The taxation of condominium association dues in the Philippines has undergone a significant evolution, shifting from a period of relative simplicity to a contentious legal battle, and finally arriving at the current framework established by the Tax Reform for Acceleration and Inclusion (TRAIN) Law and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.
For homeowners and developers, understanding this landscape is critical to ensuring compliance and managing the costs of community living.
1. The Historical Context: The Pre-TRAIN Struggle
Prior to 2018, the Bureau of Internal Revenue (BIR) maintained through Revenue Memorandum Circular (RMC) No. 65-2012 that association dues, membership fees, and other assessments collected by condominium corporations were subject to both Income Tax and Value-Added Tax (VAT). The BIR argued that these collections constituted income payment for services rendered.
However, this was heavily contested. Critics argued that association dues are not "income" because the condominium corporation is merely a trustee holding funds for the maintenance of common areas. In 2020, the Supreme Court (SC) in First e-Bank Tower Condominium Corp. vs. BIR eventually nullified RMC 65-2012, ruling that association dues do not constitute profit-oriented income.
2. The TRAIN Law (RA 10963): The Turning Point
While the SC was deliberating on the old circular, the TRAIN Law, which took effect on January 1, 2018, provided a statutory solution to the VAT issue.
- VAT Exemption: Under Section 109 (Y) of the Tax Code, as amended by the TRAIN Law, "Association dues, membership fees, and other assessments and charges collected by homeowners' associations and condominium corporations" are now expressly exempt from VAT.
- The Rationale: The law recognizes that these fees are purely for the maintenance and preservation of the property and do not represent a sale of goods or services in the traditional commercial sense.
Crucial Distinction: Residential vs. Commercial
While the TRAIN Law generally exempts association dues from VAT, it is important to note that the exemption is primarily aimed at the nature of the collection rather than the nature of the unit. However, BIR's implementing rules have occasionally nuanced this based on the status of the association. For most residential condominium corporations, the VAT exemption is absolute.
3. The CREATE Act (RA 11534): Clarifying Income Tax
While the TRAIN Law addressed VAT, the CREATE Act, effective April 11, 2021, and its subsequent regulations, further solidified the treatment of these funds regarding Income Tax.
- Income Tax Status: Following the logic of the Supreme Court and the spirit of the CREATE Act, association dues are generally considered capital contributions or reimbursements for expenses rather than taxable income.
- Conditions for Exemption: For a condominium corporation to maintain its non-taxable status on these dues, the following must typically be met:
- The dues must be used exclusively for the maintenance, preservation, and upkeep of the common areas.
- The corporation must not be organized for profit.
- No part of the net income must inure to the benefit of any member or individual.
4. Summary of Current Tax Treatment
| Tax Type | Status under TRAIN/CREATE | Legal Basis |
|---|---|---|
| Value-Added Tax (VAT) | Exempt | Section 109 (Y), National Internal Revenue Code (NIRC) |
| Income Tax | Non-Taxable (on dues) | SC Jurisprudence & CREATE Act principles |
| Withholding Tax | Variable | The Corp. must still withhold tax on payments to third-party suppliers (e.g., security, janitorial). |
5. Practical Implications for Condominium Corporations
A. Registration and Compliance
Despite the exemptions, condominium corporations are not "tax-exempt" entities in their entirety. They are still required to:
- Register with the BIR and obtain a Taxpayer Identification Number (TIN).
- File annual information returns.
- Keep Books of Accounts.
B. Other Sources of Income
It is vital to distinguish between association dues and other income. If a condominium corporation rents out space for a coffee shop in the lobby, leases space for cell towers on the roof, or earns interest from bank deposits, that income is taxable.
- Rental Income: Subject to regular Corporate Income Tax (reduced to 25% or 20% under CREATE) and VAT (if gross receipts exceed P3M).
- Interest Income: Subject to Final Withholding Tax.
C. Withholding Tax Obligations
While the corporation does not pay income tax on the collection of dues, it remains a Withholding Agent. When the association pays for electricity, water, security services, or repairs, it must withhold the expanded withholding tax (EWT) and remit it to the BIR.
6. Conclusion
The current legal framework under TRAIN and CREATE has significantly eased the financial burden on unit owners by clarifying that association dues are not a form of profit. By exempting these collections from VAT and recognizing their non-income nature for tax purposes, the law supports the sustainability of high-density urban living.
However, administrators must remain vigilant. The exemption applies strictly to dues and assessments; any "side businesses" or commercial ventures conducted by the association remain fully within the reach of the BIR. Proper accounting and segregation of funds are essential to avoid deficiency tax assessments during audits.