Conclusion
Establishing a Philippine entity as a foreigner or as a foreign corporation normally begins with a corporate registration with the Philippine Securities and Exchange Commission (SEC). While many foreign companies hire Filipino freelancers without establishing a presence in the Philippines, the Revised Corp. Code (as well as the legacy corporation code) requires the registration of foreign companies “doing business in the Philippines.”
The establishment of a Philippine corporation is aimed at providing the necessary protection to foreign investors in the Philippines. A foreign corporation without a license to do business in the Philippines is not permitted to maintain or intervene in any judicial or administrative action in the Philippines but may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine law.
Attracting foreign investments in the Philippines has been a key policy of the Philippine government since the 1980s, strengthened by the Foreign Investment Act of 1991 which covers all investment areas other than banking and financial institutions governed by the Bangko Sentral ng Pilipinas. FIA encourages foreign investments that “significantly expand livelihood and employment opportunities for Filipinos; enhance economic value of farm products; promote the welfare of Filipino consumers; expand the scope, quality and volume of exports and their access to foreign markets; and/or transfer relevant technologies in agriculture, industry and support services.”
Companies that are established primarily for export purposes are not restricted by FIA and referred to as export market enterprises, which are service or manufacturing companies with more than 60 percent of sales or purchases being exported.
In general, foreign companies are allowed to own more than 40 percent equity in a Philippine-registered corporation as long as capitalization requirements are met. Domestic market enterprises, businesses in which less than 60 percent of sales or purchases are exported, can be wholly owned by a foreigner (individual or corporate) subject to meeting a $200,000 capitalization requirement. However, for retail businesses, such as restaurants, the capitalization requirement set by the Retail Trade Liberalization Act is a bit higher at $2.5 million.
The list above is non-exhaustive and based on Executive Order 65 on “Promulgating the Eleventh Regular Foreign Investment Negative List” signed on October 29, 2018. With the 11th FINL, notable liberalization in foreign investments allowed include the following:
- Internet businesses.
- Training centers engaged in short-term high-level skills development.
Depending on the purpose for establishing a presence in the Philippines, foreign investors (individuals and corporations) generally opt to register as a domestic corporation or as a branch office in the Philippines. While foreign investors can register as a proprietor in a sole proprietorship or as a partner in a partnership, these alternative forms of legal structure are not common.
The following are the common corporate structures pursued by foreign investors:
1. Domestic corporation
Foreign investors can enter the Philippines as a domestic corporation formed in accordance with the laws of the Philippines subject to equity restrictions discussed in the earlier section. A domestic corporation is suited for foreign individual investors seeking to establish a local corporation or a foreign corporate investor seeking to do business in the Philippines other than the continuation of the parent company’s business operations.
As part of the revised corporation code, incorporators and directors are no longer subject to the residency restrictions provided under the legacy corporation code.
2. Branch.
A branch office registration is an alternative for foreign corporations to enter and do business in the Philippines. In general, a branch office is normally wholly owned by the foreign corporation serving as the head office, the minimum capitalization of $200,000 for domestic market enterprises will apply.
3. Representative office.
While a branch office registration allows income generation in the Philippines, a representative office is not allowed to derive income from the Philippines. In fact, all operations of a representative office is limited to non-income generating activities such as information dissemination, acting as a communication center, and promotion of the products of its parent company. As a representative office, the minimum paid-up capital is $30,000, representing the initial inward remittance, and all expenses of the representative office should be paid-for by the parent company.
Foreign investments in the Philippines require understanding of the legal, tax and financial complexities to avoid future problems on the purpose of business and compliance with the relevant laws and regulations in the Philippines. It is advised that foreign investors secure assistance from firms providing consulting and regulatory compliance assistance.
Filbert Tsai is the managing director of UpSmart Strategy Consulting Inc. He leads the consulting practice of UpSmart and specializes in corporate finance and financial transformation for SMEs and family businesses. He was previously a consulting manager at Ernst & Young LLP in the United Kingdom.
This column accepts contributions from accountants, especially articles that are of interest to the accountancy profession, in particular, and to the business community, in general. These can be e-mailed to boa.secretariat.@gmail.com.