BUSINESS TAXATION Succession

Succession and Transfer Taxes  A mode of acquisition by virtue of which the property, rights and
Classification of internal revenue taxes obligations to the extent of the value of the inheritance of a person
1. Income Tax are transmitted through his death to another or others either by will
2. Business Tax (testate) or by operation of law (intestate).
3. Documentary Stamp Tax
4. Transfer Tax Kinds of Succession
1. Testamentary or testate
Transfer Tax  results from the designation of an heir, made in a will executed in
 imposed upon the gratuitous transfer of private properties or rights the form prescribed by law
through donation or inheritance 2. Legal or intestate
 transfer of ownership is free because of the absence of financial  effected by operation of law since the decedent did not execute a
consideration will or the last will and testament executed by him is void
3. Mixed
Modes of Transferring Properties  effected partly by “will” and partly by operation of law
1. Onerous transfer
 a sale or a transfer of goods or services in return for something Elements of Succession
equal value 1. Decedent
 Regular business activities  deceased person with properties transferred through succession,
These sale or exchanges in the ordinary course of business are whether or not he left a will.
usually imposed of business taxes such as VAT, OPT and excise tax. 2. Estate
 Casual sale of property  properties of the decedent
Sale of property done outside the ordinary course of business is 3. Successors
subject to capital gains tax or regular income tax.  refers to the heirs or party to whom properties are being
2. Gratuitous transfer transferred
 a transfer of property for free
 Donation – “donation inter-vivos” Classification of Successors
Donor’s tax – effectivity is during the lifetime of donor 1. Compulsory Heirs
 Succession – “donation mortis causa”  those who succeed by force of law to some portion of the
Estate tax – upon death of the property owner inheritance, in an amount predetermined by law, therefore cannot
be deprived by the testator of their legitime except by
Effectivity of the transfer of properties disinheritance property effected.
1. Inter-vivos transfer 1) Primary
 property is transferred during the lifetime of the donor and donee  whom the legal portion of the estate is first reserved by law
and is effected upon the delivery and acceptance of the property a. Legitimate children and their descendants
donated  A legitimate child is someone conceived and born to legally
2. Mortis- causa transfer married parents including legitimated and adopted
 properties and rights of the decedent are transferred to his b. Surviving legitimate spouse
successor at the time of his death
 c. Illegitimate children and their descendants  Every Will must be written and made in a language or dialect known to
 conceived and born outside a valid marriage or out of the testator
wedlock  Oral Will made by the testator in contemplation of death and in the
 natural child, or acknowledged by in birth certificate or presence of credible witnesses is not allowed.
through declaration executed before a notary public  The mass of properties left by the decedent may be classified into
2) Secondary legitime and free portion.
 to receive the estate in the absence of a legitimate child
a. Legitimate parents and legitimate ascendants Testamentary Distribution of Net Estate
 father or mother of a legitimate child, either biological
SUCCESSORS LEGITIME
or adopting parents
Legitimate children and descendants ½
b. Illegitimate parents (no other descendants)
Surviving spouse alone ½
 they inherit only in default of surviving legitimate
Legitimate child & surviving spouse LC= ½
spouse and illegitimate children and their descendants.
SS= ¼
Note: “Legitime” is part of a testator’s property which cannot be disposed of Legitimate children & surviving spouse LC= ½
because the law has reserved it for certain heirs. SS= 1 LC
Illegitimate children alone ½
Absence of Compulsory Heirs Illegitimate children & surviving spouse IC= 1/3
o relatives up to the 5th degree of consanguinity SS=1/3
o If there were no relatives to receive the estate, the government Legitimate children, illegitimate children & surviving LC= ½
shall inherit the whole estate spouse IC= ½ LC
o The decedent may name other persons to inherit the free portion of SS= 1 LC
the net distributable estate through a will. Legitimate children, natural children & illegitimate LC= ½
children NC= ½ LC
Voluntary Heirs IC= ½ LC
 those instituted by the testator in his will to succeed to the inheritance Parents or ascendants alone ½
of the portion thereof of which the testator can freely dispose Ascendants & surviving spouse A= ½
SS= ¼
Order of Intestate Succession
Ascendants, surviving spouse & illegitimate children A= ½
1. Legitimate children or descendants
SS=1/8
2. Legitimate parents or ascendants
IC= ¼
3. Illegitimate children or descendants
4. Surviving spouse
5. Brothers and sisters, nephews and nieces Note:
6. Other collateral relatives within the 5 th degree When the marriage is conceived for purely financial gain motive, surviving
7. State spouse shall receive 1/3 when the testator died within 3 months from date
of marriage. This is applicable only if the decedent was in danger of death at
Testamentary Succession the time of marriage due to illness or injury existing.
 results from the designation of an heir, made in a will and executed in
the form prescribed by law.
