The Tax Sparing Rule: Why Some Dividends to a Foreign Parent Get a 15% BIR Rate Instead of 25%

A domestic corporation paying dividends to its nonresident foreign parent corporation (NRFC) can withhold at a reduced 15% final tax instead of the regular 25% rate, but only if the tax sparing rule under Section 28(B)(5)(b) of the NIRC applies — specifically, only if the parent’s home country grants it a matching tax credit for the Philippine tax that rate reduction gives up. Getting this wrong in either direction means under-withholding (BIR exposure for the domestic payor) or over-withholding (an unnecessary cost to the foreign parent).

The default rate — and why it’s higher for a foreign parent than a domestic one #

Dividends a domestic corporation pays to a nonresident foreign corporation default to a 25% final withholding tax under Section 28(B)(1) of the NIRC — a materially different outcome from dividends paid between two domestic corporations, which are fully exempt. As explained in Why Dividends Between Philippine Corporations Aren’t Taxed Again, Section 27(D)(4) exempts domestic-to-domestic intercorporate dividends entirely, because the paying corporation’s profit was already taxed once inside the Philippine corporate income tax system. That reasoning doesn’t extend to a foreign parent: the NRFC and its home-country tax system sit outside Philippine jurisdiction, so the general rule reverts to the standard 25% NRFC withholding rate covered in Withholding Tax on Payments to Non-Resident Foreign Corporations. The tax sparing rule is the one mechanism that can bring that 25% rate down to 15% for dividends specifically — not for other categories of NRFC income.

The three conditions the home country must meet #

The reduced 15% rate isn’t a discretionary BIR grant — it’s conditional on the nonresident foreign corporation’s country of domicile allowing it a tax credit for taxes “deemed paid” in the Philippines, equivalent to the difference between the 25% regular rate and the 15% reduced rate (a 10-percentage-point spread). Tax commentary summarizing Section 28(B)(5)(b) generally frames the home country’s qualifying tax system around three elements: it must follow a worldwide system of taxation (so it taxes the NRFC on income earned outside its borders, including the Philippine dividend); it must allow the NRFC a tax credit against its home-country tax liability for the Philippine tax “spared” by the reduced rate; and the NRFC must actually be in a position to use that credit rather than relying on a separate tax treaty rate for the same dividend. The idea behind the credit is that the Philippines is not simply giving up tax revenue — the foreign parent’s home country is expected to collect the difference itself, so the total tax paid by the corporate group stays roughly the same regardless of which country collects it.

Section 28(B)(5)(b) of the NIRC conditions the reduced rate on the home country crediting the NRFC with taxes deemed paid in the Philippines equal to that rate differential; the exact statutory phrasing should be verified against the current published text of the NIRC as amended by the CREATE Act (Republic Act No. 11534) before being quoted or relied on for a specific filing position, since secondary sources vary in exactly how they paraphrase this subsection.

How RMO No. 46-2020 changed the confirmation process #

Revenue Memorandum Order (RMO) No. 46-2020, “Guidelines and Procedures for the Availment of the Reduced Rate of 15% on Intercompany Dividends Paid by a Domestic Corporation to a Non-resident Foreign Corporation Pursuant to Section 28(B)(5)(b) of the National Internal Revenue Code of 1997, as amended,” streamlined how a domestic corporation confirms and applies the 15% rate. Before this RMO, availing of the reduced rate generally required the domestic corporation or its NRFC parent to secure a case-by-case ruling from the BIR’s International Tax Affairs Division (ITAD) confirming that the parent’s home country satisfied the tax sparing conditions — a process that could take considerably longer than the dividend payment schedule allowed for. RMO No. 46-2020 sets out a defined procedure for that confirmation instead of requiring a fresh ruling request each time, giving withholding agents a clearer path to apply the 15% rate at the time of payment. A domestic corporation intending to withhold at 15% rather than 25% should confirm the current documentary requirements directly with ITAD or a qualified tax advisor before relying on the reduced rate, since procedural details in BIR issuances can be updated.

Worked example: ₱10,000,000 in dividends to a foreign parent #

A Philippine subsidiary declares ₱10,000,000 in cash dividends payable to its nonresident foreign parent corporation. Whether the subsidiary withholds 25% or 15% depends entirely on whether the parent’s home country grants the qualifying tax sparing credit — the peso difference to the parent is substantial.

If the Philippine subsidiary withholds at 15% without first confirming that the parent’s home country actually satisfies the tax sparing conditions, the ₱1,000,000 difference becomes a potential BIR deficiency assessment against the subsidiary as withholding agent, plus interest and surcharge — the reduced rate is a conditional benefit to document, not a default to assume.

Frequently asked questions #

What is the tax sparing rule under NIRC Section 28(B)(5)(b)? #

The tax sparing rule is a provision in Section 28(B)(5)(b) of the National Internal Revenue Code that reduces the final withholding tax on dividends a domestic corporation pays to a nonresident foreign corporation from the regular 25% down to 15%, but only if the nonresident foreign corporation’s home country allows it a tax credit for the tax the Philippines gave up, matching the 10-percentage-point difference between the two rates.

Does the tax sparing rule apply automatically to every foreign parent company? #

No. The reduced 15% rate applies only if the nonresident foreign corporation’s country of domicile grants it a deemed-paid tax credit equivalent to the difference between the regular 25% rate and the 15% reduced rate; without that home-country credit, the domestic corporation must withhold the full 25% regular rate on the dividend.

What is the difference between the tax sparing rule and a tax treaty? #

The tax sparing rule is a unilateral reduction built into Philippine domestic law under Section 28(B)(5)(b) that depends on the foreign parent’s home-country tax credit rules, while a tax treaty is a bilateral agreement between the Philippines and another country that can independently set its own reduced dividend withholding rate, subject to a separate Tax Treaty Relief Application process.

How does a domestic corporation confirm its foreign parent qualifies for the 15% rate? #

Revenue Memorandum Order No. 46-2020 sets out the guidelines and procedures for availing of the reduced 15% rate on intercompany dividends under Section 28(B)(5)(b), streamlining what previously required a case-by-case ruling request to the BIR’s International Tax Affairs Division into a defined confirmation process.

What happens if the domestic corporation withholds only 15% but the foreign parent’s country doesn’t actually qualify? #

If the nonresident foreign corporation’s home country does not meet the conditions for the tax sparing credit, the domestic corporation has under-withheld and remains liable to the BIR for the deficiency between the 15% actually withheld and the 25% regular rate that should have applied, plus applicable penalties and interest.

Summary #

Dividends paid by a domestic corporation to a nonresident foreign parent default to the 25% final withholding tax that applies to NRFC income generally, but Section 28(B)(5)(b) of the NIRC allows a reduced 15% rate when the parent’s home country grants it a matching tax sparing credit for the 10-percentage-point difference between the two rates. RMO No. 46-2020 streamlined how a domestic corporation confirms this eligibility rather than requiring a fresh BIR ruling for every case, but the reduced rate remains conditional, not automatic — a withholding agent that applies 15% without confirming the parent’s home-country tax treatment risks a deficiency assessment on the shortfall. For the broader set of rates that apply to NRFC payments generally, see Withholding Tax on Payments to Non-Resident Foreign Corporations, and for the separate, unconditional exemption that applies when both the payor and the recipient are domestic corporations, see Why Dividends Between Philippine Corporations Aren’t Taxed Again.