Introduction

In the Philippine legal system, the donation of property from a parent to a child is a common estate planning tool that allows for the transfer of assets during the donor's lifetime. This inter-vivos transfer, governed primarily by the Civil Code of the Philippines and tax laws under the National Internal Revenue Code (NIRC) as amended, is subject to specific taxation rules. While it offers advantages such as reducing future estate taxes and providing immediate benefits to the donee, it triggers obligations under donor's tax and related fiscal impositions. This article provides a comprehensive overview of the tax implications, procedural requirements, exemptions, and potential pitfalls associated with such donations, focusing exclusively on the Philippine context.

Legal Basis for Donations

Donations in the Philippines are regulated by Articles 725 to 773 of the Civil Code, which define donation as an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. For immovable property, such as land or buildings, the donation must be in a public instrument (e.g., a Deed of Donation) and accepted in the same or another public document, with notification to the donor. Failure to comply renders the donation void.

From a tax perspective, the NIRC (Republic Act No. 8424, as amended by the Tax Reform for Acceleration and Inclusion or TRAIN Law under Republic Act No. 10963, and the Corporate Recovery and Tax Incentives for Enterprises or CREATE Law under Republic Act No. 11534) imposes taxes on transfers without consideration. Donations from parent to child are treated as gratuitous transfers, distinguishing them from sales or exchanges that might attract different taxes.

A key distinction is between donations inter-vivos (during life) and mortis causa (in contemplation of death). The former is irrevocable and subject to donor's tax, while the latter is revocable, akin to a will, and falls under estate tax upon the donor's death. Courts, such as in cases decided by the Supreme Court (e.g., emphasizing intent and irrevocability), determine the nature based on the donor's intent.

Types of Property Donations

Property donations can involve movable (personal) or immovable (real) assets. For parents donating to children:

Movable Property: Includes cash, vehicles, jewelry, or shares of stock. These require a public instrument if the value exceeds P5,000.
Immovable Property: Encompasses land, houses, or buildings. These always require a notarial public instrument and registration with the Registry of Deeds for validity against third parties.

Donations to legitimate, illegitimate, or adopted children are treated similarly, provided the relationship is legally established. Stepchildren or foster children may not qualify for certain presumptions unless legally adopted.

Tax Implications: Overview

The primary tax on such donations is the donor's tax, borne by the parent-donor. The donee (child) does not pay tax on the receipt of the donation, as the donee's tax was abolished under the TRAIN Law effective January 1, 2018. Prior to this, both donor and donee taxes applied, but now only the donor is liable. Other ancillary taxes and fees may apply, depending on the property type.

Donor's Tax

Donor's tax is imposed on the privilege of transmitting property by gift. Under Section 98 of the NIRC, as amended:

Rate: A flat rate of 6% on the total net gifts exceeding P250,000 in a calendar year. This applies regardless of the relationship between donor and donee, eliminating previous graduated rates and exemptions based on kinship.
Basis of Computation: The tax is computed on the fair market value (FMV) of the property at the time of donation. For real property, FMV is the higher of the zonal value (as determined by the Bureau of Internal Revenue or BIR) or the assessed value (per the local assessor's office). For personal property, it's the current market price.
Net Gifts: Gross gifts minus deductions (e.g., debts assumed by the donee) and the P250,000 annual exemption. Multiple donations in a year are aggregated.
Exemptions and Deductions:
- The first P250,000 of net gifts per year is exempt.
- Donations to the government, accredited educational institutions, or non-profit organizations may be fully exempt, but family donations do not qualify.
- If the donee assumes a mortgage or debt on the property, that amount is deducted from the gross gift, potentially reducing the taxable base. However, if the assumption exceeds the FMV, it may be reclassified as a sale, triggering other taxes.
Special Rules for Spouses: If the property is conjugal or community property, each spouse is considered a separate donor for half the value, allowing two P250,000 exemptions.
Anti-Abuse Provisions: Donations made within one year before death may be scrutinized and potentially included in the gross estate for estate tax purposes if deemed in contemplation of death (Section 85(B) of the NIRC).

