17. Non-Stock Corporation and Foundations

CORPORATION LAW REVIEWER (2013-‐2014)

NON-‐STOCK CORPORATIONS AND FOUNDATIONS

ATTY. JOSE MARIA G. HOFILEÑA

A. Eleemosynary Purpose and Non-‐Distribution of Profits1 •

I. Essence of Non-‐Stock Corporations

The Corporation Code definition and treatment of non-‐stock

non-‐profit corporations are counter-‐intuitive to the nomenclature used for such juridical entities. 1. The non-‐existence of capital stock is not determinative on whether the entity is a non-‐stock corporation; and it is legally possible for a corporation having capital stock to still be considered a non-‐stock corporation. In fact, under pertinent jurisprudence, as discussed hereunder, the existence of stocks in an eleemosynary-‐purposed company has not disqualified it

Section 87. Definition. For the purposes of this Code, a non-‐stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-‐stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-‐stock corporations, except as may be covered by

from being considered as a non-‐stock non-‐profit corporation. 2. The non-‐incurring of profits is not likewise determinative for an entity to be classified as non-‐profit corporation. The codal definition recognizes that non-‐stock and non-‐profit corporations may actually earn profits as an incident to their primary operations, and so long as the profits are devoted for their eleemosynary purpose. The SEC has ruled that the mere fact

specific provisions of this Title. (n) Section 88. Purposes. Non-‐stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-‐

that a non-‐stock corporation may earn profit does not make it a profit-‐making corporation where such profit or income is used to carry out the purpose set forth in the articles of incorporation and is not distributed to its incorporators, members, trustees or officers.2 o It is not inconsistent with the nature of a non-‐stock corporation for it to incidentally earn profits in pursuing its eleemosynary purpose. What is prohibited is to

stock corporations. (n)

1

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 SEC Opinion, 13 November 1990, XXIV SEC QUARTERLY BULLETIN 63 (No. 1, March, 1990).

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)


o

operate the company for profit and/or distribute any profits so earned to its officers and members. Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 (1962); Collector of Internal Revenue v. University of Visayas, 1 SCRA 669 (1961). The incurring of profit or losses does not determine

In a mutual life insurance company organized as a non-‐ stock nonprofit corporation, the so-‐called “dividend” that is received by members-‐policyholders is not a portion of profits set aside for distribution to the stockholders in proportion to their subscription to the capital stock of a corporation. One, a mutual company has no capital stock to which subscription is necessary; there are no stockholders to speak of, but only members. Two, the amount they receive does not partake of the nature of a profit or income. The quasi-‐ appearance of profit will not change its character; it remains an overpayment, a benefit to which the member-‐policyholder is equitably entitled. Republic v. Sunlife Assurance Company of Canada, 473 SCRA 129 (2005).


B. Distribution of Net Assets and Profits Upon Dissolution1 •

Although a non-‐stock corporation cannot distribute profits or dividends to its members, officers and trustees during its corporate term, in the event of dissolution, after the payment of all liabilities and return of assets received subject to limitations permitting their use, the remaining assets may be distributed to the members, or any class or classes of members, as provided for in its articles of incorporation and by-‐laws; and in the absence of distribution rules in the articles of incorporation and by-‐laws, the remaining assets may be distributed to such

whether an activity is for profit or non-‐profit, and the courts will consider whether dividends have been declared or its members or that is property, effects or profit was ever used for personal or individual gain, and not for the purpose of carrying out the objectives of the enterprise. Manila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963). o

persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution as adopted by the board of trustees and ratified by the members.2 •

Therefore, in a regular non-‐stock corporation it is possible for its net assets, as well as the accumulated profits from its years of operations, to inure to the benefit of private individuals or entities for profit but only as a consequence of dissolution.

