Managing the Tax Implications of Licensing Wind Technology to Local Branches: Philippine Withholding Tax on Foreign Royalties from Wind Farm Operations

Introduction: why withholding tax matters for wind technology licensing

Philippine wind projects often rely on foreign-owned technology—patents, proprietary processes, software, and technical know-how—licensed to a Philippine project company or local branch. When the Philippine payor remits license fees or royalties to a foreign licensor, Philippine tax law generally treats the payment as Philippine-sourced royalty income, which is subject to withholding tax (commonly final withholding tax for non-residents). Correct classification and rate selection are important because errors typically lead to deficiency withholding tax assessments, disallowance of treaty relief, and exposure to penalties.

Governing rules: what makes a “royalty” taxable in the Philippines

Under the National Internal Revenue Code of 1997 (Tax Code), royalties are treated as income from sources within the Philippines when the royalty is for the use of, or privilege to use, in the Philippines intellectual property or similar rights (including patents, designs, secret processes, trademarks, and related property or rights). This sourcing principle is the starting point for Philippine withholding tax on outbound royalty payments. (National Internal Revenue Code of 1997, as amended; Section 42 on source rules; see also the discussion of royalties’ Philippine-source nature in BIR Ruling OT-015-2025, 2025.)

As a practical point: a wind farm’s use in the Philippines of licensed turbine designs, blade profiles, control algorithms, SCADA-related software, or protected engineering processes commonly falls within the Tax Code’s royalty concept when the agreement grants a right to use protected property or proprietary information in the Philippines. (National Internal Revenue Code of 1997, as amended; Section 42; BIR Ruling OT-015-2025, 2025.)

Who is subject to withholding: resident payor and foreign licensor (NRFC)

Outbound royalties are typically paid to a foreign corporation that is not engaged in trade or business in the Philippines (NRFC). In that setting, Philippine law generally imposes an income tax on the NRFC’s gross Philippine-sourced income, and collection is enforced through withholding at source by the Philippine payor.

Older codifications and amendments also reflect the long-standing Philippine approach of withholding on payments to non-resident foreign corporations and on royalty-type income. (P.D. No. 1158-A, 1977, Section 53 on withholding at source.)

Default domestic rule vs. treaty relief

Domestic rule (baseline): absent a tax treaty, royalties paid to an NRFC are generally taxed on a gross basis and collected through final withholding. Current rates and the detailed operation of withholding depend on the specific Tax Code provision applicable and subsequent amendments, but for many outbound royalties the baseline is the Tax Code’s non-resident foreign corporation regime.

Treaty rule (possible reduction): where the foreign licensor is a resident of a treaty partner country and all treaty conditions are met (including beneficial ownership and proper documentation), the royalty withholding rate may be reduced to the treaty ceiling. Philippine administrative practice and case law recognize that treaty rates may apply to royalty payments when the treaty conditions are satisfied. (Commissioner of Internal Revenue v. Fluor Daniel Philippines, Inc., CTA En Banc No. 921, 2013.)

Typical treaty outcome: rates depend on the treaty and the facts

Treaties commonly set maximum Philippine tax rates on royalties and sometimes create different brackets depending on the nature of the royalty or the status of the Philippine payor (for example, special treatment if the payor is a registered enterprise in preferred activities).

For illustration, a BIR ruling applying the Philippines–Malaysia treaty confirmed that, absent proof that the royalties were paid by a Board of Investments-registered enterprise engaged in preferred activities, the higher treaty rate applied (25%) rather than the lower rate (15%). (BIR Ruling No. ITAD-015-25, 2025.)

Scenario	Likely tax approach	Rate outcome (illustrative)
Foreign licensor is not entitled to treaty benefits (no treaty, or conditions not met)	Apply Tax Code NRFC rule; withhold at source on gross royalties	Domestic statutory rate (depends on applicable Tax Code provision)
Foreign licensor is a treaty resident and beneficial owner; complete documentation	Apply treaty cap on royalties	Treaty rate (varies by treaty; e.g., Malaysia treaty example applied 25% absent BOI “registered enterprise” proof)

“Most favored nation” (MFN) clauses: when a lower royalty rate can (and cannot) be claimed

Some tax treaties include an MFN clause that may allow a lower Philippine royalty withholding rate if the Philippines later agrees to a lower rate with a third country for royalties of the same kind under similar circumstances. Philippine jurisprudence and BIR practice emphasize that MFN is not automatic.

Two recurring limits appear in Philippine authorities:

• Same kind of royalties: the royalty category must match (e.g., patent/know-how/software, depending on treaty language).
• Similar double-taxation relief mechanism: the compared treaties must provide sufficiently similar relief arrangements; otherwise, “similar circumstances” is not met.

In Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc. (G.R. No. 127105, 1999), the Supreme Court refused MFN-based reduction where the relevant treaties did not provide substantially the same tax credit mechanism, so the royalties were not paid under “similar circumstances.” (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., G.R. No. 127105, 1999.)

The Supreme Court reiterated that MFN application requires proof of both the “same kind” of royalties and similarity in the double taxation relief mechanism; failure to establish these conditions defeats the claim for a lower rate. (Cargill Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 203346, 2020.)

Recent BIR rulings applying the PH–US treaty MFN clause likewise deny attempts to import a 10% rate from another treaty due to differences in double-taxation relief mechanisms, and instead apply the treaty’s standard royalty rate. (BIR Ruling No. ITAD-016-25, 2025; BIR Ruling No. ITAD-018-25, 2025.)

