuel, goods and supplies shall
of the NIRC. be used exclusively or shall pertain to
c. Residential units refers to apartments the transport of goods and/or
and houses & lots used for residential passengers from a port in the
purposes, and buildings or parts or Philippines directly to a foreign port
units thereof used solely as dwelling without stopping at any other port in the
places (e.g., dormitories, rooms and Philippines, except to unload
bed spaces) except motels, motel passengers and/or cargoes from
rooms, hotels and hotel rooms, lodging abroad or load the same bound for
houses, inns and pension houses. abroad.
Page 422 of 494


2. If any portion of such fuel, goods or coveralls, gown, surgical cap, surgical
supplies is used for any other purpose, mask, N-95 mask, scrub suits, goggles
such portion of fuel, goods and and face shield, double or surgical
supplies shall be subject to VAT. [RR gloves, dedicated shoes, and shoe
13-2018] covers, for COVID-19 prevention; and
22. Services of banks, non-bank financial b. All drugs, vaccines and medical
intermediaries performing quasi-banking devices specifically prescribed and
functions and other non-bank financial directly used for the treatment of
intermediaries (such as money changers COVID-19; and
and pawnshops) subject to percentage tax; c. Drugs for the treatment of COVID-19
[RR 13-2018] approved by the Food and Drug
23. Sale or lease of goods and services to Administration (FDA) for use in clinical
senior citizens and persons with disability, trials, including raw materials directly
as provided under RA Nos. 9994 necessary for the production of such
(Expanded Senior Citizens Act of 2010) drugs: Provided, That the Department
and 10754 (An Act Expanding the Benefits of Trade and Industry (DTI) shall certify
and Privileges of Persons with Disability), that such equipment, spare parts or
respectively [added by TRAIN Law]; raw materials for importation are not
24. Transfer of property pursuant to Section locally available or insufficient in
40 (2) of the NIRC, as amended [added by quantity, or not in accordance with the
TRAIN Law]; quality or specification required:
25. Association dues, membership fees, and Provided, further, That for item (ii),
other assessment and charges collected within sixty (60) days from the
by homeowners association and effectivity of this Act, and every three
condominium corporations [added by (3) months thereafter, the Department
TRAIN Law]; of Health (DOH) shall issue a list of
26. Sale of gold to BSP [added by TRAIN Law]; prescription drugs and medical devices
27. Sale of drugs and medicines prescribed covered by this provision: Provided,
for: finally, That the exemption claimed
a. Diabetes, high cholesterol, and under this subsection shall be subject
hypertension beginning January 1, to post audit by the Bureau of Internal
2020 [TRAIN Law, as amended by RA Revenue or the Bureau of Customs as
11467] may be applicable.
b. Cancer, mental illness, tuberculosis,
and kidney diseases beginning January 29. Sale or lease of goods or properties or the
1, 2021. [RA 11467] performance of services other than the
transactions mentioned in the preceding
Provided, That the DOH shall issue a list of paragraphs, the gross annual sales and/or
approved drugs and medicines for this purpose receipts do not exceed the amount of P3M;
within sixty (60) days from the effectivity of this a. For purposes of the threshold of P3M,
Act. the husband and the wife shall be
[RA 11467] considered separate taxpayers.
However, the aggregation rule (e.g.,
28. Sale or importation of the following combining income from business and
beginning January 1, 2021 to December profession) for each taxpayer shall
31, 2023: apply.
a. Capital equipment, its spare parts and b. The VAT-exempt sales shall NOT be
raw materials, necessary for the included in determining the threshold.
production of personal protective [Sec. 4.109-1(B), RR 16-2005]
equipment components such as
Page 423 of 494

30. Self-employed individuals and [RA 11469; RR 6-2020]
professionals availing of the 8% tax on 33. In case of foreign donation, the importation
gross sales and/or receipts and other non- of personal computers, laptops, tablets, or
operating income, under Sections similar equipment by the DepEd, CHED,
24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the TESDA
NIRC [RR 13-2018].
31. Importation of critical or needed healthcare Provided, that if the importer/consignee is
equipment or supplies intended to combat other than the abovementioned agencies,
the COVID-19 public health emergency in order for the imported articles to be
including PPE (i.e., gloves, gowns, masks, exempt from VAT, the importer should
goggles, face shields, surgical equipment present a Deed of Donation duly accepted
and supplies; laboratory equipment and its by the abovementioned agencies.
reagents; medical supplies, tools, and [RA 11494; RR 26-2020]
consumable (i.e., alcohol, sanitizers,
tissue, thermometers, hand soap, 34. In the case of local donation where the
detergent, sodium hydrochloride, cleaning personal computers, laptops, tablets, or
materials, povidone iodine, common similar equipment are originally intended
medicines (e.g., paracetamol tablet and for sale or for use in the course of business
suspension, mefenamic acid, vitamins by the donor
tablet and suspension, hyoscine tablet and [RA 11494; RR 26-2020]
suspension, oral rehydration solution, and
cetirizine tablet and suspension; testing Note: Any input tax VAT attributable to the
kits, and such other supplies or equipment purchase of donated personal computers,
as may be determined by the DOH and laptops, tablets, or similar equipment not
other government agencies previously claimed as input tax shall be
[RA 11469; RR 6-2020] creditable against any output tax. The above
32. Importation of material needed to make rules shall also apply to donations by
health equipment and supplies deemed as ECOZONE locators to the abovementioned
critical or needed to address COVID-19 agencies. [RA 11494; RR 26-2020]
public health emergency
SUMMARY OF VAT-EXEMPTIONS [SEC. 109, NIRC]
1 Of agricultural and marine products in their original state

Of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock
Sale or importation
and poultry feeds.
2
Exception: specialty feeds for race horses, fighting cocks, aquarium
fish, zoo animals, and other animals generally considered pets.
Of personal and household effects belonging to (i) residents of the
3 Philippines returning from abroad and (ii) nonresident citizens coming
to resettle in the Philippines
Importation Of professional instruments and implements, tools of trade, occupation
or employment, wearing apparel, domestic animals and personal
4
household effects, belong to persons coming to settle in the Philippines
or overseas Filipinos for their own use and not for barter or sale.
5 Services Subject to percentage tax
Page 424 of 494

By agricultural contract growers and milling for others of palay into rice,
6
corn into grits and sugarcane into raw sugar
Medical, dental, hospital and veterinary services

7
Exception: those rendered by professionals
Educational services rendered by private educational institutions duly

8 accredited by DepEd, CHED, and TESDA, and those rendered by
governmental educational institutions
9 Rendered pursuant to an employer-employee relationship
10 Rendered by a RAHQ established in the Philippines
Transactions exempt under international agreements or special laws,

11 Others
except those under PD 529 (Petroleum concessionaires)
Sales By agricultural cooperatives duly registered with the CDA

12
By agricultural cooperatives of direct farm inputs, machineries and
Importation
equipment
Gross receipts from lending activities by credit or multi-purpose

13 Services
cooperatives duly registered with the CDA
By non-agricultural, non-electric, and non-credit cooperatives duly

14 Sales registered with the CDA. Provided, the share capital contribution of
each member does not exceed P15,000
15 Export sales By persons who are not VAT-registered

Of real property not primarily held for sale to customers or held for lease
in the ordinary course of business, or real property for low-cost and
16 Sales socialized housing, residential lot valued at P1.5M and below and
house and lot and other residential dwellings valued at P2.5M and
below
17 Lease Of a residential unit with a monthly rental not exceeding P15,000
Sale, importation, Of books and any newspaper, magazine, review or bulletin which
18 printing, or appears at regular intervals with fixed prices for subscription and sale
publication and is not devoted principally to publication of paid advertisements
19 Services Transport of passengers by international carriers

Of passenger or cargo vessels and aircraft, including engine,
Sale, importation,
20 equipment and spare parts thereof for domestic or international
or lease
transport operations
Page 425 of 494

Of fuel, goods, and supplies by persons engaged in international

21 Importation
shipping or air transport operations
Of banks, non-bank financial intermediaries performing quasi-banking

22 Services
functions and other non-bank financial intermediaries
23 Sale or lease Of goods and services to senior citizens and persons with disability
Of property pursuant to Section 40(C)(2) of the NIRC (tax free

24 Transfer
exchanges)
Association dues, membership fees, and other assessments and

25 Others charges collected by homeowners associations and condominium
corporations
26 Sale Of gold to BSP

Sale of drugs and medicines prescribed for:
i) Diabetes, high cholesterol, and hypertension beginning
January 1, 2020
ii) Cancer, mental illness, tuberculosis, and kidney diseases
27 Sale beginning January 1, 2021
Provided, That the DOH shall issue a list of approved drugs and
medicines for this purpose within sixty (60) days from the effectivity of
this Act.
Beginning January 1, 2021 to December 31, 2023:
(i) Capital equipment, its spare parts and raw materials, necessary for
the production of personal protective equipment components for
COVID-19 prevention
28 Sale or Importation
(ii) All drugs, vaccines and medical devices specifically prescribed and
directly used for the treatment of COVID-19; and
(iii) Drugs for the treatment of COVID-19 approved by the FDA for use
in clinical trials
Sale or lease or
Other than the transactions mentioned in the preceding paragraphs, the
29 performance of
gross annual sales and/or receipts do not exceed the amount of P3M
services
Self-employed individuals and professionals availing of the 8% tax on

Individuals
30 gross sales and/or receipts and other non-operating income, under
Availing 8% tax
Sections 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the NIRC.
Importation of critical or needed healthcare equipment or supplies

31 Importation intended to combat the COVID-19 public health emergency
[RA 11469; RR 6-2020]
Importation of material needed to make health equipment and supplies

32 Importation deemed as critical or needed to address COVID-19 public health
emergency [RA 11469; RR 6-2020]
Page 426 of 494

In case of foreign donation, personal computers, laptops, tablets, or
similar equipment by the DepEd, CHED, TESDA
If the importer/consignee is other than the abovementioned agencies,

33 Importation
in order for the imported articles to be exempt from VAT, the importer
should present a Deed of Donation duly accepted by the
abovementioned agencies.
[RA 11494; RR 26-2020]
In case of local donation where the personal computers, laptops,
tablets, or similar equipment are originally intended for sale or for use
34 Importation
in the course of business by the donor
[RA 11494; RR 26-2020]
8. Input and Output Tax 3. Purchase of services in which VAT has

actually been paid
a. Definitions 4. Transactions deemed sale
5. Transitional Input Tax [Sec 111(A),
Input tax – the VAT due from or paid by a VAT- NIRC]
registered person on importation of goods or
local purchase of goods, properties, or Who may avail of transitional input tax:
services, including lease or use of properties, 1. A person who becomes VAT-liable for the
in the course of his trade or business [Sec. first time upon exceeding P3M in any 12-
110(A)(3), NIRC] month period, or
2. any person who voluntarily registers even
Output tax – the VAT due on the sale or lease if their turnover does not exceed P3M
of taxable goods or properties or services by (except franchise grantees of radio and
any person registered or required to register television broadcasting whose threshold is
under Section 236 of the NIRC [Sec. 110(A)(3), P10M) [Sec. 4.111-1(a), RR 16-2005]
NIRC]
Transitional Input VAT credit:
b. Sources of Input Tax Whichever is higher of:
1. two percent (2%) of the value of the
1. Purchase or Importation of Goods beginning inventory on hand, OR
(evidenced by VAT invoice/receipt) 2. actual VAT paid on such goods,
a. For sale; or materials and supplies.
b. For conversion into or intended to
form part of a finished product for Note: A real estate dealer is entitled to
sale including packaging materials; claim transitional input VAT on its
or beginning inventory based on the value of
c. For use as supplies in the course of the entire real property, including the
business; or improvements thereon, regardless of
d. For use as materials supplied in the whether there was prior payment of VAT on
sale of service; or the purchase of such real property. [Fort
e. For use in trade or business for Bonifacio Development Corp. v. CIR, G.R.
which deduction for depreciation or Nos. 158885 and 170680 (2009)]
amortization is allowed under the
NIRC. 6. Presumptive Input Tax [Sec. 111(B),
2. Purchase of real properties for which NIRC]
VAT has actually been paid
Page 427 of 494


Who may avail: Persons or firms engaged Claims for input tax on depreciable goods
in the:
1. processing of (i) sardines, (ii) mackerel Where a VAT-registered person purchases or
and (iii) milk, and imports capital goods, which are depreciable
2. manufacturing (i) refined sugar, (ii) assets for income tax purposes, the aggregate
cooking oil and (iii) packed noodle acquisition cost of which (excluding VAT) in a
based instant meals calendar month exceeds P1,000,000,
regardless of the acquisition cost of each
Rate and basis: 4% of the gross value in capital good:
money of their purchases of primary 1. If the estimated useful life is 5 years or
agricultural products which are used as more – the input tax shall be spread evenly
inputs to their production [Sec. 111(B), over the month of acquisition and the 59
NIRC] succeeding months (i.e., 60 months) and
the claim for input tax credit will start in the
“Processing” means pasteurization, month of acquisition
canning and activities which through 2. If the estimated useful life is less than 5
physical or chemical process alter the years – the input tax shall be spread over
exterior texture or form or inner substance such a shorter period by dividing the input
of a product in such manner as to prepare tax by the actual number of months
it for special use to which it could not have comprising the estimated useful life [Sec.
been put in its original form or condition. 4.110-3, RR 16-2005]
[Sec. 111(B), NIRC]
Notes:
c. Persons Who Can Avail of Input Tax 1. If the aggregate acquisition cost does not
Credit exceed P1,000,000, the total input taxes
will be allowable as credit against output
Input tax on domestic purchase or tax in the month of acquisition.
importation of goods or properties shall be 2. If the depreciable capital good is
creditable: sold/transferred within 5 years or prior to
a. To the importer upon payment of the VAT the exhaustion of the amortizable input tax,
prior to the release of the goods from the entire unamortized input tax can be
customs custody; claimed as input tax credit during the
b. To the purchaser of domestic goods or month/quarter when the sale or transfer
properties upon consummation of sale; or was made. [Sec. 4.110-3, RR 16-2005]
c. To the purchaser of services or the lessee 3. The amortization of the input VAT shall only
or licensee upon payment of the be allowed until December 31, 2021 after
compensation, rental, royalty or fee. [Sec. which taxpayers with unutilized input VAT
4.110-2, RR 16-2005] on capital goods purchased or imported
shall be allowed to apply the same as
d. Input Tax on Depreciable Goods scheduled until fully utilized
Capital goods or properties Claiming of input tax on motor vehicles

1. Goods or properties with estimated useful subject to the following conditions:
life greater than one (1) year; a. Purchase of vehicle must be substantiated
2. Treated as depreciable assets under Sec. with official receipts or other adequate
34(F) of the NIRC; and records;
3. Used directly or indirectly in the production b. Taxpayer has to prove the direct
or sale of taxable goods or services. [Sec. connection of the motor vehicle to the
16, RR 4-2007] business;
Page 428 of 494


c. Only one vehicle for land transport is d. No depreciation shall be allowed for
allowed for the use of an official/employee yachts, helicopters, airplanes [Sec. 3, RR
with value not exceeding P2.4 million; 12-2012]
ILLUSTRATION: CLAIMS FOR INPUT TAX ON DEPRECIABLE GOODS

[RR 13-2018]
(1) ABC Corporation sold capital goods on installment on October 1, 2018. It is agreed that the selling
price, including the VAT, shall be payable in 5 equal monthly installments with the first installment to
be paid on October 1, 2018. The data pertinent to the sold assets are as follows:
Selling Price 5,000,000 (exclusive of VAT)
Passed on VAT 600,000
Original Cost of Asset 3,000,000
Accumulated Depreciation 1,000,000
Unutilized Input Tax (Sold Asset) 100,000
Accounting:
SELLER BUYER
October 1, 2017 October 1, 2017
Cash [(P5M + 600k)/5] P1,120,000 Asset P5,000,000
Installment Receivable 4,480,000 Input Tax* 600,000

[(P5M+600k)-1.12M]
Accumulated Depreciation 1,000,000 Cash 1,120,000
Output Tax (12% x 600,000 Installment Payable 4,480,000

P5M)
Asset 3,000,000
Gain on sale of set 3,000,000
To record VAT liability:
Output Tax 600,000
Input Tax 100,000
VAT Payable 500,000
Periodic receipt of installment Periodic receipt of installment
Page 429 of 494

Cash 1,120,000 Installment 1,120,000

Payable
Installment Receivable 1,120,000 Cash 1,120,000

* The input tax of P600,000.00 shall be spread evenly over a period of 60 months starting on October
2018 or the month of purchase.
If the depreciable capital good is sold/transferred within a period of 5 years or prior to the exhaustion
of the amortizable input tax thereon, the entire unamortized input tax on the capital goods
sold/transferred can be claimed as input tax credit during the month/quarter when the sale or transfer
was made.
(2) A manufacturer purchased capital goods on different occasions as follow :
Month of Amount 12% Input Useful Life No. of Last Month of

Purchase Tax Monthly Amortization
Amortization
January 2018 P8,500,000 P1,020,000 6 Years 60 December

2022
February 2018 P8,500,000 P1,020,000 4 Years 48 January 2022
December P10,000,000 P1,020,000 5 Years 60 November

2018 2022
January 2018 P10,000,000 P1,020,000 5 Years - *Outright claim

on January
2022
a. For purchase made in January 2018, the amortization shall be for the shorter period of 5 years
only or up to December 2022 although the useful life is 6 years.
b. For purchase made in February 2018, the amortization shall be for a period of 4 years only or
up to January 2022 since the useful life of the asset is shorter than 5 years.
c. For purchase made in December 2021, the amortization shall be for the period of 5 years or
up to November 2026.
d. For purchase made in January 2022, no amortization shall be made and the input VAT shall
be claimed on the month of purchase or January 2022
9. Tax Refund or Tax Credit amount indicated in the invoice or receipt

by 12%.
Output VAT – Input VAT = VAT Payable 𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑮𝒓𝒐𝒔𝒔 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆
or Excess input VAT × 𝑽𝑨𝑻 𝑹𝒂𝒕𝒆
Determination of output tax 2. Output VAT in a sale of services shall be

[Sec. 4.110-6, RR 16-2005] computed by multiplying the total amount
1. Output VAT in a sale of goods/properties indicated in the invoice or receipt by 12%.
shall be computed by multiplying the total
Page 430 of 494

𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑮𝒓𝒐𝒔𝒔 𝑹𝒆𝒄𝒆𝒊𝒑𝒕𝒔 Allocation of input tax on mixed
× 𝑽𝑨𝑻 𝑹𝒂𝒕𝒆 transactions
3. Where VAT is erroneously billed in the A VAT-registered person who is also engaged
invoice, the total invoice amount shall be in transactions not subject to VAT shall be
presumed to be comprised of the gross allowed tax credit as follows:
selling price or gross receipts plus the a. All input taxes directly attributable to
correct amount of VAT. Hence, the output transactions subject to VAT may be
tax is computed as follows: recognized for input tax credit. Input taxes
directly attributable to VAT taxable sales to
𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 the Government, including GOCCs, shall
𝟏𝟐% not be credited against output taxes arising
= 𝑻𝒐𝒕𝒂𝒍 𝒊𝒏𝒗𝒐𝒊𝒄𝒆 𝒂𝒎𝒐𝒖𝒏𝒕 ×
𝟏𝟏𝟐% from sales to non-government entities.
b. If any input tax cannot be directly attributed
Determination of input tax creditable to either a VAT taxable or VAT-exempt
a. Add all input tax creditable to a VAT- transaction, the input tax shall be pro-rated
registered person during the taxable month to the VAT taxable and VAT-exempt
or quarter and any excess input tax carried transactions and ONLY the ratable portion
over from the preceding month or quarter. pertaining to transactions subject to VAT
b. The sum shall be reduced by the amount of may be recognized for input tax credit.
claim for VAT refund or credit (whether filed [Sec. 4.110-4, RR 16-2005]
with the BIR, the Department of Finance,
the BOI or the BOC) and other
adjustments, such as purchase returns or
allowances and input tax attributable to
exempt sale. [Sec. 4.110-5, RR 16-2005]
ILLUSTRATION: ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS

[Sec. 4.110-4, RR 16-2005, as amended by RR 4-2007]
ERA Corporation has the following sales during the month:
Sale to private entities subject to 12% 100,000
Sale to private entities subject to 0% 100,000
Sale of exempt goods 100,000
Sale to government subjected to 5% final withholding VAT 100,000
Total sales for the month 400,000
The following input taxes were passed on by its VAT suppliers:

Input tax on taxable goods (12%) 5,000
Input tax on zero-rated sales 3,000
Input tax on sale of exempt goods 2,000
Input tax on sale to government 4,000
Page 431 of 494

Not attributable to any specific activity (monthly amortization for 60 months) 20,000
The creditable input tax for the month shall be computed as follows:
Input tax on sale subject to 12% 5,000
Ratable portion of the input tax not directly attributable to any activity:
!"#"$%& ("%&( (*+%)

!./"% 0"%&(
× 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑛𝑦 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦
100,000
× 20,000 = 5,000
400,000
Total input tax attributable to sales to private entities for the month: 10,000.00
The input tax attributable to zero-rated sales for the month shall be computed as follows:
Input directly attributable to zero-rated sale P 3,000
1&2. 2"/&3 ("%&(

!./"% 0"%&(
100,000
× 20,000 = 5,000
400,000
Total input tax attributable to zero-rated sales for the month: 8,000
The input tax attributable to VAT-exempt sales for the month shall be computed as follows:
Input tax on VAT-exempt sales - 2,000
45! &#&67/ ("%&(

!./"% 0"%&(
100,000
× 20,000 = 5,000
400,000
Total input tax attributable to VAT-exempt sales: 7,000
The input tax attributable to sales to government for the month shall be computed as follows:
Input tax on sale to gov’t. P 4,000
!"#"$%& ("%&( /. /8& 9.:&2;6&;/