II. Theory on Non-‐Stock Corporation (Sections 14(2), 43, 87, 88 and 94[5]) Section 14. Contents of the articles of incorporation. All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the

1

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 Sections 94 and 95, Corporation Code.




incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: x x x 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose,

institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable

the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or purposes: Provided, That a non-‐stock corporation may not include a purpose which would change or contradict its nature as such; x x x Section 43. Power to declare dividends.

contingencies. (n) •

charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage in undertakings such as the investment business where profit is the main or underlying purpose. Although the non-‐stock corporation may obtain profits as an incident to its operation such profits are not to be distributed among its members but must be used for the furtherance of its purposes. People v. Menil, G.R. 115054-‐66, 12

The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid

September 1999 [unrep.]) •

subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-‐thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-‐in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial

A non-‐stock corporation may only be formed or organized for

The rationale for the use of the non-‐profit form for eleemosynary endeavors, such as activities for charitable, religious, scientific, educational, or similar activities, "lies in the chief function of the non-‐distribution constraint, namely, that it helps to overcome contractual failure in situations where such failure is quite likely to occur."1 In other words, the non-‐profit corporation is employed in activities where there would be difficulties in properly monitoring and quantifying the

1

CLARK, CORPORATE LAW (Little, Brown and Company, 1986 ed.), at pp. 699-‐700.




effectiveness and quality of the services rendered, which in essence is covered by the concept of "contractual failure."1 o "Contractual failure" is characterized by the inability of a buyer of services to assure himself that he is getting what he intends to be contracting for; in more general terms, it denotes high monitoring and enforcement 2

costs.

products, the product itself is services bargained for have been an objective gauge of whether properly and adequately delivered or the purchaser thereof is performed, or whether the providers receiving equal value for the thereof, in order to increase their profit amount he has paid margin, have in fact cut corners. therefore. III. Non-‐Applicability of the Nationalization Laws

Stock Corporation

Non-‐Stock Corporation

All net earnings and residual value of the business in a stock corporation can be

Expressed legal prohibition from making such distributions

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corporation. Save for the position of the Secretary, who must be a Filipino citizen and a resident of the Philippines, the prohibition of foreign citizens becoming officers in corporations engaged in business does not apply to the activities of a non-‐ stock corporation which do not fall within the coverage of a nationalized industry or area of business reserved by law exclusively to Filipino citizens. (SEC Opinion No. 12, series of

distributed to its stockholders Both the shareholders and the officers, who control the provision of the service bought, have an incentive not only to be as efficient as

The prohibition in non-‐stock corporations against distribution of profits to its members and officers "is supposed to be helpful in such situations because it gives the buyer

possible and thus to outperform competitors, but also to take advantage of all market imperfections.

some reason to believe that those who appoint and control the actual providers of service and goods will not have an incentive to take advantage of his vulnerability as consumer."3

In case of an activity such as the delivery of tangible

In an enterprise such as education, it is very difficult to monitor whether the

A foreigner may a member or an officer of a non-‐stock

2002, 21 November 2002). •

Nonetheless, the equity requirements when it comes to nationalization rules would still apply to a corporation when operating within the regulated area, for example, even when a true non-‐stock and non-‐profit corporation is engaged in a purely eleemosynary purpose, it would not be qualified to hold private lands when its membership is not at least 60% held by Filipino citizens.4

IV. Delinquency of Membership Dues

1

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 CLARK, CORPORATE LAW (Little, Brown and Company, 1986 ed.), at pp. 699-‐700. 3 CLARK, CORPORATE LAW (Little, Brown and Company, 1986 ed.), at pp. 699-‐700.

4

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.




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Section 68. Indeed, there are fundamental differences that defy equivalence or even an analogy between sale of delinquent stock under Section 68 and sale that occurred in this case. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009). •

Neither Article 1146 or Article 1149 is applicable but Article 1140 of the Civil Code which provides that an action to recover movables shall prescribe in eight (8) years. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009).

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The utter bad faith exhibited by Calatagan brings into operation Articles 19, 20 and 21 of the Civil Code under the Chapter on Human Relations; The obligation of a corporation to treat every person honestly and in good faith extends even to its shareholders or members, even if the latter find themselves contractually bound to perform certain obligations to the corporation. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009).

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membership shall be terminated in the manner and for causes provided in the articles of incorporation or the by-‐laws of a non-‐ stock corporation. Valley Golf & Country Club v. Vda. De Caram, 585 SCRA 218 (2009).

