Buyers' Guide to Purchasing Property in the Philippine's Housing Market

Introduction

Republic of the Philippines is a democratic state and its new Constitution was ratified in early 1987. The Philippine government is comprised of the executive, legislative and judicial branches.¹

Philippines' legal system is based on Spanish and Anglo-American law.² According to Isla Lipana & Co, a member firm of PriceWaterhouseCoopers, "the Philippines has a well-developed legal system, patterned broadly after that of the United States, although the speed and quality of judicial decisions continue to cause concern to investors".³

In terms of Philippine fiscal system, it has a burdensome tax rates – the top income tax rate is 32%, and the top corporate tax rate is 35%.⁴

In general, foreign individuals or corporations cannot privately own land in the Philippines. However, foreign investors can acquire up to 40% of the equity in a domestic company that owns land in the Philippines.⁵ In terms of the protection of property rights, Philippines is yet to improve its judicial system. As of the moment, according to the Heritage Foundation, Philippine judicial system enforces the law weakly. Judges are nominally independent, but some were appointed for political reasons and can be somewhat corrupt.⁶

Legal Guide

LAW

Philippines' legal system is based on Spanish and Anglo-American law. Its judicial branch is comprised of:

Supreme Court
Court of Appeals
Sandigan-bayan

The 1987 Philippine Constitution is the fundamental jurisprudence of law. Other sources of law include the Civil Code, the Penal Code, the National Internal Revenue Code, the Labor Code, and the Code of Commerce, Letters of instruction, judicial decisions and pronouncements, administrative orders, and rules and regulations issued by the three branches of the government.

With respect of laws relevant to the immovable property, following are some main laws and decrees:

the Constitution
the Civil Code
Presidential Decree No. 1529
Property Registration Decree, Presidential Decree 1529
Cadastral Act, Act 2259
Comprehensive Agrarian Reform Law
Condominium Act (i.e. Republic Act 4726)
Batas Pambansa Blg. 185 (BP 185)
Republic Act 8179 (RA 8179)

OWNERSHIP & RIGHTS

In general, foreign individuals or corporations cannot privately own land in the Philippines. However, foreign investors can acquire up to 40% of the equity in a domestic company that owns land in the Philippines.⁷ Foreigners are also allowed to purchase a condominium unit, provided that total foreign ownership of the condominium corporation does not exceed 40%.⁸ Under the Investors' Lease Act of 1993, foreign investors may lease land for certain industrial and agricultural projects for a straight period of 50 years, renewable for another 25 years.⁹

BUYING PROCEDURE

The buying procedure for an off-plan property is in general as follows:

1. Reserve the property
Once you have chosen your ideal property, a reservation agreement is to be signed with the seller and a reservation deposit needs to be paid (will form part of the purchase price).

2. Due Diligence
Before signing the preliminary purchase contract (off-plan property) or property sale and purchase contract, it is important that to carry out a due diligence check on the seller as well as the subject property. The due diligence checklist may include:

the company registration certificate (if the seller is an entity) or proof of seller's identity (if the seller is a private individual)
proof of a personal who is duly authorised to sign all legal documents (if the seller is an entity or an attorney of the seller)
the title certificate for the land
the planning permission/consent (off-plan property)
the building licence (off-plan property)
all other relevant permissions for the commencement of the project (off-plan property)
any lien, debt, development finance, or encumbrances against the land and/or the project
at least one of bank guarantee, insurance and/or assurance ensure the completion of the project or an escrow system to provide security for the buyer's property payments (off-plan property)
an independent quantity surveying (QS) system during the construction period (off-plan property)

The above due diligence check is more appropriate to be done through a local law firm or conveyancing lawyer.

3. Exchange Contract
Before singing preliminary purchase contract, buyers are suggested to consult a local conveyancing lawyer on analyse the risk, any unfavourable terms of the contract. Upon signing of the contract, first instalment/payment is often required.

4. Deed of Sale
Deed of sale is to be ratified by notary public.

4.1 Paying Taxes
a. Obtain a certified true copy of latest tax declaration from the Assessor's Office
b. Payment of Documentary Stamp Tax and Capital Gains Tax at an authorized bank
c. Obtain tax clearance (or Certificate Authorizing Registration) from the Bureau of Internal Revenue
d. Obtain a tax clearance certificate of Real Estate Taxes from the Treasurer's Office of Manila
e. Payment of transfer tax at the Treasurer's Office
f. Apply with the Assessor's Office for the issuance of a new tax declaration over the building in the name of buyer¹⁰

4.2 Apply for registration with the register of deeds, title transfer

In the Philippines, the Department of Environment and Natural Resources (DENR) through the Lands Management Bureau (i.e. Lands Management Services), is mandated to administer and manage public lands, government owned lands and all other lands not placed under other government agencies by virtue of Comprehensive Agrarian Reform Law.

There are two processes of acquiring title, judicial and administrative. In judicial titling there are two proceedings, one is ordinary judicial proceeding (governed by Property Registration Decree, Presidential Decree 1529) and the cadastral proceedings (governed by the Cadastral Act, Act 2259). In both cases, it is the Court that issues order of registration.

