(A comprehensive legal overview – Philippine context)
Important note: This discussion is based on the National Internal Revenue Code (NIRC), as amended, and major BIR issuances up to around mid-2024. Tax rules change, so key rates and forms should always be checked against the latest BIR regulations or professional advice.
I. Overview: What “Capital Gains Tax” Actually Is in the Philippines
In Philippine tax law, “capital gains tax” (CGT) is a specific, final tax imposed only on particular kinds of transactions:
Sale, exchange or other disposition of real property located in the Philippines that is classified as a capital asset
- Rate: 6% on the higher of the gross selling price (GSP) or fair market value (FMV).
Sale, exchange or other disposition of shares of stock in a domestic corporation that are not listed and traded on a local stock exchange
- Rate: 15% on the net capital gain.
Other asset sales (e.g., business assets, inventory, equipment, real property used in business) are generally not subject to CGT but instead to regular income tax (and often creditable withholding tax). In practice, however, many people loosely refer to any tax on gains from asset sales as “capital gains tax,” which is legally inaccurate.
II. Capital vs Ordinary Assets: The Threshold Question
Before you even compute CGT, you must determine whether the asset is a capital asset or an ordinary asset under the NIRC.
A. Definition of Capital Asset
Under the Tax Code, a capital asset is essentially any property held by the taxpayer (whether connected with trade or business or not), except:
- Stock in trade or other property included in inventory,
- Property held primarily for sale to customers in the ordinary course of business,
- Property used in business and subject to depreciation, and
- Real property used in business.
Everything that is not one of these is generally a capital asset.
B. Ordinary Assets in Practice
Typical ordinary assets include:
- Inventory and merchandise of a trading business
- Condominium units or lots held by a real estate developer for sale
- Office buildings, warehouses, or factories used in business
- Equipment, vehicles, and machinery used in business and subject to depreciation
Real property held by a person engaged in the real estate business is usually treated as an ordinary asset, not a capital asset, even if not yet sold.
C. Why the Classification Matters
- Capital asset real property → Subject to 6% CGT (final tax).
- Ordinary asset real property → Subject to regular income tax (and CWT), not CGT.
- Shares of stock: If unlisted → 15% CGT on net capital gain; if listed and traded → stock transaction tax (STT) instead of CGT.
III. Capital Gains Tax on Real Property (Capital Assets)
A. Coverage
6% CGT applies if all are present:
- Taxpayer: Individuals (resident or nonresident), domestic corporations, and (in certain cases) foreign corporations;
- Asset: Real property (land and/or buildings) located in the Philippines;
- Classification: The property is a capital asset in the hands of the seller;
- Transaction: Sale, exchange, or other disposition (including pacto de retro, barter, dacion en pago, foreclosure, etc.).
B. Basic Formula
Determine:
Gross Selling Price (GSP) – the price stated in the deed of sale, including assumed liabilities (e.g., mortgage) if applicable;
Fair Market Value (FMV) – usually the higher of:
- BIR zonal value, or
- Assessed value per the Provincial/City Assessor (tax declaration).
Choose the higher of GSP or FMV → this is your tax base.
Apply the CGT rate:
[
\text{CGT} = 6% \times \max(\text{GSP}, \text{FMV})
]
No deduction for selling expenses, brokerage fees, etc. CGT on real property is on the gross base, not net profit.
C. Sample Computations
Example 1 – Simple Sale
- GSP (in deed of sale): ₱3,000,000
- BIR zonal value: ₱3,800,000
- Assessed value (tax declaration): ₱2,500,000
FMV is the higher of zonal value (₱3,800,000) and assessed value (₱2,500,000) → ₱3,800,000
Tax base = higher of GSP (₱3,000,000) and FMV (₱3,800,000) → ₱3,800,000
[
\text{CGT} = 6% \times ₱3{,}800{,}000 = ₱228{,}000
]
Even if you sold at a loss compared to market or your cost, the 6% CGT is still due, because the tax is based on gross base, not actual profit.