Section 69 of the Corporation Code refers specifically to unpaid subscriptions to capital stock, the sale of which is governed by

A non-‐stock corporation may seize and dispose of the membership share of a fully-‐paid member on account of its unpaid debts to the corporation (i.e., unpaid monthly dues) when it is authorized to do so under the corporate by-‐laws (not by the articles of incorporation), and in spite of the fact that Section 67 of Corporation Code on delinquency sale pertains to payment of shares subscription. The right of a non-‐stock corporation to expel a member through the forfeiture of such member’s share may be established in the by-‐laws alone, and need not be embodied in the articles of incorporation. This is authorized under Section 91 of Corporation Code providing that

Valley Golf & Country Club v. Vda. De Caram Facts: Valley Golf is a duly constituted non-‐stock, non-‐profit corporation which operates a golf course. The members and their guests are entitled to use its facilities and privileges, provided that the shareholders regularly pay their monthly dues. Congressman Fermin Caram, Jr. owned a golf share since 1961. Due to his delinquency despite collection letters, Valley Golf suspended his account and subsequently sold his share in order to collect his outstanding dues, without knowing that Caram already died since 1986. It was not until his estate was settled and the shares given to Vda. De Caram that the heirs were informed of the sale. She was told that she can only claim the remaining balance out of the sale after deducting the outstanding membership dues that Mr. Caram had not paid. The SEC and CA, ruling in favor of Mrs. Caram, noted that under Section 67, paragraph 2 of the Corporation Code, a share stock could only be deemed delinquent and sold in an extrajudicial sale at public auction only upon the failure of the stockholder to pay the unpaid subscription or balance for the share. The section could not have applied in Caram’s case since he had fully paid for the Golf Share and he had been assessed not for the share itself but for his delinquent club dues. Also, pursuant to Section 6 of the Corporation Code, "a provision creating a lien upon shares of stock for unpaid debts, liabilities, or assessments of stockholders to the corporation, should be embodied in the Articles of Incorporation, and




not merely in the by-‐laws.” In the same vein, it was opined that since Section 98 of the Corporation Code provides that restrictions on transfer of shares should appear in the articles of incorporation, by-‐laws and the certificate of stock to be valid and binding on any purchaser in good faith, there was more reason to apply the said rule to club delinquencies

HOWEVER, In order that the action of a corporation in expelling a member for cause may be valid, it is essential, in the absence of a waiver, that there shall be a hearing or trial of the charge against him, with reasonable notice to him and a fair opportunity to be heard in his defense. If the method of trial is not regulated by the by-‐laws of the

to constitute a lien on golf shares. Issue: Whether or not a non-‐stock corporation seize and dispose of the membership share of a fully-‐paid member on account of its unpaid debts to the corporation when it is authorized to do so under the corporate by-‐laws but not by the Articles of Incorporation.

association, it should at least permit substantial justice. Valley Golf acted in clear bad faith when it sent the final notice to Caram under the pretense they believed him to be still alive, when in fact they had very well known that he had already died. That it was in the final notice that Valley Golf had perpetrated the duplicity is especially blameworthy, since it was that notice that carried the final threat that his Golf Share would be sold at public auction should he fail to settle his account on or

Held: YES. BUT there should have been notice and hearing concerning his expulsion and therefore the sale was void. Under Section 91, membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-‐laws. The prevailing rule is that the provisions of the articles of incorporation or by-‐laws of termination of membership must be strictly complied with

before 31 May 1987. Doctrine: Section 91 of the Corporation Code authorizes the sale of membership shares on account of delinquency if such ground is specifically stated in the articles of incorporation or by-‐laws of the non-‐ stock corporation. However, in accordance with public policy, the termination of membership in a non-‐stock corporation should be done

and applied to the letter. Thus, an association whose member fails to pay his membership due and annual due as required in the by-‐laws, and which provides for the termination or suspension of erring members as well as prohibits the latter from intervening in any manner in the operational activities of the association, must be observed because by-‐ laws are self-‐imposed private laws binding on all members, directors and officers of the corporation. These conditions found in by-‐laws duly approved by the SEC warrant due respect and we are disinclined to rule

in accordance with substantial justice. V. Board of Trustees and Corporate Officers

against the validity of the by-‐law provisions.


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The second paragraph of Section 108 of the Corporation Code, although setting the term of the members of the Board of Trustees at five years, contains a proviso expressly subjecting the duration to what is otherwise provided in the articles of incorporation or by-‐laws of the educational corporation—that contrary provision control on the term of office. Barayuga v. Advestist University of the Philippines, 655 SCRA 640 (2011).



