Navigating the complexities of property sales in the Philippines is challenging enough; adding a trust layer introduces specific tax implications that both trustees and beneficiaries must understand. Under Philippine law, primarily the National Internal Revenue Code (NIRC) and relevant Bureau of Internal Revenue (BIR) regulations, the responsibility for tax payment depends on the nature of the trust and the timing of the distribution.
1. Understanding the Trust Entity
In the Philippines, a trust is generally treated as a separate taxable entity. For tax purposes, the income of the trust—including gains from the sale of real property—is taxed in a manner similar to an individual, with certain exceptions regarding deductions for income distributed to beneficiaries.
The Two Main Scenarios:
- Irrevocable Trusts: The trust is a separate taxpayer. The trustee is generally responsible for filing returns and paying taxes on the property sale.
- Revocable Trusts: If the trustor retains the power to take back the property, the income is usually taxable to the trustor, as the transfer of ownership is not considered "complete" for tax purposes.
2. Key Taxes Involved in the Sale
When a property held in trust is sold, several taxes are triggered. The classification of the property (whether it is a Capital Asset or an Ordinary Asset) determines which tax applies.
A. Capital Gains Tax (CGT)
If the property is a capital asset (e.g., land or a building not used in business), a final tax of 6% is imposed on the gross selling price or the current Fair Market Value (FMV), whichever is higher.
- Who Pays: Technically, the seller (the Trust) is liable. However, in Philippine practice, the parties can contractually agree on who shoulders this, though the BIR will still hold the Trust/Trustee accountable for the filing.
B. Ordinary Income Tax
If the property is an ordinary asset (e.g., used in business or held by a real estate dealer), the gain from the sale is subject to the Corporate Income Tax (if the trust is treated as a corporation) or Graduated Income Tax Rates (if treated as an individual).
- Creditable Withholding Tax (CWT): The buyer may be required to withhold a percentage of the sale price (ranging from 1.5% to 6%) and remit it to the BIR as a credit against the Trust's year-end income tax.
C. Documentary Stamp Tax (DST)
The DST is an excise tax on the documents (the Deed of Sale) conveying the property. The rate is 1.5% of the selling price or FMV, whichever is higher.
- Who Pays: Usually the buyer, though this is subject to the agreement between the parties.
3. The Role of the Trustee vs. The Beneficiary
The Trustee's Responsibility
The Trustee acts as the "fiduciary." They are legally mandated to:
- File the Tax Returns: Use the Trust’s own Taxpayer Identification Number (TIN).
- Pay the Taxes from Trust Funds: Taxes should be paid using the proceeds of the sale or other assets held within the trust.
- Issue BIR Form 2307: If withholding tax was applied, the trustee must ensure proper documentation is kept.
The Beneficiary’s Position
Generally, the beneficiary does not pay the taxes at the time of the sale. However, if the net proceeds (after taxes) are distributed to the beneficiary, that distribution may be:
- Deductible for the Trust: The trust can deduct the amount distributed from its taxable income.
- Taxable to the Beneficiary: The beneficiary must include the distribution in their personal income tax return, but they can claim a credit for any taxes already paid by the trust on that income to avoid double taxation.
4. Transfer of Property to a Beneficiary (The "No Sale" Scenario)
If the trustee is not selling the property to a third party but is instead transferring it to the beneficiary as part of the trust agreement:
- No CGT: Since there is no "sale" or "exchange" for consideration, Capital Gains Tax usually does not apply.
- Donor’s Tax: If the trust was created inter vivos (during the trustor's life) and the transfer is a gift, a 6% Donor’s Tax may apply on the FMV in excess of ₱250,000.
- Estate Tax: If the trust is testamentary (created by a will), the property is subject to a 6% Estate Tax upon the death of the trustor.
Summary Table of Tax Liability
| Tax Type | Rate | Primary Liable Party |
|---|---|---|
| Capital Gains Tax | 6% | The Trust (Seller) |
| Doc. Stamp Tax | 1.5% | Usually the Buyer |
| Local Transfer Tax | 0.5% - 0.75% | Usually the Buyer |
| Income Tax | Graduated/Corporate | The Trust (on gain from ordinary assets) |
Note: Real estate transactions involving trusts often require a Certificate Authorizing Registration (CAR) from the BIR before the Title can be transferred to the new owner. The BIR will not issue this unless all the taxes mentioned above are fully settled.
Would you like me to draft a sample clause for a Trust Agreement that specifies how these tax liabilities should be handled between the trustee and the beneficiaries?