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The Philippines, like many of its Asian neighbours, is host to a growing expatriate community. Most work in international organizations, development partners, multinational companies, and local firms. Many have also set up businesses here and established homes because of family, retirement, or the sheer pleasure of the Philippines’ world-class beachfronts. Others, while not taking up residence in the Philippines, have been investing in local enterprises, directly or through the stock exchange.
These ties to the Philippines have tax and other legal implications under Philippine laws – notably, in the estate planning context, because the Philippines effectively imposes an estate tax on the net worldwide assets of resident alien decedents. Moreover, it is a civil law jurisdiction where trusts have limited use and application and may create choice-of-law or other private international law issues.
The estate tax
Rate of tax
The net Philippine estate of a foreign individual, whether or not a resident of the Philippines at the time of death, is subject to an estate tax at a flat rate of 6%. This is one of the more welcome amendments introduced by a recent legislation, the Tax Reform for Acceleration and Inclusion1, which took effect in 2018. For decades, the rates were graduated with the top rate at 20%.
The net estate is essentially the remainder when the value of the gross estate is reduced by the sum of allowable deductions and the conjugal share of a surviving spouse, if any.
Gross estate
The gross estate consists of “all property, real or personal, tangible or intangible, wherever situated” of the decedent at time of death2. Property transferred revocably, by trust or otherwise, in contemplation of death forms part of the gross estate3. So does property passing under a general power of appointment4. These gross estate inclusions are similar to counterparts in U.S. law. In fact, the Philippine Supreme Court has remarked that the estate tax laws are copied from U.S. law, and interpretations adopted by U.S. courts have “some persuasive effect” on the interpretation in Philippine estate tax law5.
In the case of a non-resident alien decedent, however, “only that part of the entire gross estate which is situated in the Philippines” is considered in computing the gross estate6. In comparison, in the case of a resident alien decedent, the entirety of the worldwide assets forms the gross estate for Philippine estate tax purposes.
The following intangible properties are expressly given Philippine situs: (a) a franchise that is exercised in the Philippines; (b) shares, obligations, or bonds issued by a Philippine company; (c) shares, obligations, or bonds issued by a foreign corporation with 85% of its business located in the Philippines; and (d) shares, obligations, or bonds issued by any foreign corporation if any of such issuances have otherwise acquired a business situs in the Philippines7. These intangibles can be excluded from the gross estate based on concepts of reciprocity where the country of citizenship and residence of the alien decedent does not impose a similar tax on, or granted an exemption from, such similar tax to Philippine citizen decedents who are not residents of that country8.
The assets comprising the gross estate are generally valued at fair market value, which is the “higher of the fair market value as determined by the Commissioner [of Internal Revenue], or the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors.”9 For purposes of the estate tax, the Commissioner-determined value is generally the “zonal value” established by the Bureau of Internal Revenue under Sec. 6(E) of the Tax Code. This is usually higher than that of the Assessor’s.
Allowable deductions
For a resident alien decedent, the following items are deductible from the gross estate10:
- A standard deduction equivalent to PHP 5,000,00011.
- Claims against the estate, provided the debt instrument was duly notarized.
- Claims of the decedent against insolvent persons and unpaid mortgages, provided these are bona fide and the amount is included in gross estate.
- Casualty losses not compensated for by insurance.
- Property previously taxed or “vanishing deductions.”
- Transfers to the government of the Philippines or any of its political subdivisions exclusively for public use.
- A family home deduction of up to PHP 10,000,000 of fair market value.
For a non-resident alien decedent, only the (a) standard deduction, (b) vanishing deductions, (c) transfers for public use, and (d) a proportionate amount of unpaid mortgages, indebtedness, and casualty losses are allowable12.
Who is a resident?
