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Income Tax Exemption of Nonstock Charitable Institutions

By: Atty. Cara Angela N. Flores on October 12,2023

Under Section 30(E) of the Tax Code, nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans are exempt from income tax as long as no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.

However, the last paragraph of the Section 30 likewise provides that the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to income tax. A corporation will be considered as having failed to meet the test if substantial part of its operation are considered “activities conducted for profit”.

Section 30(E) of the Tax Code uses the terms organized and operated thus, a charitable institution must meet both the organizational test and the operational test. Revenue Memorandum Order No. 038-19 (Tax Exemption of Non-Stock, Non-Profit Corporations Under Section 30 of the National Internal Revenue Code of 1997, as amended) provides that the organizational test requires that the corporation or association’s constitutive documents exclusively limit its primary purpose to those enumerated purposes under Section 30(E). While the operational test requires that the regular activities of the corporation or association be exclusively devoted to the accomplishment of its purpose.

To breakdown the requisites, a charitable institution under Section 30(E) must be: (1) a non-stock corporation or association; (2) organized exclusively for charitable purposes; (3) operated exclusively for charitable purposes; and (4) no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.

The organizational test is embodied in requisites three and four while the operational test is embodied in requisites number one and four.

For the first requisite, a nonstock corporation, as defined in the Revised Corporation Code is one where no part of its income is distributable as dividends to its members, trustees, or officers. Any profit that a nonstock corporation may obtain incidental to its operation must be used in furtherance of the purpose/s of its organization. However, mere registration with the Securities and Exchange Commission as a nonstock corporation does not automatically result in tax exemption, it must still pass the two tests and comply with the four requisites. RMO No. 038-19 stated that in determining the true nature and taxability of a corporation claiming as a non-stock, non-profit entity the characteristics, corporate purpose/s, and actual operation are to be considered.

As to the second and third requisite, the Supreme Court in Lung Center of the Philippines vs. Quezon City (G.R. No. 144104, June 29, 2004) discussed that a charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or otherwise lessening the burden of government. The Supreme Court laid down the test of charity, and in determining if an enterprise is charitable or not is if it exists to carry out a purpose reorganized in law as charitable or if it is maintained for gain, profit, or private advantage.

            The last requisite provides for the inurement prohibition. In Department of Finance (“DOF”) Opinion No. 013-20, the DOF discussed that the “inurement” prohibition was specifically incorporated as a tool to ascertain that non-stock, non-profit organizations are not used as a tax shelter through tax exemptions granted thereto or for their officers or organizers to gain or benefit from the income or assets of the said organization, which should appropriately be devoted to the furtherance of the purpose/s for which it was organized.

Does this mean, then, that if a nonstock charitable institution engages in activities for profit that their tax-exempt status would be automatically revoked? Not necessarily. The Supreme Court, in the case of Commissioner of Internal Revenue v. St. Luke’s Medical Center, Inc. (G.R. No. 195909, 195960, September 26, 2012) discussed that even if the charitable institution must be “organized and operated exclusively” for charitable purposes, it is nevertheless allowed to engage in activities conducted for profit without losing its tax exempt status for its not-for-profit activities. The only consequence is that the income of whatever kind and character of a charitable institution from any of its for-profit activities is subject to tax, regardless of how that income is used.

            Given the above-cited rule, will the mere realization of income divest an entity of its status as nonstock, nonprofit corporation operating exclusively for charitable purposes? In DOF Opinion No. 012-19, the DOF citing Commissioner v. CA and YMCA (G.R. No. 124043, October 14, 1998) opined that the mere realization of income does not automatically divest an entity of its status as nonstock, nonprofit corporation operating exclusively for charitable purposes, as long as no part of its profits inures to the benefit of any stockholder or individual.

            This exemption is only limited to income tax and therefore excludes withholding tax, value-added tax, or percentage tax. Thus, Section 30 corporations have the responsibility to withhold taxes on the compensation income of their employees, and on the payments to individuals or corporations subject to tax. Likewise, their purchases of goods, properties, or services, and importations shall be subject to the 12% VAT. As an indirect tax, it can be passed on to the purchaser.

            RMO No. 038-19 also provides for the guidelines in processing and issuance of a certificate of exemption, including its documentary requirements and the procedure.

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Cara Angela N. Flores is an associate of Mata-Perez, Tamayo and Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment, you can email the author at or visit the MTF website at

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