In a Philippine commercial lease, the landlord usually remains legally responsible for taxes connected to owning and renting out the property, while the tenant pays the taxes and permit fees connected to operating its own business. However, the lease may require the tenant to reimburse the landlord for real property tax, local business tax, or other charges. The crucial distinction is between who the government can legally collect from and who ultimately shoulders the cost under the contract.

Who normally pays each tax in a commercial lease?

Tax or charge	Usual legal responsibility	Can the lease shift the cost?
Real property tax or amilyar	Property owner or person with a legal interest in the property	Yes. The tenant may be required to reimburse it
Special Education Fund levy	Usually collected with real property tax	Yes
Income tax on rental income	Landlord or lessor	The landlord remains the taxpayer, although a gross-up clause may shift the economic cost
VAT on commercial rent	VAT-registered landlord invoices and remits it	Usually passed to the tenant if rent is VAT-exclusive
Percentage tax on rent	Non-VAT landlord, when applicable	May be reflected in pricing, but remains the landlord’s tax
Expanded withholding tax on rent	Tenant or other payor acting as withholding agent	No. The tenant must deduct and remit it when withholding rules apply
Local business tax on the leasing activity	Landlord operating the rental business	The lease may require reimbursement
Tenant’s business tax and mayor’s permit fees	Tenant operating the business	Normally no
Documentary stamp tax on the lease	Parties liable under the tax law	Yes. The lease may allocate it to either party
Association dues, common-area charges and utilities	Depends on the contract	Yes; these are generally contractual charges rather than taxes

This allocation is only a starting point. The signed lease, the parties’ BIR registrations, the local tax ordinance and the actual nature of each payment must all be checked.

Why “who pays” has two different legal answers

Under Article 1159 of the Civil Code, a valid contract has the force of law between the parties and must be performed in good faith. Article 1306 also allows parties to establish their own terms, provided those terms are not contrary to law, morals, good customs, public order or public policy. (LawPhil)

This means a lease can say:

“The lessee shall reimburse the lessor for all real property taxes attributable to the leased premises.”

That provision may be enforceable between landlord and tenant. But it does not rewrite the tax law. If the real property tax remains unpaid, the city or municipality may still enforce the tax lien against the property even when the tenant promised to pay it.

It helps to separate two questions:

Statutory liability: Who does the tax law require to file, withhold, report or pay?
Contractual allocation: Who must ultimately absorb or reimburse the expense under the lease?

A well-drafted lease answers both questions separately. A clause merely stating that the tenant will pay “all taxes” often creates disputes because it does not identify which taxes are included, how they will be computed or what proof the landlord must provide.

The full statutory provisions may be reviewed in the Civil Code of the Philippines and the Local Government Code.

Who pays real property tax on leased commercial property?

Real property tax, commonly called amilyar, is imposed by the local government on taxable land, buildings, improvements and machinery. As a practical rule, it is primarily associated with the property owner or the person holding the taxable legal interest.

The maximum basic real property tax rates under the Local Government Code are:

Up to 1% of assessed value for a province
Up to 2% of assessed value for a city or a municipality within Metro Manila
An additional 1% Special Education Fund levy

The amount is not calculated directly from the property’s selling price. It is ordinarily based on:

Fair market value × assessment level = assessed value

The applicable tax rate is then applied to the assessed value. Actual assessment levels, classifications, discounts and special levies depend on the law and the relevant local ordinance. (LawPhil)

Can a landlord require the tenant to pay the amilyar?

Yes. Commercial leases commonly require the tenant to shoulder:

All real property tax attributable to the leased premises
Any increase over a specified “base year”
Real property tax on tenant-installed improvements
Special levies imposed during the lease
Penalties caused by the tenant’s delayed reimbursement

However, the clause should be precise. For example, a tenant leasing one floor of a building should not automatically be charged the real property tax for the entire property.

The lease should explain whether the tenant pays:

The actual tax for the leased unit
A proportion based on floor area
The amount above a stated base-year tax
Only taxes assessed because of the tenant’s improvements
A fixed tax contribution already included in rent

What happens if the tenant reimburses the landlord but the landlord does not pay?

Real property tax is a lien on the property. Delinquency may result in interest, levy and eventually a tax sale, subject to the procedures and redemption rights under the Local Government Code. Delinquency interest is generally 2% per month or fraction of a month, subject to the statutory maximum period. (LawPhil)

A tenant that reimburses the landlord should require:

The official tax bill or statement of account
The tax declaration numbers covered by the payment
A computation showing the tenant’s allocated share
The local treasurer’s official receipt
An updated real property tax clearance, when appropriate

Payment should ideally be made directly to the local treasurer or released to the landlord only upon presentation of proof. If the property is already delinquent, the tenant should obtain a written breakdown of the principal tax, interest and penalties before paying anything.

