RMC No. 81-2024: Tax Treatment of Sukuk (Islamic Bond) as Islamic Banking Arrangement Pursuant to the Tax Neutrality Provision of Republic Act No. 11439 (An Act Providing for the Regulation and Organization of Islamic Banks) as Implemented by Revenue Regulations No. 17-2020

Key points

1. Gain or profit. Sukuk with Shari’ah-compliant structure but economic features like bonds are taxed under the Circular. Gain or profit depends on the Sukuk structure and terms, and may be computed through profit-sharing ratios, rental income, mark-up or price differentials, or sale of underlying assets.
2. Holders’ tax. Gains or profits of holders on Sukuk with maturity of less than five years bear a 20% Final Withholding Tax (FWT). Those with maturity of five years or more are excluded from gross income and exempt from Income Tax. Non-resident aliens not engaged in trade or business and non-resident foreign corporations pay 25% FWT.
3. Pre-termination. On pre-termination, all gains or profits bear FWT by remaining maturity: 4 years to less than 5 years, 5%; 3 years to less than 4 years, 12%; less than 3 years, 20%.
4. Issuer and other parties. The issuer withholds tax at every payment of gains or profits and on asset purchases, whether directly from a supplier or through an agent. Originator/Obligor, Arranger, Manager and Underwriter pay regular Income Tax and VAT or Percentage Tax, whichever applies. The Special Purpose Vehicle pays regular Income Tax but is exempt from VAT.
5. Excluded transactions and DST. Disposal or lease of the underlying asset and extra instruments needed only for Shari’ah compliance are excluded for taxation. Documentary Stamp Tax applies to all Sukuk instruments under Sections 176 and 179, unless excepted under Section 199(g).

Who is affected

• Sukuk holders
• Sukuk issuers
• Originator/Obligor, Arranger, Manager and Underwriter
• Special Purpose Vehicle