Writing on extrajudicial settlement tax issues

The user wants an article on extrajudicial settlement and BIR tax issues in the Philippines, specifically relating to waivers of rights. I'll write all I know about how the Bureau of Internal Revenue handles these settlements without referring to search results. I’m focusing on aspects like tax implications, legal processes, and the waiver of rights involved, all while ensuring accuracy based on Philippine laws. This will likely involve explanations of relevant laws and scenarios to cover the topic comprehensively.

Explaining extrajudicial settlements and taxes

The user asks for a thorough explanation of extrajudicial settlements, BIR estate tax issues, and various related taxes, including donor’s tax, VAT, and capital gains tax. I’ll mainly focus on the tax implications of waivers, deadlines, required documents, and tax filings, alongside other rules. I'll also include case law and examples of practical steps involved, such as forms to file, notarization, publication, and title transfer to heirs. All this will be divided into sections like an overview, legal bases, BIR procedures, and distinctions regarding the waiver of rights.

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Extrajudicial Settlement, BIR Tax Issues, and Waiver of Rights in the Philippines

Comprehensive doctrinal, statutory, and procedural guide (updated to 8 May 2025)

Disclaimer – This article is for general information only and does not constitute legal advice. Estate planning and tax compliance should always be undertaken with the help of a Philippine-licensed lawyer and, where appropriate, a certified public accountant.

1. Conceptual Framework

Key Term	Core Idea	Primary Legal Source	Practical Highlight
Extrajudicial Settlement (EJS)	Division of a decedent’s estate by agreement, without court intervention	Rule 74, Rules of Court; Civil Code arts. 777 – 1106	Only possible if (1) no outstanding debts or all creditors are paid, and (2) heirs are of full age (or duly represented).
Waiver (Renunciation) of Rights	An heir’s act of surrendering an inheritance share	Civil Code arts. 773, 1050 – 1057; NIRC §97	Tax treatment depends on how the waiver is made (general vs. in favor of identified person).
Estate Tax	Tax on the privilege of transmitting property at death	NIRC Title III, as amended by RA 10963 (TRAIN) and RA 11569 / 11956 (Estate Tax Amnesty)	Flat 6 % on net estate; return due within 1 year from death, extendible for “reasonable cause.”
Donor’s Tax	Tax on transfer of property by gift inter vivos	NIRC Title III, ch. 2	Flat 6 % on net gifts in excess of ₱250 k per donor per calendar year; return due 30 days from donation.
Documentary Stamp Tax (DST)	Tax on certain documents such as deeds of sale or partition	NIRC Title VII	For real property, ₱15 for every ₱1 000 of consideration or fair market value (FMV), whichever is higher.
Certificate Authorizing Registration (CAR)	BIR clearance that taxes have been paid, prerequisite to annotation or transfer of title	Rev. Regs. (“RR”) 12-2018 & 17-2021	One CAR per immovable asset.

2. Extrajudicial Settlement (EJS) in Detail

Who may use EJS
- No will or the will is not offered for probate;
- The estate has no debts, or creditor claims are fully settled;
- All heirs are at least 18 years old or duly represented.
Required Instrument & Publication
- Deed of Extrajudicial Settlement (public instrument, notarized).
- Must be published once weekly for three consecutive weeks in a newspaper of general circulation in the province where the decedent resided (Rule 74 §1).
- Registration with the Registry of Deeds (for real property) or LTO/LTFRB (for vehicles).
Usual Attachments when filing with BIR
- Death Certificate, TIN of Estate, TINs of heirs
- Certified true copies of titles & latest tax declarations
- Sworn declaration of no debts (or proof debts are paid)
- Affidavit of self-adjudication/partition & Waivers, if any
- Proof of publication
- Schedule of assets & liabilities, FMV (BIR zonal or assessed value)
- BIR Forms 1801 (Estate Tax Return), 2000-OT (DST), 0605 (payment form), and BIR Form 1904 (registration of estate TIN).