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A trustee occupying his office in a hold-‐over capacity could be removed at any time, without cause, upon the election or

appointment of his successor. Barayuga v. Advestist University of the Philippines, 655 SCRA 640 (2011). 1. Right and Manner of Voting for Trustees1 •

General Rule: Straight Voting (Section 24, Corporation Code)

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Exception: Cumulative voting can apply only in a non-‐stock corporation setting when it is provided for in the articles of incorporation or the by-‐laws. o However, the language of Section 24 does not necessarily mean that in the absence of stipulation in the articles or by-‐laws, there is no cumulative voting in a non-‐stock corporation. It is true that a corporation which has capital stock may by its nature (prohibition to distribute profits and eleemosynary purpose) be a non-‐ stock corporation according to jurisprudence. Nevertheless, although it fulfills the twin requisites of non-‐stock and non-‐profit corporation, by virtue of the

more than fifteen (15) in number as may be fixed in their articles of incorporation or by-‐laws, shall, as soon as organized, so classify themselves that the term of office of one-‐ third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-‐third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporation. Unless otherwise provided in the articles of incorporation or the by-‐ laws, officers of a non-‐stock corporation may be directly elected by the members. (n)

fact that it is a corporation that has capital stock provided for in its articles of incorporation, Section 24 provides that cumulative voting would apply. 2. Number and Election of Trustees (Section 92) Section 92. Election and term of trustees. Unless otherwise provided in the articles of incorporation or the by-‐ laws, the board of trustees of non-‐stock corporations, which may be

1

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.


3. Juridical persons as Members of Board of Trustees



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to or similar to the one being used in videoconferencing or teleconferencing, where a participant can see or hear the actual proceedings of a board meeting and actively participate in the deliberation of the Board; but that a trustee may not validly vote by email along, which was deemed an inadequate medium because a user-‐participant’s role in such case is passive

The SEC has also rendered opinions to the effect that juridical persons may become members of the Board of Trustees of a non-‐stock corporation. A non-‐stock corporation whose membership is composed of juridical persons was allowed to be registered, provided that a provision for the classification of members shall include duly designated or authorized representatives of juridical persons as members of the corporation, for purposes of qualifying them as members of the Board of Directors, which shall be provided in the articles of incorporation or by-‐laws.1

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considering that his access to the entire proceedings is limited to the information in print transmitted through the internet.4 5. Election of Officers •

non-‐stock corporation, similar to the rules under stock corporations. However, in a non-‐stock corporation, unless otherwise provided for in the articles of incorporation or the by-‐ laws, officers of a non-‐stock corporation may be elected directly by the members.5

In the case of a condominium corporation where all the members thereof are corporate members or juridical person, the SEC ruled that an officer or duly authorized agent or trustee who has been designated by a corporate unit owner/member or

a condominium corporation as its representative for the express purpose of qualifying him as director, may be eligible to be elected as director; since to rule otherwise would create a situation when there would be no Board of Directors.2 4. Meetings of the Board of Trustees •

SEC has ruled that Section 53 applies, which states: meetings of directors or trustees may be held anywhere in or outside the Philippines, unless the by-‐laws provide otherwise.3

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VI. Conversion of Non-‐Stock Corporation to Stock Corporation •

internet, provided that the internet medium to be used is akin 1

SEC Opinion, 12 May 1995, XXIX SEC QUARTERLY BULLETIN 16 (No. 4, Dec. 1995). 2 SEC Opinion, 16 April 191, citing 2 FLETCHER CYC. OF CORP., 1982 Rev. Vol., Sec. 300 at 93. 3 SEC Opinion No. 27, series of 2003, addressed to Mr. Arthur Mar O. Alivio; SEC Opinion No. 26, series of 2003, addressed to Ms. Jaycel E. Sato.

If the officers in a non-‐stock corporation are directly elected by the members, as allowed under Section 92 of the Corporation Code, the power to remove them is vested directly in the members.6

SEC held that a trustee may now be allowed to vote through the

It is usually the board of trustees that appoints the officers of a

The conversion of a non-‐stock educational institution into a stock corporation is not legally feasible, as it violates Section 87 of Corporation Code that no part of the income of a non-‐stock

4

SEC Opinion No. 26, addressed to Ms. Jaycel E. Sato; SEC Opinion No. 27, series of 2003, addressed to Mr. Arthur Mar O. Alivio. 5 SEC Opinion, 16 April 191, citing 2 FLETCHER CYC. OF CORP., 1982 Rev. Vol., Sec. 300 at 93. 6 SEC Opinion, 24 April 1995, XXIX SEC QUARTERLY BULLETIN 52 (No. 3, Sept. 1995).




