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business requirements



Choice of Entity

The main vehicles used by foreign investors are corporations and branches. Joint ventures tend to be feasible investment vehicles only for construction projects and certain energy operations.

The regulatory environment tends to favor the establishment of a subsidiary over a branch, as foreign ownership restrictions preclude operation of a branch in certain industries

There are no significant impediments to investment repatriation. However, to facilitate the remittance of profits, inward foreign investments should be registered with the Bangko Sentral ng Pilipinas.

Branch profits remittances are subject to 15% tax under the Tax Code, although this may be reduced under some tax treaties. The statutory tax rate on profits remitted by way of dividend is 35%, although tax treaties and other factors are likely to reduce the rate to 10% or 15% in practice.


Corporation

marco polo hotel Forming a corporation requires between five and 15 incorporators, each of whom must hold at east one share of stock. A majority of the directors (or trustees) must be resident in the Philippines.

Financial institutions, retail trade enterprises, and foreign owned corporations are subject to minimum capitalization requirements. The minimum paid-up capital for foreign-owned corporations is US$200,000, unless they are export-oriented, involve advanced technology or will employ at least 50 employees.


Branch

Foreign corporations are required to obtain a license from the Securities and Exchange Commission (SEC) before they may do business in the Philippines, which typically involves remitting capital of at least US$200,000 to the Philippines. Failure to obtain a license will result in the corporation losing its ability to sue in local courts.


Foreign Ownership Restrictions

Foreign ownership is restricted in corporations undertaking activities listed in the Foreign Investments Negative List (FINL). Branches cannot engage in activities listed in the FINL because they do not have the requisite Filipino ownership.

Foreign ownership participation in management.

To set up a domestic corporation, a majority of the incorporators/directors must be Philippine residents.

The ratio of foreign directors to the total number of directors should generally not exceed the ratio of foreign equity to the total equity in the corporation.

No employee representation is necessary in the board of directors. Read more


Liquidating an Investment

There are no impediments to shareholders liquidating their investments by selling or assigning their shares, other than restrictions that may be contained in the bylaws of corporation, such as minimum holding periods for initial public offerings.


Tax Considerations

Branches receive the most favorable tax treatment for foreign investors. Application of a relevant tax treaty may overcome some domestic limitations on deductibility, while the treaty source rules potentially allow allocated interest and royalties expense to avoid Philippine withholding taxes. PEZA-registered branches are also exempt from the 15% branch profit remittance tax.


Professional Advice

Philippine registration requirements are quite extensive, and the consequences of failing to comply with all obligations can extend to being prevented from undertaking further business activities in the Philippines or being precluded from pursuing legal actions in court.

Using local professional firms to coordinate and submit documents can help to ensure that the various registration requirements are met.

The Intellectual Property Code requires the inclusion of mandatory clauses and the exclusion of prohibited clauses in technology transfer agreements which, if not complied with, may result in the contract being unenforceable.

Careful drafting may also be required to ensure there are no unexpected tax consequences. Local professional firms can review draft contracts and identify provisions that might have unexpected consequences for the investor.


Company Law

Philippine law governing commercial activities is derived from a mixture of Spanish civil law and U.S. common law. The Philippine Corporation Code, Tax Code, Securities Code, and Insurance Code are generally based on their U.S. counterparts. The laws on sales, partnership, agency, contracts, credit transactions, contained in the Philippine Civil Code of 1949, are based on the Spanish Civil Code.

The Foreign Investments Act of 1991 is also relevant for investors, because it places constraints on the extent to which foreign investors may own enterprises that engage in certain activities. There are also special laws that regulate certain industries.

United States precedents are not binding on Philippine courts. However, when the law concerned is based on its United States counterpart, the precedents can have persuasive effect.

There are no industries closed to private enterprise. The Philippine Constitution encourages private enterprises to broaden the base of their ownership. However, the exploration, development and utilization of natural resources are under the full control and supervision of the government. For this purpose, the government may enter into co-production, joint venture or production-sharing agreements with private enterprises that are at least 60% owned by Filipino citizens or Philippine nationals.

As an exception, large scale exploration, development and utilization of minerals, petroleum and other mineral oils are open to foreign owned corporations in areas of financial or technical assistance.


Restrictions on Foreign Ownership

Investment laws permit 100% foreign ownership in a Philippine enterprise, unless the enterprise will be undertaking activities listed in the Foreign Investment Negative Lists (FINL). The FINL is issued under the Foreign Investments Act of 1991, and prescribes the maximum level of foreign equity for covered activities.

The banking industry is not included in the FINL but is subject to ownership restrictions under specific legislation. Currently, foreign ownership in Philippine banks is limited to 60%, although the General Banking Law of 2000 has established a framework for 100% foreign ownership in the future.

