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/ 06:54 AM February 22, 2013

(First of two parts)

AS mentioned previously, Section 22 of the Tax Code defines “shares of stock” to include warrants and/or options to purchase shares of stock.


The Securities and Exchange Commission (SEC) Amended Implementing Rules and Regulations of the Securities Regulations Code (SRC) defines a warrant as a class of derivative. It describes a warrant as a right to subscribe or purchase new shares or existing shares in a company on or before a predetermined date.

The unissued shares of a corporation which may be purchased by a Warrant Holder upon the exercise of the right granted under the warrant are the underlying shares. A warrant may be either detachable or non-detachable.


Based on the definition of a warrant, a warrant holder may earn income by virtue of the warrant if he sells the warrant, whether the same is detachable or not-detachable or when he exercises his right to subscribe to the underlying shares or existing shares in the company. In other words, a warrant holder cannot earn income from a warrant by simply owning the warrant.

A warrant holder has to either sell the warrant or exercise the right to subscribe to the company’s shares and thus become a shareholder entitled to receive dividends.  Thus, while warrants are treated for tax purposes as being taxed in the same manner as shares of stock, for legal purposes, a warrant holder would not have the same right to receive dividends as that of a shareholder which is recorded in the books of the company as a stockholder of a corporation.

However, for  tax purposes, earnings from a warrant, whether from selling the same or earning dividends from exercising the right to subscribe to shares will be taxed in much the same way as the taxation of shares of stock since, as we mentioned, warrants fall within the definition of shares of stock under our Tax Code.

Consequently, if a warrant holder sells the warrant, he may be subject to capital gains tax (CGT) on the sale of the warrant. The tax imposed shall be upon a final tax on the net capital gains realized during the taxable year from the sale, barter, exchange or disposition of the warrant,  as follows:
If the amount of capital gain is not over P100,000 then the tax rate is only 5 percent. But if the amount of capital gain is in excess of P100,000 then the tax rate is 10 percent.

However, if the warrant holder is a resident of a country with which the Philippines has an existing tax treaty, the provisions of the treaty would be made to apply. For example, if a warrant holder is a resident of the United Kingdom (UK), the sale of the warrant would not be subject CGT.

Under the Tax Treaty between the Philippines and the UK with regard to gains from the alienation of property provides that CGT from the alienation of property (other than immovable, movable related to a Philippine permanents establishment,, ships/aircraft) are taxable only in the state where the seller is a resident. Thus, since the company is a UK resident, any gains on the sale of the warrant would be exempt from Philippine CGT and subject only to tax in UK. (To be continued.)

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