1) Core rule in one sentence

When a person or entity in the Philippines pays rentals for the use of property located in the Philippines (or used in the Philippines) to a non-resident foreign corporation (NRFC), the payment is generally Philippine-sourced income subject to final withholding tax (FWT)—commonly at 30% of the gross rental—unless a tax treaty validly changes the characterization or rate.

2) Legal framework (Philippine context)

A. Where the taxing right comes from

Under the Philippine National Internal Revenue Code (NIRC), the Philippines taxes non-resident foreign corporations on income from sources within the Philippines. Rentals paid for the use of property that is in the Philippines (real property) or used in the Philippines (many types of personal property) are typically treated as income from sources within the Philippines under the NIRC “source rules.”

B. Why withholding applies

The Philippines enforces collection through a withholding-at-source mechanism: the payor/lessee is made the withholding agent and is legally responsible for withholding and remitting the tax to the Bureau of Internal Revenue (BIR).

C. Final withholding vs. creditable withholding (the key classification)

Final Withholding Tax (FWT): tax withheld is the full and final Philippine income tax on that income; the foreign recipient generally does not file an income tax return for that income.
Creditable Withholding Tax (CWT / Expanded Withholding Tax): tax withheld is an advance payment creditable against the income tax due of the recipient (typical for domestic corporations/resident foreign corporations).

For NRFC lessors, rental payments are commonly treated as subject to FWT (not CWT), because the NRFC is taxed on Philippine-sourced income on a gross basis (i.e., generally without deductions) and collection is done via withholding.

3) Who is covered: what counts as a “Non-Resident Foreign Corporation”

An NRFC is a foreign corporation not engaged in trade or business in the Philippines and not licensed as a resident foreign corporation. This distinction matters because:

If the foreign corporation is doing business in the Philippines and treated as a resident foreign corporation, rental payments are generally handled under the ordinary corporate income tax system, and the payor typically withholds CWT (e.g., EWT on rentals).
If it remains an NRFC, the default approach is FWT on Philippine-sourced rentals.

Practical indicator: If the lessor has a Philippine TIN as a resident foreign corporation and is filing Philippine income tax returns as such, you are usually no longer in “NRFC + FWT” territory.

4) What counts as “rentals” for withholding purposes

“Rentals” is interpreted broadly and can include:

Fixed periodic rent for use/occupancy;
Payments for the use of equipment, machinery, or other personal property;
Amounts bundled as “lease fees” for the right to use property.

Common add-ons that may affect the withholding base:

Common area maintenance (CAM) and similar charges: if they are part of the consideration for the right to use/occupy, they are often treated as part of gross rentals for withholding.
Reimbursements (e.g., utilities paid by lessee and reimbursed): treatment depends on structure and documentation; if the lessee is paying obligations on behalf of the lessor as part of lease consideration, they can be viewed as part of gross income.
Security deposits: generally not income upon receipt if refundable and truly a deposit; but if later applied to rent or forfeited, it can become income at that point and may trigger withholding then.

5) Source rules: why the Philippines can tax the rental

A. Real property (land/buildings) located in the Philippines

Rentals from real property located in the Philippines are ordinarily Philippine-sourced.

B. Personal property (equipment, aircraft, vessels, machinery, etc.)

For many types of personal property, Philippine sourcing is commonly linked to location and/or use in the Philippines. If the equipment is used in the Philippines, the rentals are typically treated as Philippine-sourced.

C. Payment location does not control

Even if rent is paid abroad, or invoiced offshore, withholding may still be required if the income is Philippine-sourced and the payor has a Philippine withholding obligation.

6) Default tax rate: 30% final withholding on gross rentals (NRFC)

As a general domestic-law baseline, NRFC income from sources within the Philippines is subject to 30% tax, collected through final withholding, unless a special statutory rate applies or a treaty provides relief.

Gross basis

For an NRFC, the tax is typically computed on gross rentals, not net profit. Deductions (repairs, depreciation, interest, etc.) generally do not reduce the withholding base under the NRFC FWT scheme.

7) Tax treaties: when (and how) the result can change

A. Real property rentals: treaty relief is often limited

Most Philippine tax treaties follow the OECD/UN approach where income from immovable (real) property may be taxed in the country where the property is located (the situs state). That usually means the Philippines retains the right to tax Philippine real property rents, and the treaty often does not cap the rate the way it might for dividends/interest/royalties.

B. Equipment leases: may be treated as “royalties” under many treaties

Rentals for the use of industrial, commercial, or scientific equipment can be treated as royalties under many treaties (depending on the treaty text). If classified as royalties, the withholding tax may be subject to a reduced treaty rate (commonly 10% or 15%, but it varies by treaty).

This is a major planning fault line:

Lease of Philippine real property → typically taxable in the Philippines with little or no treaty rate reduction.
Lease of equipment/technology → may fall under royalties article with reduced treaty withholding.

C. Accessing treaty benefits (conceptually)

To apply treaty rates, the payor generally needs to ensure:

The recipient is a resident of the treaty partner country (commonly proven via a Tax Residency Certificate or equivalent),
The recipient is the beneficial owner (where relevant),
The income fits the treaty category and limitations,
The relevant BIR administrative requirements for treaty claims are met.

If treaty relief is not applied at source, the foreign recipient may end up seeking a refund under Philippine rules—procedurally burdensome and time-sensitive.

8) Identifying the correct withholding treatment: a practical decision map

Step 1: Who is the lessor?