There are two types of Cadastral System in the Philippines, one is Graphical Cadastre and the other is Numerical or Regular Cadastre. All lands within a Cadastral Survey Project, in the absence of titles are presumed public lands.¹¹

Taxation (for non-residents private individuals*)

TAXATION When Acquiring/purchasing property

category	tax/fee rate	scope/remark
Documentary Stamp Tax	Property Transfer – approx 1.5% + PHP15 notary stamping fee; or leasehold rights transfer – NIL.	a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale¹²
Preparation of deed of sale	Property Transfer – 1.5% of property value, including PHP100 notarization fee¹³; leasehold rights transfer – NIL.
Transfer tax	Property Transfer – 0.75% of property price + PHP125 certificate of payment; or leasehold rights transfer – NIL.
Value Added Tax (VAT)	12%**	a business tax imposed and collected from the seller in the course of trade or business on every sale of properties (real or personal) lease of goods or properties (real or personal) or vendors of services. It is an indirect tax, thus, it can be passed on to the buyer
Fee for property registration	Property Transer - PHP8,796 for properties with a value up to PHP 1.7 million+ PHP90 for every PHP20,000 (or fraction thereof) in excess of PHP1.7 million+ PHP30 (Registry Entry Fee) + PHP60 (transfer certificate of title) + PHP240 for submission of secretary's certificates of the buyer and seller + PHP240 for submission of the articles of incorporation and by-laws of the buyer only + PHP177 legal research fee;¹⁴ leasehold rights transfer – NIL.	If the sale is the transfer of leasehold rights, it is not considered as transfer of property, and will not be subject to such fee.

TAXATION when holding/owning property

category	tax/fee rate	scope/remark
Income Tax on rents	25% on gross rental income**
VAT	12%**	normally included in rent and collected from tenant
Document Stamp Tax	tenements or portions thereof at a rate of PHP3 on the first PHP2,000 and for every PHP1,000 in excess of the first PHP2,000 for each year of the term of the lease contract.	Section 194 of the Tax Code imposes DST on lease contracts of land. Such tax allows for flexibility in terms of the period and the value for tax planning purposes.

TAXATION when selling/disposing property

category	tax/fee rate	scope/remark
Income Tax on rents	Property Transfer - 25% on gross income; or leasehold rights transfer - subject to tax treaties***	Article 12, par 4 of the RP-UK Tax Treaty states: Capital gains from the alienation of these rights will be taxable only in the contracting state of which the alienator is a resident.
VAT	12%	In general, it can be passed onto the new buyer
Document Stamp Tax	Property Transfer – approx 1.5% + PHP15 notary stamping fee; or leasehold rights transfer – NIL.
Estate Tax	Property Transfer - below PHP200,000 - NIL; over PHP200,000 but below PHP500,000 – 5%; over PHP500,000 but below PHP2 million – 8%; over PHP2 million but below PHP5 million – 12%; over PHP5 million but below PHP10 million – 21%; over PHP10 million – 35%; or leasehold rights transfer – NIL.	a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers which are made by law as equivalent to testamentary disposition

* A non-resident under Philippines tax law is a person stays less than 180 days in Philippines in a year, regardless of the citizenship or nationality of this person.

** Enterprises registered with the Philippine Economic Zone Authority (PEZA) will benefit from certain tax incentives and/or exemptions, including national and local taxes, such as the tax for real property taxes on land owned by developers, the taxes imposed on business establishments operating within the ECOZONE; in lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE.¹⁵

*** Philippines has entered into double taxation agreement with many countries, including the UK and the USA. For more information on Philippine double taxation agreements with the UK, please refer to Home Revenue & Customs website: http://www.hmrc.gov.uk/manuals/dtmanual/dt15300+.htm

1. [1]The official website of the Republic of the Philippines http://www.gov.ph/aboutphil/general.asp (accessed 12 September 2008)

2. CIA, 4 September 2008, The World Factbook, Philippines [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/rp.html (accessed 12 September 2008)

3. Isla Lipana & Co, a member firm of PriceWaterhouseCoopers, 2008, Doing business and investing in the Philippines [Online] Available at: http://www.pwc.com/ph/publications/doing-business-in-the-Philippines.pdf (accessed 12 September 2008)

4. The Heritage Foundation, 2008, Index of Economic Freedom [Online] available at: http://www.heritage.org/research/features/index/country.cfm?id=Philippines (accessed 15 September 2008)

5. PricewaterhouseCoopers Investment Management & Real Estate, 2007, Going Global –tax and legal aspects of real estate investments around the global, PricewaterhouseCoopers CD Rom

6. same as 4

7. same as 5

8. Embassy of the Philippines, 2008, Foreigners Owning Philippines Land [Online] Available at: http://www.philippine-embassy.org.sg/index.cfm?GPID=110 (accessed 15 September 2008)

9. same as 5

10. Doing Business, 2008, Registering Property in Philippines [Online] Available at: http://www.doingbusiness.org/ExploreTopics/RegisteringProperty/Details.aspx?economyid=153 (accessed 15 September 2008)

11. Cadastral Template, 2003, Philippines Country Report [Online] Available at: http://www.cadastraltemplate.org/countryreport/Philippines.pdf (accessed 15 September 2008)

12. Bureau of Internal Revenue, Republic of the Philippines, 2008, Tax Information [Online] Available at: http://www.bir.gov.ph/taxinfo/taxinfo.htm (accessed 11 August 2008)

13. same as 8

14. same as 10