April

25, 2006
BIR RULING [DA-279-06]
24 (B) (1); DA-064-02
Philippine Veterans Bank
PVB Bldg., 101 V.A. Rufno cor. Dela Rosa Sts.
Legaspi Village, Makati City
Attention: Ma. Milagros Campomanes-Yuhico
VP and Trust Officer
Gentlemen :
This refers to your letter dated December 8, 2005 requesting for a certificate of tax exemption from the
20% final tax imposed under Section 24(B)(1) of the Tax Code of 1997 of the interest income from long
term deposit or investment in the form of a Living Trust or a Trust Estate administered by the Philippine
Veterans Bank through its Trust and Investment Division. ETDAaC
It is represented that the Revocable Living Trust Agreement and the Irrevocable Living Trust Agreement
cover the Living Trust and Trust Estate; and that the accounts opened through these trust vehicles are
generally and fundamentally built for long-term administration and accumulation for the eventual
transfer to the designated beneficiary/ies of the clients.
In reply thereto, please be informed that Section 24(B)(1) of the Tax Code of 1997 provides that "a final
tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any
currency bank deposit and yield or any other monetary benefit from deposit substitute and from trust
funds and similar arrangements; . . . : Provided, further, That interest income from long term deposit or
investment in the form of savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investment evidenced by certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax, Provided, finally, That should the holder
of the certificate preterminate the deposit or investment before the fifth (5th) year, a final tax shall be
imposed on the entire income and shall be deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years -

5%

Three (3) years to less than four (4) years

Less than three (3) years

12% and

20%"

Such being the case, the interest income derived by the Philippine Veterans Bank through its Trust and
Investment Division is exempt from final withholding tax provided that the fund is held by the trustee-

bank for at least five (5) years. However, if the participation is for a period of less than 5 years, the
interest income shall be subject to a final withholding tax which shall be deducted and withheld from
the proceeds of said investment and which shall be computed in accordance with the pre-termination
rate schedule under Sections 24(B)(1) and 25(A)(2) of the Tax Code of 1997. (BIR Ruling No. DA-064-02
dated April 03, 2002) ETIcHa
Moreover, it can be gleaned from your representation that the Revocable Living Trust Agreement and
the Irrevocable Living Trust Agreement cover the Living Trust and Trust Estate, and that the accounts
opened through these trust vehicles are generally and fundamentally built for long-term administration
and accumulation for the eventual transfer to the designated beneficiary/ies of your clients. Whereas, as
compared to the Common Trust Fund (CTF), the beneficiaries are one and the same person which is the
trustor or the beneficial ownership of the trust fund remains with the individual participant of the trust.
In a revocable transfer of funds to the designated beneficiary/ies of your client, such as in this case, the
funds continue to be owned by the trustor during his lifetime notwithstanding the transfer, as he still
retains the beneficial ownership. The rationale for taxing such transfer in trust at the time of death of
the trustor is to reach transfers which are really substitutes for testamentary disposition and thus
prevent evasion of estate tax. To be exempt from estate tax, the transfer of trust fund by inter vivos
must be absolute and outright with no strings attached whatsoever by the trustor.
In other words, all trust funds covered by the Revocable Living Trust Agreement of your client shall be
considered as forming part of its gross estate subject to estate tax pursuant to Section 85 of the Tax
Code of 1997, upon the death of the trustor. Thus, in case of death of your client-trustor, the transfer of
funds to the designated beneficiary/ies under the Revocable Living Trust Agreement shall be subject to
estate tax to the extent of your client-trustor's or beneficiary/ies' interest therein, as the case may be, at
the time of death pursuant to Section 85(C) of the Tax Code of 1997. (BIR Ruling No. 013-2005 dated
August 16, 2005) EacHSA
Finally, for monitoring purposes, the bank shall set up a separate numbering system in its trust books for
its long-term products.
This ruling is being issued on the basis of the foregoing facts as represented. However, if upon
investigation it will be disclosed that the facts are different, then this ruling shall be considered null and
void. aESIHT
Very truly yours,
(SGD.) JAMES H. ROLDAN
Assistant Commissioner
Legal Service