FOREIGN INVESTMENT IN THE PHILIPPINES
The law that governs 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 that is allowed in a company depends on the type of activity that the company is engaged in.
1. EXTENT OF FOREIGN EQUITY
The FIA provides for the formulation of a Foreign Investment Negative List (“Negative List”) – a list of economic activities where foreign equity is either prohibited or limited to a certain percentage. The Negative List has two component lists: List A and List B. List A contains areas of investment where foreign ownership is limited by the mandate of the Philippine Constitution or by 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 is prospective in application and will not affect foreign investment that already exists on the date of its publication. Except with respect to 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 do business or invest in a domestic enterprise in the Philippines to the extent of 100 percent of its capital, provided that the following conditions are complied with:
- a. It is investing in a domestic market enterprise in areas outside the Negative List or it is investing 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 an enterprise which produces goods for sale or renders service or otherwise engages in any business in th e Philippines. An export enterprise is a manufacturer, processor, or service (including tourism) enterprise 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.
- b. The country or state of the applicant must also allow Filipino citizens and corporations to do business therein.
- c.It must have a paid-in capital of at least the peso equivalent of US $200,000
If it will engage in business as a domestic market enterprise (an export enterprise is not required to comply with this minimum capitalization requirement). The capitalization requirements of a domestic market enterprise may be reduced to the peso equivalent of US $100,000 (i) if its activity involves advanced technology as determined and certified by the Department of Science and Technology, or (ii) if it 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 Seventh Negative List (which took effect on 6 January 2007) are as follows:
- No Foreign Equity
- Mass media except recording (Art. XVI, Sec. 11 of the Constitution· Presidential Memorandum dated 05 May 1994
- Practice Professional (Art. XXI, sec. 14 of the constitution, Sec. 1 of RA 5181, Sec. 7.j of RA 8981
- Pharmacy (RA 5 921)
- Radiologic and x-ray technology (RA 7431)
- Criminology (RA 6506)
- Forestry (RA 6239)
- Law (Art. VIII, Section 5 of the Constitution; Rule 13 8 Sec. 2 of the Rules of Court of the Philippines)
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- Retail trade enterprises with a paid-up capital of less than US $2.5 million
- Private security 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 (Art. XII, Sec. 2 of the Constitution)
- Ownership, operation and management of cockpits (Sec. 5 of PD 449)
- Manufacture, repair, stockpiling and/o distribution of nuclear weapons (Art. II, Sec. 8 of the Constitution)
- Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-personnel mines (various treaties to which the Philippines is a signatory and conventions supported by the Philippines)
- Manufacture of firecrackers and other pyrotechnic devices (Sec. 5 of RA 7183)
- Up to Twenty percent (20%) Foreign Equity
- Private Radio Communication network (RA 3846)
- Up to 25 percent Foreign Equity
- Private recruitment companies, whether for local or overseas employment
- Contracts for the construction and repair of locally funded public works except infrastructure/development projects covered by RA 7718 and projects that are foreign-funded or assisted and required to undergointernational competitive bidding
- Contracts for the construction of defense-related structures
- Up to 30 percent Foreign Equity
- Advertising
- Up to 40 percent Foreign Equity
- Exploration, development, and utilization of natural resources
- Ownership of private lands
- Operation and management of public utilities
- Ownership, establishment, and administration of educational institutions
- Contracts for the supply of materials, goods, and commodities to government-owned or controlled corporations, companies, agenciesor municipal corporations
- Culture, production, milling, processing, trading (except retailing), and acquisition of rice and corn and the byproducts thereof
- Acting as project proponent and facility operator of a build -operate- transfer project requiring a public utilities franchise
- Ownership of condominium units where the common areas of the condominium project are co -owned by owners of the separate units or owned by a corporation
- All forms of gambling
Persons that will engage in construction activities in the Philippines are also required to obtain a license from the Philippine Contractors Accreditation Board (“PCAB”). Under the rules of the PCAB, the license is reserved for and issued only to Filipino sole proprietorships or partnerships/corporations with at least 60 percent Filipino equity participation and duly organized and existing under and by the laws of the Philippines.
The foregoing is a non-exhaustive enumeration of the sectors/activities that are subject to foreign equity limitations.
2. ANTI- DUMMY LAW
The Philippines has an Anti-Dummy Law that imposes criminal and civil penalties on persons violating foreign equity limitations.
Under the Anti-Dummy Law, a person who, having in his name or under his control a right, franchise, privilege, property or business, the exercise or enjoyment of which is expressly reserved by law to Philippine citizens or to corporatio ns or associations where at least 60 percent of the capital is owned by such citizens, is prohibited from (a) permitting or allowing the use, exploitation or enjoyment of such right, franchise, privilege, property or business by a person, corporation or as sociation not possessing the qualifications prescribed by law, or (b) in any manner permitting or allowing any person not so qualified to intervene in the management, operation, administration or control of such right, franchise, privilege, property or bus iness, whether as an officer, employee, or laborer, with or without remuneration (except technical personnel whose employment may be specifically authorized by the Secretary of Justice). However, foreign nationals may serve as members of the board or gover ning body of corporations engaged in partially nationalized activities in a number proportionate to their actual and allowable equity in the company.