Real property tax payment schedule

Real property tax may generally be paid annually or in four installments:

Installment	Statutory due date
First quarter	March 31
Second quarter	June 30
Third quarter	September 30
Fourth quarter	December 31

Local governments may grant discounts for advance or prompt payment, subject to their ordinances. The percentage and deadline vary by locality. (LawPhil)

Special case: property owned by the government

Government-owned real property is generally exempt from real property tax. An important exception applies when its beneficial use is granted to a taxable private person, such as a private company occupying government or government-corporation property for commercial purposes.

In that situation, the private beneficial user may become responsible for real property tax even though it does not own the land. The Supreme Court has applied this principle in cases involving government property used for private commercial benefit. (LawPhil)

This issue commonly arises in leases involving:

Government-owned industrial estates
Port or airport facilities
Economic-zone properties
Land owned by government corporations
Public market or terminal concessions

The tenant should verify the property’s tax status instead of assuming that government ownership automatically means there is no amilyar.

Who pays taxes on the landlord’s rental income?

Income tax

Rental income belongs to the landlord and must be included in the landlord’s taxable income, subject to the rules applicable to the landlord’s legal form and tax classification.

A tenant does not ordinarily pay the landlord’s income tax directly. Be cautious with clauses requiring the tenant to pay “all taxes arising from the lease.” Unless carefully limited, such wording may be interpreted as requiring the tenant to gross up payments so that the landlord receives a fixed net amount after taxes.

A balanced clause usually excludes:

The landlord’s income tax
Estate or donor’s tax affecting the landlord
Capital gains tax arising from a sale of the property
Taxes caused by the landlord’s corporate structure or other business activities

VAT on commercial rent

The lease of commercial property is a taxable service for VAT purposes when the landlord is VAT-registered or required to be VAT-registered. The landlord issues the invoice, reports the rental sale and remits the VAT. VAT is an indirect tax, however, so the lease may pass the economic cost to the tenant. (LawPhil)

The lease should expressly state whether rent is:

VAT-exclusive: VAT is added to the stated rent
VAT-inclusive: VAT is already included in the stated amount
Subject to VAT only if the lessor becomes VAT-registered or legally required to register

For long-term leases, invoicing is generally done monthly as the rental service becomes payable under the Ease of Paying Taxes reforms. The statutory VAT-registration threshold is ₱3 million in annual gross sales, subject to the periodic consumer-price-index adjustment required by law and current BIR registration rules. (LawPhil)

Official guidance is available on the BIR VAT page and in Republic Act No. 11976, the Ease of Paying Taxes Act.

Percentage tax

A landlord that is not VAT-registered and is below the applicable VAT threshold may instead be subject to percentage tax, generally at 3% of gross quarterly sales under Section 116 of the National Internal Revenue Code, unless an exemption or another tax regime applies. (LawPhil)

The percentage tax is the landlord’s filing responsibility. It is not normally added to the invoice as a separate statutory charge in the same manner as VAT, although landlords may factor it into the agreed rental price.

Who withholds the 5% tax on commercial rent?

Business tenants are often required to deduct 5% expanded withholding tax, or EWT, from the gross rental payment for real property used in business.

The tenant, as withholding agent, generally must:

Deduct the required withholding tax when the rent becomes payable, accrued or otherwise subject to withholding under BIR rules.
Remit the amount to the BIR using the appropriate return and payment process.
Issue BIR Form 2307 to the landlord.
Keep the lease, invoices, proof of remittance and withholding certificates.

The 5% is not an additional discount for the tenant. It is a tax credit belonging to the landlord and applied against the landlord’s income tax liability. (BIR)

Example of VAT and withholding tax on rent

Assume the monthly base rent is ₱100,000, excluding VAT, and the tenant is required to withhold:

Item	Amount
Base rent	₱100,000
12% VAT	₱12,000
Total invoice	₱112,000
Less: 5% EWT on base rent	₱5,000
Cash paid to landlord	₱107,000
Amount remitted to BIR as EWT	₱5,000

The landlord records ₱100,000 in rental sales and ₱12,000 in output VAT, then claims the ₱5,000 withholding tax supported by Form 2307.

A common mistake is to compute the 5% withholding tax on the VAT-inclusive amount. Ordinarily, withholding is based on the rental amount exclusive of VAT.

