REVENUE MEMORANDUM CIRCULAR NO. 81-2024 issued on July 18, 2024 provides the tax treatment of Sukuk (Islamic Bond) as Islamic banking arrangement pursuant to the Tax Neutrality Provision of Republic Act No. 11439 (An Act Providing for the Regulation and Organization of Islamic Banks) as implemented by Revenue Regulations No. 17-2020.

Sukuk issued, structured in a Shari’ah-compliant manner, but with economic characteristics similar to bonds, are subject to the taxes per the Circular. The gain or profit in Sukuk is determined based on the specific structure and terms of the Sukuk issuance. It can be calculated through profit-sharing ratios, rental income, mark-up or price differentials, or the sale of underlying assets. The method of determining gain or profit depends on the contractual arrangements outlined in the Sukuk documentation.

Gains or profits realized by Sukuk holders from Sukuk transactions with maturity of less than five years are subject to 20% Final Withholding Tax (FWT). On the other hand, those with maturity of five years or more are excluded from the gross income and are therefore exempt from Income Tax.

In the case of Sukuk pre-termination, entire gains or profits realized by Sukuk holders, are subject to FWT with varying rates based on the remaining maturity thereof:

Four (4) years to less than five (5) years – 5%;
Three (3) years to less than (4) years – 12%; and
Less than three (3) years – 20%

Gains or profits realized by Sukuk holders, from Sukuk transactions, who are non-resident aliens not engaged in trade or business in the Philippines and non-resident foreign corporation are subject to twenty-five percent (25%) FWT.

The Sukuk issuer is required to withhold the tax at every payment of gains or profits and for purchases of asset either directly from a supplier or through an agent.

Gains or profits realized by Originator/Obligor, Arranger, Manager, and Underwriter from Sukuk transactions are subject to regular Income Tax and Value-Added Tax (VAT) or Percentage Tax, whichever is applicable.

Gains or profits realized by the Special Purpose Vehicle are subject to regular Income Tax but exempt from VAT.

Any disposal or lease of the underlying asset, and execution of any additional instrument required in a Sukuk transaction, for the purpose of compliance with Shari’ah principles but which will not be required in a conventional bond transaction, shall be deemed excluded for taxation purposes.

A Documentary Stamp Tax (DST) is imposed on all Sukuk instruments under Sections 176 and 179 of the National Internal Revenue Code of 1997, as amended, (Tax Code) unless excepted under Section 199(g) of the same code.

Guidelines and examples of some Sukuk structures that may be encountered in practice are provided in the Circular.