Clearly, it is important to determine whether an alien decedent was a resident of the Philippines at the time of death. Neither the Tax Code nor its implementing regulations define a “resident alien” for estate tax purposes. In practice, however, the definition for income tax purposes is applied, i.e., “an individual whose residence is within the Philippines and who is not a citizen thereof.”13 A “non-resident alien,” on the other hand, is “an individual whose residence is not within the Philippines and who is not a citizen thereof.”14 In a recent case, the Philippine Supreme Court emphasized that residence refers to actual or physical residence and not “legal residence” or domicile.15
Given these rather expansive definitions a foreign individual working in the Philippines under an Alien Employment Permit is a resident. A retiree residing in the Philippines under a Special Resident Retiree Visa16 is a “resident;” so is an investor holding a Special Investor’s Resident Visa under the provisions of the Omnibus Investments Code of 198717. However, a non-resident alien not holding any of such visas who stays in the Philippines for an aggregate period of more than 180 days during any calendar year is deemed a “non-resident alien doing business in the Philippines.”18
Conjugal share
Should there be a surviving spouse, one-half of the difference between the gross estate and the allowable deductions is attributed to the spouse and, hence, not subject to the estate tax19. This aligns with Philippine law on property relations between spouses, where the default regime is one of absolute community20 should the spouses not have entered into “marriage settlements” before the marriage. It is submitted that the exemption of the conjugal share from estate tax would be applicable only if the property regime of the spouses is absolute community or conjugal partnership of gains, which produces the same half-and-half effect at dissolution of net conjugal assets. Hence, if, under the national law of the alien decedent, the spousal property relations are not any of these two, there may be no conjugal share to reckon with. In an appropriate case, however, as when there is no proof of contrary applicable foreign law, it will be deemed that the foreign law is the same as Philippine law.21
Filing and payment
An estate tax return must be filed within one year of the date of death, and estate tax must be paid along with the filing.22
A credit is allowed for a proportionate amount of estate tax paid to any foreign country.23 Currently, this is the only statutory authority for handling multijurisdictional interests, as the Philippines does not have any estate tax treaties in place.
Effect of non-payment of tax
Transfers of the Philippine property cannot be registered unless the tax is paid; thereby, heirs and beneficiaries are effectively prevented from acquiring certificates of title in cases of non-payment.
Further, Registers of Deeds are prohibited from registering any documents transferring real property or rights, or chattel mortgage, without a certification from the Commissioner of Internal Revenue that the estate tax has been paid.24 The same prohibition applies to the concerned corporate officers, with respect to shares of stock, bond, or indebtedness issued by a corporation.25
On the other hand, a lawyer who intervenes in the preparation or acknowledgment of any document regarding the partition or disposal of inheritance is required to furnish the Bureau of Internal Revenue with copies of such documents and “any information whatsoever which may facilitate the collection” of the estate tax.26 Should there be judicial estate proceedings, the judge shall not authorize the executor or administrator to deliver a distributive share to any party-in-interest (as defined below) without certification from the Commissioner of Internal Revenue.27
Succession to the estate
While the reach of Philippine estate tax may be extraterritorial, the Philippines adheres to the nationality principle with respect to both intestate and testamentary succession. The order of succession, the amount of successional rights, and the intrinsic validity of testamentary provisions are regulated by the national law of the person whose succession is under consideration, whatever the nature of the property and regardless of the country where it is located.28
Validity of wills
In the case of testamentary succession, a will executed abroad by a non-resident may be given effect in the Philippines if it was made in accordance with the laws of the person’s country of residence or citizenship or in accordance with the Philippine Civil Code.29 This encapsulates the principle of lex loci celebraciones to which the Philippines adheres, whereby the forms and solemnities of wills are governed by the laws of the country where they are executed that are in force at that time. Consequently, a will executed in the Philippines by a foreigner may be given effect here.
Will format
Philippine law provides for two types of wills: the “holographic will” and the “attested will.
A holographic will is written, dated, and signed entirely by the hand of the testator. This form does not require a witness, and it may be made executed in the Philippines or in another jurisdiction.30 It is subject to no other formal requirement.