BIR guidance may be reviewed through the BIR withholding tax page and Revenue Memorandum Circular No. 5-2025.

Are real property tax reimbursements subject to VAT and withholding tax?

A reimbursement is not automatically outside the tax base merely because the landlord labels it a “reimbursement.”

BIR guidance states that amounts paid by a tenant for expenses properly attributable to the landlord—such as real property tax or association dues assigned to the tenant under the lease—may form part of the landlord’s gross sales. Proper invoicing and substantiation are therefore important.

For example, suppose the lease requires the tenant to reimburse ₱60,000 in real property tax. The parties should not assume that the landlord can simply issue an informal debit note and collect ₱60,000 without tax consequences.

They should determine:

Whether the amount forms part of the landlord’s gross rental sales
Whether VAT must be added
Whether 5% EWT applies
Whose name appears on the local treasurer’s receipt
What BIR invoice or supporting document is required
Whether the tenant can deduct the expense for income-tax purposes

The lease and accounting procedure should be reviewed before reimbursements begin, not only after a BIR audit.

Who pays local business tax and permit fees?

There are normally two separate businesses involved in a commercial lease:

The landlord’s business of leasing property
The tenant’s business conducted inside the premises

The landlord generally pays the local business tax, mayor’s permit charges and regulatory fees imposed on its leasing activity. The tenant pays the taxes and permit fees imposed on its own restaurant, store, office, clinic, warehouse or other operation.

Under the Local Government Code, municipalities may impose local business tax on businesses not otherwise specifically classified, subject to statutory rate limits. Cities may generally impose rates up to 50% higher than the municipal ceilings, while the exact classifications, graduated rates and fees depend on the local revenue ordinance. (Supreme Court E-Library)

Local business taxes are generally payable within the first 20 days of January or of each subsequent quarter, although an LGU may grant an extension as permitted by law. (PPP Philippines)

A tenant should not automatically accept a “landlord’s business tax” charge without asking for:

The relevant city or municipal tax assessment
The local ordinance or classification used
The gross receipts period covered
The allocation formula among tenants
Proof that the amount was actually paid

A landlord’s tax based on its total rental receipts should not be charged entirely to one tenant unless the lease unmistakably provides for that result.

Who pays documentary stamp tax on the lease?

A lease agreement is subject to documentary stamp tax, or DST. The current statutory rate for leases is generally:

₱6 for the first ₱2,000, or fraction thereof, of annual rent; plus
₱2 for every additional ₱1,000, or fraction thereof, for each year of the lease term

The computation can become more complicated when the lease includes rent escalation, renewal options, advance rent or an uncertain term. (Supreme Court E-Library)

Tax law may treat persons making, signing, issuing or accepting the taxable document as liable. Between landlord and tenant, however, the lease may allocate the expense to either party or divide it equally. (LawPhil)

Article 1657 of the Civil Code provides, as a default obligation, that the lessee pays expenses for the deed of lease. A written lease should still expressly identify responsibility for:

Documentary stamp tax
Notarial fees
Registration fees
Certified copies
Annotation on the title
Fees for corporate authority documents

Current forms, payment facilities and filing instructions should be checked through the BIR Documentary Stamp Tax page. BIR deadlines have changed over time; the current BIR Form 2000-OT information states a deadline within five days after the close of the month when the taxable document was made, signed, issued, accepted or transferred. (Bureau of Internal Revenue)

How to review the tax clause before signing

1. Confirm the landlord’s legal authority

Ask for:

Transfer Certificate of Title or Condominium Certificate of Title
Current tax declaration
Latest real property tax receipts
Real property tax clearance
Valid identification of the owner
Secretary’s certificate or board resolution if the landlord is a corporation
Special power of attorney if someone signs for the owner
Proof of authority from co-owners, when applicable

A lease longer than one year should be in writing because it falls within the Statute of Frauds. Leases may also be recorded in the Registry of Deeds; an unrecorded lease generally does not bind third persons in the same way as a properly registered one. (LawPhil)

2. Define “taxes” instead of using a catch-all phrase

List every included charge, such as:

Basic real property tax
Special Education Fund levy
Special assessments
Local business tax on leasing
VAT
Documentary stamp tax
Tax on tenant-installed machinery
Association dues and common-area charges

Also list excluded taxes, especially the landlord’s income tax, estate tax, donor’s tax and taxes resulting from a sale of the property.

