Withholding Tax on Advance Rental Payments
(Philippine legal perspective, updated 1 June 2025)
1. Concept and policy goals
The expanded withholding-tax (EWT) system is the Bureau of Internal Revenue’s (BIR) main tool for collecting income tax “in advance” on high-risk payments—rentals included. Lessee-withholding agents deduct the tax at source, remit it monthly/quarterly, and issue a BIR Form 2307 so the lessor can credit the amount against its own income-tax liability. (Pagba)
2. Statutory framework
| Source | Key provisions that touch advance rentals |
|---|---|
| National Internal Revenue Code (NIRC), as last amended by R.A. 11976 (“Ease of Paying Taxes Act”, 2024) | § 57(B) (creditable withholding), § 58(A)-(B) (duty to deduct & remit). The 2024 amendments now state that the duty “arises when the income becomes payable, or is actually paid/credited, whichever is earlier.” (bdblaw.com.ph) |
| Revenue Regulations (RR) No. 02-98, as repeatedly amended | § 2.57.2(B) fixes the EWT rate on rent paid to resident lessors at 5 % of the gross amount (exclusive of VAT). |
| Revenue Memorandum Circular (RMC) No. 11-2024 | Clarifies that only actual rental paid/accrued forms the EWT base—right-of-use-asset (ROUA) depreciation under PFRS 16 is ignored for withholding purposes. (PwC, Reyes Tacandong & Co.) |
| RMC No. 5-2025 | Aligns RMC 11-2024 with the EOPT law and confirms that non-withholding is no longer a ground to disallow the rent deduction but still exposes the lessee to penalties. (Grant Thornton Philippines) |
3. Who must withhold and when
- Covered payors. Any person engaged in trade or business (including governmental agencies and PEZA-registered enterprises) that pays rent to a resident lessor must withhold 5 %. Individuals who lease property for purely personal purposes are not withholding agents.
- Timing. Because of the EOPT amendment, the obligation is triggered once the rent is payable under the lease—even if actually disbursed later—or when cash/cheque is delivered, or the amount is otherwise credited to the lessor, whichever comes first. (bdblaw.com.ph)
4. Advance rental vs. security deposit
| Item | Tax treatment at the time of payment | Withholding? |
|---|---|---|
| Advance rent (amount intended to be applied to specific future periods) | Recognised as income by the lessor in the year received; carried as prepaid expense/ROUA by the lessee | Yes. Full 5 % EWT on the amount paid, even if it covers periods beyond 12 months. (Grant Thornton Philippines) |
| Refundable security deposit (meant to secure obligations and to be returned) | Liability for the lessor; asset for the lessee | No EWT on deposit; withhold only if/when the deposit is later applied to rent or forfeited. (Grant Thornton Philippines) |
BIR rulings (e.g., DA 049-98 and OT-0659-2020) repeatedly draw the line this way; the Supreme Court in Citibank v. CA likewise treated the 5 % as “advance collection” once the rental is due. (E-Library)
5. Rates and tax base snapshot
| Lessor’s tax profile | WHT character | Rate | Notes |
|---|---|---|---|
| Resident individual or domestic/resident foreign corporation | Creditable EWT | 5 % of gross rent (net of VAT/percentage tax) | Standard rate under RR 02-98 |
| Non-resident foreign corporation | Final WHT | 25 % (may be reduced by treaty) | Art. 12 of PH tax treaties applies. (PwC Tax Summaries) |
6. Interaction with VAT & DST
- VAT / Percentage tax. VAT (12 %) or 3 % percentage tax, if applicable, is separately billed; EWT is computed on the net-of-VAT amount per RMC 11-2024. (PwC)
- Documentary-stamp tax. Long-term leases over 36 months are subject to DST of ₱3 per ₱2,000 of rental value on the original instrument; withholding agents have no duty over DST, but the lease must be stamped for admissibility in evidence.
7. Compliance calendar (Lessee-withholding agent)
| Form | What it covers | Statutory deadline* |
|---|---|---|
| BIR Form 0619-E | Monthly remittance of EWT for the first two months of every calendar quarter | 10th day following the month withheld (BIR eFPS) |
| BIR Form 1601-EQ | Quarterly remittance return (covers the third month and reconciles the quarter) | Last day of the month following the close of the quarter (BIR eFPS) |
| BIR Form 2307 | Certificate of taxes withheld | Issue to lessor within 20 days after the close of the quarter or upon demand |
| BIR Form 1604-E + alphalist | Annual information return | 30 days after electronic posting of the BIR notice (RMC 15-2025) (Bir.gov.ph) |
*Add five days if enrolled in eFPS; move to the next working day when the due date falls on a holiday/weekend.
8. Accounting-tax alignment under PFRS 16
- Lessees. For book purposes, advance rentals may form part of the right-of-use asset (ROUA) and are amortised. For tax and withholding, only the contractual rent becoming due (plus advance rent when paid) is deductible and subject to EWT; ROUA depreciation is disregarded in computing the 5 %. (PwC, Grant Thornton Philippines)
- Lessors. Advance rent is taxable income—and subject to VAT—in the year received, irrespective of accounting method. Security deposits remain a liability until applied. (Grant Thornton Philippines)
9. Penalties for non-withholding / late remittance
| Violation | Civil penalty |
|---|---|
| Failure to withhold or remit | 25 % surcharge on the amount that should have been withheld plus 12 % annual interest until paid, plus compromise penalties under RMO 07-2015 |
| Late filing of 2307 / alphalist | Up to ₱1,000 per certificate and an aggregated maximum of ₱25,000 per year under R.A. 10963 (TRAIN) |
10. Recent and emerging issues
- Non-disallowance rule. Effective 1 January 2024, rent expense is still deductible even if the lessee failed to withhold, but penalties apply (RMC 5-2025). (Grant Thornton Philippines)
- “Payable” test clarified. RR 04-2024 (EOPT IRR) codifies that “payable” means the date stated in the contract or the date goods/services are actually rendered—whichever comes first—ensuring advance rent is caught at once. (bdblaw.com.ph)
- Digital filing push. eBIRForms and eFPS are now mandatory for large taxpayers and those registered in the Large Taxpayers Service, reducing paper submissions for 1601-EQ/0619-E.
11. Practical checklist for lessees
- Map the cash flow: Identify which cash lines are true advance rent and which are refundable deposits.
- Segregate VAT: Compute 5 % on the rental amount excluding VAT.
- Withhold upon signing if advance rent is paid on execution of the lease.
- File 0619-E/1601-EQ on time and always attach the SAWT file when e-filing.
- Issue BIR 2307 each quarter; the lessor will need it to claim the credit.
- Track deposits: Start withholding once any portion is applied to rent or forfeited.
- Keep RMC 11-2024 handy when computing ROUA entries—only actual rent, not straight-line averages, is the EWT base.
12. Conclusion
In Philippine tax practice, advance rental payments are immediately subject to the 5 % expanded withholding tax because they constitute income already “paid or payable” to the lessor. The only exception is a genuinely refundable security deposit. Compliance hinges on correctly distinguishing the two, computing the tax on the net-of-VAT amount, and meeting the stringent monthly-quarterly filing timetable. With the 2024 Ease of Paying Taxes Act, timing rules are now explicit and rent deductions can survive an honest withholding miss—yet late filers still face stiff penalties. Keeping contracts, accounting entries and tax filings in sync is therefore essential to avoid exposure.
(This article is for general information only and does not constitute legal advice. Engage a Philippine tax professional for transaction-specific guidance.)