Legal Updates

The Philippine Capital Market

Deep capital markets broaden access to financing by offering alternatives to conventional lending channels such as banks, financing, and lending companies. Active trading in capital markets makes it easier for investors to enter or exit investment positions, thereby boosting their financial liquidity.  

Yet, in the Philippines,  there has been limited participation from investors and relatively modest capitalization of the local stock market. Based on the 2021 Financial Inclusion Survey Report, only 1 out of 10 (or 10%) of Filipino Adults have investment products.

While high trading volumes are generally attractive to potential investors, their appeal diminishes when friction costs are high. The existing tax structure in the Philippines poses a considerable obstacle to the development of its capital markets. For instance, the stock transaction tax (STT) is imposed at 0.6% of the gross selling price — significantly higher than the 0.1% levied in Indonesia and Malaysia, and the nil rate in Singapore and Vietnam.

This discourages trading activity and reduces market liquidity. While larger foreign investors can easily shift to neighboring countries with lower or no stock transaction taxes, local retail investors are left with the less attractive options of either bearing the burden of high friction costs or reducing their trading volume.

Another key contributor to this problem is the country’s complex and burdensome tax regime, and inconsistent tax rates which sow confusion and compliance challenges for taxpayers. The complex tax regime discourages investment participation —hindering the Philippine capital market’s growth and global competitiveness.

The CMEPA

To address this problem, President Ferdinand Marcos Jr. signed into law Republic Act No. 12214, otherwise known as the Capital Markets Efficiency Promotion Act (CMEPA), on May 29, 2025. Primarily, CMEPA rests on three main policies, namely: (1) align passive income tax rates with neighboring countries, (2) streamline and simplify tax structure to minimize confusion, and (3) reduce transaction costs and barriers to entry on capital markets.

The law shall take effect on July 1, 2025, following its full publication in the Official Gazette or a newspaper of general circulation.

On Debt Financing

Prior to CMEPA, interest income was subject to a wide range of tax rates—from fully exempt to as high as 20%—depending on the taxpayer, the source, and the term of maturity, among others, creating significant confusion.

CMEPA streamlines the taxation of interest income by imposing a uniform final withholding tax of 20% on interest income earned from bank deposits (in any currency), deposit substitutes, trust funds, and similar financial instruments. Interest income from foreign currency deposits, which was previously subject to a lower final tax rate of 15%, is now taxed at the uniform 20% rate, eliminating preferential treatment and further promoting domestic banking institutions. This standardization simplifies tax compliance and ensures equitable treatment for all investors.

However, the revised tax rates only apply to Filipino citizens, resident aliens, nonresident aliens engaged in business in the Philippines, and domestic corporations. Nonresident aliens not engaged in business and nonresident foreign corporations remain subject to the general rate of 25% final withholding tax.

The President also vetoed the proposed removal of the income tax exemption for nonresident foreign currency deposit unit (FCDU) transactions. Hence, any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system, remains to be exempt from income tax.

On Equity Financing

Listed Shares

For the sale or exchange of listed shares, the Stock Transaction Tax (STT) has been substantially reduced from 0.6% to 0.1% of the gross selling price or gross value in money. This lower STT applies to transactions conducted both on the Philippine Stock Exchange and through foreign stock exchanges.

Moreover, the sale, barter, or exchange of listed shares transacted through the local stock exchange remains exempt from documentary stamp tax (DST).

Unlisted Shares

The taxation of unlisted shares has also been rationalized. Under the CMEPA, the capital gains tax on the sale, exchange, or transfer of shares in both domestic and foreign corporations is now uniformly pegged at 15%.

Prior to CMEPA, the sale of unlisted domestic shares was subject to a 15% capital gains tax, while gains from the sale of foreign shares by residents were included in regular taxable income, subject to rates of 20%/25% for corporations and up to 35% for individuals. The new 15% final capital gains tax on unlisted foreign shares levels the playing field by aligning their tax treatment with that of domestic shares.

Documentary Stamp Tax (DST) on Original Issuance

For both listed and unlisted shares, the CMEPA reduces the cost of capital infusion by lowering the DST on original share issuances. Previously imposed at 1% of the par value or actual consideration, the DST is now reduced to 0.75%. This reform aligns the DST on equity with the DST on original issues of debt instruments, effectively removing the prior preferential treatment afforded to debt financing over equity.

Mutual Funds and UITFs

Pursuant to CMEPA, the original issuance, redemption, and other forms of disposition of mutual fund shares and UITF units are now exempt from DST. This exemption further reduces transaction costs and encourages greater participation of small investors in collective investment vehicles.

From the foregoing, the CMEPA stands as a landmark reform that seeks to revitalize the Philippine capital market. By lowering friction costs—e.g., cutting the STT from 0.6% to 0.1% and reducing the DST on original issuance from 1% to 0.75%—and streamlining passive income taxation, the CMEPA encourages broader market participation, and aligns the Philippines’ tax regime with regional and global standards.

This article is only for informational and educational purposes.  It is not intended as a legal advice or opinion. For assistance and legal queries, please contact general@srmo-law.com.