Withholding Tax on Interest, Royalties, and Dividends: Rates and Which Certificate Applies

Interest, royalties, and dividends paid to individuals and domestic corporations are generally subject to final withholding tax (FWT), not the creditable withholding tax (CWT) certified on BIR Form 2307, under Sections 24(B) and 25 of the National Internal Revenue Code (NIRC). Because the tax withheld on these payments fully settles the recipient’s tax liability, the withholding agent issues BIR Form 2306, not BIR Form 2307 — mixing up the two certificates is one of the more common errors in Philippine withholding compliance.

Why do interest, royalties, and dividends get final tax instead of creditable tax? #

Passive income like interest, royalties, and dividends is taxed differently from active income such as professional fees or rent because the withholding agent’s remittance is meant to be the complete and final tax on that income — the recipient reports nothing further and claims no additional credit. That’s the defining line between final withholding tax, certified on BIR Form 2306, and creditable withholding tax, certified on BIR Form 2307, which the payee still applies against their own income tax return.

What are the current final tax rates? #

Rates vary by income type and, for royalties, by the nature of the work — a distinction that’s easy to miss when applying a single flat rate across the board.

The 10% preferential rate on literary and musical royalties exists to encourage authors and composers, and it’s narrower than it looks — it applies specifically to books, literary works, and musical compositions, not to royalties generally, which default to the 20% rate.

For the specific case of dividend payments and why they land on BIR Form 2306 rather than BIR Form 2307, see Is a Dividend Payment Subject to BIR Form 2307 or Form 2306? — that post covers the intercorporate dividend exemption and the nonresident foreign corporation tax-sparing rule in more depth.

Which certificate does the withholding agent issue? #

Because interest, royalties, and dividends are final tax, the correct certificate is BIR Form 2306 (Certificate of Final Tax Withheld at Source) — not BIR Form 2307, which exists specifically for creditable withholding tax on payments like professional fees, rent, and contractor fees. Issuing a Form 2307 for a dividend or royalty payment misrepresents the transaction: it implies the payee still has tax to credit, when in fact the final tax already settled it. Final tax remittance uses its own set of Alphanumeric Tax Codes (ATCs) distinct from the creditable-tax ATCs covered in What Is an ATC and How to Find the Right One for BIR Form 2307 — always confirm the correct ATC for final tax against the current BIR form instructions rather than assuming a creditable-tax code applies.

A worked example #

A domestic publishing company pays a Filipino author P100,000 in royalties for a published book. Because the royalty arises from a literary work, the preferential 10% final tax rate applies under NIRC Sec. 24(B) — the publisher withholds P10,000, remits it to the BIR, and issues the author a BIR Form 2306 for P10,000. Had the same P100,000 been paid as a royalty for, say, a franchise trademark rather than a book, the general 20% rate would apply instead, producing P20,000 in final tax — double the withholding on an identical gross amount, purely because of what the royalty is for.

Summary #

Interest, royalties, and dividends are passive income taxed at source under final withholding tax rules in NIRC Secs. 24(B) and 25 — 20% on most bank interest and royalties (10% for literary/musical royalties), and 10% on dividends to resident individuals — certified on BIR Form 2306, not BIR Form 2307. Getting the certificate type right matters as much as the rate itself, since it determines whether the payee has anything left to credit on their own return. See Is a Dividend Payment Subject to BIR Form 2307 or Form 2306? for the dividend-specific rules, and What Is Fringe Benefits Tax and How Do You File BIR Form 1603Q? for another common final-tax obligation employers handle alongside these.