BUSINESS TAXATION
Succession and Transfer Taxes
Classification of internal revenue taxes
1. Income Tax
2. Business Tax
3. Documentary Stamp Tax
4. Transfer Tax
Transfer Tax
 imposed upon the gratuitous transfer of private properties or rights
through donation or inheritance
 transfer of ownership is free because of the absence of financial
consideration
Modes of Transferring Properties
1. Onerous transfer
 a sale or a transfer of goods or services in return for something
equal value
 Regular business activities
These sale or exchanges in the ordinary course of business are
usually imposed of business taxes such as VAT, OPT and excise tax.
 Casual sale of property
Sale of property done outside the ordinary course of business is
subject to capital gains tax or regular income tax.
2. Gratuitous transfer
 a transfer of property for free
 Donation – “donation inter-vivos”
Donor’s tax – effectivity is during the lifetime of donor
 Succession – “donation mortis causa”
Estate tax – upon death of the property owner
Effectivity of the transfer of properties
1. Inter-vivos transfer
 property is transferred during the lifetime of the donor and donee
and is effected upon the delivery and acceptance of the property
donated
2. Mortis- causa transfer
 properties and rights of the decedent are transferred to his
successor at the time of his death
Succession
 A mode of acquisition by virtue of which the property, rights and
obligations to the extent of the value of the inheritance of a person
are transmitted through his death to another or others either by will
(testate) or by operation of law (intestate).
Kinds of Succession
1. Testamentary or testate
 results from the designation of an heir, made in a will executed in
the form prescribed by law
2. Legal or intestate
 effected by operation of law since the decedent did not execute a
will or the last will and testament executed by him is void
3. Mixed
 effected partly by “will” and partly by operation of law
Elements of Succession
1. Decedent
 deceased person with properties transferred through succession,
whether or not he left a will.
2. Estate
 properties of the decedent
3. Successors
 refers to the heirs or party to whom properties are being
transferred
Classification of Successors
1. Compulsory Heirs
 those who succeed by force of law to some portion of the
inheritance, in an amount predetermined by law, therefore cannot
be deprived by the testator of their legitime except by
disinheritance property effected.
1) Primary
 whom the legal portion of the estate is first reserved by law
a. Legitimate children and their descendants
 A legitimate child is someone conceived and born to legally
married parents including legitimated and adopted
b. Surviving legitimate spouse
c. Illegitimate children and their descendants
 conceived and born outside a valid marriage or out of
wedlock
 natural child, or acknowledged by in birth certificate or
through declaration executed before a notary public
2) Secondary
 to receive the estate in the absence of a legitimate child
a. Legitimate parents and legitimate ascendants
 father or mother of a legitimate child, either biological
or adopting parents
b. Illegitimate parents (no other descendants)
 they inherit only in default of surviving legitimate
spouse and illegitimate children and their descendants.
Note: “Legitime” is part of a testator’s property which cannot be disposed of
because the law has reserved it for certain heirs.
Absence of Compulsory Heirs
o relatives up to the 5th degree of consanguinity
o If there were no relatives to receive the estate, the government
shall inherit the whole estate
o The decedent may name other persons to inherit the free portion of
the net distributable estate through a will.
Voluntary Heirs
 those instituted by the testator in his will to succeed to the inheritance
of the portion thereof of which the testator can freely dispose
1.
2.
3.
4.
5.
6.
7.
Order of Intestate Succession
Legitimate children or descendants
Legitimate parents or ascendants
Illegitimate children or descendants
Surviving spouse
Brothers and sisters, nephews and nieces
Other collateral relatives within the 5th degree
State
Testamentary Succession
 results from the designation of an heir, made in a will and executed in
the form prescribed by law.



