In the Philippine real estate landscape, rental income is a significant source of revenue for both individuals and corporations. However, the taxation of this income is governed by a specific set of rules under the National Internal Revenue Code (NIRC), as amended by the TRAIN Law and the CREATE Act. Understanding who is responsible for paying the tax and who is mandated to withhold it is crucial for legal compliance and avoiding hefty BIR penalties.
I. The Nature of Rental Income
Rental income is considered "passive income" in some contexts, but for tax purposes in the Philippines, it is generally treated as part of the gross income of the lessor (landlord). It encompasses payments received for the use or lease of properties, whether residential, commercial, or industrial.
II. Who Pays the Tax? (The Lessor)
The primary responsibility for reporting and paying income tax on rentals lies with the Lessor. The tax treatment varies depending on the classification of the taxpayer:
- Individual Citizens and Resident Aliens: Rental income is added to their other taxable income and taxed at the graduated rates (0% to 35%). If their gross sales/receipts (including rent) do not exceed ₱3,000,000, they may opt for the 8% flat tax rate on gross sales in lieu of the graduated rates and percentage tax.
- Domestic and Resident Foreign Corporations: Rental income is part of the taxable income subject to the Corporate Income Tax (CIT) rate, currently at 25% (or 20% for certain small and medium enterprises under the CREATE Act).
- Non-Resident Foreigners:
- Non-resident aliens engaged in trade or business (NRAETB): Taxed similarly to resident individuals.
- Non-resident aliens NOT engaged in trade or business (NRANETB): Subject to a final withholding tax of 25% on the gross rental income.
- Non-resident Foreign Corporations: Subject to a final withholding tax of 25% on gross rental income.
III. Who Withholds the Tax? (The Lessee)
The Philippines employs a Creditable Withholding Tax (CWT) system. This means the tenant (Lessee) is often required to "withhold" a portion of the rent and remit it directly to the Bureau of Internal Revenue (BIR) on behalf of the landlord.
1. When is the Lessee required to withhold?
The Lessee is mandated to withhold tax if they fall under any of the following:
- Juridical Entities: Any corporation, partnership, or association.
- Individual Lessees engaged in business: If the individual uses the property for business purposes (e.g., a shop or office).
- Top Withholding Agents (TWA): Individuals or entities specifically identified by the BIR as having the obligation to withhold on all local purchases.
Note: An individual renting a house solely for personal residential use is generally not required to withhold tax, unless they are classified as a TWA.
2. The Withholding Rate
Under current regulations (RR No. 11-2018), the withholding tax rate for the lease of real property is 5%.
3. The Process
- Deduction: The Lessee pays the Lessor 95% of the gross rent.
- Remittance: The Lessee remits the 5% to the BIR using BIR Form 1601-E.
- Certification: The Lessee issues BIR Form 2307 (Certificate of Creditable Tax Withheld at Source) to the Lessor.
- Credit: The Lessor uses Form 2307 as a "cash equivalent" to reduce their total income tax liability at the end of the quarter or year.
IV. Value-Added Tax (VAT) vs. Percentage Tax
Aside from Income Tax, rental income is subject to consumption taxes:
- VAT (12%): If the Lessor’s total annual gross sales/receipts exceed ₱3,000,000, they must charge 12% VAT on the rent.
- Percentage Tax (1% or 3%): If the annual gross receipts are ₱3,000,000 or below, the Lessor is subject to a 3% Percentage Tax (temporarily reduced to 1% during certain periods under the CREATE Act, but generally reverts to 3%).
- Residential Exemption: Lease of residential units with a monthly rent not exceeding ₱15,000 is exempt from VAT, regardless of the aggregate annual rentals.
V. Summary Table of Responsibilities
| Entity | Role in Taxation | Key Form |
|---|---|---|
| Lessor (Landlord) | Reports total income; pays the balance of tax due. | 1701 (Individual) / 1702 (Corp) |
| Lessee (Tenant) | Withholds 5% (if business/corp); remits to BIR. | 1601-E & 2307 |
VI. Conclusion
Compliance in rental taxation is a two-way street. Lessees must be diligent in withholding and providing the necessary certificates, as failure to do so can result in the disallowance of the rent expense for their own tax deductions. Conversely, Lessors must ensure they receive Form 2307 to avoid double taxation on that 5% portion of their income.
Would you like me to draft a specific tax indemnification clause that you can include in a contract of lease to protect both the Lessor and the Lessee?