corporation may be distributable as dividends to its members, trustees or officers. “Thus, the Commission has previously ruled that a non-‐stock corporation cannot be converted into a stock corporation by a mere amendment of the Articles of Incorporation. For purposes of transformation, it is fundamental that the non-‐stock corporation be dissolved first under any of the methods specified Title XIV of the Corporation Code. Thereafter, the members may organize as a stock corporation directed to bring profits or pecuniary gains to themselves. (SEC Opinion dated 24 February 2003; SEC Opinion dated 10 December 1992). •

The conversion of an existing "non-‐stock non-‐profit" corporation into a "stock corporation" without dissolving it first would be tantamount to distribution of its assets or income to its members inasmuch as after its conversion, the assets of the non-‐stock corporation would now be treated as payment to the subscriptions of the members who will now become the stockholders of the stock corporation.1

VII. What Is a Foundation? (Sections 30 and 34(H), NIRC of 1997; Section 24, Rev. Reg. No. 2; BIR-‐NEDA Regulations No. 1-‐81, as amended) 1. Foundations Not a Special Category under Corporation Code •

The Corporation Code contains no separate provisions, nor does it even refer to "foundations" as separate types of corporations different from non-‐stock corporations. Foundations are

1

SEC Opinion, 24 February 1989, SEC QUARTERLY BULLETIN (No. 2, June 1989); SEC Opinion, 13 May 1992, XXVI SEC QUARTERLY BULLETIN 12 (No. 3, Sept. 1992).

essentially non-‐stock corporations governed by the same Title XI of the Code. What therefore makes foundations different from regular non-‐stock corporations are the privileges granted to it by special laws, essentially in the field of Taxation. 2. Tax-‐Exempt Status NATIONAL INTERNAL REVENUE CODE Sec. 30. Exemptions from Tax on Corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating fort he exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a non-‐ stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-‐stock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members;




(E) Non-‐stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.

(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-‐holder, or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

Section 34. Deductions from Gross Income x x x (H) Charitable and Other Contributions. (1) In General. -‐ Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or

(H) A non-‐stock and nonprofit educational institution; (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone

any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-‐government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon

company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce

recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (5%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs.

finished by them;

(2) Contributions Deductible in Full. -‐ Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions




or entities shall be deductible in full; (a) Donations to the Government. -‐ Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-‐owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional

domestic corporation: (1) Organized and operated exclusively for scientific, research, educational, character-‐building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual; (2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which

development councils and private philantrophic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;

contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner;

(b) Donations to Certain Foreign Institutions or International Organizations. -‐ donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws;

(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and

(c) Donations to Accredited Nongovernment Organizations. -‐ the term 'nongovernment organization' means a non profit


(4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic



corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which

years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds. (3) Valuation. -‐ The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said

the dissolved organization was organized.

property. (4) Proof of Deductions. -‐ Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means: (i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized.

(Important Points from the Provision – Summary from CLV Book)

(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5)


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Under Section 30 of the National Internal Revenue Code of 1997 ("NIRC"), the following corporations, among others, are exempt from corporate income taxation: a. Non-‐stock corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; b. Business leagues, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; c. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;


Therefore both a regular non-‐stock corporation and a foundation are tax-‐exempt institution under Section 30 of the NIRC when they are organized for the eleemosynary purposes specified therein and no profit inures to the benefit of their members, officers and trustees. Nevertheless, the same section provides that “the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be

Section 26 of the NIRC. •

subject to tax imposed under this Code." •

Under Section 34(H)(2)(c) of the NIRC, the definition of foundation is preceded by the qualifying term "non government organization" which means a non-‐profit domestic corporation.

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Under Section 34(H)(1) of the NIRC governing the computation of taxable net income, taxpayers are allowed to deduct from their taxable gross income contributions and gifts actually paid and made within the taxable year "to domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, no part of the net income of which inures to the benefit of any private stockholder or individual."

