Are Private Schools Tax-Exempt? How the BIR Taxes Nonstock vs. Proprietary Schools

A private school’s BIR income tax treatment depends entirely on its corporate structure: a nonstock, nonprofit educational institution can be constitutionally exempt on income used actually, directly, and exclusively for education, while a proprietary (for-profit, stock) school is never exempt and instead pays a 10% preferential income tax rate under NIRC Section 27(B) — unless it fails the 50% predominance test, in which case its entire taxable income is taxed at the regular corporate rate. This guide breaks down both regimes, the current confirmed rate, the predominance test, and a worked computation.

Two Very Different Tax Regimes for Private Schools #

Philippine private schools fall into one of two BIR tax categories, and the category — not the school’s mission or reputation — determines the tax treatment: nonstock, nonprofit educational institutions, which can be constitutionally exempt, and proprietary educational institutions, which are stock corporations that always pay income tax at a preferential rate. Confusing the two is a common and costly mistake, because the constitutional exemption available to a nonstock school does not extend to a proprietary one no matter how similar their day-to-day operations look.

Nonstock, Nonprofit Schools: Constitutionally Exempt, With Conditions #

A nonstock, nonprofit educational institution’s revenues and assets are exempt from tax under Article XIV, Section 4(3) of the 1987 Constitution and NIRC Section 30(H), but only to the extent they are used actually, directly, and exclusively for educational purposes — the exemption is conditional, not blanket. The phrase “actually, directly, and exclusively” is the operative legal test, and it comes from the same line of Supreme Court jurisprudence that decided the CIR v. De La Salle University and CIR v. St. Luke’s Medical Center cases involving nonstock, nonprofit institutions.

In CIR v. De La Salle University, the Supreme Court held that a nonstock, nonprofit educational institution’s revenues and assets — including, in that case, income from leasing campus space to canteen and bookstore operators — are exempt from tax where they are proved to have been used actually, directly, and exclusively for educational purposes. The related case of CIR v. St. Luke’s Medical Center, decided under the parallel Section 30(E)/(G) exemption for nonprofit hospitals, established that a nonprofit institution is not automatically exempt on all of its income just because the institution as a whole is nonprofit — income the institution cannot show was actually, directly, and exclusively used for its exempt purpose remains taxable. Applied to schools, this means a nonstock, nonprofit institution still needs to be able to trace how income from a commercial or unrelated source was actually applied to educational use; income it cannot trace this way is not automatically covered by the exemption.

Separately, a nonstock, nonprofit school’s income tax exemption is verified and periodically confirmed through the BIR’s own certification process for educational institutions (Revenue Memorandum Order No. 44-2016), a different framework from the Certificate of Tax Exemption renewal cycle that applies to other Section 30 nonprofits — see this site’s guide on renewing a BIR Certificate of Tax Exemption under RMO No. 38-2019 for how that separate, non-school process works.

Proprietary Schools: The 10% Preferential Rate Under Section 27(B) #

A proprietary educational institution — a private school organized as a stock corporation, with owners who can receive profit distributions — is never eligible for the constitutional exemption; instead, it pays income tax at a preferential rate under NIRC Section 27(B), currently 10% on taxable income, rather than the regular corporate income tax rate. This preferential rate exists because Section 27(B) treats for-profit education as a socially beneficial activity worth taxing more lightly than an ordinary business, but it is still a taxed activity, not an exempt one.

The 10% rate has not been constant. The CREATE Act (Republic Act No. 11534) temporarily cut it to 1% from July 1, 2020 through June 30, 2023 as pandemic relief. After that window closed, Republic Act No. 11635 — signed into law in December 2021 specifically to fix the post-relief treatment of proprietary schools and nonprofit hospitals — set the rate back to 10% rather than letting it lapse to the regular corporate rate. That 10% rate, implemented through BIR Revenue Regulations No. 3-2022 and clarified in Revenue Memorandum Circular No. 78-2022, is the rate in effect through 2026.

Section 27(B) of the NIRC, as amended by Republic Act No. 11635, states:

“Hospitals which are nonprofit and proprietary educational institutions shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That beginning July 1, 2020 until June 30, 2023, the tax rate herein imposed shall be one percent (1%).”

The Predominance Test: When a Proprietary School Loses the 10% Rate #

A proprietary school keeps the 10% preferential rate only if its gross income from unrelated trade, business, or other activity does not exceed 50% of its total gross income from all sources — this “predominance test” is all-or-nothing, so failing it pulls the school’s entire taxable income into the regular corporate rate, not just the unrelated portion. The same Section 27(B) proviso, implemented by RR No. 3-2022 and clarified in RMC No. 78-2022, defines “unrelated trade, business or other activity” as activity not substantially related to the school’s educational purpose.

A rental building leased to an outside retail tenant is a common example of unrelated income, while tuition, matriculation, and other fees tied directly to instruction are related income. The threshold is a hard line, not a proportional blend — a school at 49% unrelated income keeps the 10% rate on everything, while a school at 51% loses it on everything.

