If your corporation in the Philippines is not registered for Value-Added Tax because its annual gross sales and receipts remain at or below ₱3,000,000, the tax treatment of rental income it receives and compensation it pays to employees follows specific rules under the National Internal Revenue Code. Non-VAT corporations pay the 3% percentage tax on applicable gross receipts instead of 12% VAT, while still computing corporate income tax on net profits and acting as withholding agents for employee salaries. This article explains these obligations with clear distinctions between property types, practical compliance steps, common situations small corporate lessors face, and the forms and timelines involved.

What Defines a Non-VAT Corporation and How It Affects Tax Obligations

A domestic corporation must register for VAT once its gross sales or receipts from vatable transactions exceed ₱3,000,000 in any 12-month period. Below this threshold and without voluntary registration, it operates as non-VAT. This status replaces the output-input VAT mechanism with a straightforward 3% percentage tax under Section 116 of the NIRC (as amended by RA 10963, the TRAIN Law) on gross quarterly sales and receipts from most business activities.

The classification directly impacts business tax on rentals but leaves unchanged the corporation’s liability for corporate income tax on net taxable income and its duty to withhold income tax from employee compensation. Unlike qualified individual taxpayers who may opt for the 8% tax on gross receipts, corporations have no such election. They pay any applicable percentage tax (or VAT) plus corporate income tax on profits after deductions.

Tax Treatment of Rental Income for Non-VAT Corporations

Rental income forms part of the corporation’s gross income for corporate income tax purposes. At the same time, the gross receipts may trigger percentage tax depending on the property type and rent level.

Residential Rentals: Special Exemptions Under RR 13-2018

Revenue Regulations No. 13-2018 provides clear exemptions for residential leases:

When monthly rental per unit does not exceed ₱15,000, gross receipts from these units are exempt from both VAT and the 3% percentage tax, regardless of the lessor’s total annual gross receipts. Net income after deductions remains fully subject to corporate income tax.
When monthly rental per unit exceeds ₱15,000 but the lessor’s aggregate annual gross receipts from all such units stay at or below ₱3,000,000, the receipts are exempt from VAT but subject to 3% percentage tax.
Mixed portfolios require separate tracking: low-rent residential units stay exempt from percentage tax, while higher-rent residential or any commercial units follow the rules below.

Commercial and Higher-Rent Residential Rentals

Commercial properties (offices, retail spaces, warehouses, or any real property used in the tenant’s trade or business) generate gross receipts subject to 3% percentage tax for a non-VAT corporation whose overall gross receipts do not exceed ₱3,000,000. The same treatment applies to residential units exceeding the ₱15,000 monthly threshold when the aggregate stays within the non-VAT limit.

Corporate Income Tax on Net Rental Profits

After any percentage tax, the corporation computes regular corporate income tax on net taxable income: gross rentals minus allowable deductions. Common deductions include depreciation of buildings and improvements, repairs and maintenance, insurance, real property taxes, interest on acquisition loans, and the percentage tax itself (as a deductible business tax).

The applicable rate is 20% for qualified small domestic corporations (net taxable income not exceeding ₱5,000,000 and total assets excluding land not exceeding ₱100,000,000) or 25% for others, under the CREATE Act (RA 11534). Beginning the fourth taxable year after commencement of operations, the corporation may owe the Minimum Corporate Income Tax of 2% on gross income if higher than the regular corporate income tax. Excess MCIT paid carries forward for credit against regular tax for up to three succeeding years.

Business tenants paying rent for property used in their operations generally withhold 5% expanded withholding tax on the gross rental amount and issue BIR Form 2307. The lessor corporation claims these amounts as tax credits against its final income tax liability.

Step-by-Step Guide to Handling Rental Income Taxes

Confirm or update your corporation’s BIR Certificate of Registration to list leasing of real property accurately. Visit your Revenue District Office if the original registration does not reflect current activities.
Issue BIR-registered official receipts or invoices for every rental collection, clearly marked as non-VAT.
Maintain books that segregate gross receipts by property type and monthly rent level so you can identify which portions trigger percentage tax.
File BIR Form 2551Q (Quarterly Percentage Tax Return) and pay 3% on gross receipts from taxable rentals within 25 days after the close of each calendar quarter. No percentage tax applies to exempt low-rent residential units.
Keep supporting documents: notarized lease contracts, proof of collections (bank deposits, tenant acknowledgments), supplier official receipts for expenses, and depreciation schedules.
At year-end, file the annual corporate income tax return (BIR Form 1702 series). Report all rental income, claim deductions, apply any MCIT, and credit expanded withholding tax from Form 2307 certificates. The annual return is generally due on or before the 15th day of the fourth month following the close of the taxable year.
Monitor cumulative gross receipts monthly. If they exceed ₱3,000,000, update your registration to VAT within 30 days to avoid deficiency assessments and penalties.