!./"% 0"%&(
100,000
× 20,000 = 5,000
400,000
Page 432 of 494

Total input tax attributable to sales to government: 9,000
Determination of the VAT payable or excess e. Transitional input tax – inventory of

tax credits goods as shown in a detailed list to be
submitted to the BIR
If at the end of any taxable month or quarter: f. Input tax on "deemed sale" transactions
a. The output tax exceeds the input tax, the – required invoice
excess shall be paid by the VAT-registered g. Input tax from payments made to non-
person residents (such as for services, rentals
b. The input tax exceeds the output tax, the and royalties) – copy of the Monthly
excess shall be carried over to the Remittance Return of VAT Withheld (BIR
succeeding quarter or quarters. However, Form 1600) filed by the resident payor in
any input tax attributable to zero-rated behalf of the non-resident evidencing
sales may be refunded or credited. [Sec. remittance of VAT due which was withheld
110(B), NIRC] by the payor
h. Advance VAT on sugar – Payment Order
Illustration: showing payment of the advance VAT
For a given taxable quarter ABC Corp. has
output VAT of 100 and input VAT of 80. Since Who May Claim for Refund/Apply for
output tax exceeds the input tax for such Issuance of Tax Credit Certificate
taxable quarter, all of the input tax may be
utilized to offset against the output tax. Thus, a. Zero-Rated Sales [Sec. 112(A), NIRC]
the VAT payable is 20.
Requirements:
Substantiation of Input Tax Credits A claim for refund or tax credit for unutilized
input VAT may be allowed only if the following
Input taxes must be substantiated and requisites concur, namely:
supported by the following documents, and 1. the taxpayer is VAT-registered;
must be reported in the information returns 2. the taxpayer is engaged in zero-rated or
required to be submitted to the BIR: effectively zero-rated sales;
a. Importation of goods – import entry or 3. the input taxes are due or paid;
other equivalent document showing actual 4. the input taxes are not transitional input
payment of VAT on the imported goods taxes;
b. Domestic purchase of goods and 5. the input taxes have not been applied
properties – invoice showing the against output taxes during and in the
information required under Secs. 113 succeeding quarters;
(Invoicing Requirements) and 237 6. the input taxes claimed are attributable to
(Issuance of Receipts or Invoices) of the zero-rated or effectively zero-rated sales;
NIRC 7. for zero-rated sales under Section
c. Purchase of real property – public 106(A)(2)(a)(1) and (3) and 108(B)(1) and
instrument, i.e., deed of absolute sale, (2), the acceptable foreign currency
deed of conditional sale, exchange proceeds have been duly
contract/agreement to sell, etc., together accounted for in accordance with the rules
with VAT invoice issued by the seller and regulations of the BSP;
d. Purchase of services – official receipt 8. where there are both zero-rated or
showing the information required under effectively zero-rated sales and taxable or
Secs. 113 and 237 of the NIRC exempt sales, and the input taxes cannot
be directly and entirely attributable to any
of these sales, the input taxes shall be
Page 433 of 494

proportionately allocated on the basis of were made. The judicial claim may be
sales volume; and made beyond the two-year period [CIR v.
9. the claim is filed within two (2) years after San Roque Power Corporation, G.R.
the close of the taxable quarter when such 187485 (2013)]
sales were made. [Luzon Hydro
Corporation v. CIR, G.R. No. 188260 Note: Distinguish this process for
(2013); Sec. 4.112-1, RR 16-2005] claiming refund of unutilized input tax
credits from the claim for refunds of
b. Cancelled VAT Registration [Sec. erroneous tax payments under
112(B), NIRC] Sec. 229 of the NIRC, where the
administrative and judicial claims must
1. A VAT-registered person whose be made within the 2-year period from
registration has been cancelled due to (i) the date of payment.
retirement from or cessation of business, or
due to changes in or (ii) cessation of status b. The CIR shall act on the claim for
under Section 106(C) of the NIRC may, refund within 90 days from the date of
within two (2) years from the date of submission of complete documents in
cancellation, apply for the issuance of a tax support of the application.
credit certificate for any unused input tax
which may be used in payment of his other Note: Prior to January 1, 2018, all
internal revenue taxes. claims for refund or tax credit will be
2. The taxpayer shall be entitled to a refund if governed by the 120-day processing
he has no internal revenue tax liabilities period.
against which the tax credit certificate may
be utilized. c. Should the CIR find that the grant of
3. The date of cancellation shall be the date refund is not proper, the CIR must state
of issuance of tax clearance by the BIR, in writing the legal and factual basis for
after full settlement of all tax liabilities. the denial.
4. The filing of the claim shall be made only
after completion of the mandatory audit of Judicial Claim [Sec 112 (C), par. 2, NIRC]
all internal revenue tax liabilities covering
the immediately preceding year and the a. In case of full or partial denial of the claim
short period return and the issuance of the for tax refund, the taxpayer may appeal to
applicable tax clearance/s. [RR 13-2018] the CTA within 30 days from the receipt of
decision.
Period to File Claim/Apply for Issuance of b. The 30-day period to appeal is both
Tax Credit Certificate mandatory and jurisdictional.
Administrative Claim [Sec 112(C), par. 1, Exception: Premature filing is allowed only if
NIRC] filed between 10 December 2003 and 5
a. The claim must be filed within 2 years after October 2010, when BIR Ruling No. DA-489-
the close of the taxable quarter when the 03 was still in force. [CIR v. San Roque Power
sales were made (or 2 years from the date Corporation, G.R. 187485 (2013)]
of cancellation of registration). [Sec. 112(A)
and (B), NIRC] Effect of inaction by the CIR
Note: It is only the administrative claim that Failure on the part of any official, agent, or
must be filed within the two-year period, employee of the BIR to act on the application
which must be reckoned from the close of within the 90-day period shall be punishable
the taxable quarter when the relevant sales under Section 269 of the NIRC (Violations
Page 434 of 494

Committed by Government Enforcement Note: VAT is paid on a monthly basis.
Officers). [Sec. 112(C), NIRC] Payments in the monthly VAT declarations
shall be credited in the quarterly VAT return to
Note: The provision on the appeal of the CIR’s arrive at the net VAT payable or excess input
failure to act on the application for refund or tax tax/overpayment as of the end of a quarter.
credit was removed by the TRAIN Law. [Sec. 4.114-1(A), RR 16-2005]
Exclusive appellate jurisdiction of CTA
The CTA has exclusive appellate jurisdiction to

review by appeal the inaction by the CIR in
cases involving disputed assessments, refunds
of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other
matters arising under the NIRC or other laws
administered by the BIR, where the NIRC
provides a specific period of action, in which
case the inaction shall be deemed a denial.
[Sec. 7(a)(2), R.A. 1125 as amended by R.A.
9282]
Manner of Refund
Refunds shall be made upon warrants drawn

by the CIR or by his duly authorized
representative without the necessity of being
countersigned by the Chairman of the
Commission on Audit (COA), provided that
refunds shall be subject to post audit by COA.
[Sec. 112(D), NIRC]
10. Filing of Returns and Payment
Procedure
1. Every person liable to pay VAT shall file a
quarterly return of the amount of his gross
sales or receipts within 25 days after the
close of each taxable quarter prescribed for
each taxpayer.
2. The monthly VAT Declarations of
taxpayers whether large or non-large shall
be filed and the taxes paid not later than
the 20th day following the end of each
month.
3. Beginning January 1, 2023, the filing of
return and payment of VAT shall be done
within 25 days following the close of each
taxable quarter. [Sec. 114(A), NIRC as
amended by TRAIN Law; Sec. 4.114-1(A),
RR 16-2005]
Page 435 of 494
VAT FORMULA (IN GENERAL)

Actual Sales/Receipts xxx
Add: Excise Tax xxx
Remaining Merchandise (Cessation of VAT-registered Status) xxx
Transactions Deemed Sale xxx xxx
Less: Sales Returns and Allowances xxx

Sales Discounts xxx xxx
Total Sales (Taxable Base) xxx

Multiplied by 12% 12%
Output VAT on sales or gross receipts xxx
Less: Allowable Input Tax:
Input VAT on current purchases/importations/services xxx
Input VAT on sales to nonresidents xxx
Input VAT on capital goods exceeding P1M
(deferred from prior period) xxx
(from current period) xxx
Transitional Input VAT, if applicable xxx
Presumptive Input VAT, if applicable xxx
Input VAT Carry-over from previous period xxx
Total available input tax xxx
Less: Input tax on capital goods exceeding P1M xxx
deferred to next period
Input tax on exempt sales xxx
Input tax subject to VAT refund/TCC xxx xxx
Net VAT payable xxx
Less: Tax Credits/Payments:
Creditable VAT withheld xxx
Advance payments xxx
VAT paid in return previously filed xxx xxx
VAT Still Payable (Overpayment) xxx
Page 436 of 494


Illustration of the VAT System
VAT System (All VAT)

Raw Material (VAT) Manufacturer (VAT) Trader (VAT) End-User
SP (100+12) 100 112 SP (300 + 36). 300 336 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300+36) 300 336
Profit 50 Profit 200 Profit 150
Purchase 112 Purchases 336 Purchases 504

Input VAT 12 12% VAT 36 12% VAT 54
OT 12% 12 OT 12% 36 OT 12% 54

IT 0 IT 12 IT 36
VAT Payable 12 Vat Payable 24 VAT Payable 18
VAT to BIR 12 VAT to BIR 24 VAT to BIR 18 Total VAT 54
VAT System (VAT Exempt 1st chain)

Raw Material Manufacturer Trader End-User
(VAT Exempt)
SP (100+ 0) 100 SP (300 + 36) 300 336 SP (450 +54) 450 504
Cost 50 Cost (100) 100 Cost (300+36) 300 336

Input VAT 0 12% VAT 36 12% VAT 54
OT 0 OT 12% 36 OT 12% 54
IT 0 IT 0 IT 36
Page 437 of 494


VAT System (VAT Exempt mid-chain)
(VAT Exempt)
SP (100+12) 100 112 SP (300) 300 SP (450 +54) 450 504

Cost 50 Cost (100+12) 100 112 Cost (300) 300

No Input VAT 0 No VAT 0 12% VAT 54
OT 12% 12 OT 0 OT 12% 54
IT 0 IT 0 IT 0
VAT System (VAT zero-rate mid-chain)

(VAT Zero-rated)
SP (100+12) 100 112 SP (300+ 0) 300 SP (450 +54) 450 504

Cost 50 Cost (100 + 12) 100 112 Cost (300) 300

No Input VAT 12 No VAT 0 12% VAT 54
OT 12% 12 OT 12% 0 OT 12% 54

IT 0 IT 12 IT 0
VAT Payable 12 Vat Payable (12) VAT Payable 54
VAT to BIR 12 VAT to BIR (12) VAT to BIR 54 Total VAT 54
Page 438 of 494

B. Tax Remedies Under The General Rule: The issuance of an LOA is a
mandatory statutory requirement. [Sec. 13,
NIRC NIRC]
1. Assessment of Internal Revenue Any tax assessment issued without an LOA is

Taxes a violation of the taxpayers’ right to due
process and is therefore “inescapably void.”
Definition [RMC 75-2018; Medicard Philippines, Inc. v.
To assess means to impose a tax; to fix or CIR, G.R. No. 222743 (2017)]
settle a sum to be paid by way of tax; to settle
determine or fix the amount of tax to be paid Exception: The following cases need not be
(84 C.J.S 749-750) covered by a valid LOA:
1. Cases involving civil or criminal tax
An assessment is the notice to the effect that fraud which fall under the jurisdiction of
the amount therein stated is due from a the Tax Fraud Division of the
taxpayer as a tax with a demand for payment Enforcement Services, and
of the same within a stated period of time. [CIR 2. Policy cases under audit by the special
v. CTA, G.R. No. L-21483 (1969)] teams in the National Office. [RMO 36-
99]
Presumption of correctness
An assessment is presumed correct and made Letter of Authority vs. Letter Notice
in good faith in the performance of official
duties and failure to present proof of error will A Letter Notice (LN) is not found in the NIRC
prosper such assessment. [Atlas Consolidated and is not an authority to conduct an audit. The
Mining and Development Corp. v. CA, G.R. No. LN is merely a notice to the taxpayer that a
104151 and 105563 (1995)]. discrepancy is found based on the BIR’s third
party information data matching programs.
a. Procedural Due Process in Tax Thus, an LOA must still be secured before
Assessments proceeding with the further examination and
assessment of the taxpayer. [Medicard
[Sec. 228, NIRC; RR 12-99, as amended by Philippines, Inc. v. CIR, G.R. No. 222743
RR 18-13, RR 7-18, and RR 22-2020) (2017)]
Letter of Authority and Tax Audit Tax audit
Letter of Authority (LOA): A Letter of It is the process of examining, going over or

Authority (LOA) is the authority given to the scrutinizing the books and records of the
appropriate revenue officer to conduct the taxpayer to ascertain the correctness of the tax
assessment function. It empowers the revenue declared and paid by the taxpayer.
officer to examine the books of accounts and
other accounting records of the taxpayer for the There must be a grant of authority before any
purpose of collecting the correct amount of tax. revenue officer can conduct an examination or
[Republic v Robiegie Corporation, G.R. No. assessment. Equally important is that the
260261(2022)] revenue officer so authorized must not go
beyond the authority given. In the absence of
The LOA is premised on the power of the CIR such an authority, the assessment or
himself to investigate. Pursuant to Sec 6(A) of examination is a nullity. [CIR v. Sony
the NIRC, unless authorized by the CIR or his Philippines, Inc., G.R. No. 178697 (2010)]
representative, the investigation of a taxpayer
cannot ordinarily be undertaken. (ibid) Note: A Revenue Officer is allowed only 120
days from the date of receipt of an LOA by the
taxpayer to conduct the audit and submit the
Page 439 of 494

required report of investigation. If the Revenue If the taxpayer disagrees with the
Officer is unable to submit his final report of discrepancies during the audit/investigation, it
investigation within the 120-day period, he is during the Discussion of Discrepancy that
must then submit a progress report to his Head the taxpayer is given the opportunity to present
of Office, and surrender the LOA for his/her side of the case and explain the
revalidation. discrepancy found during the investigation of
the Revenue Officer assigned and submit
Re-assignment/Transfer of Revenue documents to support his/her explanation or
Officers arguments.
Reassigning or transferring revenue officers The “Discussion of Discrepancy” shall in no

originally named in the LOA and substituting case extend beyond 30 days from receipt of the
them with new revenue officers to continue the notice of discrepancy. The taxpayer must
audit or investigation without a separate or submit all necessary documents that supports
amended LOA (i) violates the taxpayer's right his explanation within 30 days after receipt of
to due process in tax audit or investigation; (ii) the Notice of Discrepancy.
usurps the statutory power of the CIR or his
duly authorized representative to grant the Should the taxpayer need more time to present
power to examine the books of account of a the documents, he may submit such
taxpayer; and (iii) does not comply with existing documents after the discussion.
BIR rules and regulations, particularly RMO
No. 43-90 dated September 20, 1990. [CIR v. If after being afforded the opportunity to
McDonald’s Philippine Realty Corporation, present his side through the Discussion of
G.R. No. 242670 (2021)] Discrepancy, it is still found that the taxpayer is
still liable for deficiency tax or taxes and the
Any reassignment/transfer of cases requires taxpayer does not address the discrepancy
the issuance of a new LOA. Assessment made through payment of the deficiency taxes or the
by new RO without a valid LOA is invalid. taxpayer does not agree with the findings, the
(Republic v Robiegie, supra) investigating office, shall endorse the case to
the reviewing office and approving official in the
Notice of Discrepancy (NOD) National Office or the Revenue Regional
Office, for issuance of a deficiency tax
[RR 22-2020] assessment in the form of a Preliminary
Assessment Notice within ten (10) days from
If a taxpayer is found to be liable for deficiency the conclusion of the Discussion.
tax or taxes in the course of an investigation
conducted by a Revenue Officer, the taxpayer Issuance of Preliminary Assessment
shalt be informed through a Notice of Notice (PAN)
Discrepancy. The Notice of Discrepancy aims
to fully afford the taxpayer with an opportunity General rule: A PAN shall be issued if it is
to present and explain his side on the determined that there exists sufficient basis to
discrepancies found. assess the taxpayer for any deficiency tax. It
shall show in detail the facts and the law on
The Revenue Officer who audited the which the proposed assessment is based.
taxpayer’s records shall state in his report,
among others, his findings of discrepancies. Exceptions to the issuance of a PAN
The taxpayer shall be informed in writing of the The NIC and the PAN shall not be required in
discrepancies in his/her payment of internal any of the following cases, in which case, a
revenue taxes, for the purposes of “Discussion Formal Letter of Demand and Assessment
of Discrepancy”. Notice (FLD/FAN) shall be issued outright:
Discussion of Discrepancy (DOD) ● The finding for any deficiency tax is the
result of mathematical error in the
Page 440 of 494

computation of the tax as appearing on 1. fails to respond to a PAN within the
the face of the return; or prescribed period of time, or
● A discrepancy has been determined 2. whose reply to the PAN was found to be
between the tax withheld and the without merit.
amount actually remitted by the
withholding agent; or Contents of the FLD/FAN
● A taxpayer who opted to claim a refund
or tax credit of excess creditable The taxpayer shall be informed in writing of the
withholding tax for a taxable period was law and the facts on which the assessment is
determined to have carried over and made; otherwise the assessment shall be void.
automatically applied the same amount [Sec. 228, NIRC]
claimed against the estimated tax
liabilities for the taxable quarter or An assessment contains not only a
quarters of the succeeding taxable computation of tax liabilities, but also a demand
year; or for payment within a certain period.
● The excise tax due on excisable
articles has not been paid; or Tax collection must be preceded by a valid
● An article locally purchased or assessment to allow the taxpayer to protest the
imported by an exempt person, such assessment, present their case and adduce
as, but not limited to, vehicles, capital supporting evidence. Without complying with
equipment, machineries and spare the unequivocal mandate of first informing the
parts, has been sold, traded or taxpayer of the government's claim, there can
transferred to a non-exempt person. be no deprivation of property, because no
[RR 18-2013] effective protest can be made. The
assessment is void [if it does not state] the
Note: Prior to the issuance of a PAN, the factual and legal bases therefor. Ultimately,
taxpayer may be allowed to make voluntary void assessment bears no valid fruit. [CIR v.
payments of probable deficiency taxes and Unioil Corporation, G.R. No. 204405 (2021)]
penalties. [RMC 11-2014]
Period for Issuance of the FLD/FAN
Reply to the PAN
It must be issued within 15 days from the
The taxpayer is given 15 days from the date of filing/submission of the taxpayer’s response to
receipt of the PAN to respond. the PAN.
1. If the taxpayer fails to respond, he is
considered in default and a formal 1. If the FLD/FAN is issued beyond the 15-
letter of demand and assessment day period, it shall still be valid, provided
notice (FLD/FAN) shall be issued to the that it is issued within the period of
taxpayer. limitation to assess internal revenue taxes.
2. If he responds that he disagrees with
the findings of deficiency taxes, an Note: The revenue officers who caused the
FLD/FAN shall be issued within 15 delay shall be subject to administrative
days from filing/submission of the sanction. [RMC 11-2014]
taxpayer’s response, calling for
payment of the taxpayer’s deficiency 2. If the FLD/FAN is issued before the lapse
tax liability, inclusive of the applicable of the 15-day period, it shall be void.
penalties. [RR 18-2013] Note: Prematurely issuing an FLD/FAN
Issuance of a Formal Letter of Demand before the lapse of the 15-day period is a
and Final Assessment Notice (FLD/FAN) wanton disregard of the mandatory due
process requirement. [CIR v. Pacific
An FLD/FAN is a declaration of deficiency Bayview Properties, Inc., CTA EB No. 1677
taxes issued to a taxpayer who:
Page 441 of 494

(2018), citing CIR v. Metro Star Superama, b. Requisites of a Valid Assessment
Inc., G.R. No. 185371 (2010)] 1. The taxpayer shall be informed in
writing of the law and the facts on which
Disputed Assessment the assessment is made; otherwise,
the assessment notice shall be
The taxpayer or his duly authorized rendered null and void. [Sec. 228,
representative may protest administratively NIRC]
against the FLD/FAN within 30 days from date 2. Assessment contains not only a
of receipt thereof. The taxpayer protesting an computation of tax liabilities, but also a
assessment may file a written request for demand for payment within a
reconsideration or reinvestigation. prescribed period. [CIR v. Fitness by
Design, Inc. G.R. No. 215957 (2016)]
Administrative Decision on a Disputed 3. Assessment must be served on and
Assessment received by the taxpayer. [CIR v.
Fitness by Design, Inc. G.R. No.
The FDAA issued by the CIR’s duly authorized 215957 (2016)]
representative cannot be considered as the
decision appealable to the CTA under Section Modes of service of assessment notice
7(a)(1) of RA 1125, as amended, if the 1. Personal Service – Notice is delivered
taxpayer availed of its remedy of appeal to the personally to the taxpayer at his known
Office of the Commissioner of Internal address. If not practicable, notice shall be
Revenue the denial of protest issued by the served by substituted service or by mail.
CIR’s duly authorized representative, under 2. Substituted Service – The notice is left with
Subsection 3.1.5 of RR 12-99: a clerk or a person in charge at the
taxpayer’s known address.
xxx “provided, however, that if the taxpayer 3. Service by mail [RR 18-2013]
elevates his protest to the CIR within 30-days
from date of receipt of the final decision of the Service to the tax agent shall be deemed
CIR’s duly authorized representative, the service to the taxpayer. [RR 18-2013]
latter’s decision shall not be considered final,
executory and demandable, in which case, the The notice shall first be served to the
protest shall be decided by the Commissioner.” taxpayer’s registered address before the same
[LRTA v CIR, G.R. No. 231238 (2022)] may be served to the taxpayer’s known
address, or in the alternative, may be served to
Appeal from an Administrative Decision the taxpayer’s registered address and known
on Disputed Assessment address simultaneously. [RMC 11-2014]
Appeal to the CTA must be filed 30 days from c. Tax Delinquency v. Tax Deficiency
receipt of the (final) adverse decision. In case
of inaction by the CIR, a taxpayer may either: Deficiency is defined as the amount still due
1. File a petition for review with the CTA within and collectible from a taxpayer upon audit or
30-days after the expiration of the 180-day investigation; whereas delinquency is defined
period; or as the failure of the taxpayer to pay the tax due
2. Await the final decision of the CIR on the on the date fixed by law or indicated in the
disputed assessment and appeal that final assessment notice or letter of demand.
decision to the CTA within 30-days. [Takenaka Corporation Philippine Branch v.
These options are mutually exclusive and CIR, CTA EB No. 745 (2012)]
resort to one bars the application of the other.
[LRTA v CIR, G.R. No. 231238 (2022)]
Page 442 of 494