Domestic corporation / resident foreign corporation → Usually EWT (creditable) on rentals (not final), subject to standard EWT rental rates and invoicing/VAT rules.
NRFC (not engaged in business in PH) → Usually FWT (final) at 30% on gross Philippine-sourced rentals, unless treaty or special law changes it.

Step 2: What is being leased?

Land/building in PH → Philippine-sourced rent; treaty often does not reduce.
Equipment used in PH → Philippine-sourced; may be “royalties” under treaty with reduced rate (case-by-case).
Mixed contracts (e.g., lease + services) → may require allocation; services can have different sourcing/withholding rules.

Step 3: Is there a treaty and can it be applied?

If yes, confirm classification (immovable property income vs royalties vs business profits) and compliance with administrative requirements.

9) Compliance mechanics for the Philippine payor (withholding agent)

A. Who must withhold

The payor/lessee—corporation, partnership, individual doing business, or government entity—acting as withholding agent must:

Compute withholding correctly,
Withhold at time of payment or accrual (depending on the applicable withholding rules and accounting method used in the regulations),
Remit on time,
File the proper returns,
Issue the proper withholding certificate,
Maintain documentation supporting treaty use or characterization.

B. Typical BIR forms used (final withholding)

For final withholding taxes, the Philippine system commonly uses:

Monthly remittance form (for FWT) and
Quarterly withholding tax return (for FWT), plus the related alphalists and withholding certificates.

(Exact form numbers and electronic filing requirements depend on the BIR’s current implementation rules, but the structure is consistently: remit monthly, report quarterly, and provide certificates/alphalists.)

C. Withholding certificates

Final tax withheld is generally evidenced by a certificate of final tax withheld (distinct from the certificate used for creditable withholding).

D. Deadlines and penalties (general)

Late withholding/remittance can trigger:

Surcharges,
Interest,
Compromise penalties, and can also create income tax deductibility issues for the payor in some circumstances where withholding compliance is a condition for expense recognition.

10) Computing the withholding: common scenarios

Scenario 1: Philippine company leasing office space in Manila from an NRFC

Monthly rent: PHP 1,000,000
Domestic-law FWT (baseline): 30%
Tax withheld: PHP 300,000
Net remitted to NRFC: PHP 700,000
PHP 300,000 remitted to BIR as final withholding tax.

Scenario 2: Philippine company leasing specialized equipment used in PH from an NRFC in a treaty country

Monthly lease: PHP 1,000,000
Domestic-law FWT: 30%
But if treaty classifies as royalties and provides 15% rate (illustrative), then:
- Tax withheld: PHP 150,000 (subject to proper treaty claim support)
- Net to NRFC: PHP 850,000

Scenario 3: Mixed payment (lease + embedded services)

If the contract bundles:

equipment lease (potentially royalties/rentals) and
maintenance/operator services (potentially services income),

a defensible allocation may be necessary, because different components can carry different withholding rules and rates.

11) Frequent issues and risk points (Philippine practice)

A. Misclassification of the lessor (NRFC vs resident foreign corporation)

Withholding can be completely different depending on whether the foreign corporation is treated as resident/doing business in the Philippines.

B. Treaty misuse or incomplete documentation

Applying treaty rates without adequate support can lead to:

BIR assessments against the withholding agent,
disallowance of treaty rate at audit,
exposure to deficiency withholding tax plus penalties.

C. Treating equipment rentals like real property rentals (or vice versa)

Equipment leases can implicate “royalties” in treaties. Real property rentals generally do not.

D. Base erosion through “reimbursements” and “pass-throughs”

Charges that are economically part of lease consideration may be swept into the withholding base, especially if they are required payments tied to the right to use the property.

E. Foreign exchange and grossing-up clauses

Lease contracts often include tax gross-up provisions. If the contract says the lessor must receive a net amount, the payor may bear the tax cost; the computation then becomes a gross-up exercise (i.e., solve for the gross payment that yields the desired net after withholding).

12) Interaction with other Philippine taxes (often seen alongside withholding)

A. Value-Added Tax (VAT)

Lease of property can implicate VAT depending on whether the activity is treated as being “in the course of trade or business,” the lessor’s registration posture, and the nature of the property and lease. VAT analysis is separate from withholding tax, but contract pricing and invoicing often intertwine with withholding computations.

B. Documentary Stamp Tax (DST)

Lease agreements can be subject to DST in the Philippines. DST is not a withholding tax on income, but it is commonly relevant in lease transactions and compliance checklists.

13) Documentation checklist (what the withholding agent typically keeps)

Executed lease contract and amendments;
Proof of lessor’s tax status (NRFC vs resident foreign corporation; TIN details if applicable);
Invoices/receipts and breakdown of charges (rent, CAM, reimbursements, etc.);
Proof of remittance and filed withholding returns;
Withholding certificates issued;
If treaty is applied: tax residency certificate (and other treaty-support documents), and internal memos/analysis supporting classification and rate.

14) Takeaways

Philippine-source is the anchor: rent for property located/used in the Philippines is generally taxable in the Philippines.
For an NRFC, rentals are commonly subject to 30% final withholding on gross amounts under domestic law.
Treaty relief is highly fact-specific: real property rentals are often still fully taxable in the Philippines, while equipment leases may qualify for reduced royalty rates under some treaties.
The withholding agent (Philippine payor) carries primary audit risk for wrong rate, wrong base, late remittance, or unsupported treaty application.