Tax Liability of a Non-Resident Foreign Corporation (NRFC) for Philippine-Sourced Payments
(Philippine legal perspective, updated to 19 June 2025)
1. Statutory Framework
| Reference | Key Provision |
|---|---|
| National Internal Revenue Code (NIRC) of 1997, as amended by the CREATE Act (R.A. 11534, 2021) | § 22(F) – definition of “foreign corporation” • § 23(F) & § 28(B) – tax on NRFCs • § 42 – source-of-income rules • §§ 57-58 – withholding mechanics |
| Implementing Regulations | Revenue Regulations (RR) 02-98 (withholding), RR 05-2021 (CREATE rules), RR 14-2021 (treaty relief) |
| BIR Rulings & Opinions | Numerous, but consistently apply the “source” test under § 42 and the situs-of-income doctrines set in CIR v. British Overseas Airways Corp. (G.R. L-65773, 30 Apr 1987) and later cases |
| Tax Treaties | 44 bilateral treaties in force (2025), each overriding domestic rates where more favorable (Const. Art. VII § 21; NIRC § 72) |
2. Who Is an NRFC?
An NRFC is a corporation created or organized under foreign law and not engaged in trade or business in the Philippines during the taxable year (NIRC § 28 [B]). “Engaged in trade or business” is broadly any regular commercial activity; isolated or sporadic transactions keep the corporation non-resident.
Resident vs. Non-Resident Foreign Corporation Resident status normally arises when the foreign entity operates a Philippine branch, representative office, project office, or otherwise maintains a “permanent establishment” (PE) under treaty definitions. The PE concept does not convert an NRFC into a domestic corporation; it only shifts it to the resident foreign tax regime (net-income basis, 25 % CIT under CREATE). In contrast, an NRFC is taxed only on gross Philippine-sourced income by way of final withholding.
3. Governing Principles
Situs-of-Income (Source) Rules – NIRC § 42 deems income sourced within the Philippines when:
- the property, interest, right or activity giving rise to the income is located or performed here, or
- the payer is a resident (individual or entity, including government) unless the service, property, or use is wholly outside the Philippines.
Separate & Distinct Tax Personality – Shareholders’ residence is irrelevant; liability attaches to the corporation itself.
Final Withholding System – The Philippine payor must withhold and remit the NRFC’s tax, extinguishing the NRFC’s liability.
Treaty Override – A treaty rate prevails if the NRFC is a “resident” and “beneficial owner” under the treaty and procedural requirements are met.
“Tax Sparing” Policy – Dividends can enjoy a domestic 15 % rate (instead of 25 %) where the NRFC’s home country allows a tax credit for “Philippine taxes deemed paid” equal to 10 % (NIRC § 28[B][5][b]).
4. Philippine-Sourced Income & Default Tax Rates for NRFCs
| Income Type | Statutory Rate (CREATE-adjusted) | Notes & Special Rules |
|---|---|---|
| Dividends from a domestic corp. | 25 % of gross (final tax) | 15 % if tax-sparing rule satisfied. Treaty rates often 10 %–15 %. |
| Interest on any debt-claim of Philippine obligor | 15 % (if FCDU, long-term deposits) or 25 % (others) | Interest on FCDU & OBUs is exempt if maturity ≥ 5 yrs; else 15 %. |
| Royalties (IP, technical know-how) | 25 % | Films, tapes & similar: 25 % or treaty. |
| Rents & Charter Fees | Standard: 25 % • Vessels: 4.5 % of gross • Aircraft/aviation/machinery: 7.5 % | Lower vessel & aircraft rates apply only to certain bareboat or leasing arrangements. |
| Management, Technical or Service Fees (services performed in PH) | 25 % | If services performed entirely outside PH, not Philippine-sourced (CIR Ruling series). |
| Branch Profit Remittances (BPRT) | 10 % | Resident foreign branches only; NRFCs have no branch. |
| Capital Gains – Shares in a Philippine corporation (unlisted) | 15 % on net gain | If listed on PSE: 0.6 % stock transaction tax on gross selling price; no treaty relief. |
| Capital Gains – Real property located in PH | 6 % of gross selling price or FMV | Treaties do not generally reduce real-property CGT. |
| Disposition of Vessels/Aircraft used in Philippine commerce | 4.5 % / 7.5 % as applicable | |
| Other Gross Income not otherwise specified | 25 % | Catch-all under § 28(B)(1). |
All taxes are final – no deductions or further filing by the NRFC, unless claiming a refund or treaty relief.
5. Tax Treaty Relief
Beneficial Ownership & Residency – The claimant must be the ultimate owner and tax resident of the treaty partner.
Procedures (RMO 14-2021 & RR 16-2021):
- File BIR Form 0901 (“Application for Treaty Benefits” / CORTT-Form) before or within 30 days after payment.
- Retain documents for 10 years; no prior approval needed, but subject to post-audit.
Common Treaty Concessions
- Dividends: 10 %–15 % (often lower for ≥ 10 % equity).
- Interest: 10 % (some treaties 15 %, a few 0 %).
- Royalties: 10 %–15 % (computer software sometimes 0 % under PH-Switzerland protocol).
- Business Profits / Services: Taxable only if NRFC has a PE (fixed place, construction > 6-12 months, or service PE thresholds).
Limitation-on-Benefits (LOB) & Anti-Treaty Shopping – Certain treaties (e.g., PH-US, PH-Japan) disallow benefits to conduit or shell entities.
