CAPITAL GAINS TAX

DESCRIPTION

Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale,
exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other
forms of conditional sale.

INCOME TAX OF CORPORATE TAXPAYERS

● The applicable income tax of a corporation depends on the type of the corporation and the income subject
to tax.

➢ What are the Capital Gains subject to Capital Gains Tax (CGT) ?

1. Sale of Shares of closely held Domestic Corporations.

2. Sale of Real Property in the Philippines.

➢ What are Ordinary Assets? (Under Tax Code of the Philippines)

1. Stock in Trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year.
2. Property used in trade or business subject to depreciation.
3. Real property held by the taxpayer primarily for sale to customers in the ordinary course of trade or
business.
4. Real property used in trade or business of the taxpayer.

➢ What are Capital Assets? (Under Tax Code of the Philippines)

● Capital Assets include all other property held by the taxpayer (whether or not connected with his trade or
business) under Sec. 39(A)(1) of the Code. [Sec. 2(a) of RR No. 7-2003]

➢ Sale of Capital Assets Subject to CGT:

1. Shares of Stocks (15% CG - DC) ; if applicable in Foreign Corporation, Old Rating should be used.
2. Real Properties ( 6% SP or FMV - DC) ; not applicable in Foreign Corporations.

➢ Real Estate Terms:

● Real Property: Defined as per the Civil Code of the Philippines, encompassing land, buildings, and related
assets.
● Real Estate Dealer: Buys and sells properties, acting as a principal, engaging in real estate transactions as a
business.
● Real Estate Developer: Engaged in the business of developing real properties, creating subdivisions,
constructing residential or commercial units for sale or lease.
● Real Estate Lessor: Leases or rents properties to others, making it available for use in exchange for
payment.
● Engaged in Real Estate Business: Encompasses real estate dealers, developers, and lessors actively
involved in real estate transactions.
 ● Not Engaged in Real Estate Business: Individuals or entities not falling under the categories of dealers,
developers, or lessors.

➢ Classification of Real Properties:

● Capital Assets: Include real properties acquired by real estate entities, excluding specific exemptions.
● Ordinary Assets: Encompass properties used in business activities or those not in use for more than two
years.
● Change of Business: Real properties retained but no longer used in the real estate business remain ordinary
assets.
● Involuntary Transfers: Classification remains unaffected, regardless of the circumstances of the sale.

➢ Determining Capital Gains:

● Valuation: Based on selling price, fair market value, or zonal value, selecting the higher of these figures.
● Net Capital Gains: Calculated as the excess of gains from sales or exchanges of capital assets over related
losses.

➢ Shares of Stocks Transactions:

● Determination of Selling Price: Involves various scenarios such as cash sales, partial payment in kind, or
exchanges.
● Fair Market Value: Determined using methods defined by regulations, essential for accurate valuation.
● Gain/Loss Calculation: Difference between amount realized from the sale and the basis or adjusted basis.

➢ Capital Gains Tax Rates (Effective April 11, 2021):

● Real Properties: Subject to a 6% tax rate, applied to the higher value between selling price and fair market
value.
● Shares of Stocks (Unlisted): Individuals and corporations are taxed at a flat rate of 15% for unlisted shares.

➢ Exemptions from Final Capital Gains Tax:

● Exempt Entities: Includes dealers in securities, entities enjoying specific investment incentives, and
government entities.
● Conditional Exemptions: Apply to transactions like primary residence sales under defined conditions,
encouraging home ownership.

What are the applicable tax rates of Capital Gains Tax (CGT) under the National Internal Revenue Code of
1997, as amended by Republic Act No. 10963/ TRAIN Law?

A. For Real Properties – Six percent (6%)

B. For Shares of Stocks Not Traded in the Stock Exchange:

NOTE: The option of the taxpayers to be taxed either at 6% CGT or basic tax is not applicable to corporate
taxpayers. All of taxpayers is is subject to CGT of Shares of Stocks( Domestic Corporations only)

REFERENCE: Capital Gains Tax - Bureau of Internal Revenue (bir.gov.ph)