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Philippines: Tax implications of “one person corporations”

Philippines: Tax implications of one person corporation

The corporation law in the Philippines has been revised in an effort to simplify corporate governance rules and to encourage new investment and business in the Philippines.


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One change concerns the introduction of the “one person corporation” (OPC) regime. The OPC is a corporation composed of an individual, trust or estate as a single stockholder, without a minimum authorized capital stock requirement except as special legislation could otherwise provide.

A potential implication of the OPC regime is its possible use by new and existing business owners as a mode of tax avoidance, in particular with respect to imposition of improperly accumulated earnings tax (IAET). The IAET is essentially a penalty (a 10% levy) imposed on corporations that have improperly accumulated taxable income. The IAET serves as a deterrent to the avoidance of tax for shareholders who are supposed to be taxed on their dividends distributed from the company’s profits. Basically, if a company’s earnings are distributed to its shareholders, then these shareholders are eventually liable for income tax on these dividends, whereas if the company retains its earnings, shareholders would not be liable for income tax on these undistributed profits. Businesses may avoid imposition of the IAET if they are able to reasonably justify the accumulation of income for an immediate need, for instance in anticipation of a future capital expenditure or to satisfy the rules for retaining earnings as required by law or applicable regulation.

There are forms of organizations (for instance, holding companies or investment companies) that may be construed as created for the sole purpose of accumulating profits beyond the reasonable needs of a business, thus indicative of avoiding income tax. Whether an OPC must provide a purpose of its reason for accumulation, there must be certain appropriate action steps. OPCs will not automatically be subject to scrutiny on their existence.

Read an April 2019 report prepared by the KPMG member firm in the Philippines

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