3. State whether rent is VAT-inclusive or VAT-exclusive

The clause should also explain what happens if:

The landlord later becomes VAT-registered
The VAT rate changes
The BIR cancels or changes the landlord’s registration
A reimbursement becomes subject to VAT
The landlord fails to issue a valid BIR invoice

4. Establish the withholding procedure

Specify that the tenant may deduct taxes required by law and that the landlord must accept the net payment as full settlement of the corresponding rent, provided the tenant remits the tax and timely issues Form 2307.

The clause should set a deadline for giving Form 2307 to the landlord and a procedure for correcting certificates with the wrong name, TIN, amount or quarter.

5. Set rules for real property tax allocation

For multi-tenant buildings, use an objective formula such as:

Leased floor area divided by total leasable floor area
The assessor’s separate unit valuation
Actual tax attributable to the tenant’s improvements
Increase over an agreed base-year assessment

The formula should address vacant areas, parking spaces, shared facilities and midyear commencement or termination.

6. Require invoices and official proof

Before reimbursement, the landlord should provide:

A written computation
The underlying government assessment
A valid invoice when required
The official receipt or electronic payment confirmation
Proof that penalties were not caused by the landlord’s delay

The tenant should be allowed to inspect the supporting records and dispute obvious errors before payment.

7. Allocate penalties according to fault

A fair clause normally provides that:

The tenant pays penalties caused by its late reimbursement or failure to withhold.
The landlord pays penalties caused by late filing, non-registration, incorrect invoices or failure to pay after receiving the tenant’s funds.
Neither party pays penalties caused solely by the other party’s tax noncompliance.

8. Address changes in valuation and tax law

Republic Act No. 12001, the Real Property Valuation and Assessment Reform Act of 2024, introduced reforms affecting property valuation and local assessment systems. As LGUs update schedules of market values and related procedures, commercial properties may experience assessment changes. (Bureau of Local Government Finance)

Long-term leases should therefore state whether future real property tax increases are:

Fully passed to the tenant
Shared between the parties
Limited by a yearly cap
Passed through only when supported by a final assessment
Excluded when caused by the landlord’s expansion or redevelopment

Documents and offices commonly involved

Document or transaction	Where it usually comes from
Title or condominium title	Registry of Deeds
Tax declaration and assessment records	City or municipal assessor
Real property tax bill, receipt and clearance	City or municipal treasurer
BIR Certificate of Registration	BIR or landlord
Registered BIR invoice	Landlord
Form 2307	Tenant or withholding agent
EWT returns and payment confirmations	BIR filing system or authorized bank
DST return and payment proof	BIR or eDST facility
Mayor’s permit and local business tax assessment	Business Permits and Licensing Office and local treasurer
Occupancy or building documents	Local building official
Fire safety documents	Bureau of Fire Protection
Notarized lease	Notary public
Registered or annotated lease	Registry of Deeds

Documents signed abroad may require an apostille or other acceptable authentication before they are used for Philippine registration, banking or litigation purposes. Corporate tenants and foreign landlords should also confirm the signatory’s authority and the correct Philippine tax identification details before execution.

Common commercial lease tax mistakes

“The tenant shall pay all taxes”

This wording is too broad. It may unintentionally include the landlord’s income tax, taxes on a future sale or taxes relating to portions of the property the tenant does not occupy.

Treating every reimbursement as tax-free

Real property tax, association dues and similar amounts paid for the landlord’s account may form part of the landlord’s gross sales under BIR rules. The invoice, VAT and withholding treatment must be checked.

Paying the landlord without receiving tax proof

A spreadsheet or handwritten note is not enough. For substantial amounts, obtain the government assessment, official receipt and updated clearance.

Withholding 5% but failing to remit it

Once the tenant deducts EWT from the landlord’s rent, the tenant is holding tax that must be remitted to the BIR. Failure to remit can expose the tenant to deficiency tax, interest and penalties while leaving the landlord without a usable tax credit.

Issuing an incorrect Form 2307

Common errors include:

Wrong taxpayer name or TIN
Using the VAT-inclusive amount as the tax base
Wrong withholding tax code
Reporting the wrong quarter
Combining several landlords on one certificate
Issuing the certificate late

Confusing tax with common-area charges

Common-use service area fees, association dues, security charges, air-conditioning charges and utility reimbursements are not automatically real property taxes. They should be itemized separately.

Ignoring taxes on tenant improvements or machinery

Permanent improvements and taxable machinery installed by a tenant may affect the property’s assessment. The lease should identify who reports the improvement, who owns it during and after the lease, and who pays any resulting real property tax.

