Is Interest Income From Lending Money to a Business Subject to BIR Form 2307? Bank vs Non-Bank Lender Rules
When a business borrows money from a private individual, a related company, or another non-bank lender rather than a bank, the interest it pays is generally subject to 15% creditable withholding tax (CWT) under Revenue Regulations (RR) No. 14-2012, and the borrower must issue the lender a BIR Form 2307. This is different from interest paid on a bank loan, which is withheld at 2%, and different again from interest that qualifies as a “deposit substitute,” which is final tax and never gets a BIR Form 2307 at all. Which rule applies depends on who the lender is and how many lenders are involved — not just on the fact that interest changed hands.
Generate This BIR Form 2307 FREE →Why “deposit substitute” status has to be checked first #
Before applying any withholding rate to interest, confirm the loan isn’t a “deposit substitute” — a specific, defined borrowing arrangement that pulls the interest out of creditable withholding entirely and into final tax instead. The National Internal Revenue Code (NIRC) defines the term narrowly, in Section 22(Y):
“The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public (the term ‘public’ means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer.”
The “20-lender rule” is the operative test: a company that borrows from 20 or more individual or corporate lenders at one time through a debt instrument (a bond issue is the classic example) is deemed to be borrowing “from the public,” and the interest on that borrowing is a deposit substitute — subject to a 20% final withholding tax, not creditable withholding tax, and reported differently from an ordinary BIR Form 2307. This guide covers what happens below that 20-lender threshold: a single lender, a handful of related parties, or any borrowing arrangement that doesn’t meet the “public” test — the far more common scenario for a small or mid-sized business borrowing privately.
The two CWT rates: bank lender vs. non-bank lender #
Once a loan is confirmed not to be a deposit substitute, the creditable withholding rate on the interest split into two brackets depending on who the lender is — a bank gets a much lower rate than a private individual or non-bank entity. Under RR No. 14-2012, as clarified by Revenue Memorandum Circular (RMC) No. 84-2012:
| Lender | Withholding treatment | CWT Rate |
|---|---|---|
| A bank, on an ordinary loan not securitized, assigned, or participated out | Creditable, BIR Form 2307 issued | 2% |
| A private individual, a non-bank lending investor, a related company, or any other non-bank lender | Creditable, BIR Form 2307 issued | 15% |
| Borrowing from 20+ lenders at once (deposit substitute) | Final tax, not creditable — no BIR Form 2307 | 20% |
The 2% bank rate exists because banks are themselves heavily regulated and separately taxed on their lending income; the 15% rate is the general catch-all for interest paid to everyone else who isn’t borrowing “from the public” under the 20-lender test. A private individual who lends personal savings to a small business, or a parent company that extends an intercompany loan to a subsidiary, both fall into the 15% bracket as ordinary non-bank lenders.
Worked example: borrowing from a private individual #
A retail business needs ₱1,000,000 in working capital and borrows it directly from a single private individual investor — a family friend of the owner — at 12% annual interest, payable quarterly. That is one lender, well under the 20-lender “public” threshold, so the loan is not a deposit substitute.
Each quarter, the business owes ₱30,000 in interest (12% × ₱1,000,000 ÷ 4). Because the lender is a non-bank individual, the business withholds 15% creditable withholding tax — ₱4,500 — and pays the lender the net ₱25,500. The business issues the lender a BIR Form 2307 reflecting the gross interest and the tax withheld, which the lender then uses as a credit against their own income tax due when they file their return. If the same ₱1,000,000 had instead been borrowed from a bank under an ordinary, non-securitized loan, the bank’s interest income would be withheld at only 2% instead of 15% — a material difference in the certificate’s numbers even though the loan amount and rate are identical.
Does this apply on top of the usual Top Withholding Agent rules? #
Yes, and independently of them — the interest withholding under RR No. 14-2012 is its own specific EWT item, separate from the general 1%/2% Top Withholding Agent (TWA) rule that applies to routine goods and services purchases. A business doesn’t need to be a designated TWA to be required to withhold on interest it pays to a non-bank lender; this obligation attaches to the payment itself. If the same business is separately designated a TWA for its regular purchases of goods and services, see BIR Form 2307 for Purchases of Goods: Top Withholding Agent 1% Rate Explained and BIR Form 2307 for Purchases of Services: Top Withholding Agent 2% Rate Explained — but that status is unrelated to whether interest paid on a private loan gets withheld; the interest rule applies regardless.
How this differs from dividends and other final-tax payments #
Not every payment a business makes to an investor belongs on BIR Form 2307 — some, like most dividends, are final tax and use BIR Form 2306 instead, so it matters to keep interest and dividend withholding separate even when both go to the same lender-investor. For that companion distinction, see Is a Dividend Payment Subject to BIR Form 2307 or Form 2306? and Withholding Tax on Interest, Royalties, and Dividends: Rates and Which Certificate Applies for the full comparison across all three payment types.
Summary #
Interest a business pays on a private, non-bank loan is generally creditable withholding tax at 15%, reported on BIR Form 2307 — unless the lender is a bank (2% CWT) or the borrowing pulls in 20 or more lenders at once, which makes it a deposit substitute subject to 20% final tax instead, with no BIR Form 2307 involved. Confirm which bracket applies before withholding, since the rate swings from 2% to 15% to 20% depending entirely on who’s on the other side of the loan. For the mechanics of the certificate itself, start at What Is BIR Form 2307 and When Must You Issue It?.