The Bureau of Internal Revenue (BIR) has issued Revenue Regulations (RR) No. 05-2023 which outlines the updated documentary requirements for domestic corporations seeking income tax exemption on foreign-sourced dividends.

Ordinarily, foreign-sourced dividends received by domestic corporations are subject to income tax. However, there are exceptions to this rule as provided in Section 27(D)(4) of the Tax Code, as amended by the CREATE Act. To qualify for income tax exemption, the following conditions outlined in RR No. 5-2021 must be met:

  • The foreign-sourced dividends actually received or remitted into the Philippines should be reinvested in the business operations of the domestic corporation in the Philippines within the next taxable year from the time that such dividends are received, and they shall be used to fund working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure project; and
  • The domestic corporation should directly hold at least 20% of the outstanding shares of the foreign corporation and it should have held the shareholdings uninterruptedly for a minimum of 2 years at the time of the dividend distribution. If the foreign corporation is in existence for less than 2 years, then the domestic corporation should be in continuous possession of 20% of the value of the foreign corporation for its entire existence.

Under RR No. 05-2023, the following documentary requirements are needed to avail of the exemption from income tax:

  1. Attach a sworn statement to the annual income tax return (AITR) for the taxable year when the foreign-sourced dividends were received stating that it has complied with the requirements for exemption of the foreign-sourced dividends; and
  2. Attach a sworn declaration to the AITR for the year immediately following the taxable year when the foreign-sourced dividends were received, declaring the details of disbursement/utilization of the dividends received.

Domestic corporations may already avail of the income tax exemption upon compliance with the abovementioned requirements. However, in case of partial or non-utilization of the foreign-sourced dividends, the domestic corporation is required to amend its AITR for the particular period and pay the corresponding tax due thereon, including surcharges, interest and compromise penalties.

In case the amendment of the return is already prohibited since the taxpayer is already under audit, the income tax due shall be paid using the payment form BIR Form No. 0605.

Please be guided accordingly. 



P&A Grant Thornton

Certified Public Accountants

P&A Grant Thornton is the Philippine member firm of Grant Thornton International Ltd.


As published in SunStar Cebu, dated 23 June 2023