What to do when the landlord and tenant disagree

Read the entire lease. Tax obligations may appear under rent, operating expenses, government charges, representations, indemnity or default provisions.
Collect the source documents. Obtain tax declarations, assessments, invoices, official receipts, withholding certificates and payment records.
Separate statutory liability from reimbursement. Determine who must answer to the BIR or LGU and whether the lease creates a separate repayment obligation.
Send a written notice. Identify the disputed clause, amount, tax period and supporting documents still required.
Protect the property or business from urgent consequences. When real property tax is already delinquent or a permit renewal is at risk, the necessary payment may be made under an express written reservation of rights, when appropriate, while the contractual allocation is resolved separately.
Observe assessment and protest deadlines. An owner or person with a legal interest generally has 60 days from receipt of the written assessment notice to appeal to the Local Board of Assessment Appeals. For taxes paid under protest, the written protest is generally filed within 30 days from payment, with the local treasurer given 60 days to decide. The correct remedy depends on whether the dispute concerns the legality of the tax, the valuation or classification, or the computation and collection. (LawPhil)
Use contractual remedies carefully. Under Article 1673 of the Civil Code, nonpayment of rent or breach of lease conditions may support judicial ejectment. Notice, cure periods and the proper court procedure must still be followed. (LawPhil)

Frequently Asked Questions

If the lease is silent, does the tenant have to pay the real property tax?

Ordinarily, no. Real property tax is connected with ownership or the taxable legal interest in the property. A tenant should not be required to reimburse it unless the lease clearly creates that obligation or a special legal situation—such as taxable beneficial use of government property—applies.

Can the landlord add 12% VAT to the rent?

Yes, when the landlord is VAT-registered or required to be VAT-registered and the agreed rent is VAT-exclusive. If the contract states that rent is VAT-inclusive, the landlord generally cannot simply add another 12% without contractual or legal basis.

Is the 5% withholding tax deducted from the VAT?

No. EWT is normally computed from the VAT-exclusive rental amount. VAT is separately added to the invoice when applicable.

Does withholding 5% mean the tenant pays 5% less rent?

The tenant pays less cash directly to the landlord, but it must remit the withheld amount to the BIR. The landlord receives a Form 2307 and uses the amount as an income-tax credit.

Who pays documentary stamp tax if the lease says nothing?

Tax law may hold the persons making, signing, issuing or accepting the lease liable. Article 1657 of the Civil Code also treats expenses for the deed of lease as a lessee obligation by default. In practice, the written lease should expressly allocate DST, notarial and registration costs.

Can the tenant pay real property tax directly to the city?

Yes, payment may often be made directly to the local treasurer when the tenant has the correct tax declaration information and assessment. The tenant should retain the official receipt and immediately give the landlord a copy.

Can a landlord charge the tenant for penalties on unpaid property tax?

Only when the lease supports the charge and the tenant caused the delay. A tenant should not normally bear penalties caused by the landlord’s failure to submit the assessment, remit funds already received or pay on time.

Is commercial rent covered by the Rent Control Act?

No. The Rent Control Act under Republic Act No. 9653 applies to specified residential units, not ordinary offices, shops, restaurants, warehouses or other commercial premises. Commercial lease terms are primarily governed by the Civil Code and the parties’ contract. (LawPhil)

Who pays taxes on renovations installed by the tenant?

It depends on the nature of the improvement, ownership provisions, local assessment and the lease. Permanent improvements or machinery may increase the property’s assessment. The agreement should specify who declares the improvement and who pays the resulting tax during the lease.

Can the tenant deduct a reimbursed real property tax as a business expense?

Potentially, when the payment is an ordinary and necessary business expense, is required by the lease and is properly substantiated. BIR-compliant invoices and underlying tax records are important. The tax treatment should also account for VAT and withholding rules applicable to reimbursements.

Key Takeaways

The landlord usually remains legally responsible for taxes arising from ownership and rental income.
The tenant normally pays taxes, permits and regulatory fees arising from its own business operations.
A commercial lease may require the tenant to reimburse real property tax and other landlord expenses, but that agreement does not change whom the government may pursue.
Commercial rent may involve VAT or percentage tax, plus 5% expanded withholding tax when the withholding rules apply.
The tenant must remit tax withheld from rent and issue Form 2307; it cannot simply keep the deducted amount.
Real property tax reimbursements may have VAT, withholding and invoicing consequences.
Avoid vague clauses requiring the tenant to pay “all taxes.” Identify each tax, allocation formula, deadline and required proof.
Before paying a tax reimbursement, obtain the assessment, computation, official receipt and any required BIR invoice.
Long-term leases should address future valuation increases, tenant improvements and changes in tax law.