An attested will, is witnessed by at least three people and subscribed by the testator and the witnesses in the presence of each other before a notary public.31 It is much more formal and elaborate than a holographic will and requires very specific acts:
- It must be signed on the left margin of every page except the last and at the end by the testator (or by another person in the testator’s presence and by express direction) in the presence of the instrumental witnesses. In this respect, the Philippine Supreme Court has held that signing by the testator in the presence of the witnesses is essential to the due execution of the will. The execution of a will is supposed to be one act. The will cannot be certified as valid if the testator and the witnesses sign on different days or occasions and in different combinations.32
- It must be attested by at least three credible witnesses and subscribed (signed) by them on the left margin of every page and at the bottom of the attestation clause, in the presence of the testator and of each other. In a long line of cases, the Philippine Supreme Court has defined “attestation” as the act of witnessing the testator's execution of the will in order to see and take note mentally the requirements for the execution of a will are met and that the signature of the testator exists as a fact. “Subscription,” on the other hand, is the signing of the witnesses' names upon the same paper for the purpose of authenticating and identifying the paper as the same will that was executed by the testator.33 The witnesses must also sign below the attestation clause; it is not enough that they signed on the left hand margins of the will.34
Any person may be a witness to a will if of sound mind; at least 18 years of age; not blind, deaf, or mute; able to read and write; domiciled in the Philippines; and not been convicted of falsification of a document, perjury, or false testimony.35 If any legacy or devise is made in the will in favor of a witness, or a witness’s spouse, parent, or child, the devise or legacy will be void. 36
- Each and every page of the will must be indexed alphabetically with a letter on the upper part of each page. The purpose of this requirement is to safeguard against possible interpolation or omission of one or more pages and to prevent any increase or decrease in the number of pages.37
- The will must contain an attestation clause. The attestation clause is the part of the will where the attesting witnesses certify that the instrument has been executed before them. Once signed, it affirms compliance with the essential formalities required by law. It therefore provides a strong legal guaranty for the due execution of a will and insures the authenticity. Conversely, the complete absence of an attestation clause results in the invalidity of the will.38
The attestation clause should state (a) the number of the pages of the will; (b) that the testator signed, or expressly caused another to sign, the will and every page thereof in the presence of the attesting witnesses; (c) that the attesting witnesses witnessed the signing by the testator of the will and all its pages; and (d) that the witnesses also signed the will and every page thereof in the presence of the testator and of one another.
- The will must be acknowledged before a notary public by the testator and the witnesses. Acknowledgment is an act where a person (a) appears before the notary public and presents an integrally complete instrument or document; (b) is attested to be personally known to the notary public or identified by the notary public through competent evidence of identity; (c) represents to the notary public that the signature on the instrument or document was voluntarily affixed by that person for the purposes stated in the instrument or document; and (d) declares that the execution of the instrument or document was a free and voluntary act and deed.39
In the Philippines, notaries public are commissioned to perform notarial acts by a Court, and they may perform such acts only within the territorial jurisdiction of the commissioning court.40
Probate of a will in the Philippines
No will is competent to pass title to real or personal property within an estate unless the will is proved and allowed in the proper court. Subject to the right of appeal, judicial allowance of the will is conclusive as to its due execution.41 The proper court is the regional trial court (R.T.C.) of the province in which the testator resided at the time of death or, “if he [or she] was an inhabitant of a foreign country,” the R.T.C. of any province in which the person had an estate.42 To reiterate, “residence” refers to actual or physical residence and not “legal residence” or domicile.43
Any executor, devisee, or legatee named in the will, or any other interested party, such as an heir, may petition for probate.44 The testator may petition for probate of his or her will during a lifetime.45 The court shall fix a time and place for proving the will when all concerned may appear to contest the allowance thereof and shall publish a weekly notice of such time and place, for three successive weeks prior to the appointed time, in a newspaper of general circulation in the province.46 Without publication of such a notice, the proceedings are void and should be annulled.47
The court shall also cause copies of the notice of hearing to be sent to the designated or other known heirs, legatees, and devisees who are residents of the Philippines.48
Generally, only parties-in-interest are allowed to intervene in the probate proceedings, and where an attested will is contested, the subscribing witnesses and the notary public must personally attend court or submit depositions if they reside outside of the province where the will is being probated.49
In the case of a holographic will, it is necessary that at least one witness who knows the handwriting and signature of the testator explicitly declares that the will and the signature are in the handwriting of the testator. In the absence of any such competent witness, and if the court deems it necessary, expert testimony may be utilized.50
Where the testator petitions for probate of the holographic will, and no contest is filed, the fact that the testator affirms that the holographic will and the signature are in his or her own handwriting, shall be sufficient evidence that the will is genuine and duly executed. If the holographic will is contested, the contestant is burdened with disproving that the will is genuine and duly executed.51
Probate of a foreign will
A will that has been duly probated outside the Philippines according to the laws of the country where probated may likewise be given effect in the Philippines, provided it is also probated in the Philippines in the same manner as described above.52 The petition for probate may be filed by the executor or another interested party, in the court having jurisdiction. Duly authenticated copies of the will and of the order or decree evidencing its allowance must be attached to the petition.53
Appointment of executor
Upon the will having been probated, the court issues testamentary letters to the executor named in the will, if (i) the executor is competent, (ii) accepts the trust, and (iii) files a bond.56 In any case, the executor must be a resident of the Philippines.55
An executor is allowed to recover the necessary expenses for the care, management, and settlement of the estate and to receive a fee for such services, in an amount that may be provided in the will.56 When the executor is an attorney, the fees for legal services rendered must be stated separately.57
Concluding remarks
As we all know, we are all just pilgrims on this earth. Death is inevitable and we know not when it comes, nor where and how. It behooves us then to meticulously prepare and put our material affairs and interests in order. As tax advisers to an international, globe-trotting clientele, it is in our best interest and theirs to acquire a working knowledge of the broad strokes of relevant and applicable laws of jurisdictions where they may sojourn or invest.
