Simplifying tax exemption on foreign-sourced dividends

Intercorporate investments are becoming a common feature among companies doing business in the Philippines and on foreign shores. A diversified portfolio spreads the risk of doing business and provides other advantages, such as gaining access to another market, increase in asset base, gaining a competitive advantage, or simply increased profits through stock ownership in a company that distributes dividends.

A Philippine company planning to invest in foreign companies should consider the impact of foreign and Philippine tax obligations in case of receipt of foreign-sourced dividends. Under the 1997 Tax Code, and prior to Republic Act (RA) 11534 otherwise known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law, dividends received by a Philippine domestic corporation from a foreign company were subject to income tax.

When the CREATE Law became effective on April 11, 2021, it introduced a tax exemption on foreign-sourced dividends received by Philippine domestic corporations subject to a minimum ownership stake of 20 percent of outstanding shares in the foreign corporation for at least two years and mandatory reinvestment of the earnings in the Philippines.

The Bureau of Internal Revenue (BIR) issued Revenue Regulation (RR) 05-2021 upon implementation of the CREATE Law. Under Section 5 of the RR, the following conditions must concur for the tax exemption to apply:

A. The dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time the foreign-sourced dividends were received or remitted.

B. The dividends received shall be used to fund the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructure projects.

C. The corporation holds directly at least 20 percent in value of the outstanding shares of the foreign corporation and has held the shareholdings uninterruptedly for a minimum of two years at the time of the dividends distribution. In case the foreign corporation has been in existence for less than two years at the time of dividends distribution, then the domestic corporation must have continuously held directly at least 20 percent in value of the foreign corporation’s outstanding shares during the existence of the corporation.

The RR also provides that absent any one of the above conditions, the foreign-sourced dividends shall be considered as taxable income of the corporation in the year of actual receipt or remittance, subject to surcharge, interest and penalties, as applicable. Further, the RR provides that no credit or deduction under Section 34 (C) of the Tax Code shall be allowed for taxes paid or incurred in foreign countries by the domestic corporation in relation to the exempt foreign-sourced dividends. Finally, any taxes of foreign countries paid or incurred by the domestic corporation in relation to the exempt foreign-sourced dividends shall be disregarded in computing the limitation provided under section 34(C)(4) of the Tax Code.

Apart from these substantive requirements, the RR also imposed the following compliance requirements:

(a) Submission of a Sworn Statement/Affidavit within 30 days from actual receipt of the dividends to the concerned BIR Office.

(b) In the year of receipt of the dividend, attach an independent auditor sworn certification to the Audited Financial Statements (AFS) of the domestic corporation.

(c) Disclosure of the dividends in the AFS, which will be attached to the annual income tax return (AITR) of the domestic corporation.

(d) In the immediately following taxable year, a sworn certification prepared by an independent auditor on the utilization or non-utilization of the dividends received shall be attached to the AITR.

On May 5, 2023, the BIR issued RR 05-2023 amending Section 5 of RR 05-2021, reducing the compliance requirements and standardizing the templates of documents to be submitted to the BIR to the following:

(a) A “sworn statement” (Annex A to the RR) to be attached to the domestic corporation’s AITR in the taxable year when the foreign-sourced dividends were received.

(b) A “sworn declaration” (Annex B to the RR) is to be attached to the domestic corporation’s AITR in the year immediately following the year of receipt of the foreign-sourced dividends.

RR 05-2023 provides that compliance with the above requirements is sufficient to avail of the income tax exemption. However, in case of partial or non-utilization of the foreign-sourced dividends, the domestic corporations shall pay the corresponding income tax due thereon, inclusive of surcharge, interest, and penalties, by amending the AITR filed for the particular period. In the event that the amendment is already prohibited due to the existence of a tax audit, the income tax shall be paid using a payment form (BIR From 0605).

We laud the BIR’s efforts, through RR 05-2023, to simplify compliance for taxpayers. Taxpayers, on the other hand, should keep abreast of developments in the tax field to ensure that documentation for tax compliance is complete and accurate, but also to readily explain any exemption invoked when asked by the tax authorities.

Rolex R. Argoso is a supervisor under the tax group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in transfer pricing practice and in general corporate tax practice by the International Tax Review. For more information, you may reach out to Rolex R. Argoso or Mary Karen E. Quizon-Sakkam through [email protected], social media or visit

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.