Atty. Joshua P. Francia
Recognizing the vital role of the financial sector in sustaining the country’s long-term economic growth, President Ferdinand R. Marcos, Jr. signed into law Republic Act No. 12214, also known as the Capital Markets Efficiency Promotion Act (CMEPA). The CEMPA, which took effect on July 1, 2025, declares as a key policy consideration allowing “capital markets to develop as efficiently as possible, with the least intervention,” while ensuring a fair, transparent, and competitive environment for investors. At its core, the law seeks to modernize and rationalize the taxation of certain passive income and financial transactions by establishing a simpler, regionally competitive, tax regime.
Prior to its enactment, the taxation of passive income was governed by a patchwork of provisions of the National Internal Revenue Code of 1997, as amended (NIRC). The NIRC and the various revenue regulations issued to specify, prescribe or define rules and regulations for its effective enforcement, imposed an assortment of rates across different financial instruments, which created a framework that was less unpredictable and less aligned with global practices. Businesses, in turn, relied heavily on traditional bank lending as their primary means of financing, limiting opportunities for broader capital market participation.
With the aim of ensuring greater consistency, transparency, and competitiveness, CMEPA introduced a decisive shift by simplifying and harmonizing the tax regime for interest income, dividends, and capital market transactions. This greater flow of capital is expected to, among others, stimulate entrepreneurship, expand business activity, generate employment, and contribute to national development, thus making CMEPA not only a regulatory measure but also a strategic fiscal and economic tool for promoting efficiency, stability, and sustained economic growth. The CEMPA seeks not only to streamline the fiscal framework but also to enhance investor confidence, encourage investments, and strengthen the country’s position within the regional financial landscape.
Among the significant reforms introduced by CMEPA relate to the tax treatment of passive income, financial instruments, and related transactions, as follows:
- Interest Income from Deposits and Investments. Interest income derived by individuals from long-term deposits or investments with a maturity period of at least five (5) years are no longer exempt from final withholding tax. Instead, such interest income shall be subject to a twenty percent (20%) final withholding tax. In addition, unless otherwise exempted, interest income from all peso and foreign currency deposits, deposit substitutes, trust funds, and similar arrangements, derived by individuals or corporations, shall now be uniformly subject to a twenty percent (20%) final withholding tax.
- Interest Income from Foreign Currency Deposits. Interest income derived by resident individuals and corporations, from depository banks under the expanded foreign currency deposit system shall be subject to a twenty percent (20%) final withholding tax.
- Dividends Received by Individuals. Cash and/or property dividends received by an individual resident citizen, non-resident citizen, or resident alien individual from a domestic corporation, or from a joint stock company, insurance or mutual fund company, or regional operating headquarters of multinational companies, shall be subject to a ten percent (10%) final withholding tax.
- Capital Gains Tax (CGT) on Sale of Unlisted Shares. Capital gains realized from the sale, exchange, or other disposition of shares of stock in a domestic or foreign corporation, when such shares are not listed and traded through the local or foreign stock exchange, shall be subject to a fifteen percent (15%) final tax on the net capital gains realized during the taxable year.
- Stock Transaction Tax (STT) on Listed and Traded Shares. For shares of stock listed and traded through the local stock exchange, the stock transaction tax is reduced from six-tenths of one percent (0.6%) to one-tenth of one percent (0.1%) of the gross selling price or gross value in money. For shares of stock listed and traded through a foreign stock exchange, the same rate of one-tenth of one percent (0.1%) shall likewise be levied, assessed, and collected on every sale, exchange, or other disposition. This tax is imposed in lieu of the capital gains tax and shall be payable by the seller or transferor.
- Documentary Stamp Tax (DST) Reduction. Documentary stamp tax shall be imposed at seventy-five hundredths of one percent (0.75%), reduced from the previous one percent (1%), on the following transactions. These include the original issuance of shares of stock on the par value thereof or on the actual consideration for no-par value shares, bonds, debentures, certificates of stock, or certificates of indebtedness issued in a foreign country, and debt instruments on the issue price thereof. Only one (1) DST shall be imposed on a loan agreement, promissory note, mortgage, pledge, or other security agreement issued to secure such loan.
- Exemptions from Documentary Stamp Tax (DST). The following transactions are exempt from documentary stamp tax. These include the original issuance, redemption, or other disposition of shares of stock in a mutual fund company, and the issuance of certificates or other evidence of participation in a mutual fund or unit investment trust fund (UITF).
In addition to changes in tax treatment, CMEPA also introduced significant amendments to key definitions and concepts relevant to capital markets regulation:
- Expanded Definition of Securities. Securities are now broadly defined to include any share, participation, or interest in a corporation, commercial enterprise, or profit-making venture evidenced by a certificate, contract, or instrument, whether written or electronic. This expressly covers:
- Shares of stock, bonds, debentures, notes, evidence of indebtedness, and asset-backed securities;
- Investment contracts, certificates of interest, or participation in profit-sharing agreements, including certificates of deposit for future subscriptions;
- Fractional undivided interests in oil, gas, or other mineral rights;
- Certificates of assignment, certificates of participation, trust certificates, voting trust certificates, or similar instruments;
- Proprietary or non-proprietary membership certificates in corporations; and
- Other similar instruments as may be determined by the Securities and Exchange Commission.
- Exclusion of Reverse Repurchase Agreements as Deposit Substitutes. Deposit substitutes now expressly exclude reverse repurchase agreements between the Bangko Sentral ng Pilipinas (BSP) and authorized agent banks, as well as certificates of assignment or participation and similar instruments with recourse.
- Defining Passive Income. Passive income is specifically defined as income earned from sources that do not require the taxpayer’s active pursuit of trade or business, and which is not subject to value-added tax.
To ensure the effective implementation of CMEPA, the Department of Finance, in consultation with the Securities and Exchange Commission, BSP, Bureau of the Treasury, and Bureau of Internal Revenue (BIR), was mandated to issue implementing rules and regulations within sixty (60) days from effectivity. In line with this, the BIR has already released several issuances, most notably RR No. 18-2025, which reaffirmed the excise tax exemption for purely electric vehicles while removing pick-ups from the list of exempt automobiles, and RR No. 19-2025, which clarified that only one documentary stamp tax shall apply in cases where a loan agreement and its supporting instruments such as a promissory note, mortgage, or security agreement are simultaneously issued and executed, with the higher tax prevailing.
Collectively, these reforms simplify the tax treatment of financial transactions, create a level playing field across instruments, and bring the Philippine capital markets closer in line with regional standards. By lowering costs, encouraging participation, and ensuring consistency in the taxation of passive income, CMEPA fosters a more attractive investment climate that supports enterprise growth, strengthens savings mobilization, and advances the long-term development of the Philippine economy.
Joshua P. Francia is a Junior Associate and a member of the Tax, Litigation, Corporate, Corporate Services, Real Property, and Technology, Media, and Telecommunications practice groups. Joshua handles BIR assessments and tax disputes, corporate housekeeping and regulatory compliance, representing clients in litigation and administrative proceedings, and advisory matters for clients in the retail, manufacturing, service, digital and information technology industries.