There are no foreign ownership restrictions for insurance companies, but there are minimum capitalization requirements. If foreign ownership is 60% or greater, an insurance company requires P250 million capital as well as a contributed surplus fund of P50 million. For foreign owned reinsurance companies, the capitalization requirement is P500 million. Securities with a significant market value also have to be deposited with the Insurance Commission.

Private ownership of land is reserved for Philippine citizens and corporations owned at least 60% by Filipinos. Foreigners may own buildings on leased land. A private corporation that is 60% Filipino owned may hold alienable public lands only through lease. Under the Investors' Lease Act of 1993, foreign investors may lease land for certain industrial and agricultural projects for a straight period of 50 years, renewable for another 25 years.

The Philippines has entered into bilateral investment agreements with Argentina, Australia, Austria, Bahrain, Bangladesh, Belgo-Luxembourg, Cambodia, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, India, Indonesia, Iran, Italy, Korea, Kuwait, Mongolia, Myanmar, the Netherlands, Pakistan, Portugal, Romania, Russia, Spain, Sweden, Switzerland, Taiwan Province of China, Thailand, Turkey, United Kingdom, Venezuela, and Vietnam.

These treaties essentially provide for the mutual promotion and protection of investments in the territories of the contracting countries. They ensure fair and equitable treatment of investments by investors in the other contracting country, provide for unrestricted transfer of investments and investment returns, and establish procedures for settling disputes between investors in the contracting countries.


(Acknowledgment: these are excerpts from the book ”Doing Business and Investing in the Philippines” by the Isla Lipana & Co., a member of the PriceWaterHouseCoopers with website at www.pwc.com/ph)

The Sixth Regular Foreign Investment Negative List took effect on 8 January 2005. This list does not include banking and other financial institutions, which are governed and regulated by the General Banking Law of 2000 and other laws administered by the BSP, or insurers abbreviations used

  • CA - Commonwealth Act
  • LOI - Letter of instruction
  • PD - Presidential decree
  • RA - Republic Act
  • SEC - Securities and Exchange Commission
  • BOT - Build-Operate-Transfer

List A:

Foreign ownership is limited by mandate of the Constitution and specific laws

No foreign equity
  1. Mass media except recording (Art. XVI, Sec. 11 of the Constitution; Presidential Memorandum dated 04 May 1994)
  2. Practice of all professions
    1. Engineering
      • Aeronautical engineering
      • Agricultural engineering
      • Chemical engineering
      • Civil engineering
      • Electrical engineering
      • Electronics and communication engineering
      • Geodetic engineering
      • Mechanical engineering
      • Metallurgical engineering
      • Mining engineering
      • Naval architecture and marine engineering
      • Sanitary engineering
    2. Medicine and allied professions
      • Medicine
      • Medical technology
      • Dentistry
      • Midwifery
      • Nursing
      • Nutrition and dietetics
      • Optometry
      • Pharmacy
      • Physical and occupational therapy
      • Radiological and x-ray technology
      • Veterinary medicine
    3. Accountancy
    4. Architecture
    5. Criminology
    6. Chemistry
    7. Customs brokerage
    8. Environmental planning
    9. Forestry
    10. Geology
    11. Interior design
    12. Landscape architecture
    13. Law
    14. Librarianship
    15. Marine deck officers
    16. Marine engine officers
    17. Master plumbing
    18. Sugar technology
    19. Social work
    20. Teaching
    21. Agriculture
    22. Fisheries
(Art. XII, Sec. 14 of the Constitution; Sec. 1 of RA 5181)
  1. Retail trade enterprises with paid-up capital of less than US$2,500,000 (Sec. 5 of RA 8762)
  2. Cooperatives (Ch. III, Art. 26 of RA 6938)
  3. Private security agencies (Sec. 4 of RA 5487)
  4. Small-scale mining (Sec. 3 of RA 7076)
  5. 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)
  6. Ownership, operation and management of cockpits (Sec. 5 of PD 449)
  7. Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Art. II, Sec. 8 of the Constitution)
  8. 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)
  9. Manufacture of firecrackers and other pyrotechnic devices (Sec. 5 of RA 7183)

Up to 20% foreign equity
  1. Private radio communications network (RA 3846)

Up to 25% foreign equity
  1. Private recruitment, whether for local or overseas employment (Art. 27 of PD 442)
  2. Contracts for the construction and repair of locally funded public works (Sec. 1 of Commonwealth Act No. 541, Letter of Instruction No. 630) except:
    • Infrastructure/development projects covered in RA 7718; and
    • Projects which are foreign funded or assisted and required to undergo international competitive bidding (Sec. 2(a) of RA 7718)
  3. Contracts for the construction of defense-related structures (Sec. 1 of CA 541)

