Tax exemption of employees' trust fund
Tax exemption of employees' trust fund by Lesley Noreen G. Lato
Due to the recent economic crisis, high costs of
operations, low sales or other business reasons,
some establishments were forced to close
shop. Consequently, job security becomes tenuous at best.
One of the ways to provide safety nets for retiring
employees is the setting up of an employees’ trust fund.
funds are arrangements that allow individuals to create sustained benefits for
an individual, entity, charity or other non-profit
organization. A trust can include a wide
range of assets such as cash, property, stocks, bonds, or any other type of financial instrument. A trust fund
normally has some limitations imposed on how the assets contained in the trust may be utilized.
Under the existing provisions of the Tax Code, a trust fund
is taxed in the same manner and on the same basis as in the case of an
individual, subject to some exceptions. In this regard, Section 60 (B) provides that
an employee’s trust which forms part of a pension, stock bonus or
profit-sharing plan of an employer for the benefit of some or all of his
employees shall not be subject to income tax if the : (1) contributions are
made to the trust by such employer, or employees, or both for the purpose of
distributing to such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan; and (2) under the trust
instrument it is impossible, at any time prior to the satisfaction of all
liabilities with respect to employees under the trust, for any part of the
corpus or income to be used for, or diverted to, purposes other than for the
exclusive benefit of his employees provided that any amount actually distributed to any
employee or distributee shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount contributed by such
employee or distributee.
In a recent case, a certain employees’ trust fund bought
a parcel of land through and with its employer. What materialized was a
co-ownership of the land by and between the employer and the fund, the latter
owning 49.59%. However, the TCT, deed of absolute sale and remittance return
were all registered solely in the name of said employer. Since said fund claims
that it needed cash to pay the retirement and pension benefits of its
beneficiaries and to reimburse advances made by its employer, the subject lot
was sold. Income tax was paid upon the consummation of the sale. The trustee now asserts that the funds’ share
in the tax paid should be refunded considering that the fund is exempt from the
payment of income tax. Consequently, it filed a claim for tax refund. The BIR
said that the fund is not entitled to the refund.
This case eventually reached the Supreme Court (SC) which
upheld the exemption of income of employee’s trust funds from income tax. The SC held that although the TCT, deed of
absolute sale and the remittance return were in the employer’s name, it does
not forestall the possibility that the property is owned by another entity
because Article 1452 of the Civil Code expressly authorizes a person to
purchase a property with his own money and to take conveyance in the name of
In this case, the notarized memorandum of agreement
and the certified true copies of the portfolio mix analysis prepared by its
investment manager clearly proves that petitioner invested funds sourced from
the employees' trust fund to purchase the lot. Since said lot was registered in the
employer’s name only, a resulting trust
is created by operation of law. A resulting trust is based on the
equitable doctrine that valuable consideration and not legal title determines
the equitable interest and is presumed to have been contemplated
by the parties. Based on this resulting trust, the employees’ trust fund is
considered the beneficial co-owner of the lot.
The fund has sufficiently proven that it had a
"common consent" or agreement with the employer to jointly purchase
the subject lot. The absence of the Fund’s name in the TCT does not prevent it
from claiming before the BIR that the employees’ trust fund is the beneficial
owner of 49.59% of the lot and that the employer merely holds 49.59% of the lot
in trust, for the benefit of the fund.
According to the SC, no particular words are
required for the creation of a trust, it being sufficient that a trust is
clearly intended. Since
the trustor-beneficiary exists for the purpose of holding title to, and
administering, the tax-exempt employees’ trust fund established for the benefit
of the employees, it has personality to claim tax refunds due the employees’
trust fund. (Miguel J. Ossorio Pension Foundation,
Incorporated vs. Court of Appeals and Commissioner of Internal Revenue,G.R. No. 162175, June 28, 2010. Similarly, the income of the trust funds is likewise exempt from the
payment of final withholding taxes.
In sum, following the SC decision, income derived from the sale of real property,
whose funds are sourced from the employees’ trust fund is exempt from the
payment of income tax.
This article is not intended to be a substitute for professional advice. For comments and inquiries, you may e-mail the author at Lesley.Lato@ph.gt.com. For other tax concerns, please check out our other tax services.