Is There Still an Improperly Accumulated Earnings Tax? What the CREATE Act Changed

The Improperly Accumulated Earnings Tax (IAET) — a 10% penalty tax on corporate earnings retained beyond the reasonable needs of the business — no longer exists. The CREATE Act (Republic Act No. 11534), signed into law on March 26, 2021, repealed the NIRC provision that imposed it. Corporations budgeting for 2026 don’t need to model IAET exposure at all, though pre-2021 tax years can still carry a legacy assessment risk.

What was IAET, and why did it exist? #

Before its repeal, IAET was a 10% tax imposed on a domestic corporation’s improperly accumulated taxable income — profits a closely-held corporation retained instead of distributing as dividends, where the retention exceeded what was reasonably needed for the business. The policy rationale was straightforward: without it, a closely-held corporation’s shareholders could avoid the personal income tax due on dividends simply by having the corporation hoard earnings indefinitely rather than distribute them, deferring (or effectively avoiding) the shareholder-level tax that a normal dividend distribution would trigger.

IAET applied on top of the corporation’s regular income tax — it was a separate penalty layer specifically targeting the accumulation behavior, assessed based on facts like the corporation’s dividend history, its documented business expansion plans, and how far retained earnings exceeded paid-up capital.

What did the CREATE Act actually change? #

Republic Act No. 11534, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, signed March 26, 2021, repealed the NIRC provision imposing IAET. From 2021 onward, domestic corporations no longer accrue IAET liability, regardless of how much of their earnings they retain or how thin their dividend history is.

The government’s stated rationale was that IAET actively discouraged reinvestment: corporations facing a 10% penalty for retaining earnings had an incentive to distribute profits as dividends — often flowing to foreign parent companies or shareholders abroad — rather than keeping capital in the Philippines to fund expansion or hiring. Repealing IAET removed that disincentive as part of CREATE’s broader push to encourage corporate recovery and reinvestment.

Does this mean older IAET assessments are gone too? #

Not automatically. The repeal is prospective — it stops IAET from accruing on income earned from 2021 onward, but it doesn’t erase liability that had already accrued in earlier, still-open taxable years. If the BIR issued (or still has time to issue, within its prescriptive period to assess) an IAET-inclusive deficiency assessment covering a pre-2021 taxable year, that assessment can still be pursued and litigated on its own facts — the CREATE Act repeal is not retroactive relief for those older years. Corporations working through a legacy assessment that bundles IAET with other deficiency items (income tax, VAT, withholding, documentary stamp tax) should treat the IAET component as a distinct issue subject to its own pre-2021 legal basis, separate from whatever applies to the other items in the same assessment.

This repeal is specific to the standalone IAET provision — it’s a different, older change from the more recent CREATE MORE Act, which layers additional incentives on top of the existing corporate tax structure for registered business enterprises rather than touching IAET. See CREATE MORE Act Incentives: Enhanced Deductions and Tax Breaks for RBEs for that separate, later law. For the other major corporate income tax floor that survived CREATE (and was only temporarily reduced by it), see Minimum Corporate Income Tax (MCIT): BIR Rules and When It Applies.

Frequently asked questions #

Is the Improperly Accumulated Earnings Tax (IAET) still imposed in the Philippines? #

No. The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, Republic Act No. 11534, signed into law on March 26, 2021, repealed the provision imposing IAET under the National Internal Revenue Code. There is no more IAET on corporate earnings from 2021 onward.

What was IAET before it was repealed? #

IAET was a 10% tax imposed on a closely-held domestic corporation’s improperly accumulated taxable income — earnings retained instead of distributed as dividends, beyond what was reasonably needed for the business — designed to discourage using retained earnings to avoid the personal tax shareholders would owe on dividends.

Can the BIR still assess IAET for years before the CREATE Act? #

Yes, in principle. The repeal is prospective, so IAET liability that accrued in taxable years before the CREATE Act’s effectivity remains legally assessable if within the BIR’s prescriptive period to assess, even though no new IAET accrues from 2021 onward.

Does the IAET repeal mean corporations can retain earnings without limit? #

The repeal removes the specific IAET penalty, but corporations still operate under general Philippine corporate law rules on retained earnings — for example, restrictions tied to the Revised Corporation Code on retained earnings relative to paid-up capital for stock corporations. IAET’s removal is a tax-code change, not a change to corporate law’s separate retained-earnings rules.

Why did the CREATE Act repeal IAET? #

The stated rationale was that IAET discouraged corporations from retaining and reinvesting earnings domestically — pushing profits out as dividends or overseas repatriation instead of keeping capital in the Philippines for business expansion and job creation, which ran counter to CREATE’s broader goal of encouraging investment and recovery.

Summary #

IAET is gone — the CREATE Act repealed it in 2021, and no domestic corporation accrues the 10% tax on retained earnings today. The repeal isn’t retroactive, so pre-2021 years remain a distinct legacy risk if still open to assessment, but for current tax planning, IAET is simply no longer a line item to model.