Tax Treatment of Nominal Share Dividends Philippines

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Tax Treatment of Nominal Share (Stock) Dividends in the Philippines

A comprehensive legal-tax primer (updated to 2025)

1. What are “nominal share dividends”?

Philippine corporate practice usually calls them stock dividends—i.e., a corporation capitalises a portion of its unrestricted retained earnings and issues additional shares, without any cash or property leaving the firm. The shareholder’s proportional (economic) interest normally stays the same; only the number of shares and the corporation’s paid-in capital increase. (Revised Corporation Code [RCC] § 42; NIRC § 73 [B]).

• “Nominal” is used to emphasise that no real economic value is transferred at the moment of issuance; what changes is merely the nominal (par or stated) value of shares outstanding.

2. Corporate-law prerequisites

Requirement	Key Rules	Practical Notes
Source of dividends	Unrestricted retained earnings (RCC § 42)	Must be shown in latest audited FS; SEC may question sufficiency.
Board & stockholder approvals	• Board resolution (simple majority) • Stockholder vote representing at least 2/3 of outstanding capital stock (RCC § 42)	Approvals are embodied in SEC Form STKD for stock dividends.
Increase in authorised capital stock (ACS) (if needed)	RCC § 37	Requires SEC Certificate of Filing of Amended AOI; 2 % filing fee on the increase.
Date of declaration vs. date of issuance	Both must be recorded; DST and capitalisation entries accrue on issuance date.

3. Income-tax consequences

Party	Event	Philippine income-tax treatment	Authority	Remarks
Shareholder (individual or corporate, resident or non-resident)	Receipt of pro-rata stock/nominal dividend	NOT taxable—no income realised because proportional ownership is unchanged.	NIRC § 73 (B); BIR Ruling 254-2011; CIR v. CA & Campos Ruling (G.R. L-23953, 1968).	Applies only if stock dividend is proportionate.
	Receipt of disproportionate stock dividend (changes % ownership)	Taxable to the extent of the increase in fair market value (FMV) of shares received; treated as property dividend equal to FMV at declaration.	NIRC § 73 (A), § 32; RR 02-40; BIR Ruling DA-491-90.	Often arises in closely held corps issuing only to select class/series.
	Subsequent sale/disposition of shares originally received as stock dividend	• Listed shares: Stock Transaction Tax (STT) of 0.6 % on gross selling price; capital gains tax (CGT) is exempt. • Unlisted shares: CGT of 15 % (domestic corp) or 5 %/10 % graduated (individual) on net capital gain.	NIRC § 127 (A); § 24 [C]; § 27 [D][2].	Basis = proportionate part of shareholder’s basis in old shares (allocation method) per Revenue Audit Memo Order (RAMO) 1-02.
Corporation	Declaration/issuance	No deductible expense; no income recognised. Merely reclassification from Retained Earnings to Capital Stock/Additional Paid-in Capital.	NIRC § 34; Sec. 73 framework	—but see DST and local taxes below.

4. Withholding-tax obligations

None, because no taxable income is deemed paid to shareholders on a pro-rata issuance. Hence: no final withholding tax (FWT) and no expanded withholding tax (EWT) to remit.

5. Documentary Stamp Tax (DST)

Trigger	Rate & Base	Computation example
Original issue of shares, including stock dividends	₱2.00 for every ₱200 (or fractional part) of par value, or of actual value if no-par (NIRC § 174)	1 M shares @ ₱1 par ⇒ Base = ₱1 M; DST = ₱1 M/₱200 × ₱2 = ₱10,000.

Key points

• DST is always due, even though the issuance is internal.
• File BIR Form 2000 and pay within 5 days after the close of the month following issuance (RR 06-2008).
• If ACS must be increased, SEC filing fees are separate from DST.

6. Donor’s-tax exposure

A disproportionate stock dividend can be a deemed gift from old shareholders to those whose percentage rises, triggering donor’s tax (6 %) on the net gift. (NIRC § 100; BIR Ruling 109-2018). Careful capital-structure planning avoids this pitfall.

7. VAT, percentage tax, local business tax

Not applicable, because the transaction is neither a sale of goods nor rendition of services.

8. Financial-reporting treatment (brief)

Under PFRS for SMEs / PFRS 15, stock dividends are not income; they result in:

Dr Retained Earnings  
   Cr Capital Stock (par)  
   Cr Additional Paid-in Capital (if over-par)

Earnings-per-share (EPS) must be retroactively adjusted for prior periods once the stock dividend becomes effective.

