What is the rule concerning the retention of surplus profits by stock corporations?
Stock corporations are generally prohibited from retaining surplus profits in excess of one hundred percent (100%) of their paid-in capital stock (SEC. 42, Revised Corporation Code of the Philippines). This rule, known as the “improperly accumulated earnings tax” principle, encourages the distribution of profits. However, three exceptions permit retention: when justified by definite corporate expansion projects approved by the board; when the corporation is contractually prohibited from declaring dividends by a loan agreement with creditors; or when special circumstances, such as the need for special reserves for probable contingencies, clearly require the retention. Absent these exceptions, excessive retention can lead to penalties or mandatory dividend declarations.
02 November 2025
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