Tax Exemption for Nonstock Nonprofit Corporation

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Published — June 1, 2022

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

Read also: Registering a Nonstock Corporation

A nonstock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers. It may be exempted from paying income tax, if it falls to any of the following:

1. Labor, agricultural or horticultural organization not organized principally for profit.
2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;
3. A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents;
4. Cemetery company owned and operated exclusively for the benefit of its members;
5. Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset belongs to or inures to the benefit of any member, organizer, officer or any specific person;
6. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual;
7. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
8. A non-stock and nonprofit educational institution ;
9. Government educational institution;
10. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses;
11. Farmers’, fruit growers’, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them

However, before tax exemption may be granted, the nonstock corporation must first secure BIR Tax Exemption Ruling. The requirements for the grant of tax exemption are specified by the law granting it and such grant is strictly construed against the taxpayer because an exemption restricts the collection of taxes necessary for the existence of the government. Thus, a corporation claiming tax exemption must be able to show clearly that it is organized and operated for the purposes under Section 30 of the National Internal Revenue Code (NIRC), and that its income is derived pursuant thereto.  

            For the above listed nonstock corporation, the processing and issuance of the Certificate of Tax Exemption (CTE) is provided for by the Bureau of the Internal Revenue under Revenue Memorandum Order No. 38-2019. It however does not include the CTEs of non-stock, non-profit educational institutions under Section 30(H) of the NIRC, which is covered by Revenue Memorandum Order (RMO) No. 44-2016. 

Operational & Organizational Tests in Determining Entitlement to Exemption

Under Revenue Memorandum Order No. 38-2019, in determining the entitlement to exemption, the nonstock corporation must pass the two tests, that is:

1. Organizational Test: This requires that the corporation or association’s constitutive documents (SEC Registration, Articles of Incorporation and By-Laws) must show that its primary purpose/s of incorporation fall under Section 30 of the NIRC;
2. Operational Test: This requires that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purposes specified in Section 30 of the NIRC. A corporation or association fails to meet this test if the corporation has no activities conducted in furtherance of the purpose for which it was organized, or if a substantial part of its operations constitutes “activities conducted for profit”.

In order for an entity to qualify as a non-profit corporation exempt from income tax, it must demonstrate that its earnings or assets do not inure to the benefit of any of its trustees, organizers, officers, members or any specific person. It must not be organized or operated for the benefit of private interests such as specific individuals, incorporators or his family, shareholders of the organization, or persons controlled directly or indirectly by such private interests. The organization must serve a public rather than a private purpose.

The following are considered “inurements” of such nature:

1. The payment of compensation, salaries, or honorarium to its trustees or organizers;
2. The payment of exorbitant or unreasonable compensation to its employees;
3. The provision of welfare aid and financial assistance to its members. An organization is not exempt from income tax if its principal activity is to receive and manage funds associated with savings or investment programs, including pension or retirement programs. This does not cover a society, order, association, or nonstock corporation under Section 30(C) of the NIRC providing for the payment of life, sickness, accident and other benefits exclusively to its members or their dependents;
4. Donation to any person or entity (except donations made to other entities formed for the purpose/purposes similar to its own);
5. The purchase of goods or services for amounts in excess of the fair market value of such goods or value of such services from an entity in which one or more of its trustees, officers or fiduciaries have an interest; and
6. When upon dissolution and satisfaction of all liabilities, its remaining assets are distributed to its trustees, organizers, officers or members. Its assets must be dedicated to its exempt purpose. Accordingly, its constitutive documents must expressly provide that in the event of dissolution, its assets shall be distributed to one or more entities formed for the purpose/purposes similar to its own, or to the Philippine government for public purpose.

GUIDELINES IN THE PROCESSING AND ISSUANCE OF CERTIFICATE OF TAX EXEMPTION

Revenue Memorandum Order No. 38-2019 also provided the guidelines in the processing and issuance of the Certificate of Tax Exemption (CTE) for nonstock nonprofit corporations, to wit:

A. Documentary Requirements.

1. Original application letter for issuance of Tax Exemption Ruling.

The letter shall cite the particular paragraph of Section 30 of the NIRC, as amended, under which the application for exemption/revalidation is being based;

2. Certified true copy of the latest Articles of Incorporation (AOI) and By-Laws issued by the Securities and Exchange Commission (SEC). The AOI must expressly state the following provisions, to wit:

1. It is a non-stock, non-profit corporation or association;
2. No part of the corporation or association’s net income shall inure to the benefit of any private individual;
3. The trustees of the non-profit corporation or association do not receive any compensation or remuneration; and
4. In case of dissolution, its assets shall be distributed to one or more entities formed for the purpose/purposes similar to its own, or to the Philippine government for public purpose.

   Original Certification under Oath by an executive officer of the corporation or association as to:

   1. full description of its past, present, and proposed activities,
   2. the sources and disposition of income,
   3. detailed description of all revenues which it seeks to be exempted from income tax, and
   4. amount of income, compensation, salaries or any emoluments paid by the corporation or association to its trustees, officers and other executive officers.

   4. Original Certification issued by the RDO where the corporation or association is registered, indicating the TIN of the corporation, and certifying that said corporation is not subject of any pending investigation, on-going audit, pending tax assessment, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal; or if there be any, the Original Certification issued by the RDO on the status thereof; and

   5. Certified true copies of the Income Tax Returns or Annual Information Returns and Financial Statements of the corporation or association for the last three (3) years.

   B. Procedure.

   a. The request for CTE shall be filed with the RDO where the corporation is registered. The RDO or his designated Revenue Officer of the Day must pre-evaluate the corporation’s submission using the checklist provided under Revenue Memorandum Order No. 38-2019. If there is incomplete submission of the documentary requirements, the applicant shall be notified thereof and the entire documents shall be returned to the applicant for his completion.

   b. Upon receipt of the complete documentary requirements (docket) in support of the application, the concerned RDO personnel shall pre-evaluate the same and shall determine whether or not the applicant qualifies as an exempt corporation or association under Section 30 of the NIRC, as amended.

   1. If based on the pre-evaluation, the RDO is of the position that the corporation or association is qualified, he shall prepare the CTE, together with a memorandum stating the factual and legal basis for recommending the issuance of the CTE, and endorse the docket to the Office of the Regional Director. If the Regional Director concurs with the RDO’s recommendation, he shall sign the CTE and issue the same to the requesting corporation. Otherwise, he shall return the docket to the RDO together with his findings/instructions.
   2. If the RDO is of the position that the corporation or association does not qualify, he shall notify in writing the applicant of such findings, stating the factual and legal bases for the denial. The applicant may appeal the denial to the Regional Director within thirty (30) days from the date of receipt of the written notice of denial. If the application for tax exemption/revalidation is denied, the corporation or association shall be held liable for income tax and shall be accordingly assessed for deficiency taxes, inclusive of penalties and interest.

   VALIDITY OF TAX EXEMPTION RULING

   A CTE issued under Revenue Memorandum Order No. 38-2019 shall be valid for a period of three (3) years from the date of effectivity specified in the Ruling, unless sooner revoked or cancelled. The CTE may be revalidated for another period of three (3) years under the same procedure set forth herein. The Tax Exemption Ruling shall be deemed revoked if there are material changes in the character, purpose, or method of operation of the corporation or association which are inconsistent with the basis for its income tax exemption. The revocation takes effect as of the date of the material change.

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   Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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