Every Will must be written and made in a language or dialect known to
the testator
Oral Will made by the testator in contemplation of death and in the
presence of credible witnesses is not allowed.
The mass of properties left by the decedent may be classified into
legitime and free portion.
Testamentary Distribution of Net Estate
SUCCESSORS
Legitimate children and descendants
Surviving spouse alone
Legitimate child & surviving spouse
LEGITIME
½
½
LC= ½
SS= ¼
Legitimate children & surviving spouse
LC= ½
SS= 1 LC
Illegitimate children alone
½
Illegitimate children & surviving spouse
IC= 1/3
SS=1/3
Legitimate children, illegitimate children & surviving LC= ½
spouse
IC= ½ LC
SS= 1 LC
Legitimate children, natural children & illegitimate
LC= ½
children
NC= ½ LC
IC= ½ LC
Parents or ascendants alone
½
Ascendants & surviving spouse
A= ½
SS= ¼
Ascendants, surviving spouse & illegitimate children
A= ½
SS=1/8
IC= ¼
Note:
When the marriage is conceived for purely financial gain motive, surviving
spouse shall receive 1/3 when the testator died within 3 months from date
of marriage. This is applicable only if the decedent was in danger of death at
the time of marriage due to illness or injury existing.
Intestate Distribution of Net Estate
SUCCESSORS
Legitimate children and descendants
Legitimate children and parents
Legitimate children and siblings
Legitimate children and surviving spouse
Legitimate children and illegitimate
children
Illegitimate children alone
Illegitimate children and legal parents
LEGITIME
Entire estate shared equally
All to legitimate children
All to legitimate children
Spouse = share of one child
IC= ½ LC
Entire estate
IC= ½
LP= ½
Illegitimate children and surviving spouse
IC= ½
SS= ½
Parents and surviving spouse
P= ½
SS= ½
Parents, illegitimate children and surviving P= ½
spouse
IC= ¼
SS= ¼
Parents and siblings
Entire estate to parents
Surviving spouse alone
Entire estate
Surviving spouse and siblings
SS= ½
S= ½
Surviving relative is beyond 5th degree
The State is the heir
GROSS ESTATE AND PROPERTY RELATIONS
Properties included in the Gross Estate of the Decedent
1. Properties owned at the time of death
1) Real property
 land, building or other permanent structure attached to the
land
2) Tangible personal property
 vehicles, jewelry, clothing, equipment, artwork
3) Intangible personal property
 cash, bank deposits, interests and rights, receivables, insurance,
goodwill, franchise, patents, trademarks, equity and debt
securities
2. Interest in property owned or possessed by the decedent at the
time of his death
 Accrued rent or interest income
 Accrued profit in business or partnership
 Dividends declared before his death but received after death
 Usufructuary rights
3. Taxable transfers
 Properties transferred gratuitously during lifetime, but in
substance, transferred upon death.
 Transfer in contemplation of death
 Revocable transfers
 Transfer for insufficient consideration
 Property passing under the general power of appointment
 Proceeds of life insurance policy payable to a revocable
beneficiary
Transfer in Contemplation of Death
 Properties not physically available in the estate at the time of death
because the decedent transferred them during his lifetime in
anticipation of death.
o Where donation was made concurrently with the execution of a will
o Due to the decedent’s age and/or decedent’s known serious illness
o Where the time between the making of a gift and the death of the
donor was relatively close.
Revocable Transfer
 Transfer of property with retention or reservation of rights over the
property by the donor (decedent) while he still lives.
o By gift where the donor has reserved the power to alter, amend,
and revoke donation.
o The donor retains the option to relinquish such power in
contemplation of death
o Conditional transfers where attached condition are not completed
by the donee prior to the donor’s death.
Transfers for Insufficient Consideration
 sold or disposed for less than its prevailing market value.
Proceeds of Life Insurance with Revocable Beneficiary
o Exclude from gross estate if beneficiary is irrevocable
o Include in gross estate if beneficiary is
a. Revocable, or
b. The decedent’s estate, his administrator or his executor
Estate Tax- Exempt Proceeds of Life Insurance
 A third person is designated as irrevocable beneficiary
 The proceeds or benefits are from SSS and GSIS
 The proceeds are from a group of insurance taken by the employer.
GROSS ESTATE BASED ON CITIZENSHIP AND RESIDENCE
Real Property
Citizen
Resident
Alien
NRA
without
reciprocity
NRA with
reciprocity
within


