For a successful foreign investments in the Philippines, the common concern is how to repatriate such foreign investment income to his home country. Common factors to be considered is the source of foreign currency, and tax implications of such investment income. For a foreign investment registered with the Bangko Sentral ng Pilipinas (BSP or Central Bank of the Philippines) the source of foreign currency for the purpose of repatriating income from Philippine foreign investment is not much of a problem because it could simply buy foreign currency from BSP authorized agent banks.
On the other hand, tax implications of income on such foreign investments in the Philippines could vary depending on the nature of such investments. Notably, there could be lot more ways to structure foreign investments in the Philippines and minimize taxes. Here are some of the few common ways:
Dividends income of Foreign corporation in the Philippines
Investments of non-resident foreign corporations (NRFC) in the Philippines in shares of stock of a Philippine local company would yield dividend income upon the declaration of its Board of Directors. Under the Tax Code, dividends to non-resident foreign corporation are taxed at 30% as a rule, except under the following instances of lower tax rates:
Using the lowered tax rates, the non-resident foreign corporation could maximize its investment income. In letter (a), a BIR Ruling is encouraged to facilitate application, while in letter (b), a tax treaty relief application (TTRA) is mandatory with the BIR-International Tax Affairs Division.
Branch Profit Remittance in the Philippines
A Philippine branch is an alternative of a subsidiary on areas of repatriation under lower tax rates. In a subsidiary, the foreign corporation is taxed at 30% on dividends or the lowest of 15% under certain conditions mentioned above. In a Philippine branch set-up, the Philippine branch operational profit could be repatriated at 15% final withholding tax without need of a prior BIR ruling. As such, repatriation of income is much more easier at the convenience of the Philippine branch and its parent company.
Lease of foreign-owned properties
Non-resident foreign corporations owning personal properties (equipments, machineries, vessels, aircrafts, cinematographic films) may opt to lease out such properties with a Philippine local company in exchange for a rental income. Taxing the non-resident foreign lessor would vary depending on the type of personal property as follows:
Interest Income on Foreign Loans in the Philippines
For financing needs of the Philippine subsidiary, non-resident foreign entity may simply extend loans and financing its operational needs to yield interest income on foreign loans. This is subject to 20% interest on foreign loans under the Tax Code, but could be lowered down under the Tax Treaty with the Philippines (say, 15%). Again a tax treaty relief application (TTRA) is mandatory with the BIR-International Tax Affairs Division.
Service Agreement with the Philippine Company
In this set-up, the foreign corporation will be contracted by the local company to render a particular service (say, marketing, accounting and finance, and other services). Services performed outside of the Philippines or abroad are exempt from tax because income from services is taxed in the place where the services are rendered. Services performed in the Philippines are subject to 30% final withholding tax but again, may be lowered under the implications of a Tax Treaty with the Philippines as business profits or otherwise. Tax treaty relief application (TTRA) is mandatory with the BIR-International Tax Affairs Division to avail of the treaty exemptions or lowered rates.
Royalty Agreement with the Philippine Company
The foreign licensor of an intellectual property right may also allow the Philippine company over its rights on such property ( e.g. software, technical know-how, etc). Royalty payments are normally subject to 30% final withholding tax, unless, a tax treaty provision is in place between its home country and the Philippines. Normal treaty rates on royalty payments are 15% or 25% under certain instances. Tax treaty relief application (TTRA) is mandatory with the BIR-International Tax Affairs Division to avail of the treaty exemptions or lowered rates. Read more on…taxation of software payments in the Philippines, and classification of income payments for software in the Philippines.
There could be more ways in addition to the above but we suggest the you consult with your preferred tax or legal consultant for the technical aspect of implementing any of the above or any other way of doing it.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at email@example.com.)
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