Estate Tax Payment via Promissory Note to BIR Philippines

Under the Philippine tax system, estate tax is a transfer tax imposed on the privilege of transmitting property upon death. The current rate is a flat 6% on the net taxable estate, as introduced by Republic Act No. 10963 (TRAIN Law) and further amended by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law. The estate tax return (BIR Form 1801) must be filed, and the tax paid, within one (1) year from the date of the decedent’s death.

When the estate consists primarily of illiquid assets—especially real properties—and the heirs lack sufficient cash to settle the estate tax liability in full, the Bureau of Internal Revenue (BIR) allows payment through a Promissory Note (PN) on an installment basis. This is a long-established but strictly regulated relief mechanism.

Legal Basis

The primary authority is Section 91 of the National Internal Revenue Code (NIRC) of 1997, as amended, which governs the time and manner of payment of estate tax. The Commissioner of Internal Revenue is granted discretionary power to authorize installment payments when the payment of the full amount would impose undue hardship on the estate or the heirs.

This is implemented through:

• Revenue Regulations (RR) No. 12-2018, as amended by RR No. 18-2021 and RR No. 6-2022
• Revenue Regulations No. 2-2003 (still partially observed for procedural guidelines on deferred payment)
• Revenue Memorandum Circulars and Rulings issued by the BIR on a case-to-case basis

When Payment via Promissory Note Is Allowed

BIR approves payment by Promissory Note only when the following conditions are present:

1. The gross estate consists mainly of real properties, family businesses, or other illiquid assets.
2. The estate has insufficient liquid funds to pay the tax in full without forcing the sale of properties at a great loss.
3. The heirs can demonstrate genuine inability to pay the entire tax immediately.
4. The request is made before the expiration of the one-year period (or any extended period granted).

The maximum installment period generally allowed is five (5) years from the due date, though most approvals are granted for 3 to 5 years depending on the size of the estate and the BIR’s evaluation.

Requirements for Promissory Note Payment

To avail of this option, the executor, administrator, or the heirs must submit the following:

• Duly accomplished BIR Form 1801 (Estate Tax Return)
• Request letter addressed to the Commissioner of Internal Revenue for installment payment via Promissory Note, stating the justification and proposed schedule
• Promissory Note executed by all heirs (solidary liability) in favor of the “Republic of the Philippines, represented by the Commissioner of Internal Revenue”
• Security for the Promissory Note, which may be:
  • Real Estate Mortgage over properties of the estate (preferred and most commonly accepted)
  • Surety Bond issued by an accredited surety company (up to 100% of the tax due)
  • Combination of both
• Certified true copies of Transfer Certificates of Title (TCTs) or Original Certificates of Title (OCTs)
• Sworn Statement of Assets and Liabilities of the estate
• Extrajudicial Settlement of Estate or Court Order (if judicial settlement)
• Proof of death, marriage, birth certificates, and other supporting documents

The Promissory Note must be notarized and must contain an acceleration clause, waiver of the right to question the assessment, and consent to foreclosure in case of default.

Step-by-Step Procedure

1. File the Estate Tax Return (BIR Form 1801) within 1 year, even if payment is not full.
2. Simultaneously file the formal request for installment payment via Promissory Note.
3. Pay at least the minimum initial amount required by the BIR (often 20%–30% of the tax due, though this varies).
4. Submit the executed Promissory Note and collateral documents.
5. Undergo BIR investigation and appraisal of the offered security (especially the real properties).
6. Upon approval, the Commissioner issues a Notice of Approval and the installment schedule.
7. The heirs pay the installments on the agreed dates, plus interest.

Interest and Payment Terms

• Interest is imposed on the unpaid balance at 12% per annum (prevailing legal rate under TRAIN Law).
• Interest is computed from the original due date until actual payment.
• Payments are applied first to interest, then to principal.
• The BIR may require quarterly, semi-annual, or annual installments.

Risks and Consequences of Default

Default in any installment triggers:

• Acceleration of the entire unpaid balance
• Imposition of 25% surcharge and 12% delinquency interest
• Extrajudicial foreclosure of the mortgage
• Cancellation of any installment privilege previously granted

Courts have consistently upheld the BIR’s right to foreclose the mortgaged properties in cases of default (e.g., Commissioner of Internal Revenue v. Court of Appeals and related rulings).

Important Considerations

• The Promissory Note route is discretionary — approval is never guaranteed.
• The BIR is stricter now due to past abuses; strong justification and high-quality collateral are essential.
• Payment via Promissory Note does not stop the running of interest.
• Once approved, the estate tax becomes a lien on the properties until fully paid.
• For large estates, coordination with the Large Taxpayers Service (LTS) or the Estate Tax Unit of the BIR National Office is usually required.

This facility provides critical relief to heirs who wish to preserve family properties, particularly agricultural lands, ancestral homes, or business assets. However, it demands careful planning, full transparency, and competent legal and tax advice to avoid foreclosure and additional liabilities.

Estate tax payment via Promissory Note remains one of the most important relief mechanisms under Philippine tax law for illiquid estates, balancing the State’s need for revenue collection with the heirs’ practical realities.