How Are Dividends Paid to Foreign Shareholders Taxed in the Philippines?

Dividends paid by a Philippine company to foreign shareholders are generally subject to withholding tax in the Philippines. The rate depends on whether the shareholder is a foreign corporation or a non-resident individual and whether a tax treaty or the Philippines’ tax-sparing rule provides a lower rate.

What tax rate applies to dividends paid to foreign shareholders?

A Philippine company generally withholds tax from dividends paid to a foreign shareholder and remits the tax to the Bureau of Internal Revenue (BIR).

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For a non-resident foreign corporation, dividends from a Philippine domestic corporation are generally subject to a 25 percent final withholding tax.

Dividends paid to a non-resident alien individual engaged in trade or business in the Philippines are generally subject to a 20 percent final withholding tax. For a non-resident alien not engaged in trade or business in the Philippines, Philippine-source income, including dividends, is generally subject to a 25 percent tax.

Can a tax treaty reduce the dividend withholding tax?

Philippine double tax agreements can provide lower withholding tax rates on dividends.

Treaties commonly provide different rates depending on the shareholder’s ownership of the Philippine company. A foreign corporate shareholder holding a specified percentage of the company may qualify for a lower rate than a shareholder with a smaller portfolio investment.

The foreign shareholder must satisfy the treaty requirements, including tax residence and, where applicable, beneficial ownership. To apply a treaty rate at source, the foreign shareholder generally provides the Philippine company with the appropriate BIR treaty form and a valid Tax Residency Certificate before the dividend payment. The withholding agent must then follow the BIR’s procedures for confirming entitlement to the treaty rate.

How does the Philippines’ tax-sparing rule apply to foreign corporate shareholders?

The tax-sparing rule can reduce the 25 percent dividend tax imposed on a non-resident foreign corporation to 15 percent if the country where the foreign corporation is domiciled allows the required deemed-paid tax credit or does not impose income tax on dividends received from the Philippine corporation.

A non-resident foreign corporation claiming the reduced rate must comply with the BIR’s filing requirements. The application is made using BIR Form No. 0901-TS, together with documents establishing that the conditions for tax-sparing treatment have been satisfied.

What must a Philippine company do before paying dividends overseas?

Dividends are generally declared from unrestricted retained earnings. For cash dividends, the board of directors generally approves the distribution from these earnings. Different approval requirements apply to stock dividends.

After approval, the Philippine company applies the appropriate withholding rate, remits the tax to the BIR, completes the required withholding tax filings, and pays the net dividend to the foreign shareholder.

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The company should retain records supporting the dividend declaration, distributable profits, withholding tax treatment, and any preferential rate claimed.

Philippine withholding tax does not necessarily represent the foreign shareholder’s total tax cost. The dividend may also be subject to tax or reporting requirements in the shareholder’s country of residence, where relief for Philippine tax may be available under domestic law or an applicable tax treaty.

Manage dividend repatriation from the Philippines with Dezan Shira & Associates

Dezan Shira & Associates assists foreign investors with Philippine withholding tax, tax treaty applications, tax compliance, and cross-border profit repatriation. Companies with Philippine subsidiaries can contact our professionals for assistance with overseas dividend payments.

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