Special situation: Income Tax Holiday (ITH) for wind projects and what it may cover

Many wind projects are BOI-registered and may enjoy Income Tax Holiday incentives under their registration. A relevant BIR ruling on a wind power company confirmed that income payments directly attributable to revenues generated from sales of electricity during the ITH period remain exempt from income tax (and consequently from withholding tax), even if received after the ITH period, provided the income was generated during the ITH period. (BIR Ruling No. 441-2022, December 14, 2022.)

Important caution: the scope of ITH is typically focused on income from the registered activity (e.g., sale of electricity). Whether a particular licensing structure (especially if involving related parties, offshore licensors, and separate fee streams) is covered by ITH depends on registration terms, the nature of the income, and whether the payment is part of the registered activity’s income stream. (BIR Ruling No. 441-2022, December 14, 2022.)

Classification issues in licensing: royalties vs. business income (and why it matters)

The withholding tax outcome depends heavily on whether a payment is properly classified as a royalty (passive income) versus ordinary business income. The BIR has taken the position that certain franchise fees received by a corporation may be ordinary business income (not passive royalty income) when the fees arise from the corporation’s primary business purpose—changing the applicable tax treatment. (BIR Ruling OT-015-2025, 2025.)

For wind technology licensing, classification questions often arise in these scenarios:

• Technology license bundled with services: a single fee covers both IP use and engineering support, raising allocation questions.
• Software and updates: whether a payment is for a license (royalty) or for services/sale depends on contract terms and actual rights granted.
• Intragroup arrangements: shared services or “management fees” may be recharacterized if they function as royalties.

Administrative issuances and retroactivity: limits when the BIR changes its view

When the BIR issues interpretations that reclassify payments (for example, treating certain software payments as royalties), retroactive application that prejudices taxpayers is restricted under Section 246 of the Tax Code, as applied in case law. The Court of Tax Appeals (En Banc) held that an issuance reclassifying software payments as royalties could not be applied retroactively to cover periods before its effectivity if it would prejudice taxpayers. (Commissioner of Internal Revenue v. Fluor Daniel Philippines, Inc., CTA En Banc No. 921, 2013.)

For wind projects with long-running license agreements, this principle matters in audit defense where the BIR attempts to apply a later interpretation to earlier years.

Common compliance steps for Philippine payors (wind farm operator/local branch)

For Philippine entities paying foreign licensors, the usual compliance points include:

• Confirm classification: determine whether payments are royalties, services, or a mixed stream requiring allocation (contract and actual use matter).
• Identify treaty entitlement early: verify the foreign licensor’s treaty residency, beneficial ownership, and documentary requirements before remittance.
• Apply the correct rate and withhold on time: under-withholding typically leads to assessments against the payor as withholding agent.
• Document BOI/registered enterprise status if invoking a lower bracket: as reflected in treaty applications where the lower rate depended on proof of BOI registration and preferred activity engagement. (BIR Ruling No. ITAD-015-25, 2025.)
• Be cautious with MFN claims: MFN requires proof of same-kind royalties and similar double-taxation relief mechanisms, per Supreme Court doctrine. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., G.R. No. 127105, 1999; Cargill Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 203346, 2020.)

Illustrative scenarios in wind technology licensing

Scenario 1: Offshore licensor grants patent and know-how license for turbine controls. If the Philippine wind operator uses the patent/know-how in the Philippines, the payment is generally Philippine-sourced royalty income, subject to withholding; treaty relief may reduce the rate if conditions are met. (National Internal Revenue Code of 1997, as amended; Section 42; Commissioner of Internal Revenue v. Fluor Daniel Philippines, Inc., CTA En Banc No. 921, 2013.)

Scenario 2: The payor claims an MFN-based lower treaty rate. The claim will fail if the taxpayer cannot establish that the comparable treaty offers similar relief from double taxation and covers royalties of the same kind. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., G.R. No. 127105, 1999; Cargill Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 203346, 2020.)

Scenario 3: Wind project is under ITH and receives FIT-related billings after ITH ends. Income directly attributable to sales of electricity during the ITH period remains exempt, even if collected later, based on the ruling’s interpretation. (BIR Ruling No. 441-2022, December 14, 2022.)

Conclusion: recommendations for managing withholding tax on foreign royalties in wind projects

For licensing wind technology to Philippine branches or project companies, the starting point is that royalties for IP and know-how used in the Philippines are Philippine-sourced and generally subject to withholding. If treaty relief is pursued, the payor should confirm treaty residency, beneficial ownership, and eligibility for any lower bracket (e.g., registered enterprise conditions where applicable). MFN claims should be approached conservatively because Supreme Court doctrine requires proof not only of comparable royalty type but also similarity of the treaties’ double-taxation relief mechanisms. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., G.R. No. 127105, 1999; Cargill Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 203346, 2020.)

As a risk-control measure, wind farm operators should (1) separate royalty and service fee components clearly in contracts, (2) retain documentation supporting treaty positions and BOI/registration claims where relevant, and (3) periodically review withholding positions in light of current rulings and case law—especially for long-term technology licenses.

About Nicolas and De Vega Law Offices

 Nicolas and de Vega Law Offices is a full-service law firm in the Philippines.  You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines.  You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected]. Visit our website https://ndvlaw.com.