Example 2 – Sale with Assumed Mortgage
- GSP in deed of sale: ₱1,000,000
- Buyer assumes an existing mortgage: ₱2,000,000
- Zonal value: ₱2,500,000
For CGT, the GSP generally includes assumed mortgage, so economic selling price: ₱3,000,000.
Tax base = higher of ₱3,000,000 and ₱2,500,000 → ₱3,000,000
[
\text{CGT} = 6% \times ₱3{,}000{,}000 = ₱180{,}000
]
D. Timing of Liability
CGT usually becomes due upon the execution of the notarized Deed of Absolute Sale (or relevant instrument), or upon:
- Consolidation of ownership in foreclosure;
- Fulfillment of suspensive condition, in conditional sales.
Even if the price is payable in installments, the CGT is generally computed on the full tax base and is required upfront (subject to some specific rules and BIR practice).
E. Individuals vs Corporations
- Individual (citizen or resident alien) – 6% final tax on the higher of GSP or FMV.
- Nonresident alien – generally subject to the same 6% final tax on real property located in the Philippines (subject to tax treaty relief, if any).
- Domestic corporation – also liable to 6% final tax on sale of land/buildings classified as capital asset.
- Foreign corporations – likewise generally subject to 6% on capital asset land/buildings located in the Philippines, subject to treaties.
If the property is ordinary asset, the gain is not covered by CGT; instead the net income is taxed under regular corporate or individual income tax and subject to creditable withholding tax.
IV. Principal Residence Exemption (Rollover of Gain)
One of the most important reliefs from CGT on real property is the sale of principal residence by an individual.
A. Conditions for Exemption
Under the NIRC, the 6% CGT on sale of a principal residence of a natural person (individual) may be exempt, if:
- The property sold is the taxpayer’s principal residence;
- The seller is a natural person (not a corporation);
- The proceeds are fully utilized in acquiring or constructing a new principal residence within 18 months from the date of sale;
- The taxpayer notifies the BIR in writing of their intention to avail of the exemption within 30 days from the date of sale;
- The exemption is claimed only once every ten (10) years; and
- The historical cost or adjusted basis of the old principal residence is carried over as the basis of the new principal residence (for future tax purposes).
B. Full vs Partial Utilization of Proceeds
If all of the proceeds are used to acquire/build a new principal residence within 18 months, the sale can be fully exempt from the 6% CGT.
If only part of the proceeds is used, the CGT applies proportionately to the unutilized portion.
Example – Partial Utilization
- GSP: ₱5,000,000
- Higher of GSP or FMV: ₱5,500,000 → tax base
- Proceeds used to construct new principal residence: ₱4,000,000
- Unutilized proceeds: ₱1,000,000
Unutilized proportion = ₱1,000,000 / ₱5,000,000 = 20%
Taxable base = 20% × ₱5,500,000 = ₱1,100,000
[
\text{CGT} = 6% \times ₱1{,}100{,}000 = ₱66{,}000
]
V. Capital Gains Tax on Unlisted Shares of Stock
A. Coverage
CGT on shares applies when:
- The asset sold is a share of stock in a domestic corporation;
- The share is not listed and traded on a local stock exchange (e.g., Philippine Stock Exchange);
- The shares are not held by a dealer in securities as stock in trade;
- There is a sale, exchange, or other disposition (e.g., direct sale, swap, contribution to capital that does not qualify as a tax-free exchange).
B. Basic Rule and Rate
The tax is imposed on the net capital gains realized during the taxable year from such transactions.
- Rate: 15% on net capital gain
- Net capital gain = Total selling price (or fair value) minus cost basis minus allowable selling expenses, aggregated across transactions.
If there is a net capital loss for the year, no CGT is due (though the ability to carry forward losses is restricted and subject to specific rules; in general, capital losses can only be used against capital gains).
