FOREIGN INVESTMENT IN THE PHILIPPINES
The law governing the participation of foreign entities in economic and commercial activities in the Philippines is Republic Act No. 7042, as amended, otherwise known as the Foreign Investments Act of 1991 (FIA). According to the FIA, it is the policy of the State to attract, promote, and welcome productive investments from foreign individuals, partnerships, corporations, and governments, including their political subdivisions, in activities which significantly contribute to national industrialization and socioeconomic development, to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws.
To encourage foreign investments, Philippine laws expressly recognize various rights of foreign investors in the Philippines, including the rights to repatriation of investments, remittance of earnings, and freedom from expropriation (except for public use or in the interest of national welfare or defense and upon payment of just compensation).
Foreigners may hold interests in corporations, partnerships, and other entities in the Philippines, provided that such corporations, partnerships, and other entities are not engaged in an activity that is reserved by law only to Philippine citizens or to entities that are wholly owned by Philippine citizens. The maximum amount of foreign equity allowed in a company depends on the type of activity in which the company is engaged.
EXTENT OF FOREIGN EQUITY
The FIA provides for the formulation of a Foreign Investment Negative List (Negative List), which comprises a list of economic activities where foreign equity is either prohibited or limited to a certain percentage. The Negative List consists of two component lists: List A and List B. List A contains areas of investment where foreign ownership is limited by the mandate of the Constitution and specific laws. List B contains areas of investment where foreign ownership is limited for reasons of security, defense, risk to health and morals, or protection of local small and medium-sized enterprises. A new Negative List applies prospectively and does not affect foreign investment that already exists on the date of its publication. Except for activities where restrictions on foreign equity are imposed under the Philippine Constitution or statutes, the President of the Philippines may amend the Negative List. However, amendments to List B may not be made more often than once every two years.
A non-Philippine national may conduct business or invest in a domestic enterprise in the Philippines up to 100 percent of its capital, provided that the following conditions are complied with:
- The investment must be made in a domestic market enterprise operating in areas outside the Negative List or in an export enterprise whose products and services do not fall within Lists A and B of the Negative List. A domestic market enterprise is defined as an enterprise that produces goods for sale, provides services, or engages in any business activity within the Philippines. An export enterprise is either a manufacturer, processor, or service provider (including tourism) that exports 60 percent or more of its output, or a trader that purchases products domestically and exports 60 percent or more of such purchases.
- The applicant's country or state must allow Filipino citizens and corporations to conduct business therein.
- The investment must have a paid-in capital of at least the peso equivalent of US $200,000.
If the investment is intended for a domestic market enterprise (an export enterprise is exempt from this minimum capitalization requirement), the capitalization requirements may be reduced to the peso equivalent of US $100,000 under the following conditions:
- If the enterprise's activity involves advanced technology, as determined and certified by the Department of Science and Technology.
- If the enterprise employs at least 50 direct employees, as certified by the appropriate regional office of the Department of Labor and Employment.
Some of the activities that are included in the 12th Negative List under Executive Order (EO) No.175 (which took effect on 27th of June 2022) are as follows:
List A: Foreign Ownership is Limited By Mandate of the Constitution and Specific Laws
NO FOREIGN EQUITY
- Mass media, except recording and internet business
- Practice of professions, except in cases specifically allowed by the law following the prescribed conditions therein
- Professions where foreigners are not allowed to practice in the Philippines, except if the subject to reciprocity as provided in pertinent laws.
- Corporate practice of professions with foreign equity restrictions under pertinent laws.