Tax Delinquency v. Tax Deficiency d. Prescriptive Period for Assessment
Tax Delinquency Tax Deficiency General Rule: Within 3 years after the last day
The self-assessed The amount by prescribed by law for the filing of the return or
tax per return was which the tax from the date of actual filing, whichever comes
not paid or only imposed by law later; provided, that a return filed before the last
partially paid; or exceeds the amount day prescribed by law for filing shall be
shown in the tax considered as filed on such last day [Sec. 203,
The deficiency tax return; or NIRC]
assessed by the BIR
became final and If no amount is Exception: Within 10 years after the discovery
executory. shown in the return, of the falsity, fraud or omission in case of: (FFF)
or if there is no 1. False return
return, then the 2. Fraudulent return with intent to evade tax;
amount by which the or
tax as determined by 3. Failure to file a return. [Sec. 222, NIRC]
the CIR exceeds the
amount previously 1. False Returns vs. Fraudulent Returns
assessed as a vs. Non-Filing of Returns
deficiency [Sec.
56(B), NIRC] False return Fraudulent Failure to
Delinquency tax can Deficiency tax must return file a return
be collected be assessed and Contains Made with Omission to
administratively by must go through the wrong intent to file a return
distraint or levy or by process of filing the information evade taxes within the
judicial action protest by the due to due time
taxpayer and denial mistake, prescribed
of such protest by carelessnes by law
the BIR. s or
The filing of a civil The filing of a civil ignorance
action for the action at the ordinary Deviation Intentional or
Omission
collection of the court for collection may or may deceitfulmay or may
delinquent tax in the during the pendency not be entry with
not be
ordinary court is a of protest may be the intentional intent intentional
proper remedy. subject of a motion Not subject Subject to
Not subject
to dismiss. In to 50% 50% to 50%
addition, the surcharge, surchargesurcharge,
taxpayer must file a except if except if
petition for review done willfully omission is
with the CTA to toll willful
the running of the Assessment may be made within 10 years
prescriptive period. after discovery of the falsity, fraud or
Subject to Subject to omission
administrative administrative
penalties, such as penalties of interest 2. Suspension of the Running of Statute of
25% surcharge, and compromise Limitations
interest, and penalty, but NOT to a. When the CIR is prohibited from
compromise penalty the 25% surcharge making the assessment or beginning
[MAMALATEO] distraint or levy or a proceeding in
court, and for 60 days thereafter;
Page 443 of 494

b. When the taxpayer requests for a 3. Effect of Failure to File Protest
reinvestigation which is granted by the
CIR; Failure of the taxpayer to file a protest against
c. When the taxpayer cannot be located the FLD/FAN within 30 days will make the
in the address given by him in the assessment final, executory and demandable.
return filed, BUT if the taxpayer informs No request for reconsideration or
the CIR of any change in address, the reinvestigation shall be granted on tax
running of the statute of limitations shall assessments that have already become final,
not be suspended; executory and demandable.
d. When the warrant of distraint or levy is
duly served upon the taxpayer, his 4. Action of the Commissioner on the
authorized representative, or a Protest Filed
member of his household with sufficient
discretion, and no property is located; Period to act upon or decide the protest
and filed
e. When the taxpayer is out of the 1. By the CIR’s duly authorized
Philippines. representative
a. In a request for reinvestigation,
2. Taxpayer Remedies within 180 days from
submission of documents; or
a. Protesting the assessment b. In a request for
reconsideration, within 180
1. Period to File Protest days from the date of filing of
the protest
After issuance of the FLD/FAN, the taxpayer 2. By the CIR
may protest the assessment within 30 days a. In case of protest, within 180
from receipt thereof by filing a request for days from the filing of the
reconsideration or reinvestigation. protest
b. In case of an administrative
2. Submission of Supporting Documents appeal, within 180 days from
the filing of the administrative
For requests for reinvestigation, the taxpayer appeal
shall submit all relevant supporting documents
in support of his protest within 60 days from Note: An administrative appeal to the CIR may
filing of the protest; otherwise, the assessment only be availed of upon the denial of the protest
shall become final. to the FLD/FAN by the CIR’s duly authorized
● “Relevant supporting documents” representative. Under RR 18-2013, there is no
– documents necessary to support the administrative appeal to the CIR for inaction by
legal and factual bases in disputing a the CIR’s representative. The remedy is to
tax assessment as determined by the await the decision or file a petition for review to
taxpayer the CTA within 30 days after the lapse of the
● “Assessment shall become final” – 180-day waiting period.
taxpayer is barred from disputing the
correctness of the issued assessment b. Compromise and Abatement of Taxes
by introduction of newly discovered or
additional evidence, and the FDDA Authority to compromise and abate taxes
shall consequently be denied.
● The 60-day period to submit supporting General rule: The CIR has the authority to
documents shall NOT apply to compromise or abate any tax liability. [Sec.
requests for reconsideration. [RR 18- 7(C), NIRC]
2013
Page 444 of 494

Exception: The power to compromise may be without the full settlement of the offered
delegated to: amount. In case of disapproval of the
a. the Regional Evaluation Board (REB), in application for compromise settlement, the
case of: amount paid upon filing of the aforesaid
i. assessments issued by application shall be deducted from the total
regional offices involving basic outstanding tax liabilities. [RR 9-2013]
taxes of P500,000 or less; and
ii. minor criminal violations Requisites of a tax compromise
discovered by regional and a. The taxpayer must have a tax liability;
district officials [Sec. 7(C), b. There must be an offer by the taxpayer or
NIRC] the Commissioner of an amount to be paid
b. the National Evaluation Board (NEB), by the taxpayer
when: c. There must be an acceptance by the
i. the basic tax exceeds Commissioner or taxpayer as the case may
P1,000,000, or be, of the offer in settlement of the original
ii. the settlement offered is less claim.
than the prescribed minimum
rates [Sec. 204(A), NIRC] Note: A compromise is consensual in nature.
Hence, it may not be imposed on the taxpayer
COMPROMISE without his consent. The BIR may only suggest
settlement of the taxpayer’s liability through a
Grounds for a compromise compromise.
The CIR may compromise the payment of any Cases which may be compromised:
internal revenue tax in the following cases: a. Delinquent accounts
1. Doubtful validity of the assessment – b. Cases under administrative protest
when there exists reasonable doubt as to after issuance of the FAN to the
the validity of the claim against the taxpayer which are still pending in the
taxpayer (e.g., one arising from a jeopardy Regional Offices, Revenue District
assessment, arbitrary assessment); or Offices, Legal Service, Large Taxpayer
2. Financial incapacity – when the financial Service (LTS), Collection Service,
position of the taxpayer demonstrates a Enforcement Service and other offices
clear inability to pay the assessed tax. in the National Office
[Sec. 204(A), NIRC; Sec. 3, RR 30-2002] c. Civil tax cases being disputed before
the courts
Limits of the CIR’s power to compromise d. Collection cases filed in courts
e. Criminal violations, except (i) those
Ground Minimum compromise already filed in court or (ii) those
rate involving criminal tax fraud [Sec. 2, RR
Financial 10% of the basic assessed 30-2002]
incapacity tax
Other cases 40% of the basic assessed Cases which cannot be compromised:
tax a. Withholding tax cases, unless the
[Sec. 204(A), NIRC] applicant-taxpayer invokes provisions
of law that cast doubt on the taxpayer's
Payment of compromise upon filing of obligation to withhold
application b. Criminal tax fraud cases confirmed as
such by the CIR or his duly authorized
The compromise offer shall be paid by the representative
taxpayer upon filing of the application for c. Criminal violations already filed in court
compromise settlement. No application for
compromise settlement shall be processed
Page 445 of 494

d. Delinquent accounts with duly Compromise Abatement
approved schedule of installment litigation or to put an
appears to be
payments end to one already unjustly or
e. Cases where final reports of commenced. It
excessively
reinvestigation or reconsideration have reduces the amount assessed or the
been issued resulting in reduction in of taxpayer’s liability.
costs do not the
the original assessment and the collection of the
taxpayer is agreeable to such decision amount due.
by signing the required agreement form As to authorized officer
for the purpose. CIR and, in certain CIR
f. Cases which become final and cases, the NEB and
executory after final judgment of a REB
court, where compromise is requested As to grounds
on the ground of doubtful validity of the 1. Doubtful validity 1. Unjustly or
assessment of assessment excessively
g. Estate tax cases where compromise is 2. Financial assessed tax
requested on the ground of financial incapacity 2. Administration
incapacity of the taxpayer [Sec. 2, RR and collection
30-2002] costs do not
justify the
ABATEMENT collection of the
amount due
It refers to the cancellation of the entire amount
of tax payable. c. Recovery of Tax Erroneously or
Illegally Collected
Grounds for abatement
a. The tax or any portion thereof appears
Tax Refund as Distinguished from Tax
to be unjustly or excessively assessed;
Credit
or
1. Tax refund takes place when there is
b. The administration and collection costs
actual reimbursement.
do not justify the collection of the
2. Tax credit takes place upon the
amount due. [Sec. 204(B), NIRC]
issuance of a tax certificate or tax credit
memo, which can be applied against
Coverage of abatement
any sum that may be due and collected
from the taxpayer.
General rule: The CIR’s authority to abate is
applicable to surcharge and compromise
1. Grounds, Requisites, and Period for
penalties only.
Filing a Claim for Refund or Issuance of a
Exception: In meritorious instances, the CIR
Tax Credit Certificate (TCC)
may abate the interest as well as basic tax
assessed, provided that cases for abatement Grounds for filing a claim for tax refund or
or cancellation of tax, penalties and/or interest credit
by the CIR shall be coursed through certain a. Tax is erroneously or illegally assessed
officials. [Sec. 4, NIRC] or collected
i. Taxes are erroneously paid
when a taxpayer pays under a
Compromise Abatement
mistake of fact, as when he is
As to nature/definition
not aware of an existing
It is a contract It is the cancellation
exemption in his favor at the
whereby the parties, of the entire amount
time that payment is made.
by reciprocal of tax payable
concessions, avoid a because the tax
Page 446 of 494

ii.Taxes are illegally collected It is subject to waiver in the absence of
when payments are made objection to a claim filed after 2 years.
under duress.
iii. Penalty is collected without Two-year period when counted
authority
b. Penalty is collected without authority General Rule: From the date the tax was paid
c. Sum collected is excessive or in any Exceptions:
manner wrongfully collected [Sec. 229, ● If the tax is withheld at source – from
NIRC] the date it falls due at the end of the
taxable year [Gibbs v. CIR, G.R. No. L-
Requisites for tax refund or tax credit 17406 (1965)]
a. There is a tax collected erroneously or ● If the income is paid on a quarterly
illegally, or a penalty collected without basis – from the time of filing the final
authority, or a sum excessively or adjustment return [CIR v. CA, G.R. No.
wrongfully collected. 117254 (1999)]
b. There must be a written claim for refund ● When the tax is paid in installments
filed by the taxpayer to the CIR [Vda. De – from the date of final payment or the
Aguinaldo v. CIR, G.R. No. L-19927 last installment
(1965)]
Legal basis of tax refunds
Exceptions: Tax refunds are based on the principle of
● When on the face of the return upon quasi-contract or solutio indebiti. The
which payment was made, such Government is not exempted from the
payment appears clearly to have been application of the time-honored doctrine that no
erroneously paid, the CIR may refund person shall unjustly enrich himself at the
or credit the tax even without a written expense of another. [CIR v. Acesite
claim [Sec. 229, NIRC] (Philippines) Hotel Corporation, G.R. No.
● A return filed showing an overpayment 147295 (2007); Secs. 2142 and 2154, NCC]
shall be considered as a written claim
for credit or refund. [Sec. 204(C), Necessity of proof in claim for refund
NIRC] A claim for refund partakes of the nature of an
● The claim must be a categorical claim exemption and is strictly construed against the
for reimbursement [Bermejo v. CIR, claimant. The burden of proof is on the
G.R. No. L-3029 (1950)] taxpayer claiming the refund that he is entitled
● The claim for refund must be filed to the same. [CIR v. Tokyo Shipping, G.R. No.
within 2 years from the date of the L-68252 (1995)]
payment of the tax regardless of any
supervening cause [Sec. 229, NIRC] 2. Proper Party to File Claim for Refund or
Note: Both the claim for refund with the BIR Tax Credit
and the subsequent appeal to the CTA
must be filed within the 2-year period. General Rule: The “taxpayer” is the person
entitled to claim a tax refund; hence, the proper
● Taxpayer must show proof of the party to file a claim for refund or credit.
payment of tax [Sec. 229, NIRC]
Exceptions:
Note: The two-year period is not jurisdictional. 1. In case of indirect taxes, the proper party is
Even if it had already lapsed, the same may be the “statutory taxpayer, the person on
suspended for reasons of equity and other whom the tax is imposed by law and who
special circumstances. [CIR v. Philippine paid the same even if he shifts the burden
American Life Ins. Co., G.R. 105208 (1995)] thereof to another.” [Silkair (Singapore)
Pte. Ltd. v. CIR, G.R. No. 173594 (2008)]
2. Withholding agent
Page 447 of 494

a. In case the taxpayer does not file a sum has been paid under protest or duress.
claim for refund, the withholding agent [Sec. 229, NIRC].
may file the claim. [CIR v. Smart
Communications, Inc., G.R. Nos. Remedy upon Denial or Inaction by the CIR
179045-46 (2010)]
b. The withholding agent of a non-resident Taxpayer’s remedies
foreign corporation may file the claim. 1. If the CIR denies claim – appeal to the CTA
[CIR v. Procter & Gamble Phil. Mfg. within 30 days from receipt of the CIR’s
Corp., G.R. No. L-66838 (1991)] decision and within 2 years from the date
of payment
Reason: The withholding agent, who is made 2. If the CIR does not act on the claim and the
personally liable for the withholding tax, is a 2-year period is about to lapse – file a claim
“taxpayer” under the NIRC. The withholding before the CTA prior to the lapse of the 2-
agent is directly and independently liable for year period; otherwise, the claim shall be
the correct amount of tax that should be barred [R.A. 1125, as amended]
withheld and for deficiency assessments,
surcharges and penalties. [CIR v. Procter & Simultaneous filing allowed
Gamble Phil. Mfg. Corp., G.R. No. L-66838
(1991)] If the CIR takes time in deciding the claim and
the period of two years is about to end, the suit
Option of a corporate taxpayer in case of or proceeding must be started in the CTA
excess income tax payments before the end of the 2 year period without
awaiting the decision of the CIR. [Gibbs v. CIR,
If the sum of the quarterly tax payments made G.R. No. L-17406 (1965)]
during the taxable year exceeds the total tax
due on the entire taxable income of that year, Period for claiming refund once granted
the corporation shall either:
1. carry-over the excess credit; or The refund check or warrant must be claimed
2. be credited or refunded with the excess or cashed within 5 years from the date such
amount paid warrant or check was mailed or delivered;
otherwise it shall be forfeited in favor of the
Note: These two options under Section 76 are government and the amount thereof shall
alternative in nature. The choice of one revert to the general fund. [Sec. 230(A), NIRC]
precludes the other. [Republic v. Team (Phils.)
Energy Corporation, G.R. No. 188016 (2015)] Period for using the TCC
Irrevocability rule TCCs may be applied against all internal

revenue taxes, excluding withholding tax.
Once the option to carry over and apply the TCCs which remain unutilized after 5 years
excess income tax payments to succeeding from the date of issue shall, unless revalidated,
quarters of the succeeding years is taken, that be considered as invalid, and shall revert to the
option is irrevocable for that taxable period. general fund. [Sec. 230, NIRC]
Consequently, a taxpayer is barred from
securing a refund of, or tax credit certificate for, All TCCs issued by the BIR shall not be allowed
the excess amount that it has initially opted to to be transferred or assigned to any person.
carry-over. [Sec. 76, NIRC] [RR 14-2011]
Payment under protest not required Any TCC which remains unutilized for more
than one (1) year at any given interval of time
A suit or proceeding for tax refund may be during its validity shall be converted into cash
maintained whether or not such tax, penalty or with prior written notice by the BIR, subject to
the availability of funds in accordance with the
Page 448 of 494

procedural requirements that will be issued by Sec. 229 Sec. 112
the BIR for this purpose [RR 14-2020] without
authority, or
3. Distinction Between Refund of 3. any sum
Unutilized Input VAT (Sec. 112, NIRC) and excessively
Refund of Erroneously or Illegally or wrongfully
Collected Tax (Sec. 229, NIRC) collected
The 2-year period The 2-year period
Rules on refund of excess or unutilized shall be reckoned shall be reckoned
input VAT from the date of from the close of the
● When to file an administrative claim with payment of the tax taxable quarter
the CIR: or penalty. when the sales were
o General rule: Within 2 years from made.
the close of the taxable quarter Both the Only the
when the sales were made [Sec. administrative claim administrative claim
112(A), NIRC; CIR v. Mirant with the CIR and the is required to be filed
Pagbilao, G.R. No. 172129 (2008)] appeal to the CTA within the 2-year
o Exception: Within 2 years from the must be made within period.
date of payment of the output VAT, the 2-year period.
if the administrative claim was filed If the 2-year period is Sec. 112(C) of the
from June 8, 2007 (promulgation of about to lapse and NIRC provides a 90-
Atlas v. CIR) to September 12, the CIR has not day waiting period
2008 (promulgation of Mirant) acted on the claim, for the CIR to decide
● When to file a judicial claim with the CTA: the taxpayer may on the application for
o General rule: Section 112(D) already appeal to the tax refund or credit.
applies; not Section 229 CTA without waiting Compliance with the
§ Within 30 days from the full or for the decision of 90-day waiting
partial denial of the the CIR. period is mandatory
administrative claim by the CIR; and jurisdictional.
or
§ Within 30 days from the Thus, the taxpayer
expiration of the 90-day period may elevate his
provided to the CIR to decide claim to the CTA (a)
on the claim. This is mandatory within 30 days from
and jurisdictional. the full or partial
denial of the claim, or
Exception: The judicial claim need not await (b) within 30 days
the expiration of the 90-day period, if such was after the lapse of the
filed from December 10, 2003 (issuance of BIR 90-day waiting
Ruling No. DA-489-03) to October 6, 2010 period, in case of
(promulgation of Aichi). inaction by the CIR.
[CIR v. San Roque Power Corporation, G.R.
Sec. 229 Sec. 112 No. 187485 (2013); Visayas Geothermal
Refers to a refund or Refers to a refund or Power Company v. CIR, G.R. No. 197525
credit of tax credit of excess (2014); Sec. 112, NIRC, as amended by
1. tax or unutilized input TRAIN Law]
erroneously VAT attributable to
or illegally zero-rated sales
assessed or
collected, or
2. penalty
collected
Page 449 of 494
3. Government Remedies for issued within the extraordinary period of 10
Collection of Delinquent Taxes years in cases of false or fraudulent return or
failure to file a return. For assessments issued
a. Requisites within the 3-year ordinary prescriptive period to
assess, the CIR had another 3-years to initiate
1. The government can initiate collection the collection of taxes by distraint or levy or
administratively or judicially once the court proceedings. [CIR v CTA 2nd Division
assessment becomes final and executory. and QL Development Inc., G.R. No. 258947
2. Collection must be made within 3 or 5 years (2022)]
following the assessment of the tax. [Sec.
203 vis-à-vis 222(c), NIRC] The period to collect begins to run from the
date the assessment notice is released, mailed
The government has two ways to collect: or sent to the taxpayer. (ibid)
1. Summary or administrative remedies
a. Distraint on personal property For collection to be valid, the assessment must
b. Levy on real property be within the period of limitation. Essentially,
2. Judicial remedies (civil or criminal) when the assessment is issued beyond the
prescriptive period, the government's right to
Note: The remedies of distraint and levy shall collect deficiency taxes also prescribes.
not be availed of where the amount of tax Hence, there is no more basis for its collection
involved is not more than P100. save for certain exceptions. Both the
assessment and collection should be made in
A Final Decision on Disputed Assessment accordance with law as any arbitrariness will
(FDDA) is not a collection letter. The CIR’s negate the very reason for government itself.
collection efforts are initiated by distraint, levy, [La Flor Dela Isabela, Inc. v. CIR, G.R. No.
or court proceedings. [CIR v CTA 2nd Division 202105, (2021)]
and QL Development Inc., G.R. No. 258947
(2022)] While the government cannot be estopped by
the negligence or omission of its agents, the
The distraint and levy proceedings are validly mandatory provisions on Sections 203 and 228
begun or commenced by the issuance of a of the NIRC cannot be rendered nugatory by
warrant of distraint and levy, and service the mere act of the CIR. Article 5 of the Civil
thereof on the taxpayer. (ibid) Code is explicit: "[a]cts executed against the
provisions of mandatory or prohibitory laws
A judicial action for collection is initiated by (a) shall be void, except when the law itself
filing of a complaint with the court of competent authorizes their validity." [CIR v. Unioil
jurisdiction; or (b) where the assessment is Corporation, G.R. No. 204405 (2021)]
appealed to the CTA by filing an answer to the
taxpayer’s petition for review wherein payment Exception:
of the tax is prayed for. (ibid) a. In case of assessments issued within the
extra-ordinary period of 10 years in cases
of (i) false or fraudulent return with intent to
b. Prescriptive Periods
evade tax or of (ii) failure to file a return, the
CIR has another five (5) years within which
Prescriptive period
to collect the taxes [CIR v. CTA Second
General Rule: In case of assessments issued
Division and QL Development, Inc., G.R.
within the three-year ordinary period, the CIR
No. 258947, (March 29, 2022)]
has another three years within which to collect
b. When a waiver of the statute of limitation is
the taxes [CIR v. United Salvage and Towage
executed within the 5-year period,
(Phils.) Inc., G.R. No. 197515 (2014)]
collection may be made within the period
agreed upon. [Sec. 222(d), NIRC]
The five-year period for collection of taxes
(under Sec. 222) only applies to assessments
Page 450 of 494
Court proceeding for collection of tax CIR’s contention that the date of notarization of
General rule: No proceeding in court without waiver should be presumed as the date of
assessment for the collection of taxes may be acceptance of waiver is untenable. The notary
made after the 3-year period for making an public is distinct from the CIR who is authorized
assessment. [Sec. 203, NIRC] by law to accept waivers. (ibid)
Exception: A proceeding in court for the The doctrine of estoppel cannot be applied as
collection of such tax may be filed without an exception to the statute of limitations on
assessment in the case of (i) false or fraudulent assessment of taxes considering that the BIR
return with intent to evade tax or of (ii) failure to provides a detailed procedure for the proper
file a return [Sec. 222(a), NIRC] execution of waiver which must be strictly
followed. The BIR cannot invoke the doctrine of
Waiver of prescriptive period estoppel to conceal its failure to comply with its
If tax was assessed within the period agreed own issuances, namely, RMO No. 20-90 and
upon by the CIR and the taxpayer, such tax RDAO No. 05-01. It cannot collect taxes based
may be collected by distraint or levy or by a on an already prescribed assessment, even
proceeding in court within the period agreed when taxes are considered the lifeblood of
upon in writing before the expiration of the 5-yr government. [La Flor Dela Isabela, Inc. v. CIR,
period. [Sec. 222(d), NIRC] supra]
A waiver of the statute of limitations is a The taxpayer’s contributory fault or negligence

