Withholding Tax on Bank Interest for Foreign Residents in the Philippines

Introduction

In the Philippine tax system, interest income earned from bank deposits is a common source of passive income subject to specific taxation rules. For foreign residents—typically referring to resident aliens (non-Filipino citizens who reside in the Philippines with the intention of staying indefinitely or for an extended period)—these rules align closely with those applicable to Filipino citizens. However, nuances arise depending on the type of deposit (e.g., peso or foreign currency), the residency status, and any applicable tax treaties. This article provides a comprehensive overview of the withholding tax regime on bank interest for foreign residents, drawing from the National Internal Revenue Code (NIRC) of 1997, as amended by laws such as the Tax Reform for Acceleration and Inclusion (TRAIN) Act (Republic Act No. 10963), the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (Republic Act No. 11534), and relevant Bureau of Internal Revenue (BIR) regulations up to the latest amendments as of 2025.

The discussion covers definitions, tax rates, exemptions, compliance requirements, and potential implications under international tax treaties. It distinguishes between resident aliens and non-resident aliens where relevant, as the term "foreign residents" primarily pertains to the former, but overlaps with non-residents in certain banking contexts.

Key Definitions

To understand the withholding tax on bank interest, it is essential to clarify relevant terms under Philippine tax law:

Resident Alien: A foreign individual who is not a citizen of the Philippines but resides therein. Residency is determined by factors such as physical presence, intention to stay, and economic ties (e.g., employment or business in the Philippines). Under Section 22(E) of the NIRC, an alien is considered a resident if they stay in the Philippines for more than 180 days in a calendar year or have a permanent home or vital interests there.
Non-Resident Alien: A foreign individual who does not meet the residency criteria. This is further subdivided into:
- Non-Resident Alien Engaged in Trade or Business (NRAETB): Those with business activities in the Philippines, treated similarly to residents for certain income types.
- Non-Resident Alien Not Engaged in Trade or Business (NRANETB): Those without business ties, taxed only on Philippine-sourced income at flat rates.
Bank Interest: Refers to interest income from deposits in Philippine banks, including savings accounts, time deposits, and demand deposits. This encompasses both peso-denominated deposits and foreign currency deposits under the Foreign Currency Deposit System (FCDS) governed by Republic Act No. 6426 (Foreign Currency Deposit Act).
Withholding Tax: A mechanism where the bank (as the withholding agent) deducts tax at source from the interest income before crediting it to the depositor's account. This is typically a final tax, meaning no further income tax filing is required for that income.
Philippine-Sourced Income: Interest from deposits in Philippine banks is considered sourced in the Philippines, regardless of the depositor's nationality or residency, under Section 42 of the NIRC.

Applicable Laws and Regulations

The primary legal framework includes:

National Internal Revenue Code (NIRC), Section 24(B) for Residents: Imposes a final withholding tax on interest income for resident citizens and aliens.
Section 25 for Non-Residents: Differentiates rates based on engagement in trade or business.
Republic Act No. 6426 (Foreign Currency Deposit Act): Provides confidentiality and tax exemptions for foreign currency deposits.
Bangko Sentral ng Pilipinas (BSP) Regulations: Govern bank deposit operations, including Circular No. 1111 (2021) on interest rate ceilings and reporting.
BIR Revenue Regulations (RR): Such as RR No. 5-2021 (implementing TRAIN amendments) and RR No. 14-2019 (on withholding taxes), which detail computation, remittance, and exemptions.
Tax Treaties: The Philippines has double taxation agreements (DTAs) with over 40 countries, which may reduce withholding rates on interest for residents of treaty countries.

Amendments under the TRAIN Law increased the tax on peso interest from 20% to a uniform rate, while CREATE adjusted corporate rates but maintained individual rates for interest.

Tax Rates on Bank Interest

Tax treatment varies by residency status and deposit type:

For Resident Aliens (Foreign Residents)

Resident aliens are taxed on their worldwide income, similar to Filipino citizens. Bank interest is subject to final withholding tax as follows:

Peso-Denominated Deposits: 20% final withholding tax on gross interest income (Section 24(B)(1), NIRC). This applies to savings, time, and other deposits in domestic banks.
Foreign Currency Deposits (FCDU): 15% final withholding tax on interest from deposits in Foreign Currency Deposit Units (FCDUs), as per Section 24(B)(1). This rate was adjusted under TRAIN from the previous 7.5%.
Long-Term Deposits (5 years or more): Exempt from withholding tax if held to maturity (Section 24(B)(1)). Premature withdrawal triggers a graduated tax: 20% if withdrawn within 3 years, 12% within 3-4 years, and 5% within 4-5 years.

