Philippines Income Tax for Foreign Companies

Foreign owned corporations are taxed only on Philippine source income. Corporate income is taxed when earned by the corporation and again when profits are received by shareholders. Inter-corporate dividends between domestic corporations or received from a domestic corporation by a resident foreign corporation are subject to 0% rate of tax. Depending on the business activity involved, the starting point for Philippine taxation is whether a foreign business has Philippine source income.

The Philippines also has several double taxation treaties with different countries, which relinquish taxing rights over business profits to the state of residence if no permanent establishment (“PE”) exists or should reduce the applicable rates of tax imposed on Philippine source income.

Generally, active business income earned by individuals is subject to graduated rates of tax between 5-32% in the Philippines. The active business income of Corporations, on the other hand is subject to a flat 35% rate. (the tax rate will be reduced to 30% in 2009). Passive income such as interest, royalties, and dividends are subject to final withholding taxes which are withheld at source. The applicable rates of final withholding tax vary depending on the type of income involved and the taxpayer in the Philippines.

A foreign owned company considered “doing business” in the Philippines must be licensed by the Securities and Exchange Commission (SEC)  or will be considered a non resident foreign corporation and subject to tax a final tax of 35% of its gross (rather than net) income

Foreign and local businesses in the Philippines that qualify and are registered for tax incentives  can avail of income tax holidays and this may be followed by a special tax rate of 5% in lieu of any and all taxes if the business is located in a Philippine Special Economic Zone (PEZA) .