Other Taxes and Fees

Beyond donor's tax, several ancillary impositions apply:

Documentary Stamp Tax (DST): Under Section 196 of the NIRC, DST is imposed on the Deed of Donation at 1.5% of the FMV or consideration, whichever is higher, but not less than P15. For pure donations (no consideration), it's based on FMV.
Capital Gains Tax (CGT): Generally, donations are exempt from CGT under Section 24(D) of the NIRC, as they are not sales or exchanges. However, if the transfer is deemed onerous (e.g., donee pays something or assumes significant liabilities), a 6% CGT on the gain (FMV minus cost or adjusted basis) may apply to real property classified as capital assets.
Value-Added Tax (VAT): Donations are not subject to VAT, as they lack consideration. But if reclassified as a sale, 12% VAT could apply.
Local Transfer Tax: Imposed by local government units (LGUs) under the Local Government Code (Republic Act No. 7160). Rates vary (up to 0.75% in cities/municipalities within Metro Manila, 0.5% elsewhere) on the FMV or consideration. Some LGUs require a tax clearance before registration.
Registration Fees: Payable to the Registry of Deeds, typically 1% of the FMV, plus miscellaneous fees for annotation and issuance of new titles.
Withholding Tax: Not applicable to donations unless income-generating property is involved post-transfer.

No income tax arises for the donee on the donation itself, as it is not considered income under Section 32 of the NIRC. However, if the property yields income (e.g., rental property), the donee becomes liable for income tax thereon from the date of transfer.

Procedural Requirements

To effect a valid and tax-compliant donation:

Execution of Deed: Prepare a notarized Deed of Donation specifying the property, FMV, and acceptance.
Acceptance: The child must accept in writing, ideally in the same deed.
Tax Payment and Filing:
- File BIR Form 1800 (Donor's Tax Return) within 30 days from the donation date.
- Pay the donor's tax and DST at an authorized agent bank or BIR office.
- Secure a Certificate Authorizing Registration (CAR) from the BIR, necessary for title transfer.
Registration: Submit the deed, CAR, tax receipts, and other documents (e.g., Tax Declaration, Title) to the Registry of Deeds for annotation and issuance of a new Transfer Certificate of Title (TCT) in the child's name.
Local Clearances: Obtain clearances from the local assessor's and treasurer's offices for updated tax declarations and payments.

For large-value properties, an appraisal may be required to establish FMV. The BIR may audit the valuation if discrepancies arise.

Validity and Revocability

Donations from parent to child are presumed valid but can be revoked for grounds under Article 760 of the Civil Code, such as ingratitude, birth of a child after donation (if it reduces legitime), or non-fulfillment of charges. Revocation may trigger tax consequences, such as treating it as a new transfer.

In terms of legitime (forced heirship), donations are considered advances on inheritance. Under Article 1061, they are collated in the estate computation to ensure other heirs receive their shares, potentially leading to reduction if excessive.

Consequences of Non-Compliance

Failure to pay donor's tax timely incurs penalties: 25% surcharge (50% if willful), 12% interest per annum, and possible compromise penalties. Undeclared donations may lead to deficiency assessments, with the BIR having three years (or ten if fraud) to assess.

If the donation is void (e.g., not notarized), no title transfers, and taxes paid may not be refundable. Criminal liabilities under Section 255 of the NIRC apply for tax evasion.

Practical Considerations and Examples

Parents often use donations to minimize estate taxes (currently 6% on net estate over P10 million), as donated property is removed from the estate. For instance, donating a P5 million property incurs donor's tax of 6% on (P5M - P250K) = P285,000, versus potential estate tax later.

However, if the child sells the property post-donation, CGT applies based on the donor's original basis (stepped-up basis not available). Anti-avoidance rules prevent schemes like donating then immediately selling to evade taxes.

In blended families, donations must consider legitimes of all children to avoid disputes. Consulting a lawyer and tax advisor is advisable to navigate complexities.

Conclusion

Donating property from parent to child in the Philippines, while straightforward, involves careful compliance with civil and tax laws to avoid unintended liabilities. The 6% donor's tax, coupled with DST and local fees, represents the primary fiscal burden, offset by the annual exemption and estate planning benefits. Understanding these rules ensures a smooth transfer, preserving family wealth across generations. For specific cases, professional legal advice is essential, as tax laws may evolve through BIR rulings or legislative amendments.