What Law Governs Foreign Investments in the Philippines?

Republic Act (RA) 7042, as amended by RA 8179, also known as the Foreign Investments Act of 1991, is the basic law that governs foreign investments in the Philippines. Under this law, foreign investors are allowed to invest one hundred percent (100%) equity in companies engaged in almost all types of business activities subject to certain restrictions as prescribed in the Foreign Investments Negative List, which is a shortlist of investment areas or activities which may be opened to foreign investors and/or reserved to Filipino nationals.

The Foreign Investments Act clearly require that the minimum capital is Two Hundred Thousand US Dollars (USD200,000) if the activity to be engaged in:

1. Is not included in the Foreign Investments Negative List;
2. Is more than forty percent (40%) foreign-owned; and
3. Will cater to the domestic market.

The capital may be lowered to One Hundred Thousand US Dollars (USD100,000) if activity involves advance technology or the company employs at least fifty (50) direct employees.

A foreign company that exports at least sixty percent (60%) of its output, or a trader that purchases products domestically and will export at least sixty percent (60%) of its purchases, the required capital is only Five Thousand Pesos (Php5,000).

A corporation wherein at least sixty percent (60%) Filipino - forty percent (40%) foreign-owned and will cater to the domestic market, their paid up capital can be less than Two Hundred Thousand US Dollars (USD200,000).

Equal Investment Rights for Former Filipino Nationals
While most areas of businesses have limits for foreign investors, Section 9 of the amended Foreign Investments Act of 1991 lists the following types of businesses where former natural-born Filipinos can enjoy the same investment rights as a Philippine citizen:

1. Cooperatives
2. Rural banks
3. Thrift banks and private development banks
4. Financing companies

Former natural born Filipinos can also engage in activities under List B of the Foreign Investments Negative List, meaning their investments shall be treated as Filipino or will be considered as forming part of Filipino investments in activities closed or limited to foreign participation.

The equal investment rights of former Filipino nationals do not extend to activities under List A of Foreign Investments Negative List that are reserved for Filipino citizens under the Constitution.

Former natural born Filipino have also been given the right to be transferees of private land up to a maximum of five thousand (5,000) square meters in the case of urban land or three (3) hectares in the case of rural land to be used for business or other purposes.

What are the Business Structures Allowed Under the Philippine Laws? (Part 2)

In my previous blog, we learned that deciding what business structure you will adopt for your business defines the costing, legal, tax, ownership, immigration issues, and jurisdiction requirements that your enterprise will encounter.

We also learned that the following are the types of business structures under allowed under the Philippine Laws:

Organized Under Philippine Laws

• Sole Proprietorship
• Partnership
• Corporation

Organized Under Foreign Laws

• Branch Office
• Representative Office
• Regional Headquarters (RHQs)
• Regional Operating Headquarters (ROHQs)

Business structured organized under Philippine Laws was discussed in my previous blog. Today, I will discuss those that are organized under foreign laws.

Branch Office
A branch office is an extension of the parent company. Registration as a branch office in the Philippines entitles a foreign corporation to do business in the country without a need to create a separate entity from its parent company. As such, it is not required to have directors or officers separate and distinct from its parent company.

The minimum required capitalization for a branch office is Two Hundred Thousand US Dollars (USD200,000) that may be reduced to One Hundred Thousand US Dollars (USD100,000) if the branch office is either engaged in activities involving advance technology or hired at least fifty (50) direct employees.

Since a branch office is wholly foreign-owned business entity, it cannot engage in any business activity listed under the Philippine Foreign Investments Negative List.

Representative Office
This type of business structure serves as a liaison office between its parent company and its clients. It does not derive income from the Philippines and its business activities are limited to the following:

1. Information dissemination
2. Promotion of the products of the head office
3. Provide quality control of the products of the head office
4. Act as a communication center

A representative office cannot have income in the Philippines as it can only be a cost center of the head office to provide back office support services.

The operation of the representative office is fully subsidized by its head office and must have a minimum inward remittance of Thirty Thousand US Dollars (USD30,000) to cover its operating expenses and is required to be liquidated annually.

Regional Headquarters (RHQs)

Regional headquarters act as the parent company's supervisory, communication, and coordinating centers for their subsidiaries, affiliates, or branches in the Asia-Pacific region. It may also serve as an administrative branch of a multinational enterprise engaged in international trade.

RHQs do not earn income in the Philippines and its operation is fully subsidized by its parent company. A minimum inward remittance in the amount of Fifty Thousand US Dollars (USD50,000) is required to cover its operating expenses.

