Passive income includes earnings from investments and other ventures that require minimal supervision or effort such as income generated from interests, dividends, royalties, and payments from rental property. While it’s a good idea to invest in passive income streams, just like all income, they are still subject to income tax.
The passive income tax rate varies depending on the nature and source of the income. Generally speaking, the graduated income tax rate still applies. However, on certain passive income, they are taxed accordingly as specified in the Tax Code of 1997:
On Certain Passive Income of Individual Citizens and Resident Aliens
| Passive Income | Tax Rate |
| 1. Interest from currency deposits, trust funds, and deposit substitutes | 20% |
| 2. Royalties (on books as well as literary & musical compositions) | 10% |
| – In general | 20% |
| 3. Prizes (P10,000 or less) | Graduated Income Tax Rates |
| – Over P10,000 | 20% |
| 4. Winnings (except from PCSO and Lotto amounting to P10,000 or less) | 20% |
| – From PCSO and Lotto amounting to P10,000 or less | exempt |
| 5. Interest Income from a Depository Bank under the Expanded Foreign Currency Deposit System | 15% |
| 6. Cash and/or Property Dividends received by an individual from a domestic corporation/ joint stock company/ insurance or mutual fund companies/ Regional Operating Headquarter of multinational companies | 10% |
| 7. Share of an individual in the distributable net income after tax of a partnership (except GPPs)/association, a joint account, a joint venture or consortium taxable as corporation of which he is a member or co-venture | 10% |
| 8. Capital gains from sale, exchange or other disposition of real property located in the Philippines, classified as capital asset | 6% |
| 9. Net Capital gains from sale of shares of stock not traded in the stock exchange | 15% |
| 10. Interest Income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) Upon pre-termination before the fifth year, there should be imposed on the entire income from the proceeds of the long-term deposit based on the remaining maturity thereof: Holding Period | Exempt |
| – Four (4) years to less than five (5) years | 5% |
| – Three (3) years to less than four (4) years | 12% |
| – Less than three (3) years | 20% |
For Non-Resident Aliens Not Engaged in Trade or Business
| A. Tax Rate in General – on taxable income from all sources within the Philippines | Same manner as individual citizen and resident alien individual |
| B. Certain Passive Income | Tax Rates |
| 1. Interest from currency deposits, trust funds, and deposit substitutes | 20% |
| 2. Royalties (on books as well as literary & musical compositions) | 10% |
| – In general | 20% |
| 3. Prizes (P10,000 or less) | Graduated Income Tax Rates |
| – Over P10,000 | 20% |
| 4. Winnings (except from PCSO and Lotto) | 20% |
| – From PCSO and Lotto | exempt |
| 5. Cash and/or Property Dividends received from a domestic corporation/joint stock company/insurance/mutual fund companies/Regional Operating Headquarter of multinational companies | 20% |
| 6. Share of a non-resident alien individual in the distributable net income after tax of a partnership (except GPPs) of which he is a partner or from an association, a joint account, a joint venture or consortium taxable as corporation of which he is a member or co-venture | 20% |
| 7. Interest Income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) Upon pre-termination before the fifth year, there should be imposed on the entire income from the proceeds of the long-term deposit based on the remaining maturity thereof: Holding Period | Exempt |
| – Four (4) years to less than five (5) years | 5% |
| – Three (3) years to less than four (4) years | 12% |
| – Less than three (3) years | 20% |
| 8. Capital from the sale, exchange or other disposition of real property located in the Philippines classified as capital asset | 6% |
| 9. Net Capital gains from sale of shares of stock not traded in the Stock Exchange | |
| – Not over P100,000 | 5% |
| – Any amount in excess of P100,000 | 10% |
For Domestic Corporations
| Rates of Tax on Certain Passive Income of Corporations | Tax Rate |
| 1. Interest from currency deposits, trust funds, deposit substitutes, and similar arrangements received by domestic corporations | 20% |
| 2. Royalties from sources within the Philippines | 20% |
| 3. Interest Income from a Depository Bank under Expanded Foreign Currency Deposit System | 15% |
| 4. Cash and Property Dividends received by a domestic corporation from another domestic corporation | 0% |
| 5. Capital gains from the sale, exchange or other disposition of lands and/or building | 6% |
| 6. Net Capital gains from sale of shares of stock not traded in the stock exchange | 15% |
For Domestic Corporations
| Rates of Tax on Certain Passive Income of Corporations | Tax Rate |
| 1. a. In General – on taxable income derived from sources within the Philippines | 30% |
| b. Minimum Corporate Income Tax – on gross income | 2% |
| c. Improperly Accumulated Earnings – on improperly accumulated taxable income | 10% |
| 2. International Carriers – on gross Philippine billings | 2 ½ % |
| 3. Regional Operating Headquarters of Multinational Companies– on taxable income | 10% |
| 4. Regional or Area Headquarters of Multinational Companies | exempt |
| 5. Corporation Covered by Special Laws | Rate specified under the respective special laws |
| 6. Offshore Banking Units (OBUs) | 10% |
| In general – Income derived by OBUs from foreign currency transactions with non-residents, other OBUs, local commercial banks, and branches of foreign banks authorized by BSP | Exempt |
| On interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, local branches of foreign banks authorized by BSP to transact business with OBUs | 10% |
| 7. Income derived under the Expanded Foreign Currency Deposit System | |
| Interest income derived by a depository bank under the expanded foreign currency deposit system. | 7 ½ % |
| On Income derived by depository banks under the expanded foreign currency deposit systems from foreign currency transactions with non-residents, OBUs in the Philippines, local commercial banks including branches of foreign banks that may be authorized by BSP | exempt |
| On interest income derived from foreign currency loans granted by depository banks under the expanded foreign currency deposit systems to residents other than offshore banking units in the Philippines or other depository banks under the expanded system | 10% |
| 8. Branch Profit Remittances – on total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippines Economic Zone Authority) | 15% |
| 9. Interest from currency deposits, trust funds, deposit substitutes and similar arrangements | 20% |
| 10. Royalties derived from sources within the Philippines | 20% |
