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Tuesday, September 27, 2005
Tax notes: Taxability of longterm investments
Bureau of Internal Revenue ruling 03-2005 clarifies the tax exemption of individual income from long-term investments as applicable to trust funds and investment management accounts (IMAs), as follows:
1. An irrevocable trust is taxable as a separate entity and classified as an individual. Hence, income of an irrevocable trust may be exempt from the 20 percent final withholding tax if the underlying investment is a qualified long-term investment and the trust holds on to that investment for at least five years.
2. A revocable trust is only a pass through entity and is not, for tax purposes, separate from those who establish or create it by pooling their money for investment purposes. Income from such trusts are included in the taxable income of the grantor. Hence, income of revocable common trust funds (CTFs) and investment trust accounts may be exempt from the 20 percent final tax on interest from qualified long term investments if the grantor is an individual resident or citizen.
3. On the other hand, an IMA agreement results only in a principal-agent relationship, not a trusteeship. The instruments on which the funds are invested are in the name of the principal or the investment manager as agent for the principal. Interest income from qualified long term investment under an IMA may therefore be exempt from the 20 percent final withholding tax on interest from qualified long-term investment if the investor is a qualified individual.
The exemption, if applicable, covers only interest income. Hence, the CTF, individual trust or IMA shall be subject to applicable taxes on other income. If income has been subjected to a final tax, such as dividend, such income will no longer be subject to the 20 percent final withholding tax when distributed to the individual investor in the CTF, individual trust or IMA.
(Source: Punongbayan & Araullo)
(September 27, 2005 issue)
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