Buying property under a corporation in the Philippines has become an increasingly popular approach among investment strategies, offering financial advantages, flexibility, and strategic benefits. This method showcases innovative business strategies to grow asset portfolios, manage risks, and enhance operational efficiencies. In this article, we will navigate the process of buying property under a corporation in the Philippines.
Can a corporation buy property in the Philippines?
Foreigners are granted the privilege to have full ownership of real estate when buying property under a corporation in the Philippines. However, the law does not permit foreign ownership of private land. Below are the different types of corporations that can buy property in the Philippines.
Domestic corporations
Domestic corporations can legally own land in the Philippines, subject to the 40% foreign equity limit established by the Foreign Investments Act 1991. Buying property in the Philippines for foreigners includes compliance checks, property selection, due diligence, document preparation, and payment of taxes.
Foreign corporations
Foreign corporations are generally restricted from direct land ownership when buying property under a corporation in the Philippines. They can own condominium units or engage in long-term leases. Buying property in the Philippines for foreigners includes securing necessary permits, opting for leases or condominium units, and ensuring legal compliance.
Special economic zone enterprises
Corporations in Special Economic Zones can own land, strictly for business operations, as per the rules of the Philippine Economic Zone Authority (PEZA). The property acquisition process involves verifying PEZA registration and compliance, and following through with the acquisition processes.
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Advantages of property ownership through a corporation
In recent years, buying property under a corporation in the Philippines has become increasingly popular among foreign investors. This alternative investment method often provides several financial, legal, and strategic merits that individual ownership might not typically offer. Below are some advantages of property ownership through a corporation:
1. Limited liability
Real estate corporations are seen as distinct entities with separate personalities from directors, officers, and stockholders. This separate corporate identity protects personally owned assets from any liability the corporation might incur. In this structure, unless fraudulent activity is involved, the legal system won’t “pierce the veil of corporate fiction” (G.R. No. 182729). This refers to a legal action where a court disregards the separation between a corporation and its shareholders, treating them as one entity. It ensures that personal finances and property are protected from risks.
2. Easy transfer by subscription of shares
Since the property belongs to the corporation, an individual can acquire an interest in it by buying shares of stocks. Buying property under a corporation in the Philippines eliminates the time-consuming property registration process through the Registry of Deeds. The only requirement is a record of the stock transfer in the corporation’s books, enabling a smoother and simpler transaction.
3. Taxes only on declared dividends
According to the provisions in the Tax Code on Improperly Accumulated Earnings Tax (IAET), income taxes are only due on declared dividends. This enables shareholders to control their income better each year. The real estate corporation may or may not declare dividends based on the discretion of the Board of Directors, meaning taxes are only payable if dividends are declared.
4. Control by the Board of Directors
While many individuals can acquire an indirect interest in buying property under a corporation in the Philippines through stock subscription, control over the property remains with those on the Board of Directors. According to Section 23 of the Corporation Code, the Board has complete control over the corporation, including property management. This allows for focused decision-making and management of the property while keeping ownership diversified.
Your guide to buying property in the Philippines
Disadvantages of property ownership through a corporation
When it comes to buying property under a corporation in the Philippines, choosing the most beneficial structure for your unique needs is crucial. Opting for real estate corporation ownership has advantages, but addressing the potential disadvantages is important to make an informed decision. Below are the disadvantages of property ownership through a corporation:
1. Higher corporate income tax
A corporate income tax rate of 30% of gross income is applied flat to real estate corporations. In contrast, people are subject to graduated tax rates under this tax rule. Thus, in an environment of low corporate property profits, individual stockholders pay taxes at a reduced rate. Although individuals may pay higher tax rates than corporations when such income threshold is exceeded, this could be advantageous if the corporate income exceeds ₱ 2 million ($36,000) annually. Individuals whose net income exceeds the threshold may be subject to taxes at 32% to 35% under the TRAIN Law (R.A. No. 10963).
2. Applicability of Minimum Corporate Income Tax (MCIT)
Real estate corporations become subject to the Minimum Corporate Income Tax (MCIT) at 2% of the gross income four years into operation, regardless of actual earnings, as mandated under Section 27(e) of the Tax Code. This stipulation does not hold for individual owners whose income will be taxed strictly based on their net income.
3. Higher tax rates on share transfers
Since the corporation owns the property, an individual interested in buying property under a corporation in the Philippines can do so by subscribing to the corporation’s stock shares. Nonetheless, following the TRAIN Law, capital gains from share transfers are taxed at a fixed rate of 15% — higher than the 6% capital gains tax on the transfer of ownership over the property incurred by individuals.
4. Double taxation
Corporate profits are subjected to corporate income taxation, of which the government claims a significant portion. Furthermore, when dividends are taken from the real estate corporation, shareholders must cover their income tax, thereby incurring double taxation on the corporation’s earnings.
5. Additional costs
Buying property under a corporation in the Philippines involves additional costs accruing from processing requirements and fee payments. This factor is often overlooked during business formation, leading to unforeseen expenses.
Get help with buying property under a corporation in the Philippines
Are you looking to buy property through a corporation, or starting a business? Our expert legal team is here to guide you through the process. With in-depth knowledge of the local market, we handle all legal aspects, including real estate matters. Reach out to us at [email protected] or fill in your details below to learn more.
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Frequently Asked Questions (FAQs):
Can corporations own land in the Philippines?
Yes, corporations can own land in the Philippines, provided they are domestic corporations with no more than 40% foreign equity.
Can a company buy a house in the Philippines?
Yes, a company can buy a house in the Philippines; however, it cannot own the land on which it is built.
How much tax to pay when buying property under a corporation in the Philippines?
When buying property under a corporation in the Philippines, taxes depend on the asset’s classification. A 6% capital gains tax and a 1.5% documentary stamp tax apply for capital assets. A 1.5% to 6% creditable withholding tax, a 12% value-added tax, and a 1.5% documentary stamp tax are applicable for ordinary assets.
What are the disadvantages of the Barangay Micro Business Enterprises (BMBE) Law for foreigners in the Philippines?
The BMBE disadvantage for foreigners in the Philippines is the potential limitation on ownership and operation of BMBEs due to the specific eligibility requirements that focus on assets and activities primarily available to Filipino citizens.