1 Rep. Act No. 10963, popularly known as the TRAIN Law.
2 Sec. 85, The National Internal Revenue Code of the Philippines, as amended by Rep. Act No. 10963; hereafter, the “Tax Code.”
3 Sec. 85(C), Tax Code.
4 Sec. 85(D), ibid.
5 Commissioner v. Court of Appeals, 328 SCRA 666 (2000).
6 Ibid; see also Sec. 104.
7 Sec. 104, Tax Code.
8 Ibid
9 Sec. 88, Tax Code.
10 Sec. 85(A), ibid.
11 Current exchange rate to the US dollar is about PHP 96,000.00.
12 Sec. 85(B), Tax Code.
13 Sec. 22(F), ibid.
14 Sec. 22(G), ibid.
15 Garcia v. Belen, G.R. No. 189121, 31 July 2013.
16 See Letter of Instruction No. 1470, 4 July 1985.
17 Executive Order No. 226, as amended.
18 Sec. 25 (A)(1), Tax Code.
19 Sec. 86(C), ibid.
20 See Arts. 74, 80, and 88, Civil Code.
21 (conflicts provision).
22 Secs. 90(B) and 91(A), Tax Code.
23 Sec. 86(D), ibid.
24 Sec. 95, ibid.
25 Sec. 97, ibid.
26 Sec. 95, ibid.
27 Sec. 94, ibid.
28 Art. 16, Civil Code of the Philippines.
29 Art. 816, ibid.
30 Art. 810, ibid.
31 Art. 805, Civil Code of the Philippines.
32 In re Estate of Nepomuceno, 28 Phil. 638; Caneda v. Court of Appeals, G.R. No. 103554 (28 May 1993).
33 See Caneda, ibid.
34 Azuela v. Carpio-Morales, G.R. No. 122880 (12 April 2006).
35 Arts. 820 and 821, Civil Code of the Philippines.
36 Art. 823, ibid.
37 Caneda, ibid.
38 Ibid.
39 2004 Rules on Notarial Practice, A.M. No. 02-8-13-SC, as amended.
40 2004 Rules on Notarial Practice, ibid.
41 Section 1, Rule 75, Rules of Court.
42 Sec. 1, Rule 73, ibid.
43 Garcia v. Belen, G.R. No. 189121, 31 July 2013.
44 Sec. 1, Rule 76, Rules of Court.
45 Ibid.
46 Sec. 3, Rule 76, Rules of Court.
47 De Guzman v. Angeles, 162 SCRA 347.
48 Sec. 4, Rule 76, Rules of Court.
49 Sec. 11, Rule 76, Rules of Court.
50 Sec. 5, ibid.
51 Sec. 12, ibid.
52 Sec. 1, Rule 77, Rules of Court.
53 Sec. 2, ibid.
54 Sec. 4, Rule 78, Rules of Court
55 Sec. 1, ibid.
56 Sec. 7, Rule 78, Rules of Court. The rules provide for a schedule of fees which, however, generally yields to agreement.
57 Ibid.