Intestate Distribution of Net Estate

SUCCESSORS LEGITIME
Legitimate children and descendants Entire estate shared equally
Legitimate children and parents All to legitimate children
Legitimate children and siblings All to legitimate children
Legitimate children and surviving spouse Spouse = share of one child
Legitimate children and illegitimate IC= ½ LC
children
Illegitimate children alone Entire estate
Illegitimate children and legal parents IC= ½
LP= ½
Illegitimate children and surviving spouse IC= ½
SS= ½
Parents and surviving spouse P= ½
SS= ½
Parents, illegitimate children and surviving P= ½
spouse IC= ¼
SS= ¼
Parents and siblings Entire estate to parents
Surviving spouse alone Entire estate
Surviving spouse and siblings SS= ½
S= ½
Surviving relative is beyond 5th degree The State is the heir
GROSS ESTATE AND PROPERTY RELATIONS Revocable Transfer
 Transfer of property with retention or reservation of rights over the
Properties included in the Gross Estate of the Decedent property by the donor (decedent) while he still lives.
o By gift where the donor has reserved the power to alter, amend,
1. Properties owned at the time of death
and revoke donation.
1) Real property
o The donor retains the option to relinquish such power in
 land, building or other permanent structure attached to the
land contemplation of death
2) Tangible personal property o Conditional transfers where attached condition are not completed
 vehicles, jewelry, clothing, equipment, artwork by the donee prior to the donor’s death.
3) Intangible personal property Transfers for Insufficient Consideration
 cash, bank deposits, interests and rights, receivables, insurance,
 sold or disposed for less than its prevailing market value.
goodwill, franchise, patents, trademarks, equity and debt
securities Proceeds of Life Insurance with Revocable Beneficiary
o Exclude from gross estate if beneficiary is irrevocable
2. Interest in property owned or possessed by the decedent at the
o Include in gross estate if beneficiary is
time of his death
a. Revocable, or
 Accrued rent or interest income
b. The decedent’s estate, his administrator or his executor
 Accrued profit in business or partnership
 Dividends declared before his death but received after death Estate Tax- Exempt Proceeds of Life Insurance
 Usufructuary rights  A third person is designated as irrevocable beneficiary
 The proceeds or benefits are from SSS and GSIS
3. Taxable transfers
 The proceeds are from a group of insurance taken by the employer.
 Properties transferred gratuitously during lifetime, but in
substance, transferred upon death. GROSS ESTATE BASED ON CITIZENSHIP AND RESIDENCE
 Transfer in contemplation of death
 Revocable transfers Tangible personal Intangible
Real Property
 Transfer for insufficient consideration property personal property
 Property passing under the general power of appointment within outside within outside within outside
 Proceeds of life insurance policy payable to a revocable Citizen      
beneficiary Resident
     
Alien
Transfer in Contemplation of Death
NRA
 Properties not physically available in the estate at the time of death
without   
because the decedent transferred them during his lifetime in
reciprocity
anticipation of death.
NRA with
o Where donation was made concurrently with the execution of a will  
reciprocity
o Due to the decedent’s age and/or decedent’s known serious illness
o Where the time between the making of a gift and the death of the
donor was relatively close.