- Retail trade enterprises with paid-up capital of less than ₱25,000,000.00
- Cooperatives, except investments of former natural-born citizens of the Philippines
- Organization and operation of private detective, watchmen or security guards agencies
- Small-scale mining
- Utilization of marine resources in archipelagic waters, territorial sea, and exclusive economic zone as well as small-scale utilization of natural resources in rivers, lakes, bays, and lagoons
- Ownership, operation, and management of cockpits
- Manufacture, repair, stockpiling, and/or distribution of nuclear weapons
- Manufacture, repair, stockpiling, and/or distribution of biological, chemical, and radiological weapons and anti-personnel mines
- Manufacture of firecrackers and other pyrotechnic devices
Up to 25% Foreign Equity
- Private recruitment, whether for local or overseas employment
- Contracts for the construction of defense-related structures
Up to 30% Foreign Equity
- Advertising
Up to 40% Foreign Equity
- Procurement of infrastructure projects in accordance with Section 23.4.2.1(b), (c), and (e) of the Implementing Rules and Regulations (IRR) of RA. 9184
- Exploration, development, and utilization of natural resources
- Ownership of private lands, except for a natural-born citizen who has lost his Philippine citizenship and has the legal capacity to enter into a contract under Philippine laws.
- Operation of public utilities
- Educational institutions other than those established by religious groups and mission boards, for foreign diplomatic personnel and their dependents and other foreign temporary residents, or for short-term high-level skills development that do not form part of the formal education system as defined in Section 20 of Batas Pambansa (BP) No. 232 (1982)
- Culture, production, milling, processing, trading except retailing, of rice and corn and acquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof, subject to a period of divestment.
- Contracts for the supply of materials, goods, and commodities to Government-Owned and Controlled Corporation (GOCC), company, agency or municipal corporation
- Operation of deep-sea commercial fishing vessels
- Ownership of condominium units
- Private radio communications network
List B: Foreign Ownership is Limited for Reason of Security, Defense, Risk to Health and Morals, and Protection of Small and Medium Scale Enterprises
Up to 40% Foreign Equity
- Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National Police (PNP) clearance:
- Firearms (handguns to shotguns), parts of firearms and ammunition therefor, instruments or implements used or intended to be used in the manufacture of firearms;
- Gunpowder;
- Dynamite;
- Blasting supplies;
- Telescopic sights, sniper scope and other similar devices
- Ingredients used in making explosives:
- Chlorates of potassium and sodium;
- Nitrates of ammonium, potassium, sodium barium, copper (11), lead (11), calcium, and cuprite;
- Nitric acid;
- Nitrocellulose;
- Perchlorates of ammonium, potassium, and sodium;
- Dinitrocellulose;
- Glycerol;
- Amorphous phosphorus;
- Hydrogen peroxide;
- Strontium nitrate powder;
- Toluene.
However, the manufacture or repair of these items may be authorized by the Chief of the PNP to non-Philippine nationals; provided that a substantial percentage of output, as determined by the said agency, is exported. Provided further that the extent of foreign equity ownership allowed shall be specified in the said authority/clearance (RA No. 7042 as amended by RA No. 8179).
- Manufacture and distribution of dangerous drugs
- Sauna and steam bathhouses, massage clinics, and other like activities regulated by law because of risks posed to public health and morals, except wellness centers
- All forms of gambling, except those covered by investment agreements with Philippine Amusement and Gaming Corporation (PAGCOR)
- Domestic market enterprises with paid-in equity capital of less than the equivalent of US$200,000
- Micro and small domestic markets that involves the following:
- Advance technology as determined by Department of Science and Technology (DOST)
- Endorsed as a start-up or start-up enablers by Department of Trade Industry, or DOST
- Employ at least fifty (50) direct employees with paid-in equity capital of less than the equivalent of US$100,000
ANTI -DUMMY LAW
The Philippines has an Anti-Dummy Law that imposes criminal and civil penalties on individuals violating foreign equity limitations.
Under the Anti-Dummy Law, a person who, having in their name or under their control a right, franchise, privilege, property, or business, the exercise or enjoyment of which is expressly reserved by law to Philippine citizens or to corporations or associations where at least 60 percent of the capital is owned by such citizens, is prohibited from:
- Permitting or allowing the use, exploitation, or enjoyment of such right, franchise, privilege, property, or business by a person, corporation, or association not possessing the qualifications prescribed by law.
