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
- Board meeting – Declare dividend; set record date.
- Stockholders’ approval (if needed) – 2/3 vote.
- SEC filings – Amended AOI (if ACS increase), Form STKD; pay filing fees.
- BIR DST payment – File Form 2000.
- Issue share certificates / scripless statements – Within 60 days.
- Update books & G/L – Reflect capitalisation entries.
- 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
- Confirm unrestricted retained earnings balance.
- Draft board and 2/3 stockholders’ resolutions.
- Compute DST (remember no-par rule).
- File SEC documents; secure Certificate of Filing.
- Pay DST via eFPS/eBIR Forms within deadline.
- Issue share certificates or lodge scripless shares with transfer agent.
- Adjust books and EPS retroactively.
- Keep complete dossier for possible BIR audit (at least 10 years).
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.)