Is dividend income of a holding company subject to local business tax?
A recent CTA En Banc decision states that provinces, cities, and municipalities many not impose local business tax on a holding company’s dividend income.
The power to tax of provinces, cities, and municipalities is limited by the 1991 Local Government Code (“LGC”). Section 133(a) of the LGC states that this power does not extend to levying of income tax, except when levied on banks and financial institutions. A city may not expand its power to tax and go beyond the limit set by Section 133(a).
Do holding companies fall within the purview of “banks and other financial institutions?”
A holding company is a corporation established with the purpose of owning and controlling assets, such as shares of stocks, of one or more companies.
The Court of Tax Appeals (“CTA”) in a recent decision (CTA EB No. 1957, January 2, 2020) had the chance to reiterate its position that holding companies do not fall under the purview of “banks and other financial institutions” for purposes of local business tax.
In that case, Makati City assessed the taxpayer, Corullon Holdings, Inc., local business tax on dividend income. The taxpayer paid the amount assessed under protest and asked the Makati City Regional Trial Court for a refund.
The Regional Trial Court granted the taxpayer’s petition and ordered Makati City to refund the tax paid. Makati City then appealed the case to the Court of Tax Appeals (“CTA”).
The CTA agreed with the RTC and said that Makati City may not impose local business taxes on the taxpayer’s dividend income.
Section 131(e) of the LGC defines the term “banks and other financial institutions” as follows:
"'Banks and other financial institutions' include non-bank financial intermediaries, lending investors, finance and investment companies, pawnshops, money shops, insurance companies, stock markets, stock brokers and dealers in securities and foreign exchange, as defined under applicable laws, or rules and regulations thereunder;"
The enumeration in Section 131 appears to be exclusive of other entities. So, the LGC did not categorize holding companies under “banks and financial institutions.”
Makati City’s act of subjecting holding companies to a tax dividend similar to that imposed on banks and financial institutions was a deliberate intent to circumvent the prohibition laid down in Section 133(a).
What’s more—Section 27(D)(4) of the National Internal Revenue Code states that dividends received by a domestic corporation from another domestic corporation shall not be subject to tax—meaning corporate income tax. They are instead subject to a final tax at the rate of 20%.
In levying income tax on the holding company’s dividend income, Makati City violated not only Section 133(a) of the LGC but also Section 27(D)(4) of the NIRC.
Stated simply, a holding company’s dividend income is not subject to local business tax.
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