Taxes on the Sale of Commercial Real Property in the Philippines
(A Practitioner-Oriented Overview, updated to 24 April 2025)
1. Why “commercial” matters
“Commercial” real property is land and/or improvements devoted to trade, business or income-producing purposes (office buildings, factories, warehouses, malls, hotels, mixed-use lots, etc.).
- The tax consequences turn chiefly on whether the asset is an “ordinary asset” (property used in business or held by a real-estate dealer/developer) or a “capital asset” (all other real property).
- A single parcel can shift classification over time; the rule looks to actual use on the date of disposition (Rev. Regs. 7-2003).
2. National internal revenue taxes
| Tax | Trigger | Rate & Base | Key Forms | Deadline / Pay-to |
|---|---|---|---|---|
| 1. Capital Gains Tax (CGT) | Sale/exchange of a capital asset (by any person) | 6 % of the higher of: • Gross Selling Price (GSP) in the Deed of Sale; or • BIR Zonal/Fair Market Value (FMV) |
BIR Form 1706 | Within 30 days from notarisation at an AAB* |
| 2. Creditable Withholding/Income Tax (CWT/IT) | Sale of an ordinary asset ➡ Buyer withholds; seller recognises income |
- Individual seller: graduated CWT, then seller pays income tax (graduated or 15 % MCIT). - Corporate seller: CWT 6 % of GSP/FMV, creditable against 25 % regular CIT or 1 %-2 % GIT under CREATE |
BIR Form 1606 (CWT) + 1701/1702 (Income) | CWT: on or before 10th day of the following month (eFPS: 15th). Income tax: normal quarterly/annual deadlines |
| 3. Value-Added Tax (VAT) | Sale of ordinary asset by a VAT-registered (or VAT-liable) seller; exempt if (i) seller not VAT-registered and annual realty sales ≤ ₱3 million**, or (ii) specific statutory exemptions | 12 % of the GSP or FMV (whichever is higher) | BIR Form 2550M / 2550Q | Monthly/Quarterly VAT returns |
| 4. Percentage Tax | Non-VAT seller, business gross < VAT threshold | 3 % of gross receipts (Sec. 116) | BIR Form 2551Q | 25 days after quarter-end |
| 5. Documentary Stamp Tax (DST) | All deeds/“instruments” conveying realty | 1.5 % of the higher of GSP or FMV | BIR Form 2000-OT | On or before 5th day after month-end (manual) / eFPS 10th day |
* AAB – Bank authorised by BIR to accept payment.
** TRAIN Law (R.A. 10963) adjusted the VAT-exempt ceiling; DOF index-adjusts every three years (latest: ₱3,190,000 for residential lots, ₱4,785,000 for house-and-lot as of 01 Jan 2025). Commercial property ordinarily exceeds the threshold, so VAT usually applies.
2.1 Interaction of CGT vs. Income Tax
| Seller | Asset type | Tax bite |
|---|---|---|
| Individual not engaged in real-estate business | Capital | 6 % CGT (final); no further income tax |
| Individual engaged in real-estate business | Ordinary | CWT 1 %-5 % → credit against graduated Income Tax or 15 % MCIT |
| Domestic corporation, non-dealer | Capital | No CGT for corporations; instead 25 % CIT (or 20 % if net taxable ≤ ₱5 M & assets ≤ ₱100 M) on net gain, plus CWT 6 % |
| Domestic corporation, dealer/developer | Ordinary | CWT 6 %, VAT 12 %, CIT on net profit |
Careful: a corporation never pays 6 % CGT; only individuals, estates and trusts do.
3. Local taxes and registry charges
| Levy | Rate / Basis | Collected by | Notes |
|---|---|---|---|
| Local Transfer Tax (LTT) | ≤ 0.75 % of GSP or FMV (whichever higher) | Province / City Treasurer | Ordinarily 0.5 % province-wide; NCR cities impost 0.75 %. Pay within 60 days of execution. |
| Registration Fees | ~0.25 % of consideration + filing fees | Registry of Deeds | Pay to annotate TCT/CCT; plus ₱30 IT fee. |
| Real Property Tax arrears | Varies (basic 1 %-2 % of assessed value yearly) | LGU | Seller must settle delinquencies to secure tax clearance. |
4. Procedural roadmap
- Draft & notarise Deed of Absolute Sale (or CTA-approved Deed in lieu of condemnation, etc.).
- Secure BIR clearance
- a. File BIR Form 1706 (CGT) or 1606 (CWT) and pay.
- b. File Form 2000-OT and pay DST.
- c. If VAT-liable, issue VAT invoice; file 2550 returns.
- Obtain CAR (Certificate Authorizing Registration) & Tax Clearance from BIR.
- Pay LTT at City/Provincial Treasurer; get receipt & tax clearance.
- Present CAR, LTT receipt, RPT clearance to Registry of Deeds; pay registration fees.