Banks automatically withhold and remit the tax to the BIR monthly via BIR Form 1601-FQ.

For Non-Resident Aliens

Although the topic focuses on foreign residents, non-resident aliens may hold Philippine bank accounts (e.g., through remittances or investments), and their treatment differs:

NRAETB:
- Peso Deposits: 20% final withholding tax, akin to residents.
- FCDU Deposits: Exempt from tax under RA 6426, as these are designed to attract foreign capital.
NRANETB:
- Peso Deposits: 25% final tax on gross interest income (Section 25(B), NIRC).
- FCDU Deposits: Generally exempt, but subject to verification if the depositor qualifies as non-resident.

For non-residents, interest must be Philippine-sourced, and banks require proof of non-residency (e.g., passport, visa) to apply the correct rate.

Corporate Foreign Residents

If the "foreign resident" refers to foreign corporations with a Philippine branch (resident foreign corporations), interest income is taxed at:

20% final withholding tax on peso interest (Section 28(A)(5), NIRC, as amended by CREATE).
15% on FCDU interest.
However, if the corporation is a non-resident foreign corporation, interest is subject to 25% final tax, unless reduced by treaty.

Exemptions and Special Cases

Several exemptions apply to mitigate tax burdens:

De Minimis Amounts: Interest below PHP 10 (negligible) may not trigger withholding, though rarely applicable.
Foreign Currency Deposits for Non-Residents: Fully exempt under RA 6426 to encourage inflows. This exemption extends to interest on offshore banking units (OBUs).
Tax Treaty Relief: Under DTAs (e.g., with the US, UK, or Japan), the withholding rate on interest may be reduced to 10-15% for residents of treaty partners. To avail, foreign residents must file a Tax Treaty Relief Application (TTRA) with the BIR's International Tax Affairs Division, supported by a Certificate of Residence from the treaty country.
Government Deposits: Interest from deposits with the BSP or government securities is exempt or subject to lower rates.
Senior Citizens and Persons with Disabilities: If the foreign resident qualifies (e.g., holding a Philippine senior citizen card), certain interest may be exempt up to PHP 250,000 annually under RA 9994 and RA 10754, though this is rare for foreigners.
Pandemic-Related Relief: Temporary exemptions or rate reductions were provided under BAYANIHAN Acts (2020-2021), but these have lapsed as of 2025.

Non-compliance with exemption requirements may result in full taxation plus penalties.

Compliance and Reporting Requirements

Withholding Agent Responsibilities: Banks must withhold tax at source, issue BIR Form 2307 (Certificate of Creditable Tax Withheld) to the depositor, and remit via BIR Form 1601-FQ by the 10th day of the following month.
Depositor Obligations: For resident aliens, the withheld tax is final, so no need to include in annual income tax returns (ITR) via BIR Form 1700. However, if total income exceeds PHP 250,000, an ITR must be filed by April 15. Non-residents file BIR Form 1701Q quarterly if engaged in business.
Documentation: Foreign residents must provide banks with a Taxpayer Identification Number (TIN), proof of residency (e.g., Alien Certificate of Registration), and update details annually.
Penalties: Failure to withhold incurs 25% surcharge, 12% interest per annum, and compromise penalties (Section 248-250, NIRC). Underreporting by depositors may lead to assessments via BIR audits.

Implications and Planning Considerations

For foreign residents, the withholding tax on bank interest can impact financial planning:

Yield Comparison: After-tax yields on peso deposits (post-20% tax) may be lower than FCDU (post-15%), influencing deposit choices amid inflation and BSP rates.
Double Taxation: Resident aliens taxed on worldwide income may claim foreign tax credits for interest taxed abroad, per Section 34(C)(3).
Estate and Succession: Upon death, bank deposits of foreign residents are subject to estate tax (6% under TRAIN), with interest accrued taxable.
Digital Banking: With the rise of digital banks (e.g., under RA 11967, Digital Banks Act), the same withholding rules apply, but enhanced reporting via API integrations with BIR.
Economic Context: As of 2025, with BSP's policy rates around 6-7%, net interest after tax remains attractive for foreign retirees or expatriates, but currency risks for FCDUs should be considered.

In conclusion, the withholding tax framework ensures efficient collection while balancing incentives for foreign capital. Foreign residents should consult a tax advisor or the BIR for personalized advice, especially with evolving regulations.