derogation of a taxpayer's right to security coupled with estoppel will, however, render
against prolonged and unscrupulous effective an otherwise flawed waiver,
investigations. Thus, it must be carefully and regardless of the physical number of mistakes
strictly construed. [La Flor Dela Isabela, Inc. v. attributable to a party. The doctrine of estoppel,
CIR, G.R.No.202105 (2021)] as a bar to the statute of limitations protecting
a taxpayer from prolonged investigations, must
Waiver must be (i) in the proper form; (ii) must be applied sparingly; but no taxpayer may be
be signed by the taxpayer himself or his duly allowed to execute haphazard waivers
authorized representative. In case of a deliberately, and lead the tax authorities to
corporation, the waiver must be signed by any believe that the assessment period has been
of its responsible official. If delegated, such extended, only to deny the validity thereof
delegation should be in writing and duly when it becomes unfavorable to him. [Asian
notarized; (iii) waiver should be duly notarized; Transmission Corp v CIR, G.R. No. 230861
(iv) CIR or RO authorized by him must sign the (2022)]
waiver indicating that the BIR has accepted
and agreed to the waiver. The date of such Suspension of running of statute of
acceptance by the BIR should be indicated; (v) limitations
both the date of execution by the taxpayer and [see discussion under Assessments]
the date of acceptance by the BIR should be
before the expiration of the period of 4. Civil Penalties
prescription or the lapse of the period agreed
upon in case a subsequent waiver is executed; a. Delinquency Interest and Deficiency
(vi) Executed in 3 copies; 1 copy attached to Interest
the docket, 2nd to the taxpayer, and 3rd to the
office accepting the waiver; (vii) he fact of INTEREST
receipt by the taxpayer must be indicated in the In general, interest is assessed and collected
original copy, showing that taxpayer was on any unpaid amount of tax at the rate of 12%
notified of acceptance by the BIR. [Republic v or double the legal interest rate for loans or
First Gas Power Corp. G.R. No. 214933 forbearance of any money as set by the BSP
(2022)] from the date prescribed for payment until the
Page 451 of 494

amount is fully paid. [Sec. 249(A), NIRC; Sec. delinquency interest SHALL NOT be imposed
2, RR 21-2018] simultaneously. [Sec. 249(A), NIRC; Sec. 5,
RR 21-2018]
Note: The rate of interest per BSP Circular No.
799 series of 2013 for loans or forbearance of c. Interest on extended payment – Interest
any money in the absence of an express at the rate of 12% per annum on the tax or
stipulation is 6%. Thus, the interest rate deficiency tax or any part thereof unpaid
imposable shall be 12%. [Sec. 2, RR 21-2018] from the date of notice and demand until it
is paid in the following cases:
a. Deficiency Interest – Interest at the rate of 1. When a person elects to pay the tax on
12% per annum on any deficiency tax due, installment, but fails to pay the tax or any
which interest shall be assessed and installment, or any part of such amount or
collected from the date prescribed for its installment on or before the date
payment until: (a) full payment thereof; or prescribed for its payment; or
(b) upon issuance of a notice and demand 2. Where the CIR has authorized an
by the CIR or his authorized extension of time within which to pay a tax
representative, whichever comes first [Sec or a deficiency tax or any part thereof [Sec.
249(B), NIRC; Sec. 3, RR 21-2018] 249(D), NIRC]
b. Delinquency interest – Interest at the rate Effectivity of the 12% interest rate
of 12% per annum on the unpaid amount in The interest rate of 12% is effective starting
case of failure to pay: January 1, 2018. Prior to such date, the
1. the amount of the tax due on any return applicable interest rate shall be 20%.
required to be filed; or
2. the amount of the tax due for which no b. Surcharge
return is required; or
3. a deficiency tax, or any surcharge or This is a civil penalty imposed in addition to the
interest thereon on the due date tax required to be paid [Sec. 248, NIRC]
appearing in the notice and demand of
the CIR or his authorized Rates of Surcharge (25% or 50%)
representative until the amount is fully a. 25% of the amount due in the following
paid, which interest shall form part of cases:
the tax [Sec. 249(C), NIRC; Sec. 4, RR ● Failure to file any return and pay the tax
21-2018] due on the prescribed date; or
● Filing a return with an internal revenue
Deficiency Delinquency officer other than those with whom the
interest interest return is required to be filed, unless the
Basic tax + CIR authorizes otherwise; or
deficiency ● Failure to pay the deficiency tax within
Base Basic tax
interest + the time prescribed for its payment in
surcharge the notice of assessment; or
From the due ● Failure to pay the full or part of the
From the date
date appearing amount of tax due on or before the date
prescribed for
Recko- in the notice and prescribed for its payment [Sec.
its payment
ning demand of the 248(A), NIRC]
until the full
date CIR until the
payment
amount is fully b. 50% of the tax or of the deficiency tax in
thereof
paid case any payment has been made, in the
Rate 12% per annum following cases:
• Willful neglect to file the return within
Note: Upon effectivity of the TRAIN Law on the prescribed period; or
January 1, 2018, the deficiency and the
Page 452 of 494

• A false or fraudulent return is willfully c. Compromise Penalty
made [Sec. 248(B), NIRC]
A compromise penalty is an amount of money
Prima facie evidence of a false or fraudulent paid by a taxpayer to compromise a tax
return violation that he has committed, instead of the
1. Substantial underdeclaration of sales, BIR instituting a criminal action against the
receipts or income – failure to report sales, taxpayer. A compromise is consensual in
receipts or income in an amount exceeding character, hence, may not be imposed on the
30% of that declared per return taxpayer without his consent.[Sec. 6, RR 12-
2. Substantial overstatement of deductions – 99]
a claim of deductions in an amount
exceeding 30% of actual deductions [Sec. Note: All criminal violations may be
248(B), NIRC] compromised except: (a) those already filed in
court, or (b) those involving fraud
ILLUSTRATION
Mr. A has been assessed deficiency income tax of P1,000,000, exclusive of interest and surcharge,
for taxable year 2015. The tax liability remained unpaid despite the lapse of June 30, 2017, the
deadline for payment stated in the notice and demand issued by the Commissioner. Payment was
made by Mr. A on February 10, 2018. The civil penalties are computed as follows:
Basic Tax Due P 1,000,000.00

Add: 25% surcharge for late payment P 250,000.00
20% Deficiency Interest
from April 16, 2016 to June 30, 2017
(441 days) 241,643.84 491,643.84
Total Amount Due, June 30,2017 P 1, 491,643.84
Add: 20% Deficiency Interest
from July 1, 2017 to December 31, 2017
(184 days based on P1M) 100,821.92
Add: 20% Delinquency Interest
from July 1, 2017 to December 31, 2017
(184 days; based on total amount as of
June 30, 2017) 150,390.39
Add: 12% Delinquency Interest
from January 1, 2018 to February 10, 2018
(41 days; based on total amount due as of
June 30, 2017) 20,106.54 271,318.85
Total Amount Due, February 10, 2018 P 1,762,962.90
Page 453 of 494

Congress may provide. [Sec. 5, Art. X,
1987 Constitution]
II. LOCAL TAXATION c. Legislative in nature – The power to
impose taxes is vested solely in the
legislative body (i.e., the Sanggunian)
A. Local Government Taxation of each LGU.
d. Territorial – It can only be exercised
within the territorial jurisdiction of each
1. General Principles
LGU.
i. Taxation shall be uniform in each local
Grant of Local Taxing Power Under the
government unit (LGU)
Local Government Code
ii. Taxes, fees, charges and other
a. “Each local government unit shall have
impositions shall be:
the power to create its own sources of
a. equitable and based as far as
revenues and to levy taxes, fees, and
practicable on the taxpayer’s liability to
charges subject to such guidelines and
pay;
limitations as the Congress may
b. be levied and collected only for public
provide, consistent with the basic policy
purposes;
of local autonomy. Such taxes, fees,
c. not be unjust, excessive, oppressive, or
and charges shall accrue exclusively to
confiscatory;
the local governments.” [Sec. 5, Art. X
d. not be contrary to law, public policy
of The 1987 Constitution]
national economic policy, or restraint of
b. “Each local government unit shall
trade
exercise its power to create its own
iii. The collection of local taxes, fees,
sources of revenue and to levy taxes,
charges and other impositions shall not
fees, and charges subject to the
be left to any private person;
provisions herein, consistent with the
basic policy of local autonomy. Such
iv. The revenue collected shall inure solely to
taxes, fees, and charges shall accrue
the benefit of, and be subject to the
exclusively to the local government
disposition by, the LGU levying the tax,
units.” [Sec. 129, LGC]
fee, charge or other imposition, unless
otherwise specifically provided herein;
Local Taxing Authority
and
v. Each LGU shall, as far as practicable,
The power to impose a tax, fee, or charge or to
evolve a progressive system of taxation.
generate revenue under the LGC shall be
[Sec. 130, LGC]
exercised by the Sanggunian of the LGU
concerned through an appropriate ordinance.
2. Nature and Source of Taxing Power [Sec. 132, LGC]
Nature of the taxing power of LGUs Local legislative power shall be exercised by
a. Not inherent - Municipal corporations, the ff:
being mere creatures of law, may a. Sangguniang Panlalawigan for the
exercise the power to tax only if province;
delegated to them by the national b. Sangguniang Panlungsod for the city;
legislature or conferred to them by the c. Sangguniang Bayan for the
Constitution. Sec. 5, Art. X of The 1987 municipality;
Constitution directly grants LGUs the d. Sangguniang Barangay for the
power to tax. barangay. [Sec. 48, LGC]
b. Limited – The taxing power of LGUs is
not absolute because it is subject to Note: The exercise of the power to tax by the
such guidelines and limitations that local legislative assembly is subject to the veto
Page 454 of 494

power of the local chief executive. [Sec. 55, General rule: Unless otherwise provided, tax
LGC] exemptions or incentives granted to, or
presently enjoyed by all persons, whether
Authority to Prescribe Penalties for Tax natural or juridical, including GOCCs, are
Violations withdrawn upon the effectivity of the LGC.
[Sec. 193, LGC]
1. The Sanggunian of an LGU is authorized
to prescribe fines or other penalties for Exemptions: Tax exemptions granted to the ff
violation of tax ordinances are not withdrawn:
a. in no case shall such fines be less a. Local water districts
than P1,000 nor more than P5,000 b. Cooperatives duly registered under RA
b. nor shall imprisonment be less than 1 6938 (Cooperative Code of the Philippines)
month nor more than 6 months c. Non-stock and non-profit hospitals and
2. Such fine or other penalty, or both, shall educational institutions. [Sec. 193, LGC]
be imposed at the discretion of the court
3. The Sangguniang Barangay may
prescribe a fine of not less than P100 nor Note: The LGC took effect on January 1, 1992.
more than P1,000. [Sec. 516, LGC]
By virtue of Sec. 193 of the LGC, all tax
Authority to Grant Local Tax Exemptions exemption privileges then enjoyed by all
persons, save those expressly mentioned,
LGUs may, through ordinances, grant tax have been withdrawn effective January 1, 1992
exemptions, incentives or reliefs under such – the date of effectivity of the LGC. However,
terms and conditions as they may deem the withdrawal of exemptions pertains only to
necessary. [Sec. 192, LGC] those already existing when the LGC was
enacted. The intention of the legislature was to
Withdrawal of Exemptions remove all tax exemptions or incentives
granted prior to the LGC. [City of Iloilo vs.
Local tax exemptions, in general Smart Communications, G.R. No. 167260,
Feb. 27, 2009]
3. Scope of Taxing Power
LGU Scope of Taxing Power

Province Except as otherwise provided in the LGC, a province may levy only the
following taxes, fees, and charges: [Sec. 134, LGC]
1. Transfer of real property ownership [Sec. 135, LGC]
2. Business of printing and publication [Sec. 136, LGC]
3. Franchise tax [Sec. 137, LGC]
4. Tax on sand, gravel and other quarry resources [Sec. 138, LGC]
5. Professional tax [Sec. 139, LGC]
6. Amusement tax [Sec. 140, LGC]
7. Annual fixed tax for every delivery truck or van of Manufacturers or Producers,
Wholesalers of, Dealers, or Retailers in, Certain Products. [Sec. 141, LGC]
Municipality May levy taxes, fees and charges not otherwise levied by provinces, such as:
1. Tax on business
2. Fees and charges on business and occupation
3. Fees for sealing and licensing of weights and measures
4. Fishery rentals, fees and charges [Sec. 142, LGC]
Page 455 of 494

LGU Scope of Taxing Power
City May levy taxes, fees and charges which the province or municipality may
impose; those levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with the
LGC; rate may exceed maximum rates allowed for the province or municipality
by not more than 50% except the rates of professional and amusement taxes.
[Sec. 151, LGC]
Barangay May levy taxes, fees, and charges, as provided in this Article, which shall
exclusively accrue to them:
1. Taxes on stores or retailers with fixed business establishments with gross
sales of receipts of the preceding calendar year of P50,000 or less, in the case
of cities and P30,000 or less, in the case of municipalities, at a rate not
exceeding 1% on such gross sales or receipts.
2. Service fees or charges rendered in connection with the regulations or the use
of barangay-owned properties or service facilities (e.g., palay, copra, tobacco
dryers)
3. Barangay clearance
4. Other fees and charges on commercial breeding of fighting cocks, cockfights
and cockpits, on places of recreation which charge admission fees, and
billboards, signboards, neon signs, and outdoor advertisements. [Sec. 152,
LGC]
4. Specific Taxing Power of Local Government Units
Specific Taxes Province Municipality City Barangay

Tax on Transfer of Real Property ✓ ✓
Tax on Business of Printing and Publication ✓ ✓
Franchise Tax ✓ ✓
Tax on Sand, Gravel and other Quarry ✓ ✓
Resources
Professional Tax [Sec. 139, LGC] ✓ ✓
Amusement Tax [Sec. 140, LGC] ✓ ✓
Annual Fixed Tax for Every Delivery Truck or ✓ ✓
Van of Manufacturers or Producers,
Wholesalers of, Dealers, or Retailers in,
Certain Products [Sec. 141, LGC]
Tax on Business [Sec. 143, LGC] ✓ ✓
Fees and Charges on Regulation/Licensing ✓ ✓
of Business or Occupation, or Practice of
Profession [Sec. 147, LGC]
Fees for Sealing and Licensing of Weights
and Measures [Sec. 148, LGC]
Fishery Rentals, Fees and Charges [Sec. ✓ ✓
149, LGC]
Community Tax [Sec. 156, LGC] ✓ ✓
Tax on Small-scale Stores/Retailers [Sec. ✓
152(a), LGC]
Page 456 of 494

Specific Taxes Province Municipality City Barangay
Service Fees or Charges on the Regulation ✓
or Use of Barangay-owned Properties [Sec.
152(b), LGC]
Barangay Clearance [Sec. 152(c), LGC] ✓
Other Fees and Charges (on commercial ✓
breeding of fighting cocks, cockfights,
cockpits; places of recreation which charge
admission fees; outside advertisements)
[Sec. 152(d), LGC]
Reasonable Fees and Charges for Services ✓ ✓ ✓ ✓
Rendered [Sec. 153, LGC]
Public Utility Charges [Sec. 154, LGC] ✓ ✓ ✓ ✓
Toll Fees or Charges [Sec. 155, LGC] ✓ ✓ ✓ ✓
Real Property Tax [see separate discussion ✓ ✓ [within ✓
on Real Property Taxation] Metro Manila]
B. Taxing Powers of Provinces

Transaction Taxed Tax Rate and Tax Base Exemptions Others
TAX ON TRANSFER OF REAL PROPERTY
Imposed on the sale, Tax Rate: Not more than Sale, transfer, or other Person Liable:
donation, barter, or 50% of 1% disposition of real seller, donor,
any other mode of Tax Base: Total property pursuant to RA transferor,
transfer of ownership acquisition price or fair 6657 (Comprehensive executor or
or title to real property market value if monetary Agrarian Reform Law) administrator
[Sec 135, LGC] consideration is not Time of Payment:
substantial, whichever is Within 60 days
higher. from the date of
execution of deed
or from the date of
decedent's death
Note: Evidence of
payment of tax
must be presented
to the Register of
Deeds before
registration, and to
the provincial
assessor before
cancellation of an
old tax declaration.
TAX ON BUSINESS OF PRINTING AND PUBLICATION
Imposed on the Tax Rate: Not exceeding Receipts from printing
business of persons 50% of 1% and/or publishing of
engaged in the Tax Base: Gross annual books and other
printing, and/or receipts for the preceding reading materials
publication of books, calendar year prescribed by the
cards, posters, Department of
Page 457 of 494
leaflets, handbills, In the case of a newly Education as school
certificates, receipts, started business: texts or references
pamphlets, and others ● Tax Rate: Not
of similar nature [Sec exceeding 1/20 of 1% ●
136, LGC] Tax Base: Capital
investment
FRANCHISE TAX
Imposed on Tax Rate: Not exceeding No exception Franchise tax is a
businesses enjoying a 50% of 1 Notwithstanding any tax on the privilege
franchise [Sec 137, Tax Base: Gross annual exemption granted by of transacting
LGC] receipts for the preceding any law or other special business in the
calendar year based on law, the province may state and
the incoming receipt, or impose a tax on exercising
realized, within its businesses enjoying a corporate
territorial jurisdiction franchise. [Sec. 137, franchises granted
In the case of a newly LGC] by the state. It is
started business: not levied on the
● Tax Rate: Not more corporation simply
than 1/20 of 1% for existing as a
● Tax Base: Capital corporation.
investment Requisites to be
covered by
franchise tax:
a. that one has a
franchise
in the sense of a
secondary or
special franchise;
and
b. that it is
exercising its rights
or privileges under
this franchise
within the territory
of the concerned
LGU [NPC v.
Province of
Isabela, G.R. No.
165827 (2006)]
TAX ON SAND, GRAVEL AND OTHER QUARRY RESOURCES

Levied on ordinary Tax Rate: Not more than Who issues
stones, gravel, earth 10% permit to extract:
and other quarry Tax Base: Fair market issued exclusively
resources, as defined value in the locality per by the provincial
in the NIRC, extracted cubic meter of the governor pursuant
from public lands or extracted resources to an ordinance by
from the beds of seas, the Sangguniang
lakes, rivers, streams, Panlalawigan
creeks, and other
Page 458 of 494
public waters within Distribution of
its territorial jurisdiction proceeds:
[Sec 138, LGC] a. Province - 30%
b. Component
municipality
resources
extracted - 30%
c. Barangay where
resources were
extracted - 40%
PROFESSIONAL TAX
Exercise or practice of Tax Rate: Not to exceed Professionals Place of
profession requiring P300 exclusively employed payment: To the
government Tax Base: At such by the government province where the
examination [Sec 139, amount and reasonable profession is
LGC] classification determined practiced, or where
Note: A person who by the Sangguniang the principal office
has paid the Panlalawigan is maintained
professional tax is Time of payment:
entitled to practice his Payable annually,
profession anywhere on or before
in the country without January 31 or
being subjected to before beginning
similar taxes for the the practice of
practice of such profession
profession. Employers shall
require payment of
professional tax
before
employment and
annually
thereafter.
AMUSEMENT TAX
Collected from Tax Rate: Not more than Holding of operas, Note: In case of
proprietors, lessees, or 10% [RA 9640] concerts, dramas, theaters or
operators of theaters, Tax Base: Gross receipts recitals, paintings, and cinemas, tax shall
cinemas, concert halls, from admission fees art exhibitions, flower first be deducted
circuses, boxing shows, musical and withheld by
stadia, and other programs, literary and their proprietors,
places of amusement oratorical presentations lessees and
[Sec 140, LGC] operators before
Not subject to Exception to the gross receipts
amusement tax exemption (taxable): are divided among
under the LGC: Pop, rock, or similar them.
a. Resorts, swimming concerts Distribution of
pools, bath houses, proceeds: Shared
hot springs, and tourist equally by the
spots [Pelizloy Realty province and the
Corp. v. Province of municipality where
Page 459 of 494
Benguet, G.R. No. amusement places
183137 (2013)] are located
b. Professional
basketball games
[PBA v. CA, G.R. No.
119122 (2000)]
c. Golf courses [Alta
Vista Golf and Country
Club v. City of Cebu,
G.R. No. 180235
(2016)]
d. Those subject to
amusement tax under
Sec. 125 of the NIRC
TAX ON DELIVERY TRUCK/VAN

Imposed on vehicles Tax Rate: Not exceeding Such
used by P500 manufacturers,
manufacturers, producers,
producers, Tax Base: Every truck, wholesalers,
wholesalers, dealers van, or vehicle dealers and
or retailers in the retailers shall be
delivery or distribution exempt from the
of distilled spirits, tax on peddlers.
fermented liquors, soft
drinks, cigars and
cigarettes, and other
products, as may be
determined by the
Sangguniang
Panlalawigan, to sales
outlets, or consumers
in the province,
whether directly or
indirectly [Sec 141,
LGC]
C. Taxing Powers of Municipalities

Scope of taxing power: Municipalities may levy taxes, fees, and charges not otherwise levied by
provinces. [Sec. 142, LGC]
Tax on Various Types of Businesses [Sec. 143, LGC]
Businesses Taxed Rate/Amount and Base Other Information

Manufacturers, assemblers, Tax Rate: From P165 to
repackers, processors, P24,375 per annum or at a rate
brewers, distillers, rectifiers, not exceeding 37.5 % of 1%
and compounders of liquors,
distilled spirits, and wines or
Page 460 of 494
manufacturers of any article of Tax Base: Gross sales or
commerce of whatever kind or receipts for the preceding
nature [Sec. 143(a), LGC] calendar year
Wholesalers, distributors, or Tax Rate: From P18 to “Wholesale” means a sale

dealers in any article of P10,000 or at a rate not where the purchaser buys or
commerce of whatever kind or exceeding 50% of 1% imports the commodities for
nature [Sec. 143(b), LGC] Tax Base: Gross sales or resale to persons other than the
receipts for the preceding end user regardless of the
calendar year quantity of the transaction.
[Sec. 131(z), LGC]
“Dealer” means one whose
business is to buy and sell
merchandise, goods, and
chattels as a merchant. He
stands immediately between
the producer or manufacturer
and the consumer. [Sec.
131(k), LGC]
Exporters and manufacturers, Not exceeding 1⁄2 of rates Essential Commodities:
millers, producers, prescribed under Sec. 143 (a), [RWC- CLAPS]
wholesalers, distributor, (b) and (d) of the LGC (on a. Rice and corn
dealers or retailers of essential manufacturers; wholesalers, b. Wheat or cassava flour,
commodities enumerated distributors and dealers; and meat,
below: [Sec. 143(c), LGC] retailers, respectively) dairy products, locally
manufactured, processed or
preserved food, sugar, salt, and
other agricultural, marine, and
freshwater products, whether in
their original state or not
c. Cooking oil and cooking gas
d. Cement
e. Laundry soap, detergents,
and
medicine
f. Agricultural implements,
Equipment and post-harvest
facilities, fertilizers, pesticides,
insecticides, herbicides and
other farm inputs
g. Poultry feeds and other
animal feeds
h. School supplies [Sec. 143(c),
LGC]
Retailers [Sec. 143(d), LGC] Tax Rate: Note: Barangays have the
1. 2% per annum on sales exclusive power to tax gross
not exceeding sales or receipts amounting to:
P400,000 a. 50,000 or less in case of
2. 1% per annum on sales cities b. 30,000 or less in case
in excess of the first of
Page 461 of 494

