Tax exemption of employees' trust fund

Tax exemption of employees' trust fund by Lesley Noreen G. Lato

One of the ways to provide safety nets for retiring employees is the setting up of an employees’ trust fund.

Generally, trust 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 another.

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.