Are income from Mutual Funds and UITFs taxable?

Question: Do I need to pay taxes on my earnings once I redeem my Unit Investment Trust Funds (UITFs) or shares of mutual funds?

Answer: No, as long as proper taxes have already been collected prior to the redemption of your UITF participation. That’s according to Senen Quizon, a tax manager at Punongbayan & Araullo, who wrote the article “Taxation of Unit Investment Trust Funds (UITFs)” published in Business World Philippines on August 2006.

Quizon explains that although no specific tax provisions deal with UITFs, the tax treatment for UITFs should be no different from Common Trust Funds (CTFs) because they are considered similar products.

He continues in the article:

“… in Ruling No. 003-05, the BIR makes a distinction between a revocable or irrevocable trust which receives differential tax treatment.

According to BIR Ruling No. 003-05, an irrevocable trust is treated as a separate and distinct taxable entity from the person/s or parties that established the trust. Consequently, an irrevocable trust is subject to any applicable taxes on its investment income as well as its investors, if and when the trust income is subsequently distributed to them.

In contrast, a revocable trust, for which a different set of rules apply, is only a pass-through entity, and is not, for tax purposes, considered separate from the owner-trustor. In a revocable trust, all the income of the trust would be taxed to the trustor-grantor and is to be included in its taxable income. However, in case the income from investments of the revocable trust has already been subjected to final tax, the BIR held that such income should no longer be subject to tax when it is distributed to the investors. For example, the net gain (i.e., net of 1/2 of 1% tax and DST) derived by a revocable trust from its sale of shares of stock in the stock market should already be tax free when received by the trustor-beneficiaries since such income has been subjected to final tax.

All interest income and other monetary benefit from trust funds are imposed a 20% final withholding tax under Sections 24(B)(1) and 25(A)(2) of the Tax Code. Whether UITFs are subject to this tax depends on whether they are considered revocable or irrevocable trusts.

Quizon opines that UITFs are considered as revocable trusts since “the beneficial ownership in a UITF is maintained with the trustor-beneficiary, and considering that in case of death of the trustor, the UITF participation forms part of the trustor’s estate subject to estate tax.”

As such, UITFs should be treated as one and the same taxable entity as that of the trustor. Following then the BIR Ruling No. 003-05, UITFs upon redemption are no longer subject to the 20% withholding tax if applicable taxes have already been paid on the UITF investments.

Good news for UITF investors. That’s one tax burden less that they need to worry about.

Discuss this in the Mutual Funds, UITFs, and other investment products board in the PMT Forum.

3 thoughts on “Are income from Mutual Funds and UITFs taxable?”

  1. Why don’t Punongbayan and company just write to the Bir and ask them that question of the 25% withholding tax in particular on uitf redemption of gain from the fund?

    Up to the present I am still reading about that imposition from for example the website of Land Bank, see:
    25% of earnings (net of final w/holding tax and trustee fee), but not less than PhP 500.00 [ whatever that is supposed to mean, but I seem to understand that Land Bank will impose that tax}..

    On the other hand, to date I have not read any communication from the Bir on that question.

    What to do?

    Don’t take on the banks and other operators of uitf funds, which mention the 25% withholding tax on the redemption of your gain from the fund.

    Keep to banks and other uitf operators which do not..

    And when these operators silent on the 25% tax exact such a tax on your gain, then tell them that Punongbayan and company say no.

    Tell you what, as there are many uitf operators, one of the questions to ask for choosing the ones to turn over your money to participate in their uitf funds, is to ask them whether they impose the 25% withholding tax, if they inform you yes, then don’t participate in their funds.

    As regards the 25% withholding tax on mutual funds, from my reading it seems to be not binding — that is the general position of mutual fund operators.

    If you are still fearful, then ask them.

    Marius Dejess

  2. Its like you read my mind! You seem to know a lot about this, like you wrote the book in it or something. I think that you could do with some pics to drive the message home a bit, but instead of that, this is wonderful blog. A great read. I will certainly be back.

  3. Bottomline, UITF gains will be deducted tax by the bank, before you even redeem it. Though, no double taxation should be done, as stated above.

    UITF does not qualify for exemption under Sections 24(B)(1) and 25(A)(2) of the Tax Code for long-term deposits and subject to 20% withholding tax of the capital gains. Compared to gains in mutual fund, which are TAX EXEMPT as provided for – under R.A. # 8424 or the Tax Reform Act of 1997.

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