- New title issued in buyer’s name; BIR and LGU are automatically notified.
Timelines: Under Ease of Doing Business Act (R.A. 11032), BIR must release the CAR within 14 working days from complete submission (45 days if estate tax settlement). Delays trigger mandated penalties on the agency, not an extension of tax deadlines; late payment interest (12 % p.a.) and surcharge (25 %) still apply.
5. Special rules, reliefs & pitfalls
| Situation | Tax treatment / Strategy |
|---|---|
| Section 40(C)(2) tax-free exchange (property for shares) | Possible if transferor gains ≥ 51 % control of transferee; sale is not subject to CGT/VAT, but DST still applies. Advance BIR confirmation ruling mandatory. |
| REIT property transfers | Under R.A. 9856, sale to a REIT is subject to 50 % DST and 50 % LTT reduction; CGT/IT still follow asset classification. |
| Socialized or low-cost housing (< VAT threshold) | VAT-exempt under Sec. 109(P). Still subject to CGT/CWT and DST. |
| Foreclosure sale | CGT/CWT computed on bid price or FMV, whichever higher. If redemption, second transfer taxed anew. |
| Installment sale | CGT is still entire 6 % upfront (Phil. jurisprudence treats CGT as final tax on gain, not on cash received). VAT is accrued as each installment is collected. |
| Like-kind exchange (1031-style) | No equivalent in Philippine law; each transfer is taxable. |
| Non-resident seller | 6 % CGT (if capital asset). If ordinary asset, NFT (non-resident foreign corporation) is taxed 15 % final tax on net gains under Sec. 28(B)(5)(c); buyer still withholds 25 % (fringe) if treaty not invoked. |
| Penalties | Surcharge 25 % (or 50 % if willful) + Interest 12 % p.a. + Compromise penalty up to ₱50k. |
6. Illustrative computation (ordinary-asset commercial building sold by a VAT-registered corporation)
- Selling price (contract) …………… ₱ 120,000,000
- Zonal Value ………………………………… ₱ 110,000,000
- Tax base (higher) …………………… ₱ 120,000,000
| Tax | Rate | Amount (₱) |
|---|---|---|
| VAT | 12 % | 14,400,000 |
| CWT (buyer) | 6 % | 7,200,000 |
| DST | 1.5 % | 1,800,000 |
| LTT (Makati, 0.75 %) | 0.75 % | 900,000 |
| Registration (0.25 %) | 0.25 % | 300,000 |
| Total upfront taxes & fees | 24,600,000 |
Corporate seller later applies CWT as credit against quarterly income-tax liability.
7. Record-keeping and audit exposure
- Keep notarised deeds, CAR, official receipts, VAT invoices, and LGU clearances for at least 10 years (Sec. 222, NIRC).
- BIR audits typically focus on: undervalued selling price (vs. zonal), misclassification (capital vs ordinary), VAT leakage, and failure to withhold.
- “Zonal values” are published per city/barangay; if none, use assessed value multiplied by 20 % under Sec. 6(E).
8. Legislative watch (as of April 2025)
| Pending bill | Proposed change | Status |
|---|---|---|
| House Bill No. 10236 | Reduce 6 % CGT on capital assets to 4 % and adopt a true net-gain regime | Awaiting 3rd-reading vote |
| CREATE MORE Act | Cut corporate income tax on real-property sales to 20 % flat; broaden VAT-exempt threshold to ₱5 M | Senate committee level |
| Local Government Tax Code Rewrite | Caps LTT at 0.5 % nationwide | League of Cities position paper |
9. Practical takeaways for deal structuring
- Classify early—asset classification drives the whole tax stack.
- Compare CGT vs. VAT—sometimes converting property to ordinary asset (through actual use) triggers VAT but drops the 6 % CGT for individuals.
- Price bracketing—allocating a portion of consideration to movables (e.g., equipment) may reduce VAT base but must reflect fair value.
- Share deal vs. asset deal—selling the corporation’s shares (subject to 15 % CGT or stock-transaction tax) can be tax-efficient but passes on hidden liabilities.
- Time the cash flow—remember CGT (if any) is due in 30 days regardless of whether you receive the full price. Use escrow or early release of down-payment.
10. Conclusion
The Philippine tax landscape for commercial-property transfers is a layered regime: national taxes (CGT or income/VAT), documentary stamp tax, and local transfer levies all stack on the selling price or fair market value. The correct treatment depends critically on who the seller is and how the property has been used. Because deadlines are short and penalties steep, prudent sellers and buyers map out the classification, cash-flow timing, and compliance checklist before signing. Where large values or cross-border elements are involved, advance BIR rulings and robust due diligence are the rule, not the exception.
This article is for general informational purposes as of 24 April 2025. It does not constitute legal advice. Consult Philippine tax counsel for advice on specific transactions.