Tax Rules on Employee Compensation Paid by Non-VAT Corporations

Payroll obligations apply equally to VAT and non-VAT corporations. Your corporation withholds income tax on compensation and remits it to the BIR on behalf of employees.

Withholding Tax on Salaries, Bonuses, and Benefits

Use the official BIR withholding tax tables (updated under the TRAIN Law) applied to each employee’s taxable monthly compensation. Rates are progressive, beginning at 0% for lower brackets (typically up to around ₱20,833 monthly taxable compensation after adjustments) and rising through 15%, 20%, 25%, 30%, and 35% on higher amounts.

Taxable compensation equals gross pay plus taxable allowances and benefits minus non-taxable items. Key non-taxable items include:

Mandatory SSS, PhilHealth, and Pag-IBIG contributions (within caps)
De minimis benefits within BIR-prescribed limits (rice, clothing, laundry, meal, and other allowances)
13th-month pay and other benefits up to a combined ₱90,000 per employee per year (RA 10963). Amounts above this cap become taxable and subject to withholding.

Fringe benefits furnished to managerial or supervisory employees may attract 35% fringe benefits tax on the grossed-up value unless they qualify as de minimis or serve the convenience of the employer or the nature of the business.

Step-by-Step Payroll Withholding Compliance

Ensure your corporation is registered as a withholding agent (usually automatic upon BIR registration; update the COR if necessary).
For each pay period, calculate taxable compensation, apply the current BIR withholding table, and deduct the tax.
Remit withheld taxes monthly using BIR Form 1601C on or before the 10th day of the following month (or the 15th for certain eFPS filers). Pay through an Authorized Agent Bank or eFPS.
Issue BIR Form 2316 to every employee by January 31 of the following year (or upon separation from service).
File the annual information return BIR Form 1604C, together with the alphalist of employees where required, on or before January 31. This reconciles all compensation paid and taxes withheld during the year.
Retain complete payroll records, employment contracts, and remittance proofs. These support the full deduction of gross salaries and benefits as ordinary and necessary business expenses in your corporate income tax return.

Common Pitfalls and Real-Life Scenarios for Small Corporations

Many non-VAT corporations with rental properties and a few employees encounter these issues:

Treating all residential rentals as exempt when one or more units exceed ₱15,000 monthly, resulting in underpayment of percentage tax on the higher-rent portions.
Failing to claim credits for 5% expanded withholding tax deducted by corporate tenants, leading to overpayment of corporate income tax.
Poor segregation of receipts in mixed residential-commercial portfolios, causing incorrect percentage tax computation.
Using outdated withholding tax tables or neglecting to update employee records when benefits change, resulting in incorrect monthly remittances and problems for employees when they file their own returns.
Allowing gross receipts to cross ₱3,000,000 without timely VAT registration, triggering deficiency VAT, surcharges, and interest.
Inadequate documentation of expenses and depreciation, which BIR examiners often disallow during audits, increasing taxable income.

Example: A small corporation owns five residential units renting at ₱12,000–₱14,000 monthly (all exempt from percentage tax) plus one commercial space at ₱28,000 monthly. Annual gross receipts total ₱1.3 million, keeping the corporation non-VAT. It pays 3% percentage tax only on the commercial rentals and corporate income tax at 20% on net profit after depreciation, maintenance, and other deductions. It employs one maintenance staff member and withholds correctly on his salary while fully deducting the gross compensation expense.

Another frequent situation: A corporation’s rental income grows steadily toward the ₱3 million threshold. Proactive monitoring and preparation for VAT registration prevent last-minute compliance shocks and allow smoother transition with input tax credit opportunities.

