Value Added Tax (VAT) on Lease of Real Property (Commercial and Residential Units)

In general, all forms of lease of properties held primarily for lease to customers in the ordinary course of trade or business, whether personal or real, shall be subject to 12% Value Added Tax (VAT), except or unless the gross annual receipts of the lessor do not exceed P1,919,500 and is non-vat registered shall be subject to 3% percentage tax under Section 116 of the Tax Code

Gross receipts from lease of commercial units are subject to 12% VAT if the property leased is located in the Philippines regardless of the place where the contract of lease or licensing agreement was executed.

In a lease contract, advance payment by the lessee may be: a loan to the lessor from the lessee, an option money for the property, and a security deposit to insure the faithful performance of certain obligations of the lessee to the lessor are not be subject to VAT. But a security deposit that is applied to rental is subject to VAT at the time of application. A prepaid rental is subject to VAT to the lessor in the month when received, regardless of the accounting method applied by the lessor.

While, the gross receipts from lease of "residential units" are subject to the following rules: If the monthly rental is not more than P12,800 per unit, per month, regardless of the aggregate annual rentals and if the monthly rental is more than P12,800 per unit, per month but the aggregate annual rentals do not exceed P1,919,500 are VAT exempt subject to 3% percentage tax under Section 116 of the Tax Code. However, if the monthly rental exceed P12,800 per unit, per month and the aggregate annual rentals exceed P1,919,500 shall be subject to 12% Value Added Tax (VAT). Provided, every 3 years thereafter, the amount shall be adjusted to its present value using the Consumer Price Index, as published by the NSO; Provided, further, that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year.

References: Revenue Regulations No. 16-2005 and Revenue Regulations No. 16-2011 which took effect  November 1, 2005 and January 1, 2012, respectively.

Please refer: http://philippinetaxtalk.blogspot.com/2018/06/new-rule-lease-of-residential-units.html of New Rule: Lease of Residential Units Exempt From VAT & Exempt From 3% Percentage Tax.