3. BIR Tax Issues Arising from an Extrajudicial Settlement

3.1 Estate Tax

Item	Rule	Notes
Rate	Flat 6 % on Net Estate	Net estate = Gross estate – allowable deductions (standard deduction ₱5 M; funeral expenses up to ₱200 k; medical expenses up to ₱500 k; family home deduction up to ₱10 M; etc.).
Valuation Date	FMV as of date of death (zonal value or assessed value, whichever higher)	Gains or losses after death are irrelevant.
Deadline	One (1) year from date of death (NIRC §90)	BIR may grant a reasonable extension (max 30 days at a time, cumulative six months) upon showing of meritorious cause.
Penalties	25 % surcharge + 12 % interest p.a. (computed daily) for late filing/payment; 50 % surcharge if willful neglect.	For estates of decedents who died on or before 14 June 2021, Estate Tax Amnesty under RA 11569 (extended to 14 June 2025 by RA 11956) allows payment of 6 % on net undeclared estate with no penalties or interest.

3.2 Documentary Stamp Tax (DST)

EJS itself attracts ₱15 per ₱1 000 of FMV of the real properties transferred.
If only partition among co-heirs pro-indiviso (no actual conveyance), BIR sometimes waives DST; conservative practice is to pay to avoid CAR delays.
Separate DST on shares or bank deposits transferred (original issuance).

3.3 Donor’s Tax triggered by Waivers & Partition

Scenario	Tax Consequence	Rationale
Pure/Unconditional Renunciation of inheritance share in favor of the estate itself (general waiver)	No donor’s tax	Treated as heir never becoming owner; property simply redistributes by intestacy (BIR Rulings 365-2011, 476-2015).
Waiver in favor of all co-heirs (pro-indiviso)	No donor’s tax	Considered part of partition; each heir takes according to legitime/intestate share.
Waiver in favor of specific heirs only or a third person	Subject to Donor’s Tax	Deemed a gratuitous transfer by the waiving heir to the favored party (CIR v. Marcos II, G.R. 170809, 5 Jan 2016).
Unequal Partition where some heirs receive more than their legitime	Excess portion subject to Donor’s Tax (or potentially CGT if consideration is paid)	“Collation” rule under Civil Code arts. 1061 – 1071.

Practical tip – Express waivers as “general renunciation in favor of the estate” if tax-free treatment is intended. Any preferential wording (“in favor of my brother Juan only”) will almost certainly trigger Donor’s Tax and corresponding DST.

3.4 Capital Gains Tax (CGT) and VAT

CGT (6 % of higher of zonal value or selling price) is not imposed on transfers by succession or partition.
CGT does apply if the heirs sell real property to a third party after settlement, or if a “deed of assignment” is in exchange for monetary consideration.
Value-Added Tax is generally not applicable to an isolated sale of real property by heirs, but may apply if the estate/heirs are engaged in the real estate business as a regular trade (Sec. 105, NIRC).

4. Procedural Flowchart (from Death to Transfer of Title)

│ 1  │ Death of Decedent
│    └─► 30 days: File Notice of Death (if gross estate > ₱5 M or estate has
│            registered real property) with RDO where decedent resided.
│
│ 2  │ Gather documents, secure TIN for Estate, obtain FMV certifications.
│
│ 3  │ Draft & notarize Deed of Extrajudicial Settlement and any Waivers.
│
│ 4  │ Publish EJS once weekly for 3 consecutive weeks.
│
│ 5  │ File Estate Tax Return (BIR Form 1801) + pay estate tax, DST, etc.
│
│ 6  │ BIR issues Certificate Authorizing Registration (CAR) per property.
│
│ 7  │ Register EJS and CAR with Registry of Deeds / relevant agency; titles
│        will be cancelled and new titles issued in heirs’ names.
│
│ 8  │ File Estate’s final income tax return (if it earned income during
│        settlement) and apply for cancellation of Estate TIN.

5. Penalties, Interest, and Criminal Exposure

Late Estate Tax Payment – 25 % surcharge + 12 % annual interest (subject to change per Bangko Sentral rates).
Failure to File Return – Additional compromise penalty per BIR table (₱10 k – ₱40 k).
Willful Evasion – Criminal prosecution under NIRC §255; penalties up to ₱10 M and imprisonment 6 months – 10 years.
Falsification of FMVs – Separate liability under the Revised Penal Code, art. 172.

