Tax Alert

(Republic Act No. 11523 signed by the President on February 16, 2021)

This Tax Alert is issued to inform all concerned on the relevant tax provisions of Financial Institutions Strategic Transfer (FIST) Act (Republic Act No. 11523).

The FIST Act was enacted to ensure that banks and other financial institutions are able to maintain their financial health in order to cushion the adverse economic impact of the COVID-19 pandemic. It aims to facilitate the disposal of Non-Performing Assets (NPAs) of Financial Institutions (FI) through transfers to Financial Institutions Strategic Transfer Corporations (FISTC) which specialize in the management of non-performing assets.

Financial Institutions Strategic Transfer Corporation (FISTC)

An FISTC may be set-up in accordance with the provisions of the Revised Corporation Code, subject to the following conditions:

• It cannot be incorporated as one-person corporation.
• If the FISTC will acquire land, at least sixty percent (60%) of its outstanding capital stock shall be owned by Philippine nationals.
• The minimum authorized capital of P500M is required to form FISTC.

Applications for establishment and registration of an FISTC shall be filed with the Securities and Exchange Commission (SEC) with 36 months from effectivity of FIST Act.

Tax Exemptions and Privileges

The transfer of NPAs from the FIs to an FISTC and from an FISTC to a third party or dation in payment by a borrower or by a third party in favor of an FI or FISTC shall be entitled to the following incentives:

• Exemption from documentary stamp tax (DST), capital gains tax on transfers of capital assets, creditable withholding taxes on transfers of ordinary assets and value added tax or gross receipts tax, as applicable
• The transfers shall only be subject to 50% of applicable fees for the following:
• Registration and transfer fees on the transfer of real estate mortgage and security interest to and from the FISTC;
• Filing fees for any foreclosure initiated by the FISTC in relation to any NPA acquired from FI; and
• Land registration fees.

All sales or transfers of NPAs from the FIs to a FISTC or transfers by way of dation in payment by the borrower or by a third party to the FI shall be entitled to the privileges enumerated herein for a period of not more than two (2) years from the date of effectivity of FIST Act.  

Transfers from an FISTC to a third party of NPAs acquired by the FISTC within such two (2) year period, or within such extended period, or transfers by way of dation in payment by a borrower or by a third party to the FISTC shall enjoy the privileges enumerated herein for a period of not more than five (5) years from the date of acquisition by the FISTC.

Properties for socialized or low-cost housing cannot be converted to other uses. The tax exemptions, incentives, and fee privileges given to FIs and FISTC at the various stages of the transactions shall likewise be extended to any individual, subject to certain conditions.

The Certificate of Eligibility which will be issued by the appropriate agencies will be sufficient proof of the entitlement to the above tax exemptions and privileges.

To encourage capital infusion and financial assistance by the FISTC for purposes of rehabilitating borrower’s business, the following additional tax exemptions shall be enjoyed for a period of not more than 5 years from date of acquisition of non-performing loans (NPLs):

• Exemption from income tax on net interest income, documentary stamp tax, and mortgage registration fees of new loans in excess of existing loans extended to borrowers with NPLs which have been acquired by FISTC; and
• Exemption from DST of capital infusion by the FISTC to the borrower with NPL.

The loss on transfers of NPAs by FI shall be considered ordinary loss and may be carried over for 5 years. The tax savings from the said net-operating loss carry over (NOLCO) cannot be declared as dividends and should be retained as a form of capital build-up.

The Investment Unit Instruments (IUIs) that may be issued by the FISTC and subscribed by permitted investors shall not be considered as deposit substitutes.

Abuse of Tax Exemptions

Any person, who benefits from the tax exemptions, when such person is not entitled thereto, shall be subject to the penalties of P100,000 to P2,000,000 or imprisonment of not less than 6 years nor more than 12 years or both. In addition, the offender shall refund to the government double the amount of the tax exemptions and privileges, plus interest of twelve percent (12%) per year from the date prescribed for its payment, until full payment thereof.

The FIST Act covers assets that have become and will become non-performing as of December 31, 2022. The FIST Act also repeals RA No. 9182, as amended by RA No. 9343, or “The Special Purpose Vehicle (SPV) Act of 2002”

The law immediately took effect upon publication on February 17, 2021.