BBB, Inc., a domestic corporation, enjoyed a particularly profitable year in 2014. In June 2015, its Board of Directors approved the distribution of cash dividends to its stockholders. BBB, Inc. has individual and corporate stockholders. What is the tax treatment of the cash dividends received from BBB, Inc. by the following stockholders:
a) A resident citizen (1%)
b) Non-resident alien engaged in trade or business (1%)
c) Non-resident alien not engaged in trade or business (1% )
d) Domestic corporation (1%)
e) Non-resident foreign corporation (1%)
Suggested answer only. Not an official answer and not legal advice.
(a) Resident citizen: 10% final tax. (b) NRA-ETB: 20% final tax. (c) NRA-NETB: 25% final tax. (d) Domestic corp: Tax-exempt. (e) NRFC: 25% final tax, or 15% under tax sparing.
Under Sec. 24(B)(2), 25(A)(2), 25(B), 27(D)(4), and 28(B)(1) & (5)(b), NIRC, cash dividends from domestic corporations are subject to final withholding tax based on status, or exempt for domestic corporations.
BBB, Inc.'s cash dividends are taxed at 10% for resident citizens, 20% for NRA-ETBs, and 25% for NRA-NETBs. Dividends to domestic corps are tax-exempt, while NRFCs pay 25%, or 15% under tax sparing.
Thus, domestic corporate stockholders are tax-exempt, while individual and NRFC stockholders face specific final tax rates.
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
What is the final withholding tax rate on cash dividends received by a resident citizen from a domestic corporation?
Cash dividends received by a resident citizen from a domestic corporation are subject to a ten percent final withholding tax under Section 24(B)(2).
How are cash dividends received by a domestic corporation from another domestic corporation treated for tax purposes?
Cash dividends received by a domestic corporation from another domestic corporation are tax-exempt under Section 27(D)(4).
What is the final withholding tax rate imposed on cash dividends received by a non-resident alien engaged in trade or business?
Cash dividends received by a non-resident alien engaged in trade or business are subject to a twenty percent final tax under Section 25(A)(2).
Under the tax sparing rule of Section 28(B)(5)(b), what reduced tax rate applies to cash dividends paid to a non-resident foreign corporation?
The tax sparing provision reduces the final withholding tax rate on dividends paid to a non-resident foreign corporation to fifteen percent.
What final withholding tax rate applies to cash dividends received by a non-resident alien NOT engaged in trade or business?
Non-resident aliens not engaged in trade or business are subject to a twenty-five percent final withholding tax on dividends under Section 25(B).
Learn more about these topics
1. Individual Dividend Taxation
Under Section 24(B)(2) and Section 25(A)(2) of the National Internal Revenue Code, cash dividends received from a domestic corporation by resident citizens, resident aliens, and non-resident aliens engaged in trade or business are subject to final withholding tax. For resident citizens and resident aliens, the final tax rate is ten percent. For non-resident aliens engaged in trade or business within the Philippines, cash dividends are taxed at twenty percent. Conversely, under Section 25(B), non-resident aliens not engaged in trade or business are subject to a twenty-five percent final withholding tax on gross dividend income.
2. Intercorporate Dividend Exemption
Under Section 27(D)(4) and Section 28(A)(7)(d) of the Tax Code, cash dividends received by a domestic corporation or a resident foreign corporation from another domestic corporation are completely exempt from income tax. This statutory intercorporate dividend exemption prevents multiple taxation of corporate earnings as profits flow from one domestic entity to another before final distribution to ultimate individual investors. Consequently, domestic corporate stockholders receiving dividend distributions incur zero tax liability on such income, and no final withholding tax is deducted by the distributing domestic corporation.
3. Tax Sparing Provision
Under Section 28(B)(1) and Section 28(B)(5)(b) of the National Internal Revenue Code, cash dividends received by a non-resident foreign corporation from a domestic corporation are generally subject to a twenty-five percent final withholding tax. However, under the tax sparing provision, the final tax rate is reduced to fifteen percent if the country in which the non-resident foreign corporation is domiciled allows a credit against the tax due from such foreign corporation for taxes deemed to have been paid in the Philippines equivalent to ten percent, representing the difference between the regular rate and reduced rate.