P400,000 [Art. 232(d), municipalities [Sec. 143(d),
LGC IRR] Sec. 152, LGC]
Tax Base: Gross sales or “Retail” means a sale where
receipts for the preceding the purchaser buys the
calendar year commodity for his own
consumption, irrespective of
the quantity of the commodity
sold. [Sec. 131(w), LGC]
Contractors and other Tax Rate: From P27.50 to “Contractor” includes

independent contractors [Sec. P11,500 or at a rate not persons, natural or juridical, not
143(e), LGC] exceeding 50% of 1% subject to professional tax
Tax Base: Gross sales or under Sec. 139 of the LGC,
receipts for the preceding whose activity consists
calendar year essentially of the sale of all
kinds of services for a fee,
regardless of whether or not the
performance of the service
calls for the exercise or use of
the physical or mental faculties
of such contractor or his
employees. [Sec. 131(h), LGC]
Banks and other financial Tax Rate: Not exceeding 50% Note: All other income and
institutions[Sec. 143(f), LGC] of 1% receipts of banks and other
Tax Base: Gross receipts of financial institutions not
the preceding calendar year otherwise enumerated herein
derived from interest, shall be excluded from the
commissions and discounts taxing authority of the LGU
from lending activities, income concerned. [Art. 232(f), LGC
from financial leasing, IRR]
dividends, rentals on property
and profit from exchange or
sale of property, insurance
premium
Peddlers engaged in the sale of Tax Rate and Base: Not “Peddler” means any person
any merchandise or article of exceeding P50 per peddler who, either for himself or on
commerce [Sec. 143(g), LGC] annually commission, travels from place
to place and sells his goods or
offers to sell and deliver the
same. [Sec. 131(t), LGC]
Any other business which the Tax Base: Gross sales or Note: This is a catch-all
Sanggunian concerned may receipts provision.
deem proper to tax [Sec. Tax Rate: The Sanggunian Exception: Any business
143(h), LGC] may prescribe a schedule of engaged in the production,
graduated rates but in no case manufacture, refining,
to exceed the rates prescribed distribution or sale of oil,
herein. gasoline, and other petroleum
Note: For any business subject products shall not be subject to
to excise, value-added or any local tax imposed under
percentage tax under the Sec. 143 of the LGC. [Art.
NIRC, the rate of tax shall not 232(h), LGC IRR]
Page 462 of 494
exceed 2% of gross sales or
receipts of the preceding
calendar year.
Tax base of local business tax establishment or place where business subject
to tax is conducted.
Business tax must be based on gross sales or b. One line of business is not exempted
receipts, it being different from gross revenue. by being conducted with some other
[Ericsson Telecommunications Inc. v. City of businesses for which such tax has been paid.
Pasig, G.R. No. 176667 (2007)] c. The tax on a business must be paid by
the person conducting it.
“Gross Sales or Receipts” include the total d. If a person operates 2 or more
amount of money or its equivalent representing businesses mentioned in Sec. 143, the tax
the contract price, compensation or service shall be computed:
fee, including the amount charged or materials e. on the combined total gross sales or
supplied with the services and deposits or receipts, if they are subject to the same tax rate
advance payments actually or constructively f. separately based on the gross sales or
received during the taxable quarter for the receipts of each business, if they are subject to
services performed or to be performed for different tax rates [Sec. 146, LGC]
another person excluding discounts if
determinable at the time of sales, sales return, Note: Condominium corporations are not
excise tax, and VAT. [Sec. 131(n), LGC] business entities, and are thus not subject to
local business tax. Even though the
“Gross revenue” covers money or its corporation is empowered to levy assessments
equivalent actually or constructively received, or dues from the unit owners, these amounts
including the value of services rendered or are not intended for the incurrence of profit by
articles sold, exchanged or leased, the the corporation, but to shoulder the multitude of
payment of which is yet to be received. necessary expenses for maintenance of the
[Ericsson Telecommunications Inc. v. City of condominium. [Yamane v. BA Lepanto
Pasig, G.R. No. 176667 (2007)] Condominium Corp., G.R. No. 154993 (2005)]
Ceiling on business tax within Metro Manila Situs of business tax

Municipalities within Metro Manila may levy
taxes at rates which shall not exceed by 50% Rule 1:
the maximum rates prescribed in Sec. 143 of
the LGC. [Sec. 144, LGC] In case of persons maintaining/operating a
branch or sales outlet making the sale or
Tax on retirement of business transaction, the sale shall be recorded in said
branch or sales outlet and the tax paid to the
Upon termination of a business subject to tax municipality/city where the branch or sales
under Sec. 143 and 144, it shall submit a sworn outlet is located. [Sec. 150(a), LGC]
statement of its gross sales or receipts for the
current year. If the tax paid is less than the tax “Branch or Sales Office” – a fixed place in a
due, the difference shall be paid before the locality which conducts operations of the
business is considered officially retired. [Sec. business as an extension of the principal office.
145, LGC] Offices used only as display areas of the
products where no stocks or items are stored
Rules on payment of business taxes for sale, although orders for the products may
a. Taxes imposed under Sec. 143 of the be received thereat, are not branch or sales
LGC shall be paid for every separate or distinct offices as herein contemplated. A warehouse
which accepts orders and/or issues sales
Page 463 of 494

invoices independent of a branch with sales b. 70% of all sales recorded in the
office shall be considered as a sales office. [Art. principal office shall be taxable in Sta.
243(a)(2), LGC IRR] Rosa where the factory is located.
Rule 2: Rule 4:
Where there is NO branch or sales outlet in the In case the plantation is located in a place other
city/municipality where the sale is made, the than the place where the factory is located, the
sale shall be recorded in the principal office and 70% in Rule 3 will be divided as follows:
the tax shall be paid to such city/municipality. 1. 60% to the city/municipality where the
[Sec. 150(a), LGC] factory is located; and
2. 40% to the city/municipality where the
“Principal Office” – the head or main office of plantation is located. [Sec. 150 (c), LGC]
the business appearing in the pertinent
documents (e.g., articles of incorporation) Rule 5:
submitted to the SEC, or the DTI, or other
appropriate agencies, as the case may be [Art. In case of 2 or more factories, project offices,
243(a)(1), LGC IRR] plants or plantations in different localities, the
70% shall be prorated among the localities
Rule 3: where they are located in proportion to their
respective volumes of production. [Sec. 150(d),
In the case of manufacturers, assemblers, LGC]
contractors, producers, and exporters having
factories, project offices, plants, and Illustration: A company has a principal office
plantations, proceeds shall be allocated as in Valenzuela and 2 factories located in
follows: Malolos City, Bulacan and Mandaue City,
1. 30% of sales recorded in the principal Cebu, which produced 60% and 40%,
office shall be taxable by the respectively, of the total production for the
city/municipality where the principal year. It also has branches selling merchandise
office is located; and in Muntinlupa, Bacolod and Cebu City.
2. 70% shall be taxable by the 1. Sales made in Valenzuela will be
city/municipality where the factory, recorded in Valenzuela;
project office, plant, or plantation is 2. Sales made in Muntinlupa, Bacolod and
located [Sec. 150(b), LGC] Cebu City shall be taxable in the said cities;
3. Sales in all other places which do not
Illustration of Rules 1 to 3A company has a have a sales branch shall be distributed as
principal office in Mnadaluyong, and a sales follows: 30% to Valenzuela and 70% to be
office and a factory in Sta. Rosa: allocated between Malolos City, and
1. Sales made in Mandaluyong will be Mandaue City based on the factories’
recorded in Mandaluyong. volume of production. Hence, 42% shall be
2. Sales made in Sta. Rosa by the Sta. Rosa taxed in Malolos City; while 28% shall be
sales office will be recorded in Sta. Rosa. taxed in Mandaue City.
3. Sales made in Los Baños, Calamba or
Cabuyao [i.e., delivered to customers
located in these places and not made by the Note: The sales allocation shall be applied
Sta. Rosa sales office] will be recorded in irrespective of whether or not sales are made
Mandaluyong where the principal office is in the locality where the factory, project office,
located. The allocation shall be as follows: plant, or plantation is located. [Sec. 150(e),
a. 30% of all sales recorded in the LGC]
principal office shall be taxable in
Mandaluyong; Excise Tax: The business tax is imposed on
the performance of an act, enjoyment of a
Page 464 of 494

privilege, or engagement in an occupation. The Exception: Rates of professional and
power to levy such tax depends on the place in amusement taxes [Sec. 151, LGC]
which the act is performed or the occupation is
engaged in, not upon the location of the office E. Taxing Powers of Barangays
or the domicile of the person. [Allied Thread
Co., Inc. v. City Mayor of Manila, G.R. No. L- The following shall accrue exclusively to
40296 (1984)] the barangays:
1. Taxes on stores or retailers with fixed
Sales Tax: It is the place of the consummation business establishments with gross sales or
of the sale, associated with the delivery of the receipts for the preceding calendar year of
things which are the subject matter of the P50,000 or less in case of cities, and P30,000
contract, that determines the situs of the or less in case of municipalities. [Sec. 152(a),
contract for purposes of taxation, and not LGC]
merely the place of the perfection of the a. Tax Rate: not greater than 1%
contract. [Shell Co., Inc. v. Municipality of b. Tax Base: gross sales or receipts
Sipocot, Camarines Sur, G.R. No. L-12680
(1959)] 2. Service fees or charges – Barangays may
collect reasonable fees or charges for services
Municipal Fees and Charges For Regulation rendered in connection with the regulation or
& Licensing the use of barangay-owned properties or
General rule: The municipality may impose facilities. [Sec. 152(b), LGC]
reasonable fees and charges on the conduct of
business or practice of profession 3. Barangay clearance – A city or municipality
commensurate with the cost of regulation, cannot issue a permit for business without a
inspection and licensing. [Sec. 147, LGC] clearance from the barangay concerned. The
sangguniang barangay may impose a
Exception: Professional tax reserved to the reasonable fee on the clearance. [Sec. 152(c),
province in Sec. 139 of the LGC [Sec. 147, LGC]
LGC]
4. Reasonable fees and charges:
Specific rules: a. on commercial breeding of fighting cocks,
1. The municipality may impose reasonable cockfights and cockpits;
fees for sealing and licensing of weights and b. on places of recreation which charge
measures. [Sec. 148, LGC] admission fees; and
2. The municipality has exclusive authority to c. on billboards, signboards, neon signs, and
grant fishery privileges in municipal waters and outdoor advertisements. [Sec. 152(d), LGC]
impose rentals, fees or charges therefor. [Sec.
149, LGC] 5. Common Revenue Raising Powers
D. Taxing Powers of Cities a. Service fees and charges
Scope of taxing power: The city may levy taxes, LGUs may impose and collect such reasonable
fees, charges which the province or fees and charges for services rendered. [Sec.
municipality may impose. 153, LGC]
1. Those levied and collected by highly
urbanized and independent component b. Public utility charges
cities shall accrue to them and distributed
according to the provisions of the LGC. LGUs may fix the rates for the operation of
2. Rates of taxes that the city may levy may public utilities owned, operated and maintained
exceed the maximum rates allowed for the by them within their jurisdiction. [Sec. 154,
province or municipality by not more than LGC]
50%. [Sec. 151, LGC]
Page 465 of 494
c. Toll fees or charges 3. No toll fees or charges shall be collected
1. The Sanggunian may prescribe the terms from:
and conditions and fix the rates for the i. Officers and enlisted men of the AFP and
imposition of toll fees or charges for the use members of the PNP on mission.
of any public road, pier, or wharf, waterway, ii. Post office personnel delivering mail
bridge, ferry or telecommunication system iii. Persons who are physically
funded and constructed by the LGU handicapped
concerned. iv. Disabled citizens who are 65 years or
2. The Sanggunian may discontinue the older. [Sec. 155, LGC]
collection of the tolls when public safety and
welfare so requires.
6. Community Tax
Who may levy Cities or Municipalities

[Sec. 156, LGC]
Who are liable Natural Persons Juridical Persons
[Sec. 157 & 158, a. Inhabitants of the Philippines 1. Every corporation no matter
LGC] b. 18 years of age or over how created or organized
c. Either: 2. Whether domestic or resident
• Regularly employed on a wage or foreign
salary basis for at least 30 3. Engaged in or doing business
consecutive working days during in the Philippines
any calendar year, or
• Engaged in business or
occupation, or
• Owns real property with an
aggregate assessed value of
P1,000 or more, or
• Is required by law to file an income
tax return
Rates [Sec. 157 Natural Persons Juridical Persons

& 158, LGC] a. Annual community tax of P5.00 PLUS a. Annual community tax of P500
annual additional tax of P1.00 per P1,000 PLUS annual additional tax,
of income regardless of whether from which shall not exceed P10,000
business, exercise of profession or according to the following
property, but which shall not exceed schedule:
P5,000 b. P2.00 for every P5,000 worth of
b. Husband and wife shall pay a basic tax real property in the Philippines
of P5.00 each PLUS an additional tax of owned during the preceding
P1.00 for every P1,000 of income based year, based on the assessed
on the total property owned by them value used for the payment of
and/or the total gross receipts or earnings the real property tax; and
derived by them [Art. 246(b)(2), LGC IRR] c. P2.00 for every P5,000 of gross
receipts or earnings derived
from business in the Philippines
during the preceding year.
d. Dividends received by a
corporation from another
corporation shall be deemed
part of the gross receipts or
Page 466 of 494
Who may levy Cities or Municipalities
[Sec. 156, LGC]
earnings for purposes of
computing additional tax.
Persons a. Diplomatic and consular representatives

Exempt [Sec. b. Transient visitors who stay in the Philippines for not more than 3 months
159, LGC]
Place of Where individual resides, or where the principal office of the juridical entity is
Payment [Sec. located.
160, LGC] Note: In case of branch, sales office or warehouse where sales are made and
recorded, corresponding community tax shall be paid to the LGU where such
branch, sales office or warehouse is located. [Art. 246(e)(3), LGC IRR]
Time for Accrues on January 1 of each year to be paid not later than the last day of
Payment [Sec. February of each year.
161, LGC]
If a person reaches 18 years of age or otherwise loses the benefit of exemption:
a. on or before June 30 – he shall be liable on the day he reaches such
age or upon the day the exemption ends;
b. on or before March 31 – he shall have 20 days to pay without being
delinquent.
If a person comes to reside in the Philippines, or reaches 18 years old, or

ceases to belong to an exempt class on or after July 1, he shall not be subject
to community tax for that year.
If a corporation is established and organized:
• on or before June 30 – it shall be liable to community tax for that year
• on or before March 31 – it shall have 20 days to pay without becoming
delinquent
• on or after July 1 – it shall not be subject to community tax for that year
Penalty for If unpaid within the prescribed period, an interest of 24% per annum shall be
Delinquency added from the due date until payment.
[Sec. 161, LGC]
Community Tax Certificate (CTC) v. receives any money from any public
It shall be issued to every person or corporation fund
upon payment of the community tax. It may vi. transacts other official business; or
also be issued to any person or corporation not vii. receives any salary or wage from any
subject to the community tax upon payment of person or corporation [Sec. 163(a),
P1.00. [Sec. 162, LGC] LGC]
Presentation of CTC is necessary when an Note: Presentation of CTC is not needed in the
individual subject to community tax: registration of a voter. [Sec. 163(a), LGC]
i. acknowledges any document before
a notary public;
ii. takes the oath of office upon election
or appointment to any position in the Collection of community tax
government service; The city or municipal treasurer shall deputize
iii. receives any license, certificate, or the barangay treasurers to collect, provided the
permit from any public authority; latter be bonded. [Sec. 164(b), LGC]
iv. pays any tax or fee;
Page 467 of 494
Distribution of proceeds of community tax other taxes or charges in any form
1. If the community tax is actually and directly whatsoever, on goods or
collected by the city or municipal treasurer, the merchandise. It is therefore
proceeds shall accrue entirely to the general irrelevant if the fees imposed are
fund of the city or municipality. actually for police surveillance on
2. If the community tax is collected through the the goods, because any other
barangay treasurers, the proceeds shall be form of imposition on goods
apportioned equally between the passing through the territorial
city/municipality and the barangay. [Sec. jurisdiction of the municipality is
164(c), LGC] clearly prohibited. [Palma
Development Corp. v.
7. Common Limitations on the Taxing Municipality of Malangas, G.R.
Powers of Local Government Units No. 152492 (2003)]
Unless otherwise provided, the following 6. Taxes, fees or charges on Agricultural

cannot be levied by the local governments: and aquatic products when sold by
(IDEC-GAPEP-TRR-ECN): marginal farmers or fishermen;
1. Income tax, except when levied on • "Marginal Farmer or
banks and other financial institutions Fisherman" refers to an
under Sec. 143(f) of the LGC; individual engaged in subsistence
2. Documentary stamp tax; farming or fishing which shall be
3. Taxes on Estate, inheritance, gifts, limited to the sale, barter or
legacies and other acquisitions mortis exchange of agricultural or
causa; marine products produced by
• Exception: Tax on transfer of himself and his immediate family.
real property [Sec. 135, LGC; Art. [Sec. 131(p), LGC]
221(c), LGC IRR]
4. Customs duties, registration fees of 7. Taxes on business enterprises certified
vessel and wharfage on wharves, to by the Board of Investments as
tonnage dues, and all other kinds of Pioneer or non-pioneer for a period of
customs fees, charges and dues; 6 and 4 years, respectively from the
• Exception: wharfage on wharves date of registration;
constructed and maintained by 8. Excise taxes on articles enumerated
the LGU concerned under the NIRC, as amended, and
• “Wharfage” means a fee taxes, fees or charges on petroleum
assessed against the cargo of a products;
vessel engaged in foreign or 9. Percentage or VAT on sales, barters or
domestic trade based on quantity, exchanges or similar transactions on
weight, or measure received goods or services except as otherwise
and/or discharged by vessel. provided herein.
[Sec. 131(y), LGC] • Exceptions (Percentage taxes):
a. Tax on business of printing and
5. Taxes, fees or charges on Goods publication imposed by
carried into or out of, or passing provinces/cities [Sec. 136, LGC]
through, the territorial jurisdictions of b. Amusement tax imposed by
LGUs in the guise of charges for provinces/cities [Sec. 140, LGC]
wharfage, tolls for bridges or otherwise, c. Tax on business imposed by
or other taxes, fees, or charges in any municipalities/cities on
form; manufacturers, wholesalers,
• Note: Sec.133(e) prohibits the distributors, dealers, and
imposition, in the guise of contractors enumerated in Sec.
wharfage, of fees, as well as all 143 of the LGC in accordance
Page 468 of 494

with the schedules provided b. Substantive Test: reasonableness and
therein fairness of the ordinance and
significantly its compliance with the
10. Taxes on the gross receipts of: Constitution and existing statutes.
a. Transportation contractors and [Manila Electric Company v. Barlis, G.R. No.
persons engaged in the 198529. February 9, 2021]
transportation of passengers or
freight by hire and Local tax ordinance
b. common carriers by air, land or
water The power to impose a tax, fee, or charge or to
generate revenue under the LGC shall be
Exception: Tax on the operation exercised by the Sanggunian concerned
and franchising of tricycles [Art. through an appropriate ordinance. [Sec. 132,
221(j), LGC IRR] LGC]
11. Taxes on premiums paid by way of Tests of a valid ordinance:

reinsurance or retrocession; a. Not contrary to the Constitution or any
12. Taxes, fees or charges for the statute
Registration of motor vehicles and for b. Not unfair or oppressive;
the issuance of all kinds of licenses or c. Not partial or discriminatory;
permits for the driving thereof, except d. Not prohibit but may regulate trade;
tricycles; e. General and consistent with public
13. Taxes, fees, or other charges on policy; and
Philippine products actually Exported; f. Not unreasonable [Ferrer vs. Bautista,
a. Exception: Tax on exporters of G.R. No. 210551, (2015)]
essential commodities Note: An ordinance is presumed valid unless
b. [Sc. 143(c), LGC, Art. 221(m), declared otherwise by a court in an appropriate
LGC IRR] proceeding. [Rural Bank of Makati v.
Municipality of Makati, G.R. No. 150763
14. Taxes, fees, or charges on Countryside (2004)]
and Barangay Business Enterprises
and cooperatives duly registered under Public hearing
RA 6810 (Magna Carta for Countryside
and Barangay Business Enterprises) It should be conducted prior to the enactment
and RA 6938 (Cooperative Code of the of local tax ordinance and revenue measures.
Philippines), respectively; and [Sec. 187, LGC] When no valid public hearing
15. Taxes, fees or charges of any kind on has been duly conducted prior to the
the National Government, its agencies enactment of the tax ordinance, such is void
and instrumentalities, and LGUs. [Sec. and cannot be given any effect. [Suco vs.
133, LGC] Malones, G.R. No. 182065, (2009)]
8. Requirements for a Valid Tax Procedure for approval of tax ordinances