Regional Operating Headquarters (ROHQs)

Regional operating headquarters performs the following qualifying services:

1. General administration and planning
2. Business planning and coordination
3. Sourcing of raw materials
4. Corporate finance advisory services
5. Marketing and sales promotion
6. Training and management of personnel
7. Logistic services
8. Research and development
9. Technical support and communications
10. Business or product development

ROHQs may derive income from performing the above qualifying services.

A one-time remittance of Two Hundred Thousand US Dollars (USD200,000) is required for capital.

Under Republic Act (RA) 8756, any multinational company may establish an RHQ or ROHQ as long as they are existing under the laws other than the Philippines, with branches, affiliated, and subsidiaries in the Asia Pacific Region and other foreign markets.

What are the Business Structures Allowed Under the Philippine Laws? (Part 1)

Before you decide to start a business, you need to take into consideration a lot of things including the type of business structure that you will adopt. Determining your business structure is important since it will define the costing, legal, tax, ownership, immigration issues, and jurisdiction requirements that your enterprise will encounter.

The following are the types of business structures under Philippine Laws:

Organized Under Philippine Laws

• Sole Proprietorship
• Partnership
• Corporation

Organized Under Foreign Laws

• Branch Office
• Representative Office
• Regional Headquarters (RHQs)
• Regional Operating Headquarters (ROHQs)

I will first discuss the business structures organized under Philippine Laws and will discuss those organized under foreign laws in my next blog.

Sole Proprietorship
This is the simplest and least formal type of business structure  and is best suited for individuals who want full control and authority over the business. Single proprietorship is one of the easiest form of business to set-up and manage as it has less compliance requirements as compared to a partnership or corporation. Sole proprietorship derive its legal personality from the owner (also known as the entrepreneur).

Advantage: The owner has absolute control over the business.

Disadvantages: The owner has the sole responsibility for all the business financial obligations. This also means that anyone with a claim on the business can run after the owner's personal asset to settle his debts.

Foreigners may register a business as a sole proprietorship in the Philippines as long as the business meets the required minimum capitalization and the business activity is not among those listed in the Philippine Foreign Investments Negative List.

A sole proprietorship business must be registered with the Department of Trade and Industry (DTI) by going to one of their branches or visiting their website.

Partnership
A partnership is formed when two or more individuals own the business. The Civil Code of the Philippines treats a partnership as a juridical person, which means its legal personality is separate from that of its business owners.

There are many types of partners and the common types are:

1. General partner
2. Industrial partner (one who furnishes labor or industry)
3. Capitalist partner (one who gives capital)
4. Limited partner (one who is liable only to the extent of his contribution)

There are two kinds of partnership: (1) general partnership, and (2) limited partnership. In a general partnership, the partners have unlimited liability for the debts and obligation of the partnership. In a limited partnership, one or more general partners have unlimited liability and the limited partners have liability only up to the amount of their capital contributions.

Advantages: The business partners can open bank accounts under the partnership's name. Their liability as a business partners is limited to their share of ownership in the company. Any property that belongs to the company cannot be appropriated for personal use by the partners.

Disadvantages: Business decisions would also have to be shared by partners. There are also issues of profit-sharing, exit clauses, and other important concerns of the partners. A partnership is dissolved upon the death of a partner or whether a partner decides to quit the partnership.

A partnerships with a capital of more than Three Thousand Pesos (Php3,000) must register with the Securities and Exchange Commission (SEC)..

Corporation
A corporation has a minimum of five (5) and maximum of fifteen (15) incorporators who will also form its initial board of directors. The owners are called shareholders and they have liabilities limited to the amount of their share capital. The corporate power resides with the board although major decisions may require the permission of the shareholders.

The corporation may have unlimited number of shareholders after the incorporation. A stockholder must own at least one (1) share of the corporation's capital stock.

A corporation can either be stock or non-stock. A stock corporation has a capital divided into shares which are distributed to the investors, who in turn, receives dividends and allotments of the surplus profits according to the number of shares they hold. On the other hand, a non-stock corporation is an entity organized for public purposes such as charitable, educational, cultural or similar purposes. It does not issue shares of stock to its members.

Advantages: A corporation has a distinct legal personality and a limited liability feature. This means that all of its debts are its own, separate and non-transferable to its shareholders, meaning the liability of the corporation is limited to the assets of the corporation. A corporation may enter into contracts and has the capacity to sue and be sued.

Disadvantages: Registering a corporation is more complicated than listing it as a partnership.

A corporation is considered as a domestic corporation if at least sixty (60%) percent of its capital is owned by Filipinos.

Under Republic Act 7042, otherwise known as the "Foreign Investments Act of 1991", a domestic corporation may be fully foreign-owned as long as the business activity of the corporation is not included in the Philippine Foreign Investments Negative List.

Corporations are regulated by SEC. Its minimum paid-up capital must be Five Thousand Pesos (Php5,000).