outside


Tangible personal
property
within
outside








Intangible
personal property
within
outside





Valuation of Gross Estate
o
o
o
Gross estate of the decedent shall be appraised or valued at the
time of death
Fair Market Value
Shall not be diminished by:
1. Encumbrances or mortgage loans attached to the property
2. Portion of claims that are worthless like bad debts
3. Taxes and other permissible deductions
4. Share of surviving spouse in the conjugal or communal property
5. Any subsequent contingency affecting the estate
Real Property Valuation
o Whichever is higher between
a. Current Fair Market Value (Provincial / City Assessors)
b. Fair Market Value (zonal value) determined by BIR
Commissioner
Personal Property Valuation
o Current market price for recently or newly acquired personal
properties
o
Second-hand market price for used properties
o
Grossed-up loan value for loaned or pawned personal properties
o
Fair value plus accrued interest for interest bearing receivables and
bank deposits
o
Discounted value for non-interest bearing notes
o
Face value for Philippine peso currency
o
Converted Philippine pesos value for foreign currencies
Stocks, Bonds, and Other Securities
o If listed in the local stock exchange
a. Closing price on the date of death or
b. Trading price at the date nearest to the date of death
o If not listed in the local stock exchange, the fair market value of
stock not listed and traded in the local stock exchange is
determined by using the Adjusted Asset Method
Exclusive Properties of the Decedent
1. Unmarried decedent
 it is presumed that all of his or her properties are exclusive
properties
2. Married decedent
 their exclusive properties would depend on their property relations
whether under the regime of
1. Absolute Community Property
2. Conjugal Partnership of Gains
3. Complete Separation of Property
Property Relationship Between Spouses
1. By marriage settlement executed before marriage;
2. The regime of absolute community (for marriage on August 3 and
onwards);
3. Conjugal partnership of gains for marriage prior to August 3, 1988
Absolute Community of Properties
 Properties owned before the marriage and properties acquired during
marriage by both husband and wife whose marriage was solemnized on
or after August 3, 1988.
1. Exclusive property of husband
 Property acquired during the marriage by gratuitous title
 Fruits and income of exclusive properties
 Properties for personal or exclusive use of the husband except
jewelry
 Property acquired before marriage by the husband who has
legitimate descendants by former marriage
 Properties acquired by purchase with exclusive money or
exclusive property
2. Exclusive property of wife
 Property acquired during the marriage by gratuitous title
 Fruits and income of exclusive properties
 Properties for personal or exclusive use of the wife except
jewelry
 Property acquired before marriage by the husband who has a
legitimate descendants by former marriage

Properties acquired by purchase with exclusive money or
exclusive property
Conjugal Property
 Property which is acquired by both husband and wife during the
marriage solemnized before August 3, 1988.
 Properties acquired by onerous title using the common funds
 Propertied obtained from the labor or work of spouses
 Properties acquired by chance such as winnings from gambling or
betting
 Fruits and income from the conjugal properties
 Fruits and income of the exclusive properties of each spouse.
Exclusive Property
 Property owned solely by each spouse and acquired by gratuitous title
and other acquisition using exclusive money of the husband and/or
wife.
Conjugal Partnership of Gains
1. Exclusive property of husband
 Property owned before marriage
 Property acquired during the marriage by gratuitous title
(inheritance or donation)
 Property acquired with the exclusive property of the husband,
or exchanged for exclusive property of husband
 Properties acquired by right of redemption or by exchange with
other property belonging to the husband
2. Exclusive property of wife
 Property owned before marriage
 Property acquired during the marriage by gratuitous title
(inheritance or donation)
 Property acquired with the exclusive property of the wife, or
exchanged for exclusive property of wife
 Properties acquired by right of redemption or by exchange with
other property belonging to the wife
Community Properties
1. All properties owned by the spouses at the time of the marriage
(except #4)
2. All properties acquired thereafter
3. Fruits and income of community properties
Similarities of Conjugal and Absolute Community
PROPERTY
Property inherited or received
as donation during marriage
Property acquired during
marriage (other than
inheritance or donation)
Property acquired from labor,
industry work or profession of
the spouses
Fruits or income due or
derived during the marriage
coming from common
property
CONJUGAL
PARTNERSHIP
ABSOLUTE
COMMUNITY
Exclusive Property
Exclusive property
Conjugal property
Community property
Conjugal property
Community property
Conjugal property
Community property
Differences between Conjugal Property of Gains and Absolute Community
of Properties
Property before the marriage
or brought to the marriage
Fruits or income due or
received during the marriage
coming from the exclusive
property
CONJUGAL
PROPERTY
ABSOLUTE
COMMUNITY
Exclusive property
Community property
Conjugal property
Exclusive property
DEDUCTIONS FROM GROSS ESTATE
1. Ordinary deductions
 Expenses, losses, indebtedness and taxes which include:
a. funeral expenses - removed
b. judicial expenses - removed
c. claims against estate
 an obligation contracted by the decedent when he was
alive which should have settled or paid during his
lifetime, and not terminated by his death
d. claims against insolvent person
 receivable of the decedent on persons who are declared
by competent persons or authorities as insolvent or
whose liabilities are more than his assets
e. unpaid mortgages
 amount owed by the decedent supported with
collateral and still outstanding at the time of death
f. unpaid taxes
 taxes that the decedent was subjected while still alive
but remained unpaid up to the time of his/her death
g. losses
 The allowable amount of losses represents those
casualty losses incurred during the settlement of the
estate.
 Losses should be incurred from the time of death of the
decedent up to settlement of the estate.
Requisites for Losses
1. The loss should arise from fire, storm, theft, robbery,
shipwreck or other form of calamities
2. The amount of loss is not compensated with insurance
3. The loss was not claimed as deduction against income in the
income tax return.
4. The loss should occur during settlement of the estate
5. The loss should be incurred not after the last day of
payment of estate tax.

