CORPORATION

LAW REVIEWER (2013-2014)

NON-STOCK CORPORATIONS AND FOUNDATIONS

ATTY. JOSE MARIA G. HOFILEA

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)

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)

CORPORATION LAW REVIEWER (2013-2014)

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).

ATTY. JOSE MARIA G. HOFILEA

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

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.

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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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

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

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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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

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

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.

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

(2013 ed.). Manila, Philippines: Rex Book Store.

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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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).

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).

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
members 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 Carams 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

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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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.

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

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 corporationthat
contrary provision control on the term of office. Barayuga v.
Advestist University of the Philippines, 655 SCRA 640 (2011).

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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)

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

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

(2013 ed.). Manila, Philippines: Rex Book Store.

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

3. Juridical persons as Members of Board of Trustees

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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-participants 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

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

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

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).

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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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

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;

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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

(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

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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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

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

(4) The assets of which, in the even of dissolution,

would be distributed to another nonprofit domestic

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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)

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

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;

CORPORATION LAW REVIEWER (2013-2014)

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.

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.

ATTY. JOSE MARIA G. HOFILEA

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;

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:

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

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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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

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

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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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

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

Formal requirements of Rev. Reg. No. 2 are not mandatory and

an entity may, in the absence of compliance with such

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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.

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

stock corporation can equally enjoy tax-exempt status.

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

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

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;

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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

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

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

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).