- Permitting or allowing any person not meeting the prescribed qualifications to intervene in the management, operation, administration, or control of such right, franchise, privilege, property, or business, whether as an officer, employee, or laborer, with or without remuneration (except for technical personnel whose employment may be specifically authorized by the Secretary of Justice).
However, foreign nationals may serve as members of the board or governing body of corporations engaged in partially nationalized activities in a number proportionate to their actual and allowable equity in the company.
FORMS OF INVESTMENT VEHICLE
In the Philippines, there are three main forms of business organizations: sole proprietorship, partnership, and corporation.
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Sole Proprietorship: This is a business owned and operated by a single natural person. The sole proprietor bears unlimited liability, and there is no legal distinction between the owner and the business entity.
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Partnership: A partnership involves two or more individuals or entities pooling resources and expertise to carry out a business venture. Partnerships can be general partnerships, where all partners share equally in the profits and losses, or limited partnerships, where there are both general partners and limited partners with restricted liability.
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Corporation: A corporation is a legal entity separate from its owners (shareholders) and is characterized by limited liability. There are domestic corporations, which can be joint ventures or wholly owned subsidiaries, and foreign corporations can establish branches or representative offices in the Philippines.
- Domestic Corporation: A domestic corporation may be either a joint venture or a wholly owned subsidiary.
- Branch and Representative Office: These are extensions of their head offices and do not have distinct legal personalities from the parent company.
- Partnership: Foreign investors can also participate as limited or general partners in partnerships.
Among these forms, the corporation is generally preferred for investments in the Philippines due to factors such as management powers and liability. Foreign investors, when establishing businesses not subject to nationality restrictions, typically choose between setting up a Philippine subsidiary or a Philippine branch office.
DOMESTIC CORPORATION V. BRANCH
If the proposed business activity is not subject to any foreign equity limitations, a foreign investor has the option to establish either a domestic corporation or a branch of a foreign corporation in the Philippines. Each type of corporate vehicle comes with its own advantages and disadvantages, including considerations such as the extent of liability of the parent company/head office, taxation, and administrative costs.
However, if the proposed activity is subject to foreign equity limitations, the foreign investor must establish a domestic corporation with a Philippine national as a joint venture partner.
In general, corporations that are more than 40 percent foreign-owned, as well as branches of foreign corporations classified as domestic market enterprises, are required to have a minimum paid-in capital of at least US $200,000. This paid-in capital requirement can be reduced to US $100,000 for domestic market enterprises whose activities involve advanced technology or which employ at least 50 direct employees.
Entities that qualify as export enterprises, meaning they export 60 percent or more of their output, are not subject to any minimum paid-in capital requirement.
OTHER TYPES OF CORPORATE VEHICLE
REPRESENTATIVE OFFICE
A representative office in the Philippines serves to directly engage with the clients of its parent company and to undertake activities such as information dissemination, promotion of the company's products, and quality control. However, it is important to note that a representative office is not permitted to generate income within the Philippines and is fully supported financially by its head office.
To establish a representative office, an initial inward remittance of US $30,000 is required to fund its operations. This amount covers the necessary expenses for setting up and running the representative office in the Philippines.
REGIONAL OR AREA HEADQUARTERS
A multinational company has the option to establish a regional or area headquarters in the Philippines, serving as a supervision, communications, or coordination center for its subsidiaries, branches, or affiliates in the Asia Pacific region.
However, it's crucial to note that the regional or area headquarters is not permitted to earn or derive income in the Philippines. Furthermore, it is prohibited from participating in the management of any subsidiary or branch office it may have in the Philippines, or from soliciting or marketing goods or services on behalf of its parent company or any related entities.
