Why Dividends Between Philippine Corporations Aren't Taxed Again: The Section 27(D)(4) Exemption

Dividends a domestic corporation receives from another domestic corporation are exempt from income tax entirely under Section 27(D)(4) of the National Internal Revenue Code (NIRC) — the paying corporation withholds nothing, because the exemption applies at the recipient’s level, not as a rate reduction on withholding.

What does Section 27(D)(4) actually say, and why does it exist? #

The exemption exists to prevent the same corporate profit from being taxed twice within a chain of Philippine corporations — once when the paying corporation earns and is taxed on the profit, and again when that profit is passed up as a dividend to a corporate shareholder.

Section 27(D)(4) of the NIRC states:

“Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax.”

This is a flat, unconditional exemption on its face — it does not require a minimum holding period, a minimum ownership percentage, or any reinvestment condition, unlike some of the newer conditional exemptions the Tax Code has since introduced for other dividend scenarios.

Does the same exemption apply to dividends from a foreign corporation? #

No — and this is where taxpayers most often go wrong, because the Section 27(D)(4) exemption by its own text covers only dividends from “another domestic corporation,” not dividends sourced from abroad.

Dividends a domestic corporation receives from a resident foreign corporation are instead governed by the sourcing rule in NIRC Section 42: if 50% or more of the paying foreign corporation’s gross income for the three years preceding the dividend declaration was Philippine-sourced, the dividend is treated as Philippine-sourced income and is fully taxable to the domestic recipient as part of its regular income. If less than 50% was Philippine-sourced, the dividend is treated as foreign-sourced, in whole or in proportionate part.

Separately, the CREATE Act (Republic Act No. 11534) introduced a narrower, conditional exemption for foreign-sourced dividends received by a domestic corporation, available only when the domestic corporation:

• Directly owns at least 20% of the outstanding shares of the foreign paying corporation, held for an uninterrupted period of at least two years at the time the dividend is declared; and
• Reinvests the dividends in its business operations in the Philippines — working capital, capital expenditures, dividend payments to its own shareholders, investment in a domestic subsidiary, or infrastructure — within the following taxable year, with the required sworn declaration and supporting documentation submitted to the BIR.

Does the paying domestic corporation still issue a withholding certificate? #

Because Section 27(D)(4) exempts the dividend from tax at the recipient’s level, the paying domestic corporation has no withholding obligation when the shareholder receiving the dividend is another domestic corporation — this contrasts sharply with dividends paid to an individual shareholder, which remain subject to final withholding tax and are certified on BIR Form 2306, not BIR Form 2307.

Summary #

Dividends flowing between two domestic corporations are exempt from income tax under Section 27(D)(4), with no withholding required at all — a materially simpler and broader rule than the conditional exemption Congress later added for foreign-sourced dividends under the CREATE Act, or the final withholding tax that still applies when the recipient is an individual shareholder. For how dividends paid to individuals are withheld and certified instead, see Withholding Tax on Interest, Royalties, and Dividends: Rates and Which Certificate Applies, and for the broader corporate income tax rate structure this exemption sits within, see Corporate Income Tax Rates in the Philippines: 25% vs 20% for MSMEs Under the CREATE Act.