Valuation of Gross Estate
o Gross estate of the decedent shall be appraised or valued at the
time of death
o Fair Market Value
o Shall not be diminished by:
1. Encumbrances or mortgage loans attached to the property
2. Portion of claims that are worthless like bad debts
3. Taxes and other permissible deductions
4. Share of surviving spouse in the conjugal or communal property
5. Any subsequent contingency affecting the estate
Real Property Valuation
o Whichever is higher between
a. Current Fair Market Value (Provincial / City Assessors)
b. Fair Market Value (zonal value) determined by BIR
Commissioner
Personal Property Valuation
o Current market price for recently or newly acquired personal
properties
o Second-hand market price for used properties
o Grossed-up loan value for loaned or pawned personal properties
o Fair value plus accrued interest for interest bearing receivables and
bank deposits
o Discounted value for non-interest bearing notes
o Face value for Philippine peso currency
o Converted Philippine pesos value for foreign currencies
Stocks, Bonds, and Other Securities
o If listed in the local stock exchange
a. Closing price on the date of death or
b. Trading price at the date nearest to the date of death
o If not listed in the local stock exchange, the fair market value of
stock not listed and traded in the local stock exchange is
determined by using the Adjusted Asset Method
Exclusive Properties of the Decedent
1. Unmarried decedent
 it is presumed that all of his or her properties are exclusive
properties
2. Married decedent
 their exclusive properties would depend on their property relations
whether under the regime of
1. Absolute Community Property
2. Conjugal Partnership of Gains
3. Complete Separation of Property
Property Relationship Between Spouses
1. By marriage settlement executed before marriage;
2. The regime of absolute community (for marriage on August 3 and
onwards);
3. Conjugal partnership of gains for marriage prior to August 3, 1988
Absolute Community of Properties
 Properties owned before the marriage and properties acquired during
marriage by both husband and wife whose marriage was solemnized on
or after August 3, 1988.
1. Exclusive property of husband
 Property acquired during the marriage by gratuitous title
 Fruits and income of exclusive properties
 Properties for personal or exclusive use of the husband except
jewelry
 Property acquired before marriage by the husband who has
legitimate descendants by former marriage
 Properties acquired by purchase with exclusive money or
exclusive property
2. Exclusive property of wife
 Property acquired during the marriage by gratuitous title
 Fruits and income of exclusive properties
 Properties for personal or exclusive use of the wife except
jewelry
 Property acquired before marriage by the husband who has a
legitimate descendants by former marriage
  Properties acquired by purchase with exclusive money or Community Properties
exclusive property 1. All properties owned by the spouses at the time of the marriage
(except #4)
Conjugal Property 2. All properties acquired thereafter
 Property which is acquired by both husband and wife during the 3. Fruits and income of community properties
marriage solemnized before August 3, 1988.
 Properties acquired by onerous title using the common funds Similarities of Conjugal and Absolute Community
 Propertied obtained from the labor or work of spouses CONJUGAL ABSOLUTE
PROPERTY
 Properties acquired by chance such as winnings from gambling or PARTNERSHIP COMMUNITY
betting Property inherited or received
Exclusive Property Exclusive property
 Fruits and income from the conjugal properties as donation during marriage
 Fruits and income of the exclusive properties of each spouse. Property acquired during
marriage (other than Conjugal property Community property
inheritance or donation)
Exclusive Property
Property acquired from labor,
 Property owned solely by each spouse and acquired by gratuitous title
industry work or profession of Conjugal property Community property
and other acquisition using exclusive money of the husband and/or
the spouses
wife.
Fruits or income due or
derived during the marriage
Conjugal Partnership of Gains Conjugal property Community property
coming from common
1. Exclusive property of husband
property
 Property owned before marriage
 Property acquired during the marriage by gratuitous title
(inheritance or donation) Differences between Conjugal Property of Gains and Absolute Community
 Property acquired with the exclusive property of the husband, of Properties
or exchanged for exclusive property of husband
 Properties acquired by right of redemption or by exchange with CONJUGAL ABSOLUTE
other property belonging to the husband PROPERTY COMMUNITY
2. Exclusive property of wife Property before the marriage
Exclusive property Community property
 Property owned before marriage or brought to the marriage
Fruits or income due or
 Property acquired during the marriage by gratuitous title
received during the marriage
(inheritance or donation) Conjugal property Exclusive property
coming from the exclusive
 Property acquired with the exclusive property of the wife, or property
exchanged for exclusive property of wife
 Properties acquired by right of redemption or by exchange with
other property belonging to the wife
DEDUCTIONS FROM GROSS ESTATE
1. Ordinary deductions
 Expenses, losses, indebtedness and taxes which include:
a. funeral expenses - removed
b. judicial expenses - removed
c. claims against estate
 an obligation contracted by the decedent when he was
alive which should have settled or paid during his
lifetime, and not terminated by his death
d. claims against insolvent person
 receivable of the decedent on persons who are declared
by competent persons or authorities as insolvent or
whose liabilities are more than his assets
e. unpaid mortgages
 amount owed by the decedent supported with
collateral and still outstanding at the time of death
f. unpaid taxes
 taxes that the decedent was subjected while still alive
but remained unpaid up to the time of his/her death
g. losses
 The allowable amount of losses represents those
casualty losses incurred during the settlement of the
estate.
