Tax Articles

Local Business Tax on association dues

By Atty. Rodel C. Unciano

Atty. Rodel C. Unciano Partner   +632 8403-2001 loc.380 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

It is now undisputed that association dues, membership fees, and other charges collected by a condominium corporation from members are not subject to income tax and value added tax (VAT). This was the clear ruling by the Supreme Court in the First E-Bank Tower case (G.R. No. 215801). In fact, it is now clear under the amended provisions of the Tax Code that association dues, membership fees, and other assessments and charges collected by homeowners associations and condominium corporations are exempt from VAT.

As regards the imposition of local business tax (LBT), the Supreme Court in another case (GR 154993) has long declared that condominium corporations are generally exempt from local business taxation under the Local Government Code (LGC), irrespective of any local ordinance that seeks to declare otherwise.

However, to date, some local government units (LGUs) still attempt to collect LBT from association dues collected by condominium corporations.

The Local Government Code of 1991, which is the mother of local tax laws in the Philippines, authorizes the imposition of LBT based on the taxpayer’s gross sales or receipts for the preceding calendar year. And as defined under the LGC, gross sales or receipts for local business tax purposes, refers to the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments received for the services performed or to be performed.

From this definition, it is apparent that only receipts representing income from business activity may be subjected to LBT. Absent any business activity geared for profit, there is no basis for the imposition of LBT. The Bureau of Local Government Finance had in fact opined in one occasion that from the definition of gross sales or receipts in the LGC, passive income such as interest income from savings and time deposits are not subject to LBT.

It is undisputed that a condominium corporation is not engaged in trade or business. A condominium corporation is not designed to engage in activities that generate income or profit. While a condominium corporation is allowed to collect association dues, the same is purely for the benefit of the condominium owners. It is necessary to effectively oversee, maintain, or even improve the common areas of the condominium. Association dues, fees, and other charges do not constitute profit or gain. The expenditures incurred by the condominium corporation on behalf of the condominium owners are not intended to generate revenue nor equate to the cost of doing business.

Clearly then, association dues do not arise from performance of trade or business. When a condominium corporation manages, maintains, and preserves the common areas of the building, it only does so for the benefit of the condominium owners. It cannot be said to be engaged in trade or business. In collecting such fees, the condominium corporation is not selling its service to the condominium owners nor are the condominium owners buying goods and/or services from the condominium corporation when the dues are paid.

However, it is not unthinkable that the unit owners of a condominium corporation would band together to engage in activities for profit under the shelter of the condominium corporation. If said fact is established such as when portions of the condominium project are leased out as barber shops, drug stores, beauty shops, or other corner enterprises, then the condominium corporation may already be subjected to LBT (CTA EB 2404).

Housing shortage is a big problem in this country. The non-imposition of tax on association dues is certainly a great sigh of relief to condominium dwellers.