Tax Articles

Passive Income Taxation under CMEPA

By: Atty. Mabel L. Buted

Mabel L. Buted Partner   +632 8403-2001 loc.160 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

The Comprehensive Tax Reform Program (CTRP) of the government started in 2018 and was finally completed this year, with the passage of the Capital Markets Efficiency Promotion Act or otherwise known as CMEPA. To recall, the CTRP consisted of four packages. The first three packages which were enacted earlier are: Package 1 (the Tax Reform for Acceleration and Inclusion Law or TRAIN Law), Package 2 (the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE Act) and Package 3 (the Real Property Valuation and Assessment Reform Act or RPVARA). The last package, Package 4, is CMEPA, which was recently signed into law on May 29, 2025 and became effective on July 1, 2025. The law was an “alternate” bill to the then PIFITA or the Passive Income and Financial Intermediary Taxation Act. Most of the significant changes proposed under PIFITA were carried over to the CMEPA.

This new law aims to simplify the taxation of financial intermediation services. To note, before the enactment of CMEPA, a lot of factors were considered in determining the tax treatment of income derived from investment in financial instruments, where the taxpayers usually earn their passive income. These factors include the term of the instrument, residency of the investor and the currency involved. The resulting taxes based on these factors then largely affected the investors in making their investment decisions. The new law now seeks to eliminate the reliance on these varying tax treatments in making investment decisions.

Under CMEPA, all taxpayers, except in the case of some nonresidents, are now subject to the 20% final withholding tax on the interest income, yield or any other monetary benefit earned from any currency bank deposit or deposit substitute, trust funds, and other similar arrangements. The new rule effectively removes the previous tax exemptions enjoyed by individuals on interest from long-term deposits and investments as well as modified the tax rate on interest derived by residents (individual or corporation) from the expanded foreign currency deposit unit system (EFCDU) of banks.

Before CMEPA, the interest income earned by citizens, resident aliens, and nonresident aliens engaged in trade or business (NRAETB) on long-term deposits and savings were exempted from tax, except if the investments are pre-terminated, in which case, the interest would be subjected to 5%, 12% and 20%, depending on the remaining maturity of the instrument. Also, prior to the amendments introduced by CMEPA, interest income derived by residents from the EFCDU of banks was subject to 15%.

The foregoing rule further effectively removed the tax exemption of interest earned by nonresidents under the EFCDU of banks under the law prior to amendment. However, this was later subjected to veto by the President.

Under CMEPA, nonresident aliens not engaged in trade or business and nonresident foreign corporations remain subject to the 25% final tax on interest.

While significant changes were introduced on the taxation of interest income, it can be noted that taxation of dividends derived from equity instruments remain unchanged under CMEPA.

Individual taxpayers remain subject to different tax rates on their dividend income depending on their classification. Both the PIFITA and the version of CMEPA passed by the House of Representatives proposed uniform tax treatment of dividends earned by all individuals (i.e., 15% under PIFITA and 10% under the House version). However, these did not materialize in the new law. This is a matter that might later be considered by our lawmakers. Under the new law, citizens and resident aliens are subject to 10% on their dividends while NRAETBs are subject to 20% and NRANETBs are subject to 25%. Dividends derived by domestic and resident foreign corporations from domestic corporations continue to be exempt from income tax.