 Losses should be incurred from the time of death of the
decedent up to settlement of the estate.
Requisites for Losses
1. The loss should arise from fire, storm, theft, robbery,
shipwreck or other form of calamities
2. The amount of loss is not compensated with insurance
3. The loss was not claimed as deduction against income in the
income tax return.
4. The loss should occur during settlement of the estate
5. The loss should be incurred not after the last day of
payment of estate tax.
 Transfers for public use
 Value of the property that was transferred by the decedent
to the Government of the Philippines as stated in his/her
last will and testament
 Vanishing deduction
 The amount applies on the property included in the gross
estate of the decedent which was acquired either through
donation of inheritance.
 The said property has been taxed previously.
2. Special deductions
 Family home
 Dwelling house where the decedent resides with
his/her spouse, children, parents, brothers and
sisters and all those who are dependent on him/her
for support.
 Includes the house and lot where the house is
located.
 The deductible amount for family home shall be the
fair market value at the time of death but should
not exceed P10,000,000; subject to the following
conditions
o If the decedent is single or head of the
family, the whole amount of family home
(house and lot) is deductible
o If the decedent is married, the FMV is
divided by two, the deductible amount
should not exceed P10,000,000
 Standard deduction – from P1M to P5M
o The law allows a standard deduction of P5,000,000
from P1,000,000
o No qualification, condition or requisite.
o (applicable for resident citizens, non-resident
citizens and resident alien)
o Non-resident alien up to P500,000
 Medical expenses – removed
 Covers the hospitalization of the decedent prior to the
time of death, which include payments for hospital
room, laboratory examination fee, doctor’s professional
fees, cost of medicine and other related expenses
 Allowable amount is P500,000
3. Share of surviving spouse
  Deducted from the conjugal or community property, net of
ordinary deductions
ESTATE LAW COMPARATIVES
OLD TAX CODE
Progressive at 5% to 20%
Standard deduction of resident/citizen
estate of Php 1M and none for non-
resident
Family home Php 1 Million
Expenses, losses, indebtedness, taxes,
actual funeral expenses or an amount
equal to 5% of the gross estate,
whichever is lower, but in no case to
exceed P200,000 + judicial expenses of
the testamentary or intestate
proceedings
Medical expenses incurred within one
year before death not exceeding
P500,000
Notice of death to be filed within two (2) None
months
CPA certification needed at P2 Million
Bank shall not allow any withdrawal
from the decedent’s deposit account,
unless the CIR has certified that the
taxes imposed have been paid.
Provided, that the administrator or any 1
of the heirs may withdraw an amount
not exceeding P20,000 with the said
certification
Estate tax return filing deadline – within 1 year
6 months from the date of death
No counterpart provisions
TRAIN LAW AMENDMENTS
Flat Rate of 6%
Php 5M/Php 500,000 for non-
resident
Php 10 Million
None
None
Php 5 million
Bank shall allow any
withdrawal from the said
deposit account, subject to a
final withholding tax of 6%
Payment by installment in two
(2) years in case of insufficient
cash without civil penalty &
interest
Deductions from Gross Estate of a Citizen or Resident Alien of the
Philippines
1. Standard deduction
2. Claims against the estate
3. Claims against insolvent persons
4. Unpaid mortgages, taxes and casualty losses
5. Property previously taxed (vanishing deduction)
6. Transfers for public use
7. Family Home
8. Amount received by heirs under Republic Act No.4917
9. Net Share of the surviving spouse in the conjugal partnership or
community property
Deductions from Gross Estate of a Non-Resident Alien of the Philippines
1. Standard deduction – P500,000
2. Proportion of the total losses and indebtedness
1) claims against the estate
2) claims against insolvent persons
3) unpaid mortgages, taxes and casualty losses
3. Property previously taxed
4. Transfers for public use
5. Net share of the surviving spouse in the conjugal property or
community property
Nonresident Alien Decedent
Allowable deductions:
1. Prorated ELITE
2. Transfers for public use
3. Vanishing deduction
4. Share of the surviving spouse