Ordinance 1. Within 10 days from the filing of the proposed
tax ordinance, the same shall be published
Validity of Local (Tax) Ordinance. The two- for 3 consecutive days in a newspaper of
pronged test: local circulation or posted simultaneously in
a. Formal Test: whether the ordinance at least 4 conspicuous public places within
was enacted within the corporate the territorial jurisdiction of the LGU. [Art.
powers of the LGU, and whether the 276(b)(1), LGC IRR]
same was passed pursuant to the 2. The Sanggunian shall send written notices,
procedure laid down by law. specifying the date and venue of public
hearing, to the interested or affected parties
Page 469 of 494

operating or doing business within the days from the date a copy is posted at the
concerned LGU. [Art. 276(b)(2), (3), LGC entrance of the provincial capitol or city,
IRR] municipal, or barangay hall, as the case may
3. The public hearing must be held not earlier be, and in at least 2 other conspicuous places
than 10 days from sending the notices, or in the LGU concerned. [Sec. 59, LGC]
the last day of publication, or date of posting,
whichever is later. [Art. 276(b)(3), LGC IRR] In case the effectivity falls on any date other
4. An ordinance must be approved on third than the beginning of the quarter, the same
reading by a majority of the sanggunian shall be considered as falling at the beginning
members present, there being a quorum. of the next quarter and the taxes, fees, or
[Art. 107(g), LGC IRR] charges due shall begin to accrue therefrom.
5. The enacted ordinance shall be presented [Art. 276(a), LGC IRR]
to the local chief executive (LCE), who
may: 9. Taxpayer's Remedies
a. Approve the same by affixing his
signature; or a. Protest
b. Veto and return the same with his
objections to the Sanggunian within 15 Protest: Upon the issuance of a notice of
days in case of a province, and 10 days assessment by the local treasurer, the
in case of a city or municipality; otherwise, taxpayer may file a written protest with said
the ordinance shall be deemed approved. local treasurer within 60 days from receipt of
[Art. 108, LGC IRR] the notice of assessment; otherwise, the
assessment shall become final an executory.
Note: The LCE, except the Punong Barangay,
may veto any ordinance on the ground that it is Decision: The local treasurer shall decide the
ultra vires or prejudicial to public welfare. His protest within 60 days from the time of its filing.
reasons shall be stated in writing. The LCE 3. Within 30 days from the receipt of the
may veto an ordinance only once. [Art. 109, denial of the protest or from the lapse of the 60-
LGC IRR] day period, the taxpayer may appeal with the
The sanggunian may override the veto of the court of competent jurisdiction, otherwise the
LCE by 2/3 vote of all its members, thereby assessment becomes conclusive and
making the ordinance effective. [Art. unappealable. [Sec. 195, LGC]
109(c), LGC IRR]
Once approved, the ordinance shall be Court of competent jurisdiction
transmitted to the higher level sanggunian 5. Depending on the amount of assessed tax
for review. If no action is taken by the latter involved, the taxpayer may appeal the
within 30 days after submission, the same decision of the local treasurer to the MTC,
shall be deemed approved. [Arts. 110 and MeTC, MCTC or the RTC in the exercise of
111, LGC IRR] its original jurisdiction.
Within 10 days after the approval of the 6. Local tax cases decided by the MTC,
ordinance, certified true copies of all tax MeTC and MCTC may be appealed to the
ordinances or revenue measures shall RTC in the exercise of its appellate
be published in full for 3 consecutive days jurisdiction.
in a newspaper of local circulation. Where 7. Said cases decided by the RTC in its
there are no newspapers of local original or appellate jurisdiction may be
circulation, it must be posted in at least 2 elevated to the CTA.
conspicuous and publicly accessible With the passage of R.A. No. 9282, the
places. [Art. 276, LGC, IRR] authority to exercise either original or appellate
Effectivity of ordinance jurisdiction over local tax cases depended on
the amount of the claim. In cases where the
a. Unless otherwise stated in the RTC exercises appellate jurisdiction, it
ordinance, the same shall take effect after 10 necessarily follows that there must be a court
Page 470 of 494

capable of exercising original jurisdiction – 2. The Secretary must render a decision
otherwise there would be no appeal over which within 60 days from receipt of the
the RTC would exercise appellate jurisdiction. appeal.
The RTC exercises appellate jurisdiction only
from cases decided by the MeTC, MTC, and The appeal shall not suspend the
MCTC in the proper cases, and not those effectivity of the ordinance and the
decided by non-judicial entities such as the City accrual and payment of the tax, fee or
Treasurer. [China Banking Corp. vs. City charge levied therein.
Treasurer of Manila, G.R. No. 204117, (2015)]
3. Within 30 days after receipt of the
b. Refund decision or the lapse of the 60-day period
without any action from the Secretary of
Requisites: Justice, the aggrieved party may file
1. A written claim for refund or credit must be appropriate proceedings with a court of
filed with the local treasurer; and competent jurisdiction. [Sec. 187, LGC]
2. The case or proceeding must be filed in
court within 2 years from the payment of Note: Failure to interpose the requisite appeal
tax or from the date the taxpayer became to the Secretary of Justice is fatal to a
entitled to refund or credit. [Sec. 196, LGC] complaint for a refund. [Reyes vs. CA G.R. No.
3. If the refund is brought about by an 118233, (1999)]
assessment made by the local treasurer,
the written claim for refund will be treated as 10. Assessment and Collection of
the written protest, and upon the denial of Local Taxes
the protest/refund or lapse of the 60-day
period for the local treasurer to decide, the a. Remedies of Local Government Units
taxpayer must appeal within 30 days
therefrom, even though the whole 2-year Local Government’s Lien
period has not been maximized. [City of
Manila vs. Cosmos Bottling Corp. G.R. No. Local taxes, fees, charges and other revenues
196681 (2018)] constitute a lien, superior to all liens or
c. Action before the Secretary of Justice encumbrances in favor of any person,
1. Any question on the constitutionality or enforceable by administrative or judicial action.
legality of tax ordinances or revenue [Sec. 173, LGC]
measures may be raised on appeal to
the Secretary of Justice. [Sec. 187, LGC] The lien may only be extinguished upon full
2. The Secretary of Justice can only review payment of the delinquent local taxes, fees,
the constitutionality or legality of the and charges including related surcharges and
tax ordinance, and, if warranted, to interest. [Sec. 173, LGC]
revoke it on either or both of these
grounds. Civil Remedies, in General
When he alters or modifies or sets aside a tax (a) Administrative action

ordinance, he is not also permitted to substitute
his own judgment for the judgment of the local DISTRAINT OF PERSONAL PROPERTY
government that enacted the measure. [Drilon
vs. Lim, G.R. No. 112497, (1994)] Subject of distraint: goods, chattels or effects
Procedure: and other personal property of whatever
1. Appeal must be made to the Secretary of character, including stocks and other
Justice within 30 days from effectivity of securities, debts, credits, bank accounts, and
the ordinance. interest in and rights to personal property [Sec.
174(a), LGC]
Page 471 of 494

Procedure: k. Redemption of property sold within 1
1. Seizure of personal property year from date of sale [Sec. 179, LGC]
2. Accounting of distrained goods l. If not redeemed, the local treasurer
3. Publication of time and place of sale and shall execute a deed conveying the property
the articles distrained to the purchaser [Sec. 180, LGC]
4. Release of distrained property upon m. Purchase of the real property by the
payment prior to sale local treasurer in case there is no bidder for
5. Sale of the goods or effects distrained at said property or if the highest bid is
public auction. insufficient to pay the taxes, fees, or
6. Disposition of proceeds [Sec. 175, LGC] charges, related surcharges, interests,
penalties and costs; resale of said property
Note: If the property distrained is not disposed may be made at a public auction [Sec. 181
of within 120 days from the date of distraint, the and 182, LGC]
same shall be considered as sold to the LGU
for the amount of the assessment made. [Sec. Further distraint or levy
175(e), LGC]
The remedies of distraint or levy may be
LEVY ON REAL PROPERTY repeated if necessary until the full amount due,
including all expenses, is collected [Sec. 184,
Subject of Levy: real property and interest in or LGC]
rights to real property
Procedure Note: In case the levy is not issued before or
a. After expiration of the time for payment simultaneously with the warrant of distraint,
of delinquent tax, fee or charge, real and the personal property of the taxpayer is not
property may be levied on before, sufficient to satisfy his delinquency, the local
simultaneously or after the distraint of treasurer shall within 30 days after execution of
personal property. the distraint, proceed with the levy on the
b. Preparation of a duly authenticated taxpayer's real property. [Sec. 176, LGC]
certificate by the local treasurer effecting the
levy and showing: Property exempt from distraint or levy
c. the name of the taxpayer, (ToB-CUPLAF)
d. the amount of the tax, fee or charge, a. Tools and implements necessarily
and penalty due, and used by the taxpayer in his trade or
the description of the property. employment
e. Service of written notice of levy to the b. One horse, cow, carabao, or other
assessor, Register of Deeds, and the Beast of burden, such as the delinquent
delinquent taxpayer (or his agent if he be taxpayer may select and necessarily used
absent from the Philippines, or if none, to by him in his ordinary occupation
the occupant of the property in question) c. His necessary clothing, and that of all
f. Annotation of the levy on the tax his family
declaration and the certificate of title d. Household furniture and Utensils
g. Report on any levy to be submitted to necessary for housekeeping and used for
the Sanggunian within 10 days after receipt that purpose by the delinquent taxpayer,
of warrant [Sec. 176, LGC] such as he may select, of a value not
h. Advertisement of the sale or auction exceeding P10,000
shall be held within 30 days after the levy. e. Provisions, including crops, actually
i. Before the date of sale, the taxpayer provided for individual or family use
may stay the proceedings by paying the sufficient for 4 months
taxes, fees, charges, penalties and f. The professional Libraries of doctors,
interests. engineers, lawyers and judges
j. Sale of the subject property [Sec. 178, g. One Fishing boat and net, not
LGC] exceeding the total value of P10,000 by the
Page 472 of 494

lawful use of which a fisherman earns his 1. The treasurer is legally prevented
livelihood from making the assessment or
h. Any material or Article forming part of a collection
house or improvement of any real property. 2. The taxpayer requests for
[sec. 185, LGC] reinvestigation and executes a
waiver in writing before the lapse of
Penalty on local treasurer for failure to issue the period for assessment or
and execute warrant of distraint or levy collection
Automatic dismissal from service after due 3. The taxpayer is out of the country
notice and hearing [Sec. 177, LGC] or otherwise cannot be located
[Sec. 194(d), LGC]
Judicial Action
The LGU may enforce the collection of III. REAL PROPERTY

delinquent taxes, fees, charges or other
revenues by civil action in any court of TAXATION
competent jurisdiction within 5 years from the
date they became due. [Secs. 183 and 194, 1. Fundamental Principles
LGC] The appraisal, assessment, levy and
collection of real property tax shall be guided
Note: Either of these remedies (administrative by the following fundamental principles:
or judicial action) or all may be pursued 1. Real property shall be appraised at its
concurrently or simultaneously at the discretion current and fair market value.
of the LGU concerned. [Sec. 174, LGC]. 2. Real property shall be classified for
assessment purposes on the basis of
Injunction against collection of local taxes its actual use.
The LGC does not contain a provision 3. Real property shall be assessed based
prohibiting courts from enjoining the collection on a uniform classification within
of local taxes. Such lapse may have allowed each local government unit.
preliminary injunction under Rule 58 of the 4. The appraisal, assessment, levy and
Rules of Court where local taxes are involved. collection of real property tax shall not
[Angeles City v. Angeles City Electric be left to any private person.
Corporation, G.R. No. 166134 (2010)] 5. The appraisal and assessment of real
property shall be equitable. [Sec. 198,
b. Prescriptive Period LGC]
Prescriptive period for assessment 2. Nature of Real Property Tax (RPT)

General Rule: Within 5 years from the date they a. It is a direct tax on the use of real
become due property.
Exception: In case of fraud or intent to evade • Note: Real property shall be classified,
tax, within 10 years from discovery of fraud or valued and assessed on the basis of its
intent to evade payment [Sec. 194(a),(b), LGC] actual use regardless of where located,
whoever owns it, and whoever uses it.
Prescriptive period for collection [Sec. 217, LGC]
Within 5 years from the date of assessment by b. It is an ad valorem tax where the tax
administrative or judicial action. No such action base is a fixed proportion of the value of the
shall be instituted after the expiration of said property. [Sec. 199(c), LGC]
period. [Sec. 194(c), LGC] c. It is proportionate because the tax is
calculated on the basis of a certain
Grounds for suspension of prescriptive percentage of the value assessed.
period d. It creates a single, indivisible
obligation.
Page 473 of 494
e. It attaches on the property (i.e., a lien) permanently attached to the real property
and is enforceable against it. which are actually, directly, and exclusively
used to meet the needs of the particular
3. Imposition industry, business or activity and which by their
very nature and purpose are designed for, or
a. Power to Levy Extent of taxing power necessary to its manufacturing, mining,
logging, commercial, industrial or agricultural
A province or city or a municipality within purposes [Sec. 199(o), LGC]
Metro Manila may levy an annual ad valorem
tax on real property such as land, building, Summary of rules on machinery
machinery, and other improvement not
hereinafter specifically exempted; and [Sec. a. Machinery that is permanently
232, LGC] attached to land and buildings is subject to
RPT.
Note: A province or city or a municipality b. Machinery that is not permanently
within Metro Manila shall fix a uniform rate of attached:
basic real property tax applicable to their 1. Subject to the RPT if it is an
respective localities. [Sec. 233, LGC] essential and principal element of
an industry, work or activity without
The following may levy real property tax: which such industry, work or activity
1. Province cannot function; and
2. City 2. Not subject to RPT if it is not an
3. Municipality within Metro Manila [Sec. essential and principal element of an
232, LGC] industry, work or activity. [DOF Local
Finance Circular No. 001- 2002]
Note: A special levy on lands benefited by
public works may be imposed by municipalities Improvement
outside Metro Manila.
It is a valuable addition made to a property or
PROPERTIES SUBJECT TO RPT an amelioration in its condition, amounting to
1. Land more than a mere repair or replacement of
2. Building parts involving capital expenditures and labor,
3. Machinery which is intended to enhance its value, beauty
4. Other improvements not specifically or utility or to adapt it for new or further
exempted [Sec. 232, LGC] purposes [Sec. 199(m), LGC]
Note: The LGC contains no definition of the Types of Real Property Tax
term “real property”. Therefore, reference
should be made to the enumeration of 1. Basic Real Property Tax
immovable property under Art. 415 of the Civil a. Province: not exceeding 1% of the assessed
Code. value of real property; and
b. City or municipality within Metro Manila: not
Machinery exceeding 2% of the assessed value of real
property. [Sec. 233, LGC]
It embraces machines, equipment, mechanical
contrivances, instruments, appliances or 2. Special Levies on Real Property
apparatus which may or may not be attached, a. Special Education Fund (SEF) – annual
permanently or temporarily, to the real tax of 1% on the assessed value of real
property. It includes the physical facilities for property which shall be in addition to the
production, the installations and appurtenant basic RPT [Sec. 235, LGC]
service facilities, those which are mobile, self-
powered or self-propelled, and those not
Page 474 of 494

Note: The LGU can impose SEF at a rate of construction of such projects or
less than 1%. The text in Sec. 235 of the LGC improvements. [Sec. 240, LGC]
is cast in a permissive language. Sec. 235’s
specified rate of 1% is a maximum rate rather Note: Municipalities outside Metro Manila may
than an immutable edict. [Demaala vs. COA, impose a special levy on lands benefited by
G.R. No. 199752, (2015)] public works.
b. Special Levy on Idle Lands – annual tax on b. Exemptions from RPT

idle lands at the rate not exceeding 5% of the
assessed value of the property in addition to a. Real property owned by the Republic of the
the basic RPT [Sec. 236, LGC] Philippines or any of its political subdivisions
Idle lands covered Exception: when beneficial use is granted

for a consideration or to a taxable person.
1. Agricultural lands more than 1 hectare in
area, suitable for cultivation, dairying, inland Beneficial use – means that the person or
fishery, and other agricultural uses, 1/2 of entity has the use and possession of the
which remain uncultivated or unimproved property. In contrast, actual use refers to the
2. Non-agricultural lands more than 1,000 sqm purpose for which the property is principally
in area, 1/2 of which remain unutilized or or predominantly utilized by the person in
unimproved [Sec. 237, LGC] possession thereof. [Herarc Realty
Corporation vs. Provincial Treasurer of
Lands not considered idle Batangas, G.R. No. 210736, (2018)]
1. Agricultural lands planted to permanent or The assessment of real property shall be

perennial crops with at least 50 trees to a based on its actual use. The liability to pay
hectare real property taxes on government-owned
2. Lands actually used for grazing purposes properties, the beneficial or actual use of
[Sec. 237(a), LGC] which was granted to a taxable entity,
devolves on the taxable beneficial user.
Idle lands may be exempted by reason of: While the liability for taxes generally rests on
1. Force majeure, the owner of the real property, liability for real
2. Civil disturbance, property taxes may also expressly rest on
3. Natural calamity, or the entity with the beneficial use of the real
4. Any cause or circumstance which property at the time the tax accrues. [MWSS
physically or legally prevents the owner v CBAA, G.R. No. 215955. January 13,
from improving, utilizing or cultivating the 2021]
same. [Sec. 238, LGC]
b. Charitable institutions, churches
c. Special Levy for Public Works – a special parsonages, or convents appurtenant
levy on lands specially benefited by public thereto, mosques, non-profit or religious
works projects or improvements funded by the cemeteries, and all lands, buildings, and
LGU concerned, but which shall not exceed improvements actually, directly and
60% of the actual cost of such projects and exclusively used for religious, charitable, or
improvements, including the costs of acquiring educational purposes
land and such other real property in connection
therewith [Sec. 240, LGC] c. Machinery and equipment actually, directly
and exclusively used by local water districts
Exception: The special levy shall not apply to: and GOCCs engaged in the supply and
a. lands exempt from basic RPT; and distribution of water and/or generation and
b. the remainder of the land, portions of transmission of electric power
which were donated to the LGU for the
Page 475 of 494

d. Real property owned by duly registered GOCCs not exempt from RPT
cooperatives as provided for under RA 6938
[Cooperative Code of the Philippines] The last paragraph of Sec. 234 of the LGC
expressly withdrew the exemption of GOCCs
e. Machinery and equipment used for pollution from RPT upon the effectivity of the LGC.
control and environmental protection [Sec.
234, LGC] Exemption of Charitable Institutions
A claim for exemption under Sec. 234(e) of the To be entitled to the exemption, claimant must
LGC should be supported by evidence that prove, that (a) it is a charitable institution; and
the property sought to be exempted is actually, (b) its real properties are actually, directly and
directly and exclusively used for pollution exclusively used for charitable purposes.
control and environmental protection.
[Provincial Assessor of Marinduque v. CA, What is meant by actual, direct and exclusive
G.R. No. 170532 (2009)] use of the property for charitable purposes is
the direct and immediate and actual application
Withdrawal of exemption of the property itself to the purposes for which
the charitable institution is organized. [Lung
Except as provided herein, any exemption from Center of the Philippines v. Quezon City, G.R.
payment of RPT previously granted to, or No. 144104 (2004)]
presently enjoyed by, all persons, whether
natural or juridical, including all government- 4. Appraisal and Assessment of Real
owned or controlled corporations (GOCCs) are Property
hereby withdrawn upon the effectivity of the
LGC. [Sec. 234, LGC] Appraisal is the act or process of determining
the value of property as of a specified date for
Note: Section 234 of the LGC applies a specific purpose. [Sec. 199(e), LGC]
specifically to RPT exemptions, while Sec. 193
of the LGC applies to exemptions from all other Assessment is the act or process of
local taxes. determining the value of a property, or
proportion thereof subject to tax, including the
Proof of exemption discovery, listing, classification, and appraisal
of properties. [Sec. 199(f), LGC]
Every person who shall claim tax exemption
shall file with the local assessor within 30 a. Classes of Real Property
days from the date of declaration of real For purposes of assessment, real property
property sufficient documentary evidence in shall be classified as follows: [Sec. 215, LGC]
support of such claim (e.g., corporate charters, 1. Residential land – land principally devoted
title of ownership, affidavits, by-laws, contract, to habitation [Sec. 199(u), LGC]
articles of incorporation). Otherwise, the 2. Agricultural land – land devoted principally
property will be listed as taxable in the to the planting of trees, raising of crops,
assessment roll. [Sec. 206, LGC] livestock and poultry, dairying, salt making,
inland fishing and similar aquaculture
The burden of proving exemption from local activities and other agricultural activities
taxation is upon whom the subject real property and is not classified as mineral, timber,
is declared; thus, said person shall be residential, commercial or industrial land
considered by law as the taxpayer thereof. [Sec. 199(d), LGC]
Failure to do so, said property shall be listed as 3. Commercial land – land devoted
taxable in the assessment roll. [Camp John principally for the object of profit and is not
Hay Development Corporation vs. Central classified as agricultural, industrial,
Board of Assessment Appeals, G.R. No. mineral, timber or residential land [Sec.
169234, (2013)] 199(i), LGC]
Page 476 of 494
4. Industrial land – land devoted principally Declaration of real property by the local
to industrial activity as capital investment assessor
and is not classified as agricultural,
commercial, timber, mineral or residential When the person required to file the sworn
land [Sec. 199(n), LGC] declaration under Sec. 202 of the LGC refuses
5. Mineral land – land in which minerals exist or fails to make such declaration, the
in sufficient quantity or grade to justify the provincial, city or municipal assessor shall
necessary expenditures to extract and declare the property in the name of the
utilize such minerals [Sec. 199(p), LGC] defaulting owner, and shall assess the property
6. Timberland – land identified as forest or for taxation. [Sec. 204, LGC]
reserved area by the government, which
may or may not be granted to a Notice of transfer of real property
concessionaire, licensee, lessee or
permitee [BLGF Manual on Real Property Any person who shall transfer real property
Appraisal and Assessment Operations] ownership to another shall notify the provincial,
7. Special city or municipal assessor within 60 days from
a. all lands, buildings and other the date of such transfer.
improvements actually, directly and The notification shall include the ff:
exclusively used for hospitals, cultural, 1. Mode of transfer,
or scientific purposes, and 2. Description of the property alienated,
b. those owned and used by local water 3. Name and address of the transferee
districts, and GOCCs rendering [Sec. 208, LGC]
essential public services in the supply
and distribution of water and/or Appraisal of Real Property at Fair Market
generation and transmission of electric Value
power [Sec. 216, LGC]
All real property shall be appraised at the
Declaration of real property by owner or current and fair market value (FMV) prevailing
administrator at the locality where the property is situated.
[Sec. 201, LGC]
All persons owning or administering real
property, including improvements therein, shall FMV is the price at which property may be sold
prepare a sworn statement: by a seller who is not compelled to sell and
4. declaring the true value of the property bought by a buyer who is not compelled to buy.
which shall be the current and FMV of the [Sec. 199(l), LGC]
property; and
5. containing a sufficient description of the Note: Sec. 201 of the LGC implies that an LGU
property for assessment purposes. may only collect real estate tax on properties
The declaration must be filed with the assessor falling within its territorial jurisdiction. Thus, the
once every 3 years during the period from settlement of a boundary dispute between 2
January 1 to June 30. [Sec. 202, LGC] LGUs presents a prejudicial question that must
Declaration by person acquiring real be resolved before determining the real
property or making improvement thereon property tax liability of a property that straddles
the border. [Sta. Lucia Realty vs. City of Pasig,
A sworn statement declaring the true value of G.R. No. 166838, (2011)]
the property must be filed with the provincial,
city or municipal assessor within 60 days after Determination of FMV
the acquisition of a real property or upon
completion or occupancy of the improvement, a. The assessor of the province, city or
whichever comes earlier. [Sec. 203, LGC] municipality or his deputy may summon
the owners or persons having legal
interest therein and witnesses, and may
Page 477 of 494

administer oaths, and take deposition reproduction cost, for each
concerning the property, its ownership, year of use
amount, nature, and value. [Sec. 213, The remaining value shall
LGC] be fixed at not less than
b. The assessors shall prepare a schedule 20% of such original,
of FMV for the different classes of real replacement or
property situated in their respective local reproduction cost for so
government units for enactment by long as the machinery is
ordinance of the Sanggunian concerned. useful and in operation.
[Sec. 212, LGC] [Sec. 225, LGC]
c. The schedule of FMV shall be published
in a newspaper of general circulation in b. Assessment of Real Property Based on
the LGU concerned or in the absence Actual Use
thereof, shall be posted in the provincial
capitol, city or municipal hall and in 2 Basis of assessment
other conspicuous public places therein.
[Sec. 212, LGC] Real property shall be classified, valued and
d. The assessor may recommend to the assessed on the basis of actual use
Sanggunian amendments to correct regardless of where located, whoever owns
errors in valuation in the schedule of it, and whoever uses it. [Sec. 217, LGC]
FMV. The Sanggunian shall, by
ordinance, act upon the “Actual Use” refers to the purpose for which
recommendation within 90 days from its the property is principally or predominantly
receipt. [Sec. 214, LGC] utilized by the person in possession thereof
[Sec. 199(b), LGC]
FMV of Machinery
Note: Unpaid realty taxes attach to the property
Brand New The FMV is the acquisition and are chargeable against the person who
cost. [Sec. 224(a), LGC] had actual or beneficial use and possession of
it regardless of whether or not he is the owner.
If the machinery is [Estate of Lim v. City of Manila, G.R. No. 90639
imported, the acquisition (1990)]
cost includes freight,
insurance, bank and other Assessment levels
charges, brokerage,
arrastre and handling, It is the percentage applied to the FMV to
duties and taxes, plus cost determine the taxable value of the property.
of inland transportation, [Sec. 199(g), LGC]
handling, and installation
charges at the present site. Note: Assessment levels shall be fixed by
[Sec. 224(b), LGC] ordinances of the Sanggunian at rates not
All other FMV is determined by exceeding those prescribed under Sec. 218 of
cases dividing the remaining the LGC.
economic life of the
machinery by its estimated Assessed or Taxable Value
economic life and multiplied
by the replacement or It is the FMV of the real property multiplied by
reproduction cost. [Sec. the assessment level. [Sec. 199(h), LGC]
224(a), LGC]
Depreciation Depreciation rate: not Assessed FMV × Assessment Level
Allowance exceeding 5% of its original Value
cost or its replacement or
Page 478 of 494

