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
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.
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.
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
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.
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.
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.
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.
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