Worked Example: Applying the Predominance Test #

A concrete computation shows how the predominance test decides which rate applies to a proprietary school’s income, using realistic tuition and rental figures — and why crossing the 50% line changes the tax on the school’s entire income, not just the rental slice. Assume Bright Horizons Learning Center, Inc. is a proprietary (stock corporation) school running a K-12 campus. For a given taxable year, it reports:

• Tuition and other school fees (related income): PHP 45,000,000
• Rental income from campus space leased to an outside coffee shop chain and a bank branch (unrelated income): PHP 12,000,000
• Total gross income from all sources: PHP 57,000,000

Step 1 — Compute the unrelated-income share: PHP 12,000,000 ÷ PHP 57,000,000 = 21.05%

Step 2 — Compare to the 50% threshold: 21.05% is below 50%, so Bright Horizons passes the predominance test and keeps the 10% preferential rate on its entire taxable income.

Step 3 — Compute the tax due: If Bright Horizons’ allowable deductions bring its net taxable income (from both the tuition and rental activities combined) to PHP 15,000,000, its income tax due is: PHP 15,000,000 × 10% = PHP 1,500,000

What if the numbers were different? If Bright Horizons instead earned PHP 45,000,000 in tuition and PHP 60,000,000 in unrelated rental income (total PHP 105,000,000), its unrelated share would be 60,000,000 ÷ 105,000,000 = 57.14% — above 50%. In that scenario, Bright Horizons would lose the preferential rate entirely, and its full PHP 15,000,000 net taxable income would instead be subject to the regular corporate income tax rate under NIRC Section 27(A) (currently 25% for a domestic corporation of that size, or 20% for a qualifying MSME), not just the rental portion.

Nonstock vs. Proprietary Schools at a Glance #

The table below summarizes how the two categories differ across the questions that matter most for BIR income tax purposes: whether exemption is ever possible, which rule governs, the default rate, and what happens if the school’s favorable treatment is lost. Use it as a quick reference after reading the fuller explanations above.

Frequently Asked Questions #

Are private schools tax-exempt in the Philippines? #

Not automatically, and not all of them the same way. A nonstock, nonprofit educational institution can be constitutionally exempt from income tax under Article XIV, Section 4(3) of the 1987 Constitution and NIRC Section 30(H), but only on revenues and assets used actually, directly, and exclusively for educational purposes. A proprietary (for-profit, stock) school is never exempt — it pays a preferential 10% income tax rate under NIRC Section 27(B) instead of the 25% regular corporate rate, provided it passes the predominance test.

What is the current BIR income tax rate for proprietary schools? #

As of 2026, proprietary educational institutions pay 10% on their taxable income under Section 27(B) of the NIRC. This is the rate as amended by Republic Act No. 11635, which took effect after a temporary 1% rate — granted as pandemic relief from July 1, 2020 to June 30, 2023 — expired and reverted to 10% rather than staying at 1% or jumping to the regular corporate rate.

Did the 1% tax rate for private schools expire? #

Yes. The 1% rate was a temporary reduction under the CREATE Act (Republic Act No. 11534), effective only from July 1, 2020 through June 30, 2023, as COVID-19 relief. Republic Act No. 11635, signed in December 2021, permanently fixed the post-relief rate for proprietary educational institutions and nonprofit hospitals at 10%, so the rate has been 10% since July 1, 2023 and remains 10% in 2026.

What is the predominance test for proprietary educational institutions? #

The predominance test looks at whether a proprietary school’s gross income from unrelated trade, business, or other activity exceeds 50% of its total gross income from all sources. If it does, the school loses the 10% preferential rate entirely, and its whole taxable income — not just the unrelated portion — is taxed at the regular corporate income tax rate instead.

Can a nonstock, nonprofit school still owe income tax? #

Yes. The constitutional and NIRC Section 30(H) exemption only covers revenues and assets used actually, directly, and exclusively for educational purposes. Income the school earns from activities not shown to meet that standard — for example, from a commercial tenant’s rent that is not proven to fund the school’s educational operations — can still be assessed income tax, even though the institution as a whole remains nonprofit.

What is the difference between a nonstock, nonprofit school and a proprietary school for BIR purposes? #

A nonstock, nonprofit school has no owners who receive profit distributions and can claim a constitutional tax exemption on revenue used actually, directly, and exclusively for education. A proprietary school is organized as a stock corporation with owners entitled to dividends; it is never exempt and instead pays the 10% preferential rate under NIRC Section 27(B), subject to the predominance test, or the regular corporate rate if it fails that test.

Summary #

A private school’s income tax treatment turns on its corporate structure, not its size or reputation. Nonstock, nonprofit institutions can be constitutionally exempt, but only on income they can show was used actually, directly, and exclusively for education — a standard the Supreme Court has applied strictly in cases like CIR v. De La Salle University. Proprietary schools are never exempt: they pay a 10% preferential rate under NIRC Section 27(B), a rate that dipped to 1% under the CREATE Act’s temporary 2020–2023 relief and was permanently restored to 10% by Republic Act No. 11635. That 10% rate holds only as long as the school’s unrelated trade or business income stays at or below 50% of its total gross income — cross that line, and the entire taxable income shifts to the regular corporate rate. Related reading: this site’s breakdown of VAT-exempt educational services under NIRC Section 109 covers the separate VAT treatment of tuition and school fees.