C. Sample Computation – Unlisted Shares
Assume a resident individual sells shares in a domestic corporation, unlisted:
Transaction 1:
- Shares sold: 1,000
- Selling price: ₱200 per share → ₱200,000
- Cost basis: ₱120 per share → ₱120,000
- Brokerage and selling expenses: ₱5,000
- Gain: ₱200,000 − ₱120,000 − ₱5,000 = ₱75,000
Transaction 2 (same year):
- Shares sold: 500
- Selling price: ₱150 per share → ₱75,000
- Cost basis: ₱180 per share → ₱90,000
- Selling expenses: ₱2,000
- Loss: ₱75,000 − ₱90,000 − ₱2,000 = −₱17,000
Net capital gain for the year = ₱75,000 − ₱17,000 = ₱58,000
[
\text{CGT} = 15% \times ₱58{,}000 = ₱8{,}700
]
In practice, you report such transactions using the BIR capital gains tax return for stock transactions (currently Form 1707) and pay the corresponding tax.
D. Individuals vs Corporations
- Individuals (citizens/resident aliens) – 15% final tax on net capital gains from unlisted domestic shares.
- Nonresident aliens – also typically subject to 15% final tax on net capital gains, subject to tax treaties.
- Domestic corporations – 15% final tax on net capital gains from unlisted domestic shares (except those treated as dealers in securities).
- Resident and nonresident foreign corporations – similarly covered, but tax treaties may alter or exempt such gains.
E. Basis and Record-Keeping for Shares
To compute CGT properly, you must keep reliable records of:
- Acquisition cost (including purchase price, documentary stamp taxes, transfer fees, etc.);
- Subsequent subscriptions or additional investments;
- Stock dividends (which can affect the per-share cost basis);
- Corporate reorganizations or tax-free exchanges, where the basis may carry over.
VI. Listed Shares: Stock Transaction Tax (Not CGT, But Related)
For shares listed and traded on the Philippine Stock Exchange (PSE):
- Instead of CGT, sales are subject to Stock Transaction Tax (STT), a final tax on the gross selling price.
- The rate (after TRAIN) is 0.6% of the gross selling price, typically withheld and remitted by the stockbroker.
While economically this functions like a tax on capital gains, legally it is not CGT. Losses or actual profit level do not matter; the tax is based on the gross selling price.
VII. Transfers Not Subject to Capital Gains Tax
Not all transfers of property that involve “gains” are subject to CGT. Key examples:
A. Donations and Transfers by Reason of Death
- Inter vivos transfers (donations) → subject to Donor’s Tax, not CGT.
- Transfers at death (inheritance) → subject to Estate Tax, not CGT.
Important for future CGT:
If the heir later sells inherited real property or shares, the basis for computing gain will generally be the fair market value at the time of death (or at the time of acquisition in case of donation, subject to some rules). This affects future CGT or income tax on the sale.
B. Tax-Free Exchanges and Corporate Reorganizations
Under Section 40(C)(2) of the NIRC, certain exchanges of property for shares in connection with a merger, consolidation, or reorganization can be non-taxable (often referred to as “tax-free exchanges”) if strict conditions are met, such as:
- Transfer of property to a corporation in exchange for its shares, and
- The transferor (alone or together with others) gains control (at least 51%) of the corporation as a result of the exchange.
In such cases:
- No gain or loss is recognized at the time of exchange;
- No CGT (6% or 15%) is imposed on that exchange;
- The basis of the property and shares is carried over.
However, these exchanges generally require careful structuring and usually a BIR ruling or at least compliance with specific documentary requirements.
VIII. Compliance, Forms, and Deadlines
A. Real Property (Capital Assets) – BIR Form 1706
For sales of real property classified as capital assets:
- Form: BIR Form 1706 – Capital Gains Tax Return (for real property).
- Deadline: Generally within 30 days following the sale, exchange, or disposition.
- Who files: The seller/transferor (or their authorized representative).
- Where: The Revenue District Office (RDO) where the property is located or where the taxpayer is registered, following BIR rules.