Under existing revenue regulations, in order for regular non-‐ stock corporations and foundations to establish their tax-‐ exempt status, and thus be relieved of the duty of filing income tax returns and paying income tax, it is necessary that they file an affidavit with the Commissioner of Internal Revenue showing the character of their organizations, the purpose for which they are organized, their actual activities, the source of their income and the disposition thereof, and whether or not any of the income is credited to surplus or inures or may inure to the

From the point of view of tax-‐exemption, foundations enjoy the same privilege, and must undertake the same application process with the BIR to enjoy such privilege, as with regular

non-‐stock corporations. 3. Tax Deductibility of Charitable Contributions3

This tax-‐exempt status of ordinary non-‐stock corporations and foundations only pertain to income earned from pursuing their eleemosynary purposes, and not to other profit-‐seeking venture outside of their main purpose. •


benefit of any private stockholder or individual.1 It has been held, however, in Collector v. V.G. Sinco Educational Corporation, 2 that the formal requirements of Revenue Regulations No. 2 are not mandatory and that an entity concerned may, in the absence of compliance with such requirements, still show that it falls under the provisions of

d. Non-‐stock and non-‐profit educational institution; •

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The extent by which a taxpayer may deduct from his taxable net income the charitable contributions and gifts to regular non-‐ stock corporations organized for any of the purposes enumerated in Section 34(H)(1) is as follows:

1

Section 24, Revenue Regulations No. 2. 100 Phil. 127 (1956). 3 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2




a. For individual taxpayer, 10% of his taxable net income derived from business; and b. For corporate taxpayers, 5% of taxable net income derived from business. •

to be prescribed by the Secretary of Finance but in no case to exceed thirty percent (30%) of the total expenses; and e. The assets of which in the event of dissolution would be distributed to another non-‐profit domestic corporation organized for similar purpose or purposes or to the

On the other hand, under Section 34(H)(2)(c) contributions and gifts made to "foundations" or “nongovernment organization” may be deductible in full by the taxpayer from his taxable gross income. It actually is Section 34(H)(2)(c), which now refers to "foundations" as "accredited nongovernment organizations," and defines and distinguishes them from other corporate entities, as follows: a. Non-‐profit domestic corporation, formed and organized under Philippine laws b. Organized and operated exclusively for scientific, research, educational, character-‐building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part

State for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. •

nongovernment organization is for practical purposes a creature fashioned under NIRC for purposes of tax administration. The requirements laid-‐down by Section 34(H)(2)(c) put more stringent requirements on the foundation as compared to a regular non-‐stock corporation, namely:

of the net income of which inures to the benefit of any private individual; c. Which, not later than the 15th day of the third month after the close of the corporation's taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purposes or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations promulgated; d. The level of administration expense of which, shall on an annual basis, conform with the rules and regulations


It will be noted therefore that a foundation or accredited

a. The limitation of administration expenses to 30% of the corporation's total expenses; and b. The strict form of distribution of the net assets of the corporation in the event of dissolution to similar non-‐ stock corporations or to the State (whereas, it is legal for regular non-‐stock corporation to distribute their net assets to the members or event other entities organized for profit). •

In exchange for such stringent requirements, donations, contributions and gifts to foundations are totally deductible by the taxpayer from his tax gross income, while those to regular non-‐stock corporation are subject to the 10%-‐5% limitations for



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their deduction from the taxable gross income of a taxpayer. Theoretically therefore, taxpayers would have greater motivations to donate and contribute to foundations than to regular non-‐stock corporation because of the greater tax benefits to them.

SECTION 24. Proof of exemption. In order to establish its exemption, and thus be relieved of the duty of filing returns of income and paying the tax, it is necessary that every organization claiming exemption file an affidavit with the Commissioner of Internal Revenue, showing the character of the

The direct benefit granted under Section 34(H)(2)(c) is to the

organization, the purpose for which it was organized, its actual activities, the sources of its income and its disposition, whether or not any of its income is credited to surplus or inures or may inure to the benefit of any private shareholder or individual, and in general, all facts relating to its operations which affect its right to exemption. To such affidavit should be attached a copy of the charter or articles of incorporation, the by-‐laws of the organization, and the latest financial

contributing or donating taxpayer and not to the foundation itself. Whether the entity is a foundation or a regular non-‐stock corporation does not really matter since all donations to them are equally tax-‐exempt. In fact, the foundation is at a greater disadvantage as compared to a regular non-‐stock corporation, since a foundation is subject to the 30% limitation on its administration expenses, whereas a regular non-‐stock corporation is not saddled by such limitation. In addition, a foundation is mandated with greater reportorial obligations to the BIR than the regular non-‐stock corporation since it has to make not later than the 15th of the third month after the close of its taxable year a detailed report. •