3. FORMS OF INVESTMENT VEHICLE
There are three general forms of business organizations in the Philippines: so le proprietorship, partnership, and corporation.
A sole proprietorship is a business owned and operated by a single natural person. The liability of the sole proprietor is unlimited , and there is no distinct and separate personality of the business enterprise from that of the owner.
Subject to nationality requirements pertaining to the intended activity, Philippine law allows foreign investors to establish and register a domestic corporation, a branch, and a representative office.
A domestic corporation may be a joint venture or a wholly owned subsidiary. A branch and a representative office are mere extensions of their head offices. A foreign investor may also invest as a limited or generalpartner in a partnership.
For reasons relating to the exercise of management powers and the extent of liability, among others, the corporation is generally the most preferred vehicle for investments in the Philippines among the various forms of business organizations . Foreign investors that wishtoengageinabusinessthatisnotsubjecttonationalityrestrictionsgenerally choose between establishing a Philippine subsidiary and establishing a Philippine branch office.
4. DOMESTIC CORPORATION v. BRANCH
If the proposed activity is not subject to any foreign equity limitation, a foreign investor may be set up as a domestic corporation or a branch of a foreign corporation in the Philippines. These two types of corporate vehicle have their relative advantages and disadvantages relating to, among others, the extent of liability of the parent company/head office, taxation, and the administrative costs of maintaining the same.
If the proposed activity is subject to foreign equity limitations, a foreign investor will have to set up a domestic corporation with a Philippine national as a joint venture partner.
Generally, corporations that are more than 40 percent foreign-owned as well as branches of foreign corporations that are considered domestic market enterprises must have a paid-in capital of at least US $200,000. The paid-in capital requirement is 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 (enterprises that export 60 percent or more of their output) are not subject to any minimum paid -in capital requirement.
5. OTHER TYPES OF CORPORATE VEHICLE
5.1. Representative Office
A representative office may be established to deal directly with the clients of its parent company in the Philippines and to undertake activities , including, but not limited to, information dissemination and promotion of the company’s products as well as quality control. A representative office may not derive income in the Philippines and is fully subsidized by its head office.
A representative office must have an initial inward remittance of US $30,000 to fund its operations.
5.2. Regional or Area Headquarters
A multinational company may establish a regional or area headquarters in the Philippines to serve as supervision, communications, or coordination center for its subsidiaries, branches, or affiliates in the Asia Pacific region.
The regional or area headquarters may not earn or derive income in the Philippines. It may not participate, in any manner, in managing any subsidiary or branch office it may have in the Philippines; neither may it solicit or market goods or services, whether on behalf of its parent company or its branches, affiliates, subsidiaries, or any other company.
Its expenses 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, its head office or parent company must initially remit into the Philippines at least US $50,000 and thereafter US $50,000 annually.
The regional headquarters is not subject to income tax, value -added tax, and all local licenses, fees, and charges, except real property tax on land improvements and equipment. It enjoys tax – and duty-free importation of equipment and materials necessary for training and conferences.
5.3. Regional Operating Headquarters (“ROHQ”)
A multinational company may establish a ROHQ in the Philippines to service its own affiliates, subsidiaries, or branches in the Philippines, in the Asia Pacific region, and other foreign markets.
A ROHQ is allowed to derive income in the Philippines by performing any of the following qualifying services:
- 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
A ROHQ must initially remit into the Philippines at least US $200,000.
5.4. Regional Warehouses (“ROHQ”)
A multinational company which is engaged in international trade and supplies 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 will simultaneously establish a regional or area headquarters and/or ROHQ in the Philippines, may also establish a regional warehouse in the Philippines.
The activities of the regional warehouse are limited to:
- serving as a supply depot for the storage, deposit, and safekeeping of spare parts, components, semi-finished products, and raw materials, including packing, covering, putting up, marking, labeling and cutting or altering the goods to the customer’s specifications, and mounting and/or packing these into kits or marketable lots thereof;
- filling up transactions and sales made by its head office or parent company; and
- serving as a storage or warehouse of goods purchased locally by the head office of the multinational for export abroad.
The regional warehouse 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. It may not derive income from Philippine sources.
5.5. Offshore Banking Unit (“OBU”)
A foreign bank may operate an OBU in the Philippines. The OBU may be a branch, subsidiary, or affiliate of a foreign banking corporation authorized by the Bangko Sentral ng Pilipinas (“BSP”) to conduct business with funds from external sources.
6. Post-Registration Requirements
Upon incorporation/registration with the SEC, the newly incorporated/registered entity must comply with certain basic registration and licensing requirements with different government agencies. These post -registration requirements include obtaining from certain government agencies and local government offices tax, employee – welfare-related, and commencement-of-operations permits, licenses, and registrations.
In addition to the basic post-registration requirements, certain businesses in highly regulated industries may be subject to special licensing or registration requirements with the government agency having jurisdiction over such industry.