Real Property Assessed Value × Tax 3. any great and sudden inflation or
Tax Rate deflation
of real property values;
Computing the RPT 4. gross illegality of the assessment when
1. Compute for the assessed value made; or
2. Multiply the assessed value by the real 5. any other abnormal cause. [Sec. 221,
property tax rate (ref Sec. 233) LGC]
General revisions of assessments and Assessment of property subject to back taxes

property classification Property declared for the first time shall be
assessed for taxes for the period during which
The local assessor shall undertake a general it would have been liable but in no case for
revision of real property assessments every 3 more than 10 years prior to the date of initial
years. [Sec. 219, LGC] assessment [Sec. 222, LGC]
Valuation of real property by assessor Notification of new or revised assessment

The local assessor shall make a classification, When real property is assessed for the first
appraisal and assessment of the real property time or when an existing assessment is
irrespective of any previous assessment or increased or decreased, the local assessor
taxpayer’s valuation thereon in the following shall within 30 days give written notice of the
cases: new or revised assessment to the person in
1. real property is declared and listed for whose name the property is being declared.
taxation purposes for the first time;
2. there is an ongoing general revision of Notice may be given personally or by
property classification and assessment; registered mail or through the assistance of the
or Punong Barangay to the last known address of
3. a request is made by the person in whose the person to be served. [Sec. 223, LGC]
name the property is declared. [Sec. 220,
LGC] 5. Collection of Real Property Tax
Note: The assessment shall not be increased Collecting authority

more often than once every 3 years except in
case of new improvements substantially The collection of RPT shall be the responsibility
increasing the value of said property or of any of the city or municipal treasurer concerned. He
change in its actual use. [Sec. 220, LGC] may deputize the barangay treasurer to collect
all taxes on real property located in the
Date of effectivity of assessment or barangay provided the latter is bonded. [Sec.
reassessment 247, LGC]
General rule: All assessments or Duty of assessor to furnish local treasurer

reassessments made after January 1 of any with assessment rolls
year shall take effect on January 1 of the
succeeding year [Sec. 221, LGC] The provincial, city or municipal assessor shall
prepare and submit to the local treasurer, on or
Exceptions: Reassessments due to the before December 31 of each year, an
following causes shall be made within 90 days assessment roll containing a list of all persons
from the date of any cause and shall take effect whose real properties have been newly
at the beginning of the quarter subsequent to assessed or reassessed and the values of
the reassessment: such properties. [Sec. 248, LGC]
1. partial or total destruction
2. major change in actual use; Notice of time for collection of tax
Page 479 of 494

The local treasurer shall post the notice of the RULES ON PAYMENT
dates when the tax may be paid without interest
at a conspicuous and publicly accessible place Payment of RPT
at the city or municipal hall:
• on or before January 31 of each year in a. Payment of RPT and the additional tax
the case of basic RPT and additional for SEF, without interest, may be made in 4
tax for SEF; or equal installments:
• on any other date in the case of any 1. 1st: March 31
other tax. 2. 2nd: June 30
The notice shall also be published in a 3. 3rd: September 30
newspaper of general circulation in the locality 4. 4th: December 31
once a week for 2 consecutive weeks. [Sec. b. Any special levies shall be governed by
249, LGC] ordinance of the Sanggunian concerned.
[Sec. 250, LGC]
a. Date of Accrual
Note: Payments of RPT shall first be applied
Real property tax for any year shall accrue on to prior years’ delinquencies, interests and
the 1st day of January and from that date it penalties, if any, and only after the
shall constitute a lien on the property which delinquencies are settled may tax payments be
shall be superior to any other lien, mortgage, or credited for the current period. [Sec. 250, LGC]
encumbrance of any kind whatsoever, and
shall be extinguished only upon the payment of Interests on unpaid RPT
the delinquent tax. [Sec. 246, LGC]
Interest at the rate of 2% per month on the
b. Periods to Collect unpaid amount or a fraction thereof until the
delinquent tax shall have been fully paid, but
Ordinary Period to Collect: Within 5 years the total interest shall not exceed 36 months
from the date the taxes become due. [Sec. 255, LGC]
Extraordinary Period to Collect: In case of Discount for advance or prompt payment

fraud or intent to evade payment of tax, within
10 years from discovery of fraud or intent to 1. Advance payment – not exceeding 20% of
evade payment [Sec. 270, LGC] annual tax due [Sec. 251, LGC]
2. Prompt payment – not exceeding 10% of
Grounds for suspension of prescriptive annual tax due [Art. 342, LGC IRR]
period c. Remedies of LGUs
The period of prescription within which to Issuance of notice of delinquency

collect shall be suspended for the time during
which: When the real property tax becomes
1. The local treasurer is legally prevented from delinquent, the local treasurer shall post a
collecting the tax; notice of delinquency at the main hall and in a
2. The owner of the property or the person publicly accessible and conspicuous place in
having legal interest therein requests for each barangay of the LGU concerned. [Sec.
reinvestigation and executes a waiver in writing 254, LGC]
before the expiration of the period to collect;
and 1. Local Government’s Lien
3. The owner of the property or the person
having legal interest therein is out of the The RPT shall constitute a lien on the property
country or cannot be located. [Sec. 270, LGC] subject to tax, superior to all liens, charges or
encumbrances in favor of any person,
irrespective of the owner or possessor thereof,
Page 480 of 494

enforceable by administrative or judicial action m. Redemption of property sold within
and may only be extinguished upon payment of 1 year from date of sale upon
the tax and the related interests and expenses. payment of the delinquent tax [Sec.
[Sec. 257, LGC] 261, LGC]
n. If not redeemed, the local treasurer
It constitutes a lien on the property from the shall execute a deed conveying the
date of accrual (i.e., January 1) [Sec. 246, property to the purchaser. [Sec.
LGC]. 262, LGC]
o. Purchase of property by local
2. Administrative Action treasurer in case there is no bidder
for the real property or if the highest
Levy on real property bid is insufficient to pay the RPT and
a. After expiration of the time required other costs; resale of such property
to pay the tax when due, the local may be made at a public auction
treasurer shall issue a warrant of [Sec. 263 and 264, LGC]
levy on or before, or simultaneously
with, the institution of the civil action Further levy until full payment
for the collection of the delinquent Levy may be repeated if necessary until the full
tax. due, including all expenses, is collected. [Sec.
b. The warrant shall include a duly 265, LGC]
authenticated certificate showing:
c. the name of the owner or person Distraint of personal property
having legal interest therein, The notice of delinquency shall state that
d. description of the property, and personal property may be distrained to effect
e. amount of the tax due and interest payment. It shall likewise state that any time
thereon. before the distraint of personal property,
f. Warrant must be mailed to or served payment of the tax with surcharges, interests
upon the delinquent owner or and penalties may be made. [Sec. 254, LGC]
person having legal interest in the
property. Judicial Action
g. Written notice of levy with the The LGU concerned may enforce the collection
attached warrant must be mailed to of the basic RPT or any other related tax by civil
or served upon the assessor and the action in any court of competent jurisdiction.
Register of Deeds where the The civil action shall be filed by the local
property is located. treasurer within the period prescribed for
h. The Register of Deeds must collection (i.e., 5 years or 10 years) under Sec.
annotate the levy on the tax 270 of the LGC. [Sec. 266, LGC]
declaration and certificate of title.
i. The levying officer shall submit a 6. Taxpayer’s Remedies
report on the levy to the Sanggunian
within 10 days after receipt of a. Contesting an Assessment
warrant by the owner. [Sec. 258,
LGC] Payment Under Protest; Exceptions
j. Advertisement of the sale or auction
shall be made within 30 days after General Rule: No protest shall be entertained
service of warrant. unless the taxpayer first pays the tax. There
k. Before the date of sale, the shall be annotated on the tax receipts the
proceedings may be stayed by words "paid under protest". [Sec. 252, LGC]
paying the delinquent tax. When the taxpayer questions the
l. Sale of the real property [Sec. 260, excessiveness or reasonableness of the
LGC] assessment, the taxpayer is required to first
pay the tax due before his protest can be
Page 481 of 494

entertained. [NPC v. Provincial Treasurer of or applied as tax credit against his existing or
Benguet, G.R. No. 209303 (2016)] future tax liability. [Sec. 252(c), LGC]
2. If the protest is denied or the 60-day period
Exceptions to Payment Under Protest: expired, the taxpayer may appeal to the Local
a. “Payment under protest” is not a Board of Assessment Appeals (LBAA) and
prerequisite when the issue is the legality subsequently to the CBAA pursuant to Secs.
or validity of the assessment. Certainly, it 226 and 229 as in the case of assessment
would be unjust to require the realty owner appeals. [Sec. 252(d), LGC]
to first pay the tax, the validity of which he
precisely questions, before he can lodge a Erroneous assessment vs. illegal
complaint to the court. [NPC v. Municipal assessment
Government of Navotas, G.R. 192300
(2014)] Erroneous Illegal Assessment
b. When questioning the very authority Assessment
and power of the assessor, acting solely Definition
and independently, to impose the An erroneous An assessment is
assessment and of the treasurer to assessment illegal if it was made
collect the tax, such are not questions presupposes that the without the authority
merely of amounts of the increase in the tax taxpayer is subject to under the law.
but attacks on the very validity of any the tax but is
increase for which no payment under disputing the
protest is mandated. [NPC vs. Province of correctness of the
Quezon, G.R. No. 171568, (2010)] amount assessed.
c. When the taxpayer posts a surety The taxpayer claims
bond which guarantees the payment to the that the local
local treasurer of the total amount of real assessor erred in
property taxes and penalties due, such is determining any of
substantial compliance with the “payment the items for
under protest” requirement. [Manila Electric computing the RPT.
Co. vs. City Assessor, G.R. No. 166102,
(2015)]
File Protest with Local Treasurer Exhaustion of administrative remedies

Taxpayer must The taxpayer may
Period to file protest exhaust the directly resort to
The protest in writing must be filed within 30 administrative judicial action
days from payment of the tax to the provincial, remedies provided without paying under
city or municipal treasurer. [Sec. 252(a), LGC] under the LGC. protest the assessed
tax and filing an
Note: The tax or a portion thereof paid under appeal with the
protest shall be held in trust by the treasurer. LBAA and CBAA.
[Sec. 252(b), LGC]
[City of Lapu-Lapu v. PEZA, G.R. Nos. 184203
Period to decide
and 187583 (2014)]
The local treasurer shall decide the protest
Note: A claim for exemption from the payment
within 60 days from receipt. [Sec. 252(a), LGC]
of RPT pertains to the reasonableness or
correctness of the assessment by the local
Decision on the protest
assessor, a question of fact which should be
1. If the protest is decided in favor of the
resolved, at the very first instance, by the
taxpayer, the amount or portion of the tax
LBAA. [NPC v. Provincial Treasurer of
protested shall be refunded to the protestant,
Benguet, G.R. No. 209303 (2016)]
Page 482 of 494
Refunds or Credits of RPT subpoena and subpoena duces tecum. [Sec.
229(b), LGC]
Repayment of excessive collections
When an assessment of RPT is found to be Motion for reconsideration with local
illegal or erroneous and the tax is accordingly assessor not allowed
reduced or adjusted, the taxpayer may file a The procedure likewise does not permit the
written claim for refund or credit for taxes and property owner the remedy of filing a motion
interests with the provincial or city treasurer for reconsideration before the local assessor.
within 2 years from the date the taxpayer is If the taxpayer fails to appeal with the LBAA in
entitled to such reduction or adjustment due course, the right of the LGU to collect the
taxes due with respect to the taxpayer’s
The provincial or city treasurer shall decide the property becomes absolute upon the
claim for tax refund or credit within 60 days expiration of the period to appeal. [Fels
from receipt thereof. [Sec. 253, LGC] Energy Inc. v. Province of Batangas, G.R. No.
168557 (2007)]
Remedy in case of denial by the local
treasurer When appeal to LBAA not required
In case the claim for tax refund or credit is
denied, the taxpayer may follow the procedure An exception to the rule on exhaustion of
in questioning an assessment (i.e., appeal to administrative remedies is where the
the LBAA, then to the CBAA, and subsequently controversy does not involve questions of fact
to the CTA En Banc). [Sec. 253, LGC] but only of law. Under Sec. 229(b) of the LGC
"the proceedings of the Board shall be
b. Contesting the Valuation of Real conducted solely for the purpose of
Property ascertaining the facts." It follows that appeals
to the LBAA may be fruitful only where
Appeal to the Local Board of Assessment questions of fact are involved. [Ty v. Trampe,
Appeals (LBAA) G.R. No. 117577 (1995)]
Who may appeal The protest contemplated under Section 252 of

Any owner or person having legal interest in the the LGC is required when there is question as
property who is not satisfied with the action of to the reasonableness or correctness of the
the local assessor in the assessment of his amount assessed, while an appeal to the LBAA
property may appeal to the LBAA by filing a under Section 226 is fruitful only where
petition under oath, together with copies of the questions of fact are involved. When the very
tax declarations and such affidavits or authority and power of the assessor to impose
documents submitted in support of the appeal. the assessment, and of the treasurer to collect
[Sec. 226, LGC] real property taxes are in question, the proper
recourse is a judicial action. [MWSS v CBAA,
When to appeal supra]
The appeal must be filed within 60 days from
the date of receipt of the written notice of Appeal to the Central Board of Assessment
assessment. [Sec. 226, LGC] Appeals (CBAA)
Period to decide on the appeal Who may appeal and when to appeal
The LBAA shall decide the appeal within 120 The owner of the property or the person having
days from the date of receipt of such appeal. legal interest therein or the assessor who is not
[Sec. 229(a), LGC] satisfied with the decision of the LBAA, may,
within 30 days after receipt of the decision of
Note: The LBAA shall have the power to said LBAA, appeal to the CBAA. [Sec. 229,
summon witnesses, administer oaths, conduct LGC]
ocular inspection, take depositions, and issue
Page 483 of 494

Period to decide and finality of decision may, by ordinance, condone or reduce taxes
The CBAA shall decide cases on appeal within and interest for the succeeding year/s in the
12 months from the date of receipt thereof, city or municipality affected by the calamity.
which shall become final and executory 15 [Sec. 276, LGC]
days after receipt thereof by the appellant or
appellee, as the case may be. [Sec. 9, Rule 3, 2. The President of the Philippines may, when
Chapter VII, Manual of Real Property Appraisal public interest so requires, condone or reduce
and Assessment Operations] the real property tax and interest for any year
in any province or city or municipality within
Effect of Payment of Taxes Metro Manila. [Sec. 277, LGC]
Appeal on assessments of real property shall
not suspend the collection of the corresponding Compromise by authority of the President
realty taxes on the property involved as
assessed by the provincial or city assessor The CTA allowed the compromise agreement
without prejudice to subsequent readjustment between Batangas City, represented by its
depending upon the final outcome of the Mayor, and the taxpayer since it was entered
appeal. [Sec. 231, LGC] into in line with an executive order issued by
the President to address the real property tax
c. Compromising an RPT assessment issues of independent power producers
through the reduction of their tax liabilities and
Condonation or reduction of RPT the condonation of fines, penalties and interest
on deficiency taxes. [Kepco Ilijan Corporation
1. The Sanggunian, in case of general failure v. CBAA, CTA EB No. 909 (2013)]
of crops or substantial decrease in the price of
agricultural or agri-based products or calamity,
Page 484 of 494

Flowchart V: Procedure for Assessment of Land Value for Real Property Tax Purposes – Local
Government Code
For purposes of this flowchart, owner means owner or administrator of real property or any person having legal interest
thereto:
Owner declares real Assessor declares Assessor prepares
property once every 3 real property if assessment rolls wherein
START owner/administrator real property shall be
years (Sec. 202) listed, valued and
within Jan 1 to Jun 30 fails to do so (Sec.
204) assessed. (Sec. 205)
Submit documents
supporting exemption Owner may claim
Is real property
within 30 day from for tax exemption yes
exempt?
declaration (Sec. 206) (Sec. 206)
Required
documents Property Property shall be
submitted yes proven as yes dropped from
within 30 days? tax assessment roll
exempt? (Sec. 206)
No
END
Property shall be
listed as taxable in
the assessment No
roll (Sec. 206)
Within 30 days
from assessment,
assessor sends No
notice to owner
(Sec. 223)
Owner may If LBAA rejects

LBAA must
protest protest, owner may
decide within
assessment appeal to the CBAA
120 days from
within 60 days within 30 days from
receipt of appeal
from receipt of receipt of notice (Sec.
(Sec. 229)
notice to the 229)
LBAA (Sec. 226)
If CBAA rejects
protest, owner may
Appeal to the
END SC within 15 appeal to the CTA en
banc within 30 days
days from receipt of
decision
Page 485 of 494

Flowchart VI: Taxpayer’s Remedies Involving Collection of Real Property Tax – Loc Gov’t Code
Page 486 of 494

Flowchart VII: Procedure for Levy for purposes of Satisfying Real Property Taxes – Loc Gov’t
Code
Page 487 of 494