Only after payment of CGT (and documentary stamp tax, etc.) will the BIR issue the necessary Certificate Authorizing Registration (CAR), which the Register of Deeds requires to effect transfer of title.
B. Unlisted Shares – BIR Form 1707
For sales/exchanges of unlisted domestic shares:
- Form: BIR Form 1707 – Capital Gains Tax Return for Onerous Transfer of Shares of Stock Not Traded Through the Local Stock Exchange.
- Deadline: Typically within 30 days after each sale or disposition.
- Where: RDO where the seller is registered.
C. Documentary Stamp Tax (DST) and Other Taxes
In addition to CGT, the following may apply:
These are separate from CGT and must be computed and paid independently.
D. Penalties for Late Payment
Late filing and payment of CGT returns may result in:
- Surcharge (typically 25%, or 50% in cases of willful neglect/fraud);
- Interest at a rate set by law (commonly described as double the legal interest rate per annum) from the date the tax should have been paid;
- Compromise penalties based on BIR schedules.
IX. Asset Sale vs Share Sale: Tax Planning Considerations
When dealing with a business, one common strategic choice is between:
- Asset sale (the corporation sells specific assets), vs
- Share sale (the shareholders sell their shares).
A. Asset Sale
- If real property is ordinary asset (e.g., held by a real estate developer), the gain is taxed under regular income tax, not CGT.
- Buyer gets a step-up in basis for the assets (the purchase price becomes new basis for depreciation/future sale).
- May trigger multiple taxes: VAT (if applicable), income tax on gains, DST, etc.
B. Share Sale
- If the shares are unlisted domestic shares, the seller may be subject to 15% CGT on net capital gains.
- If the buyer acquires shares, the assets remain with the corporation; no VAT or regular income tax at corporate level on the sale of shares (though future sale of assets by the corporation will be taxed).
- Buyer does not get a step-up in basis of the underlying assets, only in the shares.
This choice can dramatically affect both tax cost and commercial risk, so both sides typically evaluate:
- Whether the real property is capital or ordinary asset,
- Available losses,
- VAT implications,
- Tax-free reorganization options, and
- Potential BIR audit risks.
X. Common Practical Issues and Pitfalls
Misclassification of real property
- Calling a property a “capital asset” when the taxpayer is actually in the real estate business can lead to underpayment and later assessments (plus penalties).
Under-declaration of selling price
- Attempting to lower CGT by understating the GSP is usually ineffective, because the BIR uses the higher of GSP or FMV (zonal/assessed value).
Ignoring principal residence rules
- Failing to notify the BIR within 30 days or not fully using proceeds within 18 months can result in lost exemption.
Not keeping evidence of cost basis
- For shares and real property, lack of documentation of acquisition cost may prevent you from properly computing net capital gain (for shares) or supporting future tax positions.
Overlooking tax treaties
- For cross-border shareholders, treaties may reduce or eliminate Philippine tax on capital gains from shares, but typically require a Tax Treaty Relief Application (TTRA) and compliance with BIR procedures.
XI. Summary
To compute Capital Gains Tax on asset sales in the Philippines, you must:
Identify the asset and its classification
- Is it real property? If so, is it a capital asset or ordinary asset?
- Is it a share in a domestic corporation? If so, is it listed or unlisted?
Apply the correct regime
Check for exemptions or special rules
- Principal residence rollover (once every 10 years, strict conditions).
- Tax-free exchanges and reorganizations under Section 40(C)(2).
- Estate/donor’s tax instead of CGT for gratuitous transfers.
Comply with forms and deadlines
- BIR Form 1706 (real property) and BIR Form 1707 (unlisted shares), generally within 30 days of the taxable transaction.
- Pay CGT before securing the CAR, DST, and local transfer taxes.
Because tax law and BIR practice evolve, and because classification and computation can be fact-sensitive (especially for businesses, developers, and cross-border transactions), it is prudent to consult a Philippine tax professional or legal counsel for actual deals—especially high-value real estate or share transfers.