Key Forms, Deadlines, Documents, and BIR Offices

Non-VAT corporations typically deal with these core BIR obligations (verify exact dates on the current BIR Tax Calendar, as holidays or extensions may apply):

Obligation	Form	Frequency	Typical Deadline	Key Notes
Percentage Tax on taxable rentals	2551Q	Quarterly	Within 25 days after quarter end	Gross receipts from commercial or qualifying residential units
Quarterly Corporate Income Tax	1702Q	Quarterly	Within 60 days after quarter end	Estimated tax payments
Annual Corporate Income Tax	1702 series	Annual	15th day of 4th month after year-end	Attach audited FS if required by gross sales or assets
Monthly Withholding on Compensation	1601C	Monthly	10th (or 15th) day of following month	Remit tax withheld from salaries
Annual Withholding Reconciliation	1604C + alphalist	Annual	January 31	Issue Form 2316 to employees

Essential documents to maintain:

Notarized lease contracts
Official receipts issued to tenants and received from suppliers
Bank statements and deposit proofs
Depreciation schedules and asset ledgers
Payroll registers and employment contracts
BIR Form 2307 certificates from tenants (for expanded withholding tax credits)
Books of accounts (registered with BIR if loose-leaf or computerized)

Primary office: Your local BIR Revenue District Office handles registration updates, form submissions, and audits. Electronic filing through eFPS is strongly encouraged for speed and accuracy. Payments go through Authorized Agent Banks or eFPS.

Frequently Asked Questions

Is rental income from apartments subject to percentage tax if my corporation is non-VAT?
Only if monthly rent per unit exceeds ₱15,000 or the property is commercial. Low-rent residential units (₱15,000 or less per month) are exempt from percentage tax under RR 13-2018, though net income stays subject to corporate income tax.

Do non-VAT corporations still need to withhold tax on employee salaries?
Yes. Withholding obligations on compensation apply to all employers regardless of VAT status. You must use current BIR tables, remit monthly, issue Form 2316, and file the annual reconciliation.

Can my corporation deduct the full salaries paid to employees?
Yes, provided you properly withhold and remit the corresponding income tax. The gross compensation amount qualifies as a deductible business expense in your corporate income tax return.

What is the difference between percentage tax and corporate income tax on rental income?
Percentage tax is a 3% tax on applicable gross receipts (a business tax). Corporate income tax is 20% or 25% on net taxable income after deducting expenses, depreciation, and the percentage tax paid. Both generally apply unless the rental qualifies for full exemption from percentage tax.

How do I claim the 5% expanded withholding tax deducted by my tenants?
Tenants issue BIR Form 2307. You attach these certificates to your annual corporate income tax return and credit the amounts against tax due. Proper claiming prevents overpayment.

What happens if gross receipts exceed ₱3 million during the year?
Update your BIR registration to VAT within 30 days of crossing the threshold. You will then charge 12% VAT on vatable rentals and file VAT returns instead of (or in addition to) percentage tax returns.

Does the Minimum Corporate Income Tax apply to small rental corporations?
Yes, beginning the fourth year of operations. If regular corporate income tax is lower than 2% of gross income, you pay MCIT. Excess MCIT carries forward for credit against future regular tax for up to three years.

Are there simpler rules for very small non-VAT corporations with minimal employees?
Core filing and withholding requirements remain the same. However, if employee compensation falls entirely within the 0% bracket after non-taxable adjustments, monthly withholding may be zero for some periods while returns and certificates are still required.

Key Takeaways

Non-VAT corporations pay 3% percentage tax only on gross receipts from commercial rentals or residential units exceeding ₱15,000 monthly per unit (subject to aggregate limits), while exempt low-rent residential leases generate no percentage tax but still produce net income subject to 20% or 25% corporate income tax.
Corporate income tax applies to profits after allowable deductions; the 2% MCIT may apply from the fourth year if higher than regular tax.
Business tenants typically withhold 5% expanded withholding tax on rentals used in their operations, giving the lessor corporation a creditable amount supported by BIR Form 2307.
Employers must withhold income tax on compensation using BIR tables, remit monthly via Form 1601C, issue Form 2316, and file annual Form 1604C; compliant gross salaries and benefits are fully deductible.
Accurate lease classification, segregation of receipts, timely quarterly percentage tax filings (Form 2551Q when applicable), annual corporate returns, and complete records of expenses and withholding certificates are essential for compliance and minimizing tax.
Monitor total gross receipts closely against the ₱3,000,000 threshold and maintain strong documentation to support deductions and withstand any BIR review.