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.

About the Author

PSEi support seen at 6,200 and 6,000 amid weaker Peso

In a not-so-surprising move, the U.S. Federal Reserve (Fed) yesterday raised interest rates by 75 basis points (bps) or 0.75% in a bid to tame rising inflation in the United States. This was the third consecutive 0.75% rate hike by the Fed, which brings the federal funds rate, the central bank’s benchmark interest rate, to ... Read more

Official SWIFT Code of BDO, BPI, Metrobank, Philippine banks

When sending cash remittances or wire transfer to a bank account in the Philippines (such as BDO, BPI, Metrobank, Landbank, DBP, etc.), you’ll surely need the SWIFT Code of the bank. Look no further because you can find all the SWIFT Codes you need in this list! Make sure you’re using the right bank code ... Read more
blank

How to Waive your Credit Card Annual Fee (BDO, BPI, Metrobank, RCBC, Citibank, UnionBank)

Without a doubt, one of the most annoying fees that credit cardholders have to pay is the annual fee. Majority of cardholders are familiar with this fee and majority of us likely pay this grudgingly year after year after year. In the case of my credit card with BPI (Bank of the Philippine Islands), I’m ... Read more
blank

Why Filipinos do not become business owners or entrepreneurs

For a majority of Filipinos, entrepreneurship does not seem to be a typical, expected path. This is not surprising, considering that in school, students are primarily taught to become employees after graduation. Students train for years to become staff workers, reporting to a supervisor, and just waiting to receive their wages or salaries every month. ... Read more
blank

My experience investing in Mutual Funds in the Philippines

I started investing in mutual funds when I was 22 years old. As an Overseas Filipino Worker (OFW) then, I was fortunate to be able to save some money at that young age because of my work abroad. One time while I was on vacation in the Philippines, I saw a large billboard in EDSA ... Read more
blank

Income Tax Tables in the Philippines (2022)

The Philippines’ new tax reform bill, known as TRAIN or Tax Reform for Acceleration and Inclusion, was signed into law on December 19, 2017 and its implementation began on January 1, 2018. What are the new income tax rates under the TRAIN law? How will TRAIN affect income taxes of individuals and corporations? How is the ... Read more
blank

PSE Stocks Performance under each Philippine President (1987-2021)

Did you know that Philippine stocks were able to achieve an astounding growth of 800% in a span of 30 years? From 1987 until 2018, the Philippine Stock Exchange index (PSEi) rose from 1,000 points to a peak of 9,000 points — generating a return of 800% over 30 years. (The PSEi is an index ... Read more
blank

SSL 2022: Salary Increases for Teachers, Nurses, Gov’t Employees

Good news to all government employees! There’s a new round of salary increases beginning January 1, 2022! Millions of employees of the Philippine government — including public school teachers, nurses and staff of government hospitals, and workers in local and national government agencies, etc. — will be getting an automatic salary adjustment this 2022 under ... Read more
blank

PSE Trading Hours in 2022: What time open, when closed?

Before you take the plunge into stock trading and investing, make sure you understand what stocks are and how the Philippine Stock Exchange (PSE) operates. Unlike other investments that are relatively safe, stock trading is risky and loss of money is a possibility. So before you deep dive into the exciting world of stock trading, ... Read more

Price Floor and Price Ceiling of PSE Stocks

Trading bands in the PSE come in two forms: Price Ceiling, or the upper price limit, and Price Floor, or the lower price limit.

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

    Reply
  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.

    Reply
  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.

    Reply

Leave a Comment