The expenses of the regional headquarters must be financed by the head office or parent company from external sources in an acceptable foreign currency. To fund its operations in the Philippines, the head office or parent company must initially remit at least US $50,000 into the country, followed by an annual remittance of US $50,000 thereafter.
The regional headquarters enjoys several tax and regulatory benefits:
- It is exempt from income tax, value-added tax (VAT), and all local licenses, fees, and charges, except for real property tax on land improvements and equipment.
- It is entitled to tax- and duty-free importation of equipment and materials necessary for training and conferences.
REGIONAL OPERATING HEADQUARTERS (ROHQ)
A multinational company has the option to establish a Regional Operating Headquarters (ROHQ) in the Philippines to serve its own affiliates, subsidiaries, or branches not only within the Philippines but also in the Asia Pacific region and other foreign markets.
A ROHQ is permitted to derive income in the Philippines by providing qualifying services, which include:
- General administration and planning
- Business planning and coordination
- Sourcing/procurement of raw materials and components
- Corporate finance advisory services
- Marketing control and sales promotion
- Training and personnel management
- Logistics services
- Research and development services and product development
- Technical support and maintenance
- Data processing and communication
- Business development
To establish a ROHQ, the multinational company must initially remit at least US $200,000 into the Philippines. This initial investment is required to fund the operations and activities of the ROHQ.
REGIONAL WAREHOUSES
A multinational company engaged in international trade and supplying spare parts, components, semi-finished products, and raw materials to its distributors or markets in the Asia Pacific region and other foreign areas, and which has established or intends to establish a regional or area headquarters and/or ROHQ in the Philippines, may also set up a regional warehouse in the country.
The activities permitted for the regional warehouse are limited to:
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Serving as a supply depot for the storage, deposit, and safekeeping of spare parts, components, semi-finished products, and raw materials. This includes activities such as packing, covering, putting up, marking, labeling, and cutting or altering the goods to the customer’s specifications. Additionally, it involves mounting and/or packing these into kits or marketable lots thereof.
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Filling up transactions and sales made by its head office or parent company.
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Serving as a storage or warehouse of goods purchased locally by the multinational's head office for export abroad.
However, it's important to note the restrictions on the regional warehouse:
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It may not engage in trade or directly solicit business, promote any sale, or enter into any contract for the sale or disposition of goods in the Philippines.
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The regional warehouse may not derive income from Philippine sources. Its operations are primarily intended to support the multinational company's activities in the Asia Pacific region and other foreign areas, rather than engaging in local trade or commercial transactions.
OFFSHORE BANKING UNIT (OBU)
A foreign bank has the option to operate an Offshore Banking Unit (OBU) in the Philippines. The OBU may take the form of a branch, subsidiary, or affiliate of a foreign banking corporation that has been authorized by the Bangko Sentral ng Pilipinas (BSP) to conduct business with funds sourced from external sources.
Offshore Banking Units are established to cater primarily to offshore clients and engage in activities such as offshore banking, offshore financing, and similar transactions involving funds from external sources. They are typically subject to specific regulations and oversight by the BSP to ensure compliance with international banking standards and to safeguard the stability of the Philippine financial system.
POST- REGISTRATION REQUIREMENTS
After incorporation or registration with the Securities and Exchange Commission (SEC), newly established entities in the Philippines must adhere to various post-registration requirements. These requirements encompass obtaining permits, licenses, and registrations from different government agencies and local government offices.
These post-registration obligations typically include securing permits and licenses related to taxation, employee welfare, and the commencement of operations. Such requirements ensure that the business is compliant with relevant laws and regulations and can operate legally within the country.
Moreover, businesses operating in highly regulated industries may be subject to additional licensing or registration requirements specific to their respective sectors. These special requirements are imposed by government agencies with jurisdiction over the particular industry to ensure compliance with industry-specific regulations and standards. Compliance with these additional requirements is essential for businesses to operate lawfully and effectively within the Philippines.