9. Typical compliance timeline

1. Board meeting – Declare dividend; set record date.
2. Stockholders’ approval (if needed) – 2/3 vote.
3. SEC filings – Amended AOI (if ACS increase), Form STKD; pay filing fees.
4. BIR DST payment – File Form 2000.
5. Issue share certificates / scripless statements – Within 60 days.
6. Update books & G/L – Reflect capitalisation entries.
7. Report to BIR & SEC in annual filings – GIS, Audited FS notes.

10. Common problem areas & BIR audit focuses

Issue flagged	Why BIR cares	Mitigation
Improper earnings source	Dividends from revaluation surplus or restricted earnings are disallowed.	Maintain clear RE ledger; Board resolution must cite unrestricted RE.
Disproportionate issuance	Possible taxable dividend / gift.	Ensure pro-rata or secure advance ruling.
DST underpayment (no-par shares)	Some taxpayers mistakenly use book value instead of “actual value.”	Use FMV per last SEC valuation or appraisal.
Back-dating of issuance to avoid TRAIN-era STT	Issuance date is evidenced by SEC stamping; tampering liable under Sec. 255 NIRC (false returns).

11. Advance rulings & safe-harbour

Dividends whose tax-free status is unclear (e.g., different classes, foreign parent-subsidiary splits) should obtain a BIR confirmatory ruling under Revenue Memorandum Order 14-2021. The request must be filed before the transaction, attaching:

• SEC-stamped documents;
• Audited FS;
• Board and stockholder resolutions;
• Computation of DST.

12. Cross-border aspects

Scenario	Philippine rule	Treaty relief?
Philippine subsidiary issues stock dividend to non-resident foreign parent	Same non-taxability principle if pro-rata; no FWT.	None needed; but certificate of non-resident foreign corporation may be required to evidence status.
Stock dividend from foreign corp received by PH resident	Taxable as ordinary income based on FMV at distribution (NIRC § 42); creditable with foreign tax credits.	Treaty may reduce foreign withholding on subsequent sale, not on dividend.

13. Comparison table – Cash vs. Nominal Share Dividends

Feature	Cash Dividend	Nominal Share Dividend
Income to shareholder?	Yes – subject to 10 %/15 % FWT (individual) or 25 % (non-res.), unless treaty.	No, if pro-rata.
Corporate deductibility	Not deductible	Not deductible
Withholding obligation	Yes	None
DST	None	Yes (§ 174)
Effect on EPS	Immediate decrease	Requires retro EPS restatement
SEC stockholder approval	Not required unless preferred shares terms demand it	Required (2/3)

14. Jurisprudence & administrative issuances worth citing

• CIR v. Batangas Transportation Co. (G.R. L-5434, 1953) – Confirmed non-taxability of proportionate stock dividends.
• Evangelista v. CIR (G.R. L-9996, 1957) – Clarified “income” concept.
• BIR Ruling No. DA-491-90 – Disproportionate issue deemed taxable.
• RMC 35-2020 – Reminded taxpayers that stock dividends are subject to DST notwithstanding lockdown extensions.
• RMO 15-2014 – Prescribes procedures for stock-dividend confirmation letters.

15. Practical checklist for tax managers

1. Confirm unrestricted retained earnings balance.
2. Draft board and 2/3 stockholders’ resolutions.
3. Compute DST (remember no-par rule).
4. File SEC documents; secure Certificate of Filing.
5. Pay DST via eFPS/eBIR Forms within deadline.
6. Issue share certificates or lodge scripless shares with transfer agent.
7. Adjust books and EPS retroactively.
8. Keep complete dossier for possible BIR audit (at least 10 years).

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Key take-aways

• Pro-rata nominal/stock dividends are income-tax free to both the shareholder and the issuing corporation—but they never escape DST.
• Disproportionate or selective issuances convert them into taxable property dividends or gifts.
• Record-keeping, SEC compliance, and prompt DST payment are the main risk areas scrutinised by BIR examiners.
• Advance BIR rulings and consistent accounting disclosures are the safest way to insulate the transaction from future assessments.

(Updated as of July 8 2025 – reflects TRAIN, CREATE, and RCC developments.)