6. Compliance by the Philippine Payor
| Step | Obligation |
|---|---|
| Withhold correct rate on gross amount. | |
| File BIR Form 1601-FQ (or 1601-EQ for eFPS) – on or before the last day of the month following the close of the quarter. | |
| Remit tax via eFPS/eBIRForms & authorized agent bank. | |
| Issue BIR Form 2306 (Certificate of Final Tax Withheld) to NRFC within 30 days after payment/credit. | |
| Maintain treaty documents & contracts for 10 years (RR 17-2013 retention rule). |
Failure results in deficiency tax, 25 % surcharge, 12 % interest p.a. (or prevailing rate), and compromise penalties; deliberate evasion exposes officers to criminal sanctions (NIRC § 255).
7. Permanent Establishment (PE) Risk
When an NRFC performs services or maintains assets/agents in the Philippines, careful PE analysis is essential:
- Fixed-Place PE – office, factory, warehouse; mere presence of servers or data center may create PE if significant functions performed therein.
- Service PE – aggregate of 183 days in any 12-month period (most PH treaties) for on-site services.
- Dependent Agent PE – person habitually concluding contracts in PH on behalf of NRFC.
Once PE exists, the entity becomes a Resident Foreign Corporation, taxed on net income at 25 % CIT (or 20 % if net taxable < PHP 5 M and total assets < PHP 100 M). Prior years may also be re-characterised, leading to deficiency assessments.
8. Special Industry Rules
| Sector | Incentive / Special Rule |
|---|---|
| Offshore Banking Units (OBUs) & Foreign Currency Deposit Units (FCDUs) | Interest income paid by OBUs/FCDUs to NRFCs is exempt (§ 28[A][4]). |
| Digital Services & E-Commerce | While digital services tax bills are pending (as of 2025), BIR currently uses source rules: downloads, streaming and ads paid by Philippine residents are treated as royalty or service fees subject to 25 % FW tax absent a treaty. |
| Contract Mining / Petroleum Service Contracts | Under P.D. 87 & Mining Act, the Government share often labelled “royalty” and subject to contractual tax regime; however, subcontractor NRFCs still face ordinary § 28(B) taxes unless fiscal stability clause applies. |
| Film & TV Distribution | “Cinematographic film rentals” specifically taxed at 25 % on gross; treaties usually cap at 10 %–15 %. |
9. Recent Developments (2021-2025)
| Date | Measure | Impact on NRFCs |
|---|---|---|
| CREATE Act (R.A. 11534, eff. 11 Apr 2021) | Reduced dividend base rate from 30 % to 25 %; preserved 15 % tax-sparing; reduced CIT for RFCs (may affect PE calculations). | |
| BIR RR 14-2021 (1 Aug 2021) | Abolished prior-approval for treaty relief; shifted to “post-audit” system; introduced CORTT Form. | |
| Ease of Paying Taxes Act (R.A. 11976, signed 5 Jan 2024) | Will eventually consolidate withholding returns; once implemented, NRFC taxes will be reported via a unified Final Withholding Tax Return. | |
| Proposed Digital Services VAT (H.B. 4122 / S.B. 2521) | Not yet enacted (June 2025). Affects separate VAT liability, but income tax rules for NRFCs unchanged. |
10. Illustrative Computations
Example 1 – Royalty Payment Philippine company licenses software from a Singapore NRFC (no PE). Gross royalty: $100,000 ⇒ PHP 5,600,000. Treaty PH-Singapore Royalty article: 10 % rate. Tax to withhold = PHP 560,000. (If treaty documents not in order, domestic 25 % = PHP 1,400,000.)
Example 2 – Dividends under Tax Sparing Domestic corp. declares PHP 20 M dividends to a German parent. Germany allows full credit for underlying PH tax. Withholding = 15 % × PHP 20 M = PHP 3 M. If German law allowed only partial credit, Philippine rate reverts to 25 % (PHP 5 M).
11. Anti-Avoidance & Transfer Pricing
- General Anti-Avoidance Rule (GAAR) – While no statutory GAAR yet, BIR invokes § 247-248 (false returns) and doctrines of “substance over form.”
- Transfer Pricing (TP) Regs – RR 34-2020 & RMO 14-2020 require TP documentation for cross-border related-party dealings, even for NRFCs; failure can trigger adjustments and penalties.
- Controlled Foreign Corporation (CFC) Regime – Still proposed under the Passive Income and Financial Intermediary Taxation Act (PIFITA); as of 2025, no CFC rules in force.
12. Compliance Checklist for Philippine Payers
- Confirm NRFC status vs. PE.
- Determine source of income under § 42.
- Check domestic rate vs. treaty concession.
- Secure CORTT or equivalent documents.
- Compute, withhold, and remit tax on gross amount.
- File Form 1601-FQ (eFPS deadlines).
- Issue Form 2306 to NRFC within 30 days.
- Retain all records for 10 years.
13. Key Take-Aways
- An NRFC is taxed only on Philippine-sourced gross income, via final withholding collected by the Philippine payor.
- Default rate is 25 %, but many categories have lower statutory or treaty rates.
- Proper use of treaty relief and the tax-sparing rule can substantially reduce cost.
- Vigilant PE analysis is crucial; crossing the line converts the NRFC to resident taxation on net profits.
- Philippine parties bear most compliance risk—penalties fall on the withholding agent if taxes are under-withheld.
Disclaimer
This article is for general informational purposes only and does not constitute legal or tax advice. Laws and regulations change; consult Philippine tax counsel or the Bureau of Internal Revenue for specific guidance.