This Tax Alert is issued to remind all concerned taxpayers on the reportorial requirements for the income tax exemption of foreign-soured dividends received by domestic corporations.
Under the CREATE Law, foreign-sourced dividends received by a domestic corporation shall be exempt from income tax subject to all of the following conditions:
- Dividends actually received or remitted in the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time the foreign-source dividends were received or remitted;
- Dividends shall only be used to fund the working capital requirements, capital expenditure, dividend payments, investment in domestic subsidiaries, and infrastructure project; and
- The domestic corporation holds at least 20% in value of the outstanding shares of the foreign corporation and has held the shareholdings uninterruptedly for at least 2 years at the time of dividends distribution.
Taxpayers who are availing of the exemption are reminded to comply with the following:
- Submit to the concerned BIR office within thirty (30) calendar days from actual receipt of the remitted dividends a Sworn Statement/Affidavit containing (i) the fact of actual receipt of such dividends, (ii) the amount and the source (non-resident foreign corporation [NRFC]) of such dividends, including their shareholdings in that NRFC and the holding period at the time of the dividends distribution, and (iii) a statement that they shall fully comply with the conditions of the exemptions above stated;
- Submission of Independent Auditor Sworn Certification as attachment to the Audited Financial Statements (AFS) in the year of receipt of dividend. The dividends shall also be disclosed in the said AFS and the amount of dividend deemed exempt from income tax shall be declared in reconciliation part of the said Annual ITR; and
- Submission of Sworn Certification as attachment to the AITR in the immediately following taxable year. The certification shall be prepared and executed by an independent auditor on the utilization or non-utilization of dividends received by the corporation. It shall confirm the taxpayer's full compliance with the conditions for its exemption. However, if the certification will state non-utilization of the dividends received, the corresponding tax due on the unutilized dividends shall be declared as taxable income, subject to surcharges, interest, and penalty, if any.
No credit or deduction under Section 34 (C) of the Tax Code shall be allowed for any taxes of foreign countries paid or incurred 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 limitations on foreign tax credits.
