Kilusang Krus, Inc. (KKI) is a non-stock, non-profit religious organization which owns a vast tract of land in Kalinga.
KKI has devoted 1 /2 of the land for various uses: a church with a cemetery exclusive for deceased priests and nuns, a school providing K to 12 education, and a hospital which admits both paying and charity patients. The remaining 1/2 portion has remained idle.
The KKI Board of Trustees decided to lease the remaining 1 /2 portion to a real estate developer which constructed a community mall over the property.
Since the rental income from the lease of the property was substantial, the KKI decided to use the amount to finance (1) the medical expenses of the charity patients in the KKI Hospital and (2) the purchase of books and other educational materials for the students of KKI School.
(a) Is KKI liable for real property taxes on the land? (2.5%)
(b) Is KKl’s income from the rental fees subject to income tax? (2.5%)
Suggested answer only. Not an official answer and not legal advice.
**Answer:** (a) Yes, KKI is **liable for real property tax**, but **only on the leased portion**. (b) Yes, KKI's **rental income is subject to income tax**. **Legal Basis:** Under **Article VI, Section 28(3)** of the Constitution,
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Quick check
Under Article VI, Section 28(3) of the Constitution, what is the primary test for real property tax exemption?
Real property tax exemption requires actual, direct, and exclusive use of the property for religious, charitable, or educational purposes.
Under Section 30 of the Tax Code, how is rental income earned by a non-profit religious entity from leasing land to a commercial developer treated?
Section 30 of the Tax Code subjects income generated from properties or activities conducted for profit to income tax regardless of disposition.
If a non-stock religious organization uses half its land for a church and leases the other half for a mall, how is real property tax applied?
Real property tax applies strictly to the portion leased for commercial use because it is not exclusively used for exempt purposes.
Does devoting commercial rental income to pay for charity hospital patients exempt the leased land from real property tax?
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Which statute governs the income taxation of for-profit activities conducted by tax-exempt non-stock organizations in the Philippines?
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Learn more about these topics
1. Property Tax Exemption
Under Article VI, Section 28(3) of the 1987 Philippine Constitution, charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes are exempt from taxation. Real property tax exemption hinges on the actual and direct use of the property rather than the ownership of the entity. When a tax-exempt religious organization leases a portion of its real property to a commercial developer, that specific leased portion ceases to be used exclusively for exempt purposes and becomes subject to real property tax.
2. Rental Income Taxation
Under Section 30 of the National Internal Revenue Code, non-stock, non-profit religious, educational, and charitable organizations are generally exempt from income tax on revenues derived in pursuit of their primary purposes. However, the last paragraph of Section 30 explicitly provides that income of whatever kind and character from any property or activity conducted for profit is subject to income tax. Consequently, rental fees earned from leasing real property to commercial developers constitute taxable corporate income, regardless of whether the proceeds are subsequently used to fund the organization's charitable, religious, or educational projects.
3. Actual Use Test
Philippine tax jurisprudence strictly enforces the actual use test over the destination of income test for real property tax exemptions. The destination of income test, which considers where revenues are ultimately spent, applies only in specific statutory contexts and does not exempt commercial land from real property taxation. Even if rental proceeds generated from leasing real property are devoted entirely to subsidizing charity hospital patients or buying school textbooks, the physical land occupied by a commercial community mall remains subject to real property tax because the land itself is not actually used for exempt purposes.