In the Philippine legal landscape, the sale of shares of stock in a domestic corporation—when such shares are not traded through the local stock exchange—is subject to Capital Gains Tax (CGT). While many transactions are settled in a single "cash" payment, the law provides a specific mechanism for Installment Sales, allowing taxpayers to manage cash flow by spreading the tax liability over the period of collection.

This article outlines the substantive and procedural rules governing these transactions under the National Internal Revenue Code (NIRC), as amended by the TRAIN Law (Republic Act No. 10963) and the CREATE Act.

I. The Substantive Law: Tax Rates and Scope

The CGT on the sale, barter, exchange, or other disposition of shares of stock in a domestic corporation not traded through the local stock exchange is governed by Section 24(C) of the NIRC.

Tax Rate: A final tax of 15% is imposed on the net capital gains realized during the taxable year.
Net Capital Gain: This is computed by deducting the cost of the shares (and allowed selling expenses) from the gross selling price or the fair market value (FMV) of the shares, whichever is higher.

Determination of Fair Market Value

For shares not traded in the Stock Exchange, the FMV is determined as follows:

Common Shares: Based on the Book Value of the corporation as shown in its financial statements nearest to the date of sale.
Preferred Shares: Based on the Par Value.
Adjusted Net Asset Method: Per RR No. 6-2013, the value of the shares must reflect the appraised value of the corporation's real properties.

II. Criteria for the Installment Method

A seller is not automatically entitled to pay CGT in installments simply because the buyer pays in tranches. Under Section 49 of the NIRC, the installment method is only available if:

The "25% Rule": The initial payments received by the seller during the taxable year of the sale do not exceed twenty-five percent (25%) of the gross selling price.

Key Definitions:

Gross Selling Price: The total amount of the consideration (Cash + FMV of property received + Mortgages assumed by the buyer).
Initial Payments: The sum of all payments received in the year of sale (including the down payment and any subsequent installments paid within that same calendar year). It does not include the mortgage assumed by the purchaser unless such mortgage exceeds the cost of the property to the seller.

III. Computation of the Tax per Installment

If the transaction qualifies for the installment method, the tax is reported proportionately. The formula for the tax due on any given payment is:

$$\text{Tax Due per Installment} = \left( \frac{\text{Collection (Principal)}}{\text{Selling Price}} \right) \times \text{Total Capital Gains Tax}$$

Example Calculation:

Cost of Shares: ₱1,000,000
Selling Price: ₱2,000,000 (Paid in 4 annual installments of ₱500,000)
Total Gain: ₱1,000,000
Total CGT (15%): ₱150,000

Since the initial payment (₱500,000) is 25% of the selling price, the installment method applies. Tax to be paid upon the first installment: $$\frac{500,000}{2,000,000} \times 150,000 = ₱37,500$$

IV. Administrative and Procedural Requirements

To formalize the transfer of shares and secure the Electronic Certificate Authorizing Registration (eCAR), the following compliance steps are mandatory:

1. Filing and Payment (BIR Form 1707)

Standard Sale: The return is filed within 30 days after each sale or disposition.
Installment Sale: The tax must be paid within 30 days after the receipt of each installment.
Annual Return: An annual CGT return (BIR Form 1707-A) must be filed on or before the 15th day of the fourth month following the close of the taxable year for consolidated capital gains/losses.

2. Documentary Stamp Tax (DST)

Under Section 175 of the NIRC, the sale of shares is also subject to DST.

Rate: ₱1.50 on each ₱200, or fractional part thereof, of the par value of the stock.
Deadline: The DST return (BIR Form 2000-OT) must be filed and paid within five (5) days after the close of the month when the taxable document was made/signed. Note that unlike CGT, DST is usually paid in full upon the execution of the deed of sale, regardless of the installment arrangement.

3. Required Documents for eCAR

The Bureau of Internal Revenue (BIR) requires the following for the issuance of the eCAR, which is the document needed by the Corporate Secretary to record the transfer in the Stock and Transfer Book:

Notarized Deed of Sale.
Stock Certificates.
Proof of Cost/Acquisition (e.g., previous eCAR).
Audited Financial Statements of the corporation (to verify Book Value).
Proof of payment of CGT and DST.

V. Legal Consequences of Non-Compliance

Failure to properly report the sale or pay the taxes on time results in:

Surcharges: 25% of the tax due (or 50% in cases of willful neglect or fraud).
Interest: 12% per annum (under the TRAIN Law).
Compromise Penalties: Based on the schedule of penalties provided by the BIR.
Inability to Transfer: The Corporate Secretary is legally prohibited from recording the transfer of shares in the corporate books without the eCAR. Any such transfer is considered invalid against third parties and the government.

Summary Table

Feature	Cash Sale	Installment Sale
Eligibility	Any amount	Initial payments $\le$ 25% of Selling Price
CGT Rate	15% of Net Gain	15% of Net Gain
Payment Deadline	30 days from date of sale	30 days from receipt of each installment
DST Deadline	5th day of the following month	5th day of the following month (Full amount)
Consolidation	Annual Return required	Annual Return required