Spouses Konstantino and Karina are Filipino citizens and are principal shareholders of a restaurant chain, Karina’s, Inc. The restaurant’s principal office is in Makati City, Philippines.
Korina’s became so popular as a Filipino restaurant that the owners decided to expand its operations overseas. During the period 2010-2015 alone, it opened ten (10) stores throughout North America and five (5) stores in various parts of Europe where there were large Filipino communities. Each store abroad was in the name of a corporation organized under the laws of the state or country in which the store was located. All stores had identical capital structures: 60% of the outstanding capital stock was owned by Karina’s, Inc., while the remaining 40% was owned directly by the spouses Konstantino and Korina.
Beginning 2017, in light of the immigration policy enunciated by US President Donald Trump, many Filipinos have since returned to the Philippines and the number of Filipino immigrants in the US dropped significantly. On account of these developments, Konstantino and Karina decided to sell their shares of stock in the five (5) US corporations that were doing poorly in gross sales. The spouses’ lawyer-friend advised them that they will be taxed 5% on the first PhP100,000 net capital gain, and 10% on the net capital gain in excess of PhP100,000.
Is the lawyer correct? If not, how should the spouses Konstantino and Karina be taxed on the sale of their shares? (5%)
Suggested answer only. Not an official answer and not legal advice.
**Answer:** The lawyer is incorrect. The final capital gains tax applies solely to shares of domestic corporations, whereas gains from selling foreign corporate shares are subject to regular income tax.
**Legal Basis:** Under Section 24(C) of the NIRC, final capital gains tax applies only to unlisted shares of domestic corporations. Under Sections 23(A) and 24(A), resident citizens are taxed on worldwide income, and gains from foreign shares form part of gross income subject to graduated tax rates.
**Application:** Since the US corporations are foreign entities, final capital gains tax does not apply. Instead, Spouses Konstantino and Karina must report the recognized net capital gain from selling their foreign shares in their annual income tax returns under regular graduated rates.
**Conclusion:** Thus, the lawyer is wrong, and gains from selling foreign shares are subject to regular graduated income tax.
This is not an official scoring system and carries no weight with the Supreme Court or any bar review provider. It measures how much of the suggested answer's wording your response covers, not whether your reasoning is correct. For practice only.
Quick check
Under Section 24(C) of the Tax Code, to which shares of stock does the preferential final capital gains tax apply?
Section 24(C) limits the preferential final capital gains tax strictly to net capital gains from unlisted shares of domestic corporations.
How are resident Filipino citizens taxed on income derived from sources outside the Philippines under Section 23(A) of the Tax Code?
Resident citizens are subject to Philippine income tax on their worldwide income derived from both domestic and foreign sources.
What income tax rate regime applies to net gains realized by a resident citizen from selling shares of a US corporation?
Gains from selling shares of a foreign corporation form part of gross income subject to regular graduated income tax rates.
Under Section 39 of the Tax Code, what percentage of capital gain is recognized if an individual holds a capital asset for more than twelve months?
Under Section 39(B), only fifty percent of capital gain or loss is recognized for tax purposes if the capital asset was held for over twelve months.
Why is the lawyer's advice regarding the 5% and 10% capital gains tax rates on the sale of US corporate shares incorrect?
Final capital gains tax applies only to domestic corporate shares, whereas gains from selling foreign corporate shares are taxed under regular income tax rates.
Learn more about these topics
1. Capital Gains Scope
Under Section 24(C) of the National Internal Revenue Code, the preferential final capital gains tax applies exclusively to net capital gains realized from the sale, barter, exchange, or other disposition of shares of stock in a domestic corporation not traded through the local stock exchange. This special tax regime is strictly limited to equity shares issued by domestic entities incorporated under Philippine laws. Consequently, shares of stock issued by foreign corporations, even if owned by Filipino citizens, fall completely outside the scope of Section 24(C).
2. Resident Citizen Taxation
Under Section 23(A) in relation to Section 24(A) of the Tax Code, Filipino citizens residing in the Philippines are subject to income tax on all income derived from sources within and outside the country. When a resident citizen realizes net capital gains from the sale of foreign corporate shares, such gains constitute taxable income from foreign sources. The net capital gain must be included in the taxpayer's annual gross income and subjected to the regular graduated income tax rates applicable to individual taxpayers.
3. Capital Asset Rules
Under Section 39 of the Tax Code, shares of stock held by individual investors constitute capital assets unless held as inventory by security dealers. For capital assets other than shares of domestic corporations, net capital gain is determined by applying the statutory holding period rules. If the capital asset was held for more than twelve months, only fifty percent of the capital gain is recognized in computing net income. The recognized net gain is then added to gross income subject to regular graduated tax rates.