TAXATION LAW
day-period under Section 228 of the NIRC
shall be deemed a denial for purposes of
IV. JUDICIAL allowing the taxpayer to appeal his case to
the Court and does not necessarily
REMEDIES constitute a formal decision of the CIR on
the tax case; Provided, further, that should
the taxpayer opt to await the final decision
A. Jurisdiction of The Court Of
of the CIR on the disputed assessments
Tax Appeals beyond the one hundred eighty day-period
above mentioned, the taxpayer may appeal
[R.A. 1125, as amended by R.A. No. 3457 and such final decision to the Court under
further amended by R.A. 9282 and R.A. 9503, Section 3(a), Rule 8 of these Rules; and
and A.M. No. 05-11-07-CTA or the Revised Provided, still further, that in the case of
Rules of the Court of Tax Appeals (RRCTA)] claims for refund of taxes erroneously or
illegally collected, the taxpayer must file a
1. Exclusive Original and Appellate petition for review with the Court prior to the
Jurisdiction Over Civil Cases expiration of the two-year period under
Section 229 of the NIRC;
The Court in Divisions shall exercise exclusive 3. Decisions, resolutions or orders of the RTC
original jurisdiction in tax collection cases in local tax cases decided or resolved by
involving final and executory assessments for them in the exercise of their original
taxes, fees, charges and penalties, where the jurisdiction;
principal amount of taxes and fees, exclusive 4. Decisions of the Commissioner of Customs
of charges and penalties, claimed is one million in cases involving liability for customs
pesos or more. [Sec. 3(c)(1), Rule 4, RRCTA] duties, fees or other money charges,
seizure, detention or release of property
The Court in Divisions shall exercise exclusive affected, fines, forfeitures of other penalties
appellate jurisdiction over appeals from the in relation thereto, or other matters arising
judgments, resolutions or orders of the RTCs in under the Customs Law or other laws
tax collection cases originally decided by them administered by the Bureau of Customs;
within their respective territorial jurisdiction. 5. Decisions of the Secretary of Finance on
[Sec. 3(c)(2), Rule 4, RRCTA] customs cases elevated to him
automatically for review from decisions of
The Court in Divisions shall exercise exclusive the Commissioner of Customs adverse to
original or appellate jurisdiction to review by the Government under Section 2315 of the
appeal the following: Tariff and Customs Code; and
6. Decisions of the Secretary of Trade and
1. Decisions of the CIR in cases involving Industry, in the case of nonagricultural
disputed assessments, refunds of internal product, commodity or article, and the
revenue taxes, fees or other charges, Secretary of Agriculture, in the case of
penalties in relation thereto, or other agricultural product, commodity or article,
matters arising under the NIRC or other involving dumping and countervailing
laws administered by the BIR; duties under Section 301 and 302,
2. Inaction by the CIR in cases involving respectively, of the Tariff and Customs
disputed assessments, refunds of internal Code, and safeguard measures under
revenue taxes, fees or other charges, Republic Act No. 8800, where either party
penalties in relation thereto, or other may appeal the decision to impose or not
matters arising under the NIRC or other to impose said duties. [Sec. 3(a), Rule 4,
laws administered by the BIR, where the RRCTA]
NIRC or other applicable law provides a
specific period for action: Provided, that in Note, however, that applying PD No. 242,
case of disputed assessments, the inaction except in the case of Constitutional offices, it is
of the CIR within the one hundred eighty the Secretary of Justice or the Solicitor General
Page 488 of 494
TAXATION LAW
or the Government Corporate Counsel original jurisdiction over tax collection
depending on the issues and the government cases; and
agencies involved who has the jurisdiction to d. Decisions of the Central Board of
settle all intra-governmental disputes, including Assessment Appeals (CBAA) in the
disputed tax assessments, prior to resort to exercise of its appellate jurisdiction over
judicial action. (CIR v COMELEC, G.R. No. cases involving the assessment and
244155, May 11, 2021) The reason for vesting taxation of real property originally decided
jurisdiction to them is the President's by the provincial or city board of
constitutional power of control over all assessment appeals.
departments, bureaus, and offices under the
executive branch that cannot be curtailed or 2. Exclusive Original and Appellate
diminished by law. It is also in line with the Jurisdiction Over Criminal Cases
doctrine of exhaustion of administrative
remedies that every opportunity must be given The Court in Divisions shall exercise exclusive
to the administrative body to resolve the original jurisdiction over all criminal offenses
matter, and exhaust all options for a resolution arising from violations of the NIRC or Tariff and
under the remedy provided by statute before Customs Code and other laws administered by
bringing an action in or resorting to the courts the BIR or the Bureau of Customs, where the
of justice. (ibid) principal amount of taxes and fees, exclusive
of charges and penalties, claimed is one million
Civil cases within the jurisdiction of the pesos or more. [Sec. 3(b)(1), Rule 4, RRCTA]
Court En Banc [Sec. 2(a-e), Rule 4, RRCTA]
The Court En Banc shall exercise exclusive The Court in Divisions shall exercise exclusive
appellate jurisdiction to review by appeal the appellate jurisdiction over appeals from the
following: judgments, resolutions or orders of the RTC in
their original jurisdiction in criminal offenses
a. Decisions or resolutions on motions for arising from violations of the NIRC or Tariff and
reconsideration or new trial of the Court in Customs Code and other laws administered by
Divisions in the exercise of its exclusive the BIR or Bureau of Customs, where the
appellate jurisdiction over: principal amount of taxes and fees, exclusive
1. Cases arising from administrative of charges and penalties, claimed is less than
agencies – Bureau of Internal Revenue, one million pesos or where there is no specified
Bureau of Customs, Department of amount claimed. [Sec. 3(b)(2), Rule 4, RRCTA]
Finance, Department of Trade and
Industry, Department of Agriculture; Criminal cases within the jurisdiction of the
2. Local tax cases decided by the Regional Court En Banc [Sec. 2(f-h), Rule 4, RRCTA]
Trial Courts in the exercise of their The Court En Banc shall exercise exclusive
original jurisdiction; and appellate jurisdiction to review by appeal the
3. Tax collection cases decided by the following:
Regional Trial Courts in the exercise of 1. Decisions, resolutions or orders on motions
their original jurisdiction involving final for reconsideration or new trial of the Court
and executory assessments for taxes, in Division in the exercise of its exclusive
fees, charges and penalties, where the original jurisdiction over cases involving
principal amount of taxes and penalties criminal offenses arising from violations of
claimed is less than one million pesos. the NIRC or the Tariff and Customs Code
b. Decisions, resolutions or orders of the RTC and other laws administered by the BIR or
in local tax cases and in tax collection Bureau of Customs;
cases decided or resolved by them in the 2. Decisions, resolutions or orders on motions
exercise of their appellate jurisdiction; for reconsideration or new trial of the Court
c. Decisions, resolutions or orders on motions in Division in the exercise of its exclusive
for reconsideration or new trial of the Court appellate jurisdiction over criminal offenses
in Division in the exercise of its exclusive
Page 489 of 494

TAXATION LAW
mentioned in the preceding subparagraph; Presentation of Evidence in the CTA. Cases
and before the CTA are litigated de novo where
3. Decisions, resolutions or orders of the RTC party litigants should prove every minute
in the exercise of their appellate jurisdiction aspect of their cases. The CTA’s decision
over criminal offenses arising from should be solely based on the evidence
violations of the NIRC or the Tariff and formally presented before it, notwithstanding
Customs Code and other laws any pieces of evidence that may have been
administered by the BIR or Bureau of submitted (or not submitted) to the CIR. The
Customs. court is not limited by the evidence presented
in the administrative claim. (CIR v. PBCom,
Does the CTA have jurisdiction over a G.R. No. 211348. February 23, 2022)
special civil action for certiorari assailing Appeal. Section 1, Rule 8 of the RRCTA
an interlocutory order issued by the RTC in requires that an appeal to the CTA En Banc
a local tax case? YES. must be preceded by a motion for
reconsideration or new trial with the CTA
While there is no express grant of such power, Division that issued the decision or resolution.
with respect to the CTA, Section 1, Article VIII that the rule applies in an amended decision
of the 1987 Constitution provides, nonetheless, since an amended decision is a different
that judicial power shall be vested in one decision. (CIR v COMELEC, G.R. No. 244155,
Supreme Court and in such lower courts as May 11, 2021)
may be established by law and that judicial
power includes the duty of the courts of justice However, if the amended decision of the CTA
to settle actual controversies involving rights Division is not a "new" decision, but a mere
which are legally demandable and enforceable, clarification, a correction at best, appeal would
and to determine whether or not there has been be proper without aa motion for
a grave abuse of discretion amounting to lack reconsideration. (ibid)
or excess of jurisdiction on the part of any
branch or instrumentality of the Government. B. Procedures
On the strength of the above constitutional
1. Filing of an Action for Collection of
provisions, it can be fairly interpreted that the
power of the CTA includes that of determining Taxes
whether or not there has been grave abuse of
discretion amounting to lack or excess of a. Internal Revenue Taxes
jurisdiction on the part of the RTC in issuing an
interlocutory order in cases falling within the The remedies for the collection of internal
exclusive appellate jurisdiction of the tax court. revenue taxes, fees or charges, and any
[City of Manila v. Grecia-Cuerdo, G.R. No. increment thereto resulting from delinquency
175723 (2014)] can be through the institution of a civil or
criminal action. [Sec. 205, NIRC]
The CTA may take cognizance of a petition for
certiorari to determine whether there is grave Note: See Taxpayer’s Remedies – Collection
abuse of discretion amounting to lack or above.
excess of jurisdiction committed by the BIR in
issuing the 2017 LOA against petitioner as well When this remedy is resorted to:
as the subpoena duces tecum considering that The tax assessment becomes final and
a previous investigation of the same taxable executory because of the failure to appeal.
year 2007 was already conducted pursuant to
the 2008 LOA and petitioner has already Even pending decision of the administrative
settled its tax liabilities arising out of said protest [CIR v. Union Shipping, G.R. No. L-
investigation. [Golden Donuts, Inc. v. 66160 (1990)]
Commissioner of Internal Revenue, G.R. No.
252816 (Notice), February 3, 2021]
Page 490 of 494
TAXATION LAW
b. Local Taxes Appeal to CTA Division
The LGU concerned may enforce the collection 1. A party aggrieved or adversely affected by
of delinquent taxes, fees, charges or other the decision or ruling or inaction of
revenues by civil action in any court of a. CIR;
competent jurisdiction. The civil action shall be b. Commissioner of Customs;
filed by the local treasurer. [Sec. 183, LGC] c. Secretary of Finance;
d. Secretary of Trade and Industry;
MTC/RTC depending on jurisdictional e. Secretary of Agriculture; or
threshold amount. f. RTC exercising original jurisdiction
2. May appeal within 30 days from the receipt
Prescriptive period of the copy of the decision or ruling, or the
Local taxes, fees, or charges shall be assessed expiration of the period fixed by law for the
within five (5) years from the date they became Commissioner to decide, to the Court of
due. Tax Appeals Division.
No action for the collection of such taxes, fees, Mode of Appeal: Rule 42
or charges, whether administrative or judicial,
shall be instituted after the expiration of such Aggrieved party may file a motion for
period. reconsideration or new trial within 15 days from
receipt of the copy of the decision.
In case of fraud or intent to evade the payment
of taxes, fees, or charges, the same may be In view of respondent’s availment of a wrong
assessed within ten (10) years from discovery mode of appeal via notice of appeal stating that
of the fraud or intent to evade payment. it was elevating the case to the Court of
Local taxes, fees, or charges may be collected Appeals — instead of appealing by way of a
within 5 years from the date of assessment by petition for review to the CTA within thirty (30)
administrative or judicial action. days from receipt of a copy of the RTC’s
August 3, 2012 Order, as required by Section
No judicial or administrative action for 11 of RA 1125, as amended by Section 9 of RA
collection can be instituted after lapse of the 9282 — the Court is constrained to deem the
period for assessment except when there is RTC’s dismissal of respondent’s collection
fraud or intent to evade tax. [Sec. 194 LGC] case against petitioner final and executory.
[Mitsubishi Motors Phils. Corp. v. Bureau of
The running of the periods of prescription shall Customs, G.R. No. 209830 (2015)]
be suspended for the time during which:
a. The treasurer is legally prevented from b. Suspension of Collection of Taxes
making the assessment of collection;
b. The taxpayer requests for a reinvestigation General rule: No appeal taken to the Court
and executes a waiver in writing before shall suspend the payment, levy, distraint, or
expiration of the period within which to sale of any property of the taxpayer for the
assess or collect; and satisfaction of his tax liability as provided under
c. The taxpayer is out of the country or existing laws.
otherwise cannot be located. [Sec. 194,
LGC] Exception: Where the collection of the amount
of the taxpayer’s liability, sought by means of a
2. Civil Cases demand for payment, by levy, distraint or sale
of any property of the taxpayer, or by whatever
a. Who May Appeal, Mode of Appeal, means, as provided under existing laws, may
Effect of Appeal jeopardize the interest of the Government or
the taxpayer, an interested party may file a
motion for the suspension of the collection of
the tax liability [Sec. 11, RA 1125, as amended]
Page 491 of 494
TAXATION LAW
c. Injunction not available to restrain injunction applies only in cases where the
collection processes by which the collection sought to be
made by means thereof are carried out in
No court shall have authority to grant an consonance with the law for such cases
injunction to restrain the collection of any provided and not when said processes are
national internal revenue tax, fee or charge obviously in violation of the law to the extreme
imposed by the Code. [Sec. 217, NIRC] that they have to be suspended for
jeopardizing the interests of taxpayer.
Exception: Sec. 11, R.A. 1125, supra. [Privatization and Management Office v. Court
of Tax Appeals, G.R. No. 211839 (2019)]
Injunctive relief is not available as a remedy to
assail the collection of a tax. The more The wording of Section 11 of the CTA Law is
substantial reason that should have impelled clear in requiring the existence of a “tax liability”
the RTC to desist from taking cognizance of the before a Suspension Order may be availed of.
respondent’s petition for declaratory relief However, more than just proof of an issued
except to dismiss the petition was its lack of assessment, the said assessment must be
jurisdiction. Section 218 of the NIRC expressly properly assailed and elevated to the CTA for it
provides that “[n]o court shall have the to acquire jurisdiction to issue any and all kinds
authority to grant an injunction to restrain the of ancillary remedies in favor of the taxpayer,
collection of any national internal revenue tax, e.g., a Suspension Order. [Commissioner of
fee or charge imposed by the [NIRC].” Also, Internal Revenue v. Court of Tax Appeals (First
pursuant to Section 11 of RA 1125, as Division), G.R. Nos. 210501, 211294 &
amended, the decisions or rulings of the 212490, March 15, 2021]
Commissioner of Internal Revenue, among
others, assessing any tax, or levying, or A taxpayer may seek the following provisional
distraining, or selling any property of taxpayers remedies before the CTA: (a) a motion to
for the satisfaction of their tax liabilities are suspend the direct enforcement of the tax
immediately executory, and their enforcement assessment pursuant to the special provision
is not to be suspended by any appeals thereof of the CTA law; and/or (b) the ordinary
to the CTA unless “in the opinion of the Court injunctive writs (TRO/WPI) based on the
[of Tax Appeals] the collection by the Bureau of suppletory application of the Rules of Court
Internal Revenue or the Commissioner of against the implementation of the tax statute or
Customs may jeopardize the interest of the issuance assailed. To note, since the latter
Government and/or the taxpayer,” in which remedy (TRO/WPI) is meant to enjoin the
case the CTA “at any stage of the proceeding implementation of a tax statute or issuance, a
may suspend the said collection and require successful application thereof will indirectly
the taxpayer either to deposit the amount result in the suspended implementation of a tax
claimed or to file a surety bond for not more assessment or demand for payment of taxes, if
than double the amount.” [Commissioner of any, springing from the tax statute or issuance.
Internal Revenue v. Standard Insurance Co.,
Inc., G.R. No. 219340 (2018)] The issuance of one of two remedies does not
necessarily result into or preclude the other.
The CTA has ample authority to dispense with However, when a TRO/WPI is issued enjoining
the deposit of the amount claimed or the filing the implementation of a tax statute or issuance,
of the required bond, whenever the method the practical effect is to suspend the
employed by the BIR in the collection of tax assessment or collection of all taxes stemming
jeopardizes the interest of the taxpayer for from the same. In this regard, the TRO/WPI
being patently in violation of law. [Sps. may thus be considered as a broader relief
Pacquiao v. CTA First Division, G.R. No. which renders unnecessary further Suspension
213394 (2016)] Orders covering future assessments/collection
of taxes stemming from such tax statute or
The requirement of the bond as a condition issuance. [Commissioner of Internal Revenue
precedent to the issuance of the writ of v. Court of Tax Appeals (First Division), G.R.
Page 492 of 494
TAXATION LAW
Nos. 210501, 211294 & 212490, March 15, Revenue, represented by the Commissioner of
2021] Internal Revenue, G.R. No. 210238 (2020)]
3. Criminal Cases b. Institution of Civil Action in Criminal

Action
a. Institution and Prosecution of
Criminal Actions In cases within the jurisdiction of the Court, the
criminal action and the corresponding civil
Institution of criminal action action for the recovery of civil liability for taxes
Instituted by the filing an information in the and penalties shall be deemed jointly instituted
name of the People of the Philippines in the same proceeding. The filing of the
criminal action shall necessarily carry with it the
Those involving violations of the NIRC and filing of the civil action. No right to reserve the
other laws enforced by the BIR: Must be filing of such civil action separately from the
approved by the CIR criminal action shall be allowed or recognized.
Those involving violations of the tariff and Rule 111, Section 1(a) of the Rules of Court
Customs Code and other laws enforced by the provides that what is deemed instituted with the
Bureau of Customs: Must be approved by the criminal action is only the action to recover civil
Commissioner of Customs liability arising from the crime. Civil liability
arising from a different source of obligation,
Institution shall interrupt the running of the such as when the obligation is created by law,
period of prescription. such civil liability is not deemed instituted with
the criminal action. It is well-settled that the
Prosecution of criminal action taxpayer’s obligation to pay the tax is an
Conducted and prosecuted under the direction obligation that is created by law and does not
and control of the public prosecutor arise from the offense of tax evasion, as such,
the same is not deemed instituted in the
Those involving violations of the NIRC and criminal case. [Gaw, Jr. v. Commissioner of
other laws enforced by the BIR or violations of Internal Revenue, G.R. No. 222837 (2018)]
the tariff and Customs Code and other laws
enforced by the Bureau of Customs - The c. Period to Appeal
prosecution may be conducted by their
respective duly deputized legal officers. Deciding Period to Mode of
Body Appeal Appeal
All violations of any provision of this Code shall Regional Appeal
prescribe after five (5) years. Prescription shall Trial Court in pursuant to
begin to run from the day of the commission of the exercise 15 days from Sec. 3[a] and
the violation of the law, and if the same be not of its original receipt of 6, Rule 122
known at the time, from the discovery thereof jurisdiction decision of the Rules
and the institution of judicial proceedings for its [to CTA of Court
investigation and punishment. [Sec. 281, Division]
NIRC] 15 days from Petition for
receipt of review as
An offense under the Tax Code is considered decision provided in
discovered only after the manner of CTA Division Rule 43 of
commission and the nature and extent of fraud [to CTA En May be the Rules of
has been definitely ascertained. This occurs Banc] extended for Court
when the BIR renders its final decision and good cause
requires the taxpayer to pay the deficiency tax. for not more The Court En
[Imelda Sze, et al. v. Bureau of Internal than 15 days Banc shall
Page 493 of 494

TAXATION LAW
Deciding Period to Mode of within fifteen days from receipt of a copy of the
Body Appeal Appeal questioned decision or resolution. Upon proper
act on the motion and the payment of the full amount of
appeal. the docket and other lawful fees and deposit for
Regional costs before the expiration of the reglementary
Trial Courts Petition for period herein fixed, the Court may grant an
in the review as additional period not exceeding fifteen days
15 days from from the expiration of the original period within
exercise of provided in
receipt of which to file the petition for review. [Section
their Rule 43 of
decision 3(b) and (c), Rule 8 of the RRCTA]
appellate the Rules of
jurisdiction Court
[To CTA The CTA En Banc cannot annul a final and
division] executory judgment of a division of the court
The laws creating the CTA and expanding its
Solicitor General as counsel for the People jurisdiction, and the CTA’s own rules of
and government officials sued in their procedure do not provide for a scenario where
official capacity the CTA sitting En Banc is asked to annul a
decision of one of its divisions. Annulment by a
The Solicitor General shall represent the collegial court, sitting En Banc is tantamount to
People of the Philippines and government allowing a court to annul its own judgment and
officials sued in their official capacity in all acknowledging that a hierarchy exists within
cases brought to the Court in the exercise of its such court. A proper remedy would have been
appellate jurisdiction. He may deputize the an original action for Certiorari under Rule 65.
legal officers of the Bureau of Internal Revenue [CIR v. Kepco Ilijan Corp., G.R. No. 199422
in cases brought under the National Internal (2016)]
Revenue Code or other laws enforced by the
Bureau of Internal Revenue, or the legal The filing of a motion for reconsideration or new
officers of the Bureau of Customs in cases trial before the CTA Division is an
brought under the Tariff and Customs Code of indispensable requirement for filing an appeal
the Philippines or other laws enforced by the before the CTA En Banc. Failure to file such
Bureau of Customs, to appear in behalf of the motion for reconsideration or new trial is cause
officials of said agencies sued in their official for dismissal of the appeal before the CTA En
capacity: Provided, however, such duly Banc. [City of Manila v. Cosmos Bottling Corp.,
deputized legal officers shall remain at all times G.R. No. 196681 (2018)]
under the direct control and supervision of the
Solicitor General. 5. Petition for Review on Certiorari to
the Supreme Court
4. Appeal to the CTA En Banc
[Rule 16, A.M. No. 05-11-07]
No civil proceeding involving matters arising
under the National Internal Revenue Code, the A party adversely affected by a decision or
Tariff and Customs Code or the Local ruling of the Court En Banc may appeal by filing
Government Code shall be maintained, except with the Supreme Court a verified petition for
as herein provided, until and unless an appeal review on certiorari within fifteen days from
has been previously filed with the CTA and receipt of a copy of the decision or resolution,
disposed of in accordance with the provisions as provided in Rule 45 of the Rules of Court.
of this Act.
The motion for reconsideration or for new trial
A party adversely affected by a decision or filed before the Court shall be deemed
resolution of a Division of the Court on a motion abandoned if, during its pendency, the movant
for reconsideration or new trial may appeal to shall appeal to the Supreme Court.
the Court by filing before it a petition for review
Page 494 of 494


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FOR UP CANDIDATES ONLY

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Table of Contents D. Unlawful Acts .................................................. 252

PUBLIC SERVICE ACT .......................... 248 II. NATIONAL TAXATION.................. 338

A. In a Universal Partnership B. In a Particular Partnership

e. Characteristics All partners, including industrial ones, shall be

When the intent of parties does not clearly

Exception: No such inference is drawn if the a. Definition

1. Personal Representation When all the A partnership act or

If he has made such representation or

5. Partnership as Distinguished from The property rights of a partner are:

Exception: If the taking by the partner is with

If the capitalist partner violates this prohibition,

c. Obligation to Share in the The partnership is primarily liable for contracts

Basis for Pro-rating Exception: The partnership is not bound when

4. Stipulation against Individual Liability 3. Acts of strict dominion

The interest charged may be redeemed before 2. Causes of Dissolution

Any act of a partner after dissolution in no d. On Existing Liability of Partners [Art.

Nature of Fraud or Deceit The individual property of a deceased partner

Note: The limited

General Rule: Only general partners have the

Exception: By an agreement of all the partners g. Right to Ask for Dissolution

a. Order of Payment b. Amendment of Certificate

(1) In case of refusal to execute the

Trigger: If any person, who is designated in

Rule: A person desiring the cancellation or

Action of the court: The court shall order the

12. Limited Partnerships Formed Prior

Limited partnerships formed under the law

Revised Corporation Code (RA 11232) c. Has the Right of Succession

1. Stock Corporations Have capital No part of its

The governing body of a stock corporation is

Its governing body is usually the Board of Other distinctions

Stock Non-Stock Stock Non-Stock

Number of Maximum of May be more the right to

Being an entity with a separate juridical 2. Doctrine of Piercing the Corporate

2. Subscription Requirements Characteristics

No minimum capital requirement There can be a subscription only with reference

This benefit does not extend to corporations Nature of Shares of Stock

Summary of changes [Herbosa, 2019] The shares in stock corporations may be

For GR: May file an

Only preferred and redeemable shares may be

No pre-incorporation subscription may be The following cannot be exchanged for the

4. Consideration for Stocks Valuation of Consideration

Where the consideration is other than actual

Other Matters Included in the AOI A corporation has only such

Contents Comments Contents Comments

the building, and name or Capital ● Amount of its authorized

Contents Comments provisions required by law to be set out

Unless the Articles of Incorporation provides DOCUMENTS TO BE FILED WITH SEC:

Steps Comments Steps Comments

Examination Process: Issuance of Certificate of Incorporation

Grounds for rejection or Should it be subsequently found

A stockholder or member who participates Exception: Unless otherwise provided in the

Stockholders entitled to vote shall have the Report to SEC

Notwithstanding any provision of the articles of

May be done either: Record-Keeping: Must be kept in the principal

Where only the approval of a quorum of the The continuity-of-business enterprise

9. Power to Declare Dividends Note: In case a corporation unjustifiably retains

Stock corporations are prohibited from Effect on Shall be Shall be withheld

Cash Stock 10. Power to Enter into Management

12. Doctrine of Equality of Shares Lawfulness Lack of Illegality;

The test to be applied is whether the act in