What Counts as Philippine-Source Income? NIRC Section 42 for Freelancers, Landlords, and Nonresidents
NIRC Section 42 decides whether an item of gross income comes from sources within or outside the Philippines, and the answer turns on where services are performed and where property is located. Compensation for services “performed in the Philippines” is Philippine-source; rentals and gains from real property located here are Philippine-source; the same items performed or located abroad are foreign-source. This classification matters most for nonresidents.
Generate BIR Form 2307 Certificates FREE →What are the Philippine-source income rules? #
NIRC Section 42(A) lists items of gross income that are treated as from sources within the Philippines. The first six are interests, dividends, services, rentals and royalties, sale of real property, and sale of personal property. Key excerpts read:
“(3) Services. - Compensation for labor or personal services performed in the Philippines; (4) Rentals and royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property … (5) Sale of Real Property. - gains, profits and income from the sale of real property located in the Philippines; …”
— Section 42(A)(3)–(5), National Internal Revenue Code (Republic Act No. 8424), as posted by LawPhil. The ellipses omit the detailed royalty sub-items in paragraph (4).
What counts as foreign-source income? #
Section 42(C) mirrors the list for income without the Philippines:
“(3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property …; and (5) Gains, profits and income from the sale of real property located without the Philippines.”
— Section 42(C)(3)–(5), same source.
Dividends follow a special test in Section 42(A)(2): dividends from a domestic corporation are Philippine-source; dividends from a foreign corporation are Philippine-source only to the extent that at least 50% of its three-year gross income came from Philippine sources, in the proportion the Code states.
Worked classifications #
| Situation | Governing rule | Source |
|---|---|---|
| A Cebu-based freelance designer completes work for a Canadian client while physically in Cebu | Services performed in the Philippines, Section 42(A)(3) | Philippine |
| The same designer completes one project while working from Bali for three months | Services performed without the Philippines, Section 42(C)(3) | Foreign (for that project) |
| A nonresident Filipino rents out a Makati condominium | Rentals from property located in the Philippines, Section 42(A)(4) | Philippine |
| The same person rents out a Vancouver apartment | Rentals from property located without the Philippines, Section 42(C)(4) | Foreign |
| An individual receives dividends from a domestic corporation | Section 42(A)(2)(a) | Philippine |
The Cebu designer’s client being foreign does not change the first row’s source; where the work is performed controls. How the tax applies is a separate question, covered for example in Freelancer VAT Zero-Rating for Foreign Clients.
Why does the source matter? #
Taxation scope depends on residence and source. As discussed in Foreign-Sourced Income of Resident Citizens, residents are taxed on a broader base than nonresidents, whose Philippine tax exposure is generally limited to Philippine-source income. Source also affects withholding on payments to nonresidents; see Withholding Tax on Rent Paid to a Nonresident Foreign Landlord and Online Freelance Income of OFWs and Nonresident Citizens.
Deductions follow the source #
Section 42(B)(1) allows only deductions “properly allocated” to Philippine-source gross income, plus a ratable part of effectively connected expenses that cannot be allocated, and only “if fully substantiated by all the information necessary for its calculation.” Keep project-level records showing where each service was performed.
Summary #
NIRC Section 42 sources services by where they are performed, rentals and royalties by where the property is located, real property gains by location, and dividends by the payer’s Philippine-source income. Keep records of where work is performed and where property sits. The quoted text comes from RA 8424 as posted by LawPhil; verify against the current consolidated Code before applying it.
Frequently asked questions #
Is income from a foreign client taxed as Philippine-source if I work from the Philippines? #
Yes for sourcing. NIRC Section 42(A)(3) treats compensation for personal services performed in the Philippines as Philippine-source, regardless of where the client is located.
Is rent from a property I own abroad Philippine-source income? #
No. NIRC Section 42(C)(4) treats rentals or royalties from property located outside the Philippines as income from sources without the Philippines.
How are dividends sourced? #
Dividends from a domestic corporation are Philippine-source. Dividends from a foreign corporation are Philippine-source only to the extent determined under the 50% three-year gross income test in NIRC Section 42(A)(2).
Does the location of the buyer matter for gains on real property? #
No. NIRC Section 42(A)(5) and (C)(5) look at where the real property is located, not where the buyer or seller lives.
Can I deduct any expense against Philippine-source income? #
Only expenses properly allocated to it, plus a ratable share of effectively connected expenses that cannot be allocated, and only if fully substantiated, under NIRC Section 42(B)(1).