By Euney Marie Mata-Perez on March 25, 2021.

On Feb.y 16, 2021, President Rodrigo Duterte signed into law Republic Act (RA) 11523, or the “Financial Institutions Strategic Transfer Act” (FIST), which seeks to aid banks and other credit-granting financial institutions (FIs) to cushion the impact of the coronavirus disease 2019 (Covid-19) pandemic by allowing them to offload bad loans. Under the FIST Act, covered FIs are allowed to clean up their books by selling or transferring their bad loans or assets to financial strategic transfer corporations (FISTCs). This law is seen as an enhancement of the “Special Vehicle (SPV) Act of 2002” (RA 9182), which was enacted in 2002 to alleviate the impact of the Asian financial crisis.

Financial institutions strategic transfer corporations (FISTC)
FISTCs must be a stock corporation which shall have a minimum capital stock of P500 million, a minimum subscribed capital stock of P125 million, and a minimum paid-up capital of P31.25 million. A one-person corporation shall not be allowed to be incorporated as a FISTC.

FISTCs shall have the power, among others, to: invest in or acquire non-performing assets (NPAs) of FIs; engage third parties to manage, operate, collect and dispose of the NPAs; in case of non-performing loans (NPLs), to restructure debt, condone debt and undertake other restricting related activities; and spend funds to renovate, improve, complete or alter its NPAs acquired from an FI.

Covered financial institutions
FIs entitled to the tax exemptions and free privileges under the FIST Act include the Bangko Sentral ng Pilipinas (BSP), banks, financing companies, investment houses, lending companies, accredited microfinance non-government organizations, insurance companies, government financial institutions, government-owned and controlled corporations, and other institutions licensed by BSP to perform quasi-banking functions and credit-granting activities. The SPV Act did not cover insurance companies, lending companies, and other institutions licensed by the BSP authorized to perform credit-granting activities.

It should be noted that entities previously-created under the SPV Act are also qualified to avail of the privileges and incentives under the FIST Act.

Tax exemptions and fee privileges
Tax exemptions are granted to the transfer of NPAs from the FI to a FISTC and from a FISTC to a third party or dation in payment by the borrower or by a third party in favor of an FI or in favor of a FISTC. The exemptions include the payment for documentary stamp tax (DST) on the transfer of NPAs and dation in payment, capital gains tax on the transfer of lands and other capital assets, creditable withholding taxes on the transfer of land or buildings which are considered as ordinary assets, and value-added tax or gross receipts tax on the transfer of NPAs.

In addition to the above tax exemptions, fee privileges are also granted to the above-mentioned transfers. This includes the payment of only 50% on the following: applicable registration and transfer fees on the transfer of real estate mortgage and security interest to and from the FISTC; filing fees for any foreclosure initiated by the FISTC in relation to any NPA acquired from an FI; and land registration fees.

However, entitlement to the privileges for the sale or transfer of NPAs from the FI to a FISTC or transfers by way of dation in payment by the borrower or by a third party to the FI shall be for a period of not more than two years from the date of the effectivity of the FIST Act (which in this case, is on Feb. 17, 2021). Meanwhile, transfers from a FISTC to a third party of NPAs acquired by FISTC from the FI should be made within a period of not more than five years from the date of acquisition by the FISTC of such assets for such transfers to be entitled to the tax incentives.

The FIST Act further grants exemption to FISTCs from income tax on the net interest income, DST, and mortgage registration fees on new loans in excess of existing loans extended to borrowers with NPLs which have been acquired by the FISTC. Moreover, the capital infusion by the FISTC to the borrower with NPLs shall also be exempt from the DST. These incentives shall apply for a period of not more than 5 years from the date of acquisition of NPLs by the FISTC.

Any loss which an FI may incur in the transfer of an NPA within two years from effectivity of the FIST Act shall be treated as an ordinary operating loss, which may be carried forward as a net operating loss carry-over deduction for a period of five years after the year of the loss.

The incentives under the FIST Act are also extended to individuals who shall transfer a single residential unit or empty lot to an FI in settlement of a loan or receivable,

The FIST Act will definitely aid and encourage FIs to transfer their NPAs and NPLs to FISTCs, and will help them maintain their financial health which is crucial for our economic recovery in these times of the Covid-19 pandemic. Its passage is indeed a welcome development, and we hope for a smooth implementation of its provisions.

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