Transfers for public use
 Value of the property that was transferred by the decedent
to the Government of the Philippines as stated in his/her
last will and testament

Vanishing deduction
 The amount applies on the property included in the gross
estate of the decedent which was acquired either through
donation of inheritance.
 The said property has been taxed previously.
2. Special deductions
 Family home
 Dwelling house where the decedent resides with
his/her spouse, children, parents, brothers and
sisters and all those who are dependent on him/her
for support.
 Includes the house and lot where the house is
located.
 The deductible amount for family home shall be the
fair market value at the time of death but should
not exceed P10,000,000; subject to the following
conditions
o If the decedent is single or head of the
family, the whole amount of family home
(house and lot) is deductible
o If the decedent is married, the FMV is
divided by two, the deductible amount
should not exceed P10,000,000
 Standard deduction – from P1M to P5M
o The law allows a standard deduction of P5,000,000
from P1,000,000
o No qualification, condition or requisite.
o (applicable for resident citizens, non-resident
citizens and resident alien)
o Non-resident alien up to P500,000
 Medical expenses – removed
 Covers the hospitalization of the decedent prior to the
time of death, which include payments for hospital
room, laboratory examination fee, doctor’s professional
fees, cost of medicine and other related expenses
 Allowable amount is P500,000
3. Share of surviving spouse

Deducted from the conjugal or community property, net of
ordinary deductions
ESTATE LAW COMPARATIVES
OLD TAX CODE
TRAIN LAW AMENDMENTS
Progressive at 5% to 20%
Flat Rate of 6%
Standard deduction of resident/citizen
Php 5M/Php 500,000 for nonestate of Php 1M and none for nonresident
resident
Family home Php 1 Million
Php 10 Million
Expenses, losses, indebtedness, taxes,
None
actual funeral expenses or an amount
equal to 5% of the gross estate,
whichever is lower, but in no case to
exceed P200,000 + judicial expenses of
the testamentary or intestate
proceedings
Medical expenses incurred within one
None
year before death not exceeding
P500,000
Notice of death to be filed within two (2) None
months
CPA certification needed at P2 Million
Php 5 million
Bank shall not allow any withdrawal
Bank shall allow any
from the decedent’s deposit account,
withdrawal from the said
unless the CIR has certified that the
deposit account, subject to a
taxes imposed have been paid.
final withholding tax of 6%
Provided, that the administrator or any 1
of the heirs may withdraw an amount
not exceeding P20,000 with the said
certification
Estate tax return filing deadline – within 1 year
6 months from the date of death
No counterpart provisions
Payment by installment in two
(2) years in case of insufficient
cash without civil penalty &
interest
Deductions from Gross Estate of a Citizen or Resident Alien of the
Philippines
1. Standard deduction
2. Claims against the estate
3. Claims against insolvent persons
4. Unpaid mortgages, taxes and casualty losses
5. Property previously taxed (vanishing deduction)
6. Transfers for public use
7. Family Home
8. Amount received by heirs under Republic Act No.4917
9. Net Share of the surviving spouse in the conjugal partnership or
community property
Deductions from Gross Estate of a Non-Resident Alien of the Philippines
1. Standard deduction – P500,000
2. Proportion of the total losses and indebtedness
1) claims against the estate
2) claims against insolvent persons
3) unpaid mortgages, taxes and casualty losses
3. Property previously taxed
4. Transfers for public use
5. Net share of the surviving spouse in the conjugal property or
community property
Nonresident Alien Decedent
Allowable deductions:
1. Prorated ELITE
2. Transfers for public use
3. Vanishing deduction
4. Share of the surviving spouse