In addition, unlike in the ordinary non-‐stock corporation where it is possible upon dissolution for the net assets to be distributed to the members, for foundations, the net assets are required to be distributed to another non-‐profit domestic corporation organized for similar purpose or purposes, or to the State for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.

statement showing the assets, liabilities, receipts, and disbursement of the organization. Upon receipt of the affidavit and other papers by the Commissioner of Internal Revenue, the organization will be informed whether or not it is exempt. When an organization has established its right to exemption, it need not thereafter make and file a return of income as required under Section 46 of the Tax Code. However, the organization should file on or before April 15 of each year, an annual information return under oath, stating its gross income and expenses incurred during the preceding year, and a certificate showing that there has not been any substantial change in its By-‐Laws, Articles of Incorporation, manner of operation and activities as well as sources and disposition of income. (As amended by Revenue Regulations No. 7-‐64, approved November 25, 1964.)

REVENUE REGULATION NO. 2


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Formal requirements of Rev. Reg. No. 2 are not mandatory and an entity may, in the absence of compliance with such



requirements, still show that it falls under the provisions of Section of NIRC. Collector v. V.G. Sinco Educational Corp., 100 Phil. 127 (1956). 4. Registration as Qualified Donee-‐Institutions1

non-‐stock corporations. In fact, a foundation would suffer a diminution of the extent of power by which to distribute its net assets in the event of dissolution, as compared to a regular non-‐ stock corporation.

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BIR-‐NEDA Regulations No. 1-‐81, as amended

stock corporation can equally enjoy tax-‐exempt status.

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Regulations No. 1-‐81, as amended, it must file with the Government and Tax Exempt Corporation Division of the BIR a sworn statement showing the character or the organization, the purpose for which it is organized, its actual activities, the sources of income and its disposition; and other facts relating to their operations which are relevant to their qualification as donee institutions. Once the foundation is qualified as a donee institution by the issuance of BIR Certificate of Registration, it

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For purposes of Corporate Law, with respect to corporate powers and capabilities, and rules on internal management and membership relations, there are no distinctions between foundations and regular non-‐stock corporations, and there is no advantage enjoyed in this realm by foundations over regular

1

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

When it comes to charitable contributions, a foundation is limited in the manner by which it disburses the same by the 30% limitation on its administrative expenses, whereas no such limitation applies to regular non-‐stock corporations. In addition, both the donors to, and the management of, foundations are saddled with reportorial requirements on donations given and received, as the case may be. On the other hand, because donations to foundations which have qualified as donee-‐

For a foundation to qualify for full deduction, under BIR-‐NEDA

must issue certificates of donations in the form prescribed by the BIR on every donation or gift it receives within thirty (30) days from receipt of the donation. 5. In Summary2

In the realm of income taxation, both a foundation and a non-‐

institutions are deductible in full, there may be greater motivation from benefactors to give to foundations rather than to a regular non-‐stock corporation. VIII. Dissolution: Right of Members to Proportionate Share of Remaining Assets (Sections 94 and 95; Section 34(H)(2)(c), 1997 NIRC). Section 94. Rules of distribution. In case dissolution of a non-‐stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore;




2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements;

the provisions of this Title, may be adopted by a non-‐stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission

3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines

thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least two-‐thirds (2/3) of the members having

substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-‐laws, to the extent that the articles of incorporation or the by-‐laws, determine the distributive rights of

voting rights present or represented by proxy at such meeting. (n)

members, or any class or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. (n) Section 95. Plan of distribution of assets. A plan providing for the distribution of assets, not inconsistent with


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As provided for under Sections 94 and 95 of Corporation Code, in the event of dissolution of a non-‐stock corporation, its assets shall be distributed in accordance with the rules. Unless, it is so provided in the Articles of Incorporation or By-‐Laws, the members are not entitled to any beneficial or vested interest over the assets of the non-‐stock corporation. In other words, non-‐stock, non-‐profit corporations hold their funds in trust for the carrying out of the objectives and purposes expressed in its charter. (SEC Opinion dated 24 February 2003; SEC Opinion dated 13 May 1992).

17. Non-Stock Corporation and Foundations

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