BIR Amends the Requirements for Availing of Income Tax Exemption of Foreign-Sourced Dividends Received by a Domestic Corporation

On 07 March 2023, the Bureau of Internal Revenue (“BIR”) introduced Revenue Regulations (“RR”) No. 5-2023, which amended RR No. 5-2021 on the requirements for domestic corporations to avail income tax exemption on foreign-sourced dividends.

Section 5 of RR No. 5-2021, as amended by RR No. 5-2023, maintains the following conditions for a domestic corporation to qualify for income tax exemption on foreign-sourced dividends, to wit:

1. The domestic corporation must reinvest the dividends actually received or remitted into the Philippines into its business operations within the next taxable year after receiving or remitting the foreign-sourced dividends;
2. The received dividends should be allocated towards funding the working capital requirements, capital expenditures, dividend payments, investments in domestic subsidiaries, and infrastructure projects; and
3. The domestic corporation must directly hold at least 20% in value of the outstanding shares of the foreign corporation, and this shareholding must have been continuously held for a minimum of 2 years at the time of dividend distribution. If the foreign corporation has been in existence for less than 2 years at the time of dividend distribution, the domestic corporation must have continuously held directly at least 20% in value of the foreign corporation’s outstanding shares throughout its entire existence.

Failure to meet any of the aforementioned conditions will result in the foreign-sourced dividends being treated as taxable income for the domestic corporation in the year of receipt or remittance. Applicable surcharges, interest, and penalties will be imposed.

By virtue of RR No. 5-2023, in addition to the above requirements, domestic corporations must now also comply with the following to qualify for the income tax exemption:

1. Attach a “Sworn Statement” to the Annual Income Tax Return (“AITR”) for the taxable year in which the foreign-sourced dividends were received. The template for the “Sworn Statement” is provided within RR No. 5-2023 as Annex A.
2. Attach a “Sworn Declaration” to the AITR for the year immediately following the year of receiving the foreign-sourced dividends. The template for the “Sworn Declaration” is provided within RR No. 5-2023 as Annex B.

Compliance with these requirements is necessary to avail of the income tax exemption. However, if the foreign-sourced dividends are only partially or non-utilized, the domestic corporation must pay the corresponding income tax, including surcharges, interest, and penalties, by amending the AITR filed for that specific period. In case the amendment is prohibited due to an ongoing audit, the income tax must be paid using payment form BIR Form 0605.