Up to 30% foreign equity
  1. Advertising (Art. XVI, Sec. 11 of the Constitution)

Up to 40% foreign equity
  1. Exploration, development and utilization of natural resources (Art. XII, Sec. 2 of the Constitution)
  2. Ownership of private lands (Art. XII, Sec. 7 of the Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 of RA 9182)
  3. Operation and management of public utilities (Art. XII, Sec. 11 of the Constitution; Sec. 16 of CA 146)
  4. Ownership/establishment and administration of educational institutions (Art. XIV, Sec. 4 of the Constitution)
  5. 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 (Sec. 5 of PD 194; Sec. 15 of RA 8762)
  6. Contracts for the supply of materials, goods and commodities to government-owned or controlled corporation, company, agency or municipal corporation (Sec. 1 of RA 5183)
  7. Project proponent and facility operator of a BOT Project requiring a public utilities franchise (Art. XII, Sec. 11 of the Constitution; Sec. 2(a) of RA 7718)
  8. Operation of deep sea commercial fishing vessels (Sec. 27 of RA 8550)
  9. Adjustment companies (Sec. 323 of PD 612 as amended by PD 1814)
  10. Ownership of condominium units where the common areas in the condominium
    project are co-owned by the owners of the separate units or owned by a corporation (Sec. 5 of RA 4726)

Up to 60% foreign equity
  1. Financing companies regulated by the Securities and Exchange Commission (SEC) (Sec. 6 of RA 5980 as amended by RA 8556)
  2. Investment houses regulated by the SEC (Sec. 5 of PD 129 as amended by RA 8366)

List B:

Foreign ownership is limited for reasons of security, defense, risk to health and morals and protection of small- and medium-scale enterprises

Up to 40% foreign equity
  1. Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National Police (PNP) clearance:
    1. Firearms (handguns to shotguns), parts of firearms and ammunition, I instruments or implements used or intended to be used in the manufacture of firearms
    2. Gunpowder
    3. Dynamite
    4. Blasting supplies
    5. 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
    6. Telescopic sights, sniper scope and other similar devices.
      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 7042 as amended by RA 8179)
  2. Manufacture, repair, storage and/or distribution of products requiring Department of National Defense (DND) clearance:
    1. Guns and ammunition for warfare
    2. Military ordnance and parts thereof (e.g.,torpedoes, depth charges, bombs, grenades, missiles)
    3. Gunnery, bombing and fire control systems and components
    4. Guided missiles/missile systems and components
    5. Tactical aircraft (fixed and rotary-winged), parts and components thereof
    6. Space vehicles and component systems
    7. Combat vessels (air, land and naval) and auxiliaries
    8. Weapons repair and maintenance equipment
    9. Military communications equipment
    10. Night vision equipment
    11. Stimulated coherent radiation devices, components and accessories
    12. Armament training devices
    13. Other as may be determined by the Secretary of the DND

However, the manufacture or repair of these items may be authorized by the Secretary of National Defense 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 7042 as amended by RA 8179).


  1. Manufacture and distribution of dangerous drugs (RA 7042 as amended by RA 8179)
  2. Sauna and steam bathhouses, massage clinics and other like activities regulated by law because of risks posed to public health and morals (RA 7042 as amended by RA 8179)
  3. All forms of gambling, e.g. race track operation (RA 7042 as amended by RA. 8179)
  4. Domestic market enterprises with paid-in equity capital of less than the equivalent of US$200,000 (RA 7042 as amended by RA 8179)
  5. Domestic market enterprises which involve advanced technology or employ at least fifty (50) direct employees with paid-in-equity capital of less than the equivalent of US$100,000 (RA 7042 as amended by RA 8179)


Philippine eagle Notes:
  1. This is limited to Filipino citizens save in cases prescribed by law.
  2. Full foreign participation is allowed for retail trade enterprises: (a) with paid-up capital of US$2,500,000 or more provided that investments for establishing a store is not less than US$830,000; or (b) specializing in high end or luxury products, provided that the paid-up capital per store is not less than US$250,000 (Sec. 5 of RA 8762)
  3. Domestic investments are also prohibited (Art. II, Sec. 8 of the Constitution; Conventions/Treaties to which the Philippines is a signatory)
  4. Full foreign participation is allowed through financial or technical assistance agreement with the President (Art. XII, Sec. 2 of the Constitution)
  5. Full foreign participation is allowed provided that within the 30-year period from start of operation, the foreign investor shall divest a minimum of 60% of their equity to Filipino citizens (Sec. 5 of PD 194; NFA Council Resolution No. 193 s. 1998)
  6. No foreign national may be allowed to own stock in financing companies or investment houses unless the country of which he is a national accords the same reciprocal rights to Filipinos (Sec. 6 of RA 5980 as amended by RA 8556; PD 129 as amended by RA 8366)


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