6. Sample Computation (Illustrative)

Scenario – Decedent died 1 June 2024, leaving:

House & Lot in QC – zonal value ₱15 M, assessed value ₱12 M

Bank deposit – ₱1 M

Funeral expenses – ₱180 k

Family home, no prior mortgages; heirs are spouse + 2 legitimate children

Gross Estate

Real property (FMV)      ₱15,000,000
Bank deposit               1,000,000
---------------- --------------------
TOTAL GROSS ESTATE       ₱16,000,000

Allowable Deductions

Standard deduction               ₱5,000,000
Family home deduction            10,000,000
Funeral expenses (cap ₱200k)        180,000
------------------------------- ------------
TOTAL DEDUCTIONS                ₱15,180,000

Net Estate = ₱16,000,000 – ₱15,180,000 = ₱820,000

Estate Tax (6 %) = 0.06 × ₱820,000 = ₱49,200

DST on EJS (₱15/₱1 000 of FMV) 15 000 000 ÷ 1 000 × ₱15 = ₱225,000

If the eldest child executes a specific waiver in favor of the mother, value = 1⁄3 of net estate = ₱273 333.33 → Donor’s Tax (6 %) = ₱16 400, due 30 days from date of waiver.

7. Estate Tax Amnesty (RA 11569 & RA 11956)

Covers estates of decedents who died on or before 14 June 2021.
Amnesty rate: 6 % of net undeclared estate OR of FMV if no return was ever filed.
No penalties, surcharges, or interest.
Application period now runs until 14 June 2025 (non-extendible by BIR; only Congress can further extend).
Submission requires Certificate of Availment + EJS or Affidavit of Self-Adjudication.

8. Frequently Litigated Points & Leading Cases

Issue	Key Ruling	Take-away
Estate vs. Donor’s Tax on waivers	CIR v. Marcos II (G.R. 170809, 5 Jan 2016)	Targeted waiver = donation; general renunciation = no donor’s tax.
Prescription of Estate Tax	Republic v. CA & Dr. Laureano (G.R. 118708, 10 Aug 2001)	10-year prescriptive period when no return is filed.
Partition after amnesty filing	BIR Ruling DA-412-2020	CAR issued under amnesty remains valid even if heirs later re-partition, but donor’s/DST consequences may attach to new deed.
Venue for estate tax assessment	CIR v. Heirs of Vicente E. Velez (G.R. 201383, 10 Aug 2020)	RDO of decedent’s domicile at time of death has primary jurisdiction.

9. Practical Compliance Tips

Start early – One-year filing window is tight when properties need valuation or heirs are abroad.
Secure zonal valuation print-outs at death date; BIR often updates values without archiving old schedules.
Pay even a small amount within the one-year period if cash-strapped; it stops surcharges (but not interest). Apply for installment under NIRC §91.
Describe waivers carefully – “I hereby renounce any and all hereditary shares in favor of the estate” is safer tax-wise than naming a sibling.
Publication Proof – Keep newspaper tear sheets and affidavit of publication; Registry of Deeds will refuse registration without them.
Coordinate with RD examiner before paying taxes; mistakes in description (e.g., wrong lot numbers) will void the CAR and require re-issuance.
Bank accounts – Some banks still insist on a court-issued “Countersigned Extrajudicial Settlement” despite BIR CAR; negotiate or consider filing a Special Proceedings case for release if funds are large.

10. Quick Reference – Tax Rates & Deadlines (effective as of 8 May 2025)

Tax	Rate	Return Due	Payment Due
Estate Tax	6 % of Net Estate	1 year from death	Upon filing (installment plan possible)
Donor’s Tax	6 % of net gifts > ₱250 k	Within 30 days from date of gift/waiver	Same day
DST (EJS/partition)	₱15 per ₱1 000 of FMV	On or before notarization	On or before notarization
CGT (sale post-EJS)	6 % of higher of FMV or price	Within 30 days from notarization of deed of sale	Same day
Income Tax of Estate (if estate earns income while under settlement)	Regular graduated rates or 15 % MCIT	Quarterly (1701Q) + Annual (1701A)	Per NIRC sched.

Conclusion

An extrajudicial settlement is often the fastest and least costly route for heirs to divide a Philippine estate, but the tax consequences hinge on the precise wording of deeds, the timing of filings, and full documentary compliance with BIR regulations. The two toughest pitfalls are:

Unintended Donor’s Tax when waivers single out specific beneficiaries, and
Surcharges and interest when estate tax returns are filed late while the heirs debate over assets.

With the Estate Tax Amnesty window closing on 14 June 2025, families with elderly but un‐settled estates should act swiftly. Finally, remember that BIR examiners have little discretion once tax is due; meticulous preparation and early consultation with tax counsel remain the best defenses against painful assessments later on.