Setting Up a Business

 

FOREIGN INVESTMENT AND OWNERSHIP 

General Provisions

The Foreign Investments Act (FIA) of 1991 (or Republic Act No. 7042 as amended by RA No. 8179) liberalised the entry of foreign investments into the Philippines. Its passage marked the end of decades of protectionism for local businesses. Foreign companies are now generally allowed to conduct business in the Philippines under the FIA, subject to restrictions spelled out in the Foreign Investments Negative List (FINL).

Restrictions on Foreign Investment

The Foreign Investment Negative List (FINL) is a short list of areas of economic activities where foreign investments are restricted or limited. The list aims to prevent any circumvention of nationalisation laws and prohibits foreigners from intervening in nationalised activities. Violation may result in criminal and civil penalties as the anti-dummy law prosecutes any persons violating these foreign equity limitations. The restrictions stem from a constitutional provision allowing Congress to reserve certain areas of investment for Filipino citizens. No mechanism exists for a waiver under the negative lists. The eighth negative list came into effect in 2010 and can be found on the Philippine Board of Investment (BOI) website.

The list has two components. List A contains areas of activities reserved to Filipino nationals by mandate of the Constitution and other specific laws. List B contains the areas of activity and enterprises where foreign ownership is limited pursuant to law.

Examples of foreign equity restrictions from List A include:

No foreign equity

Mass media, except recording Except in cases prescribed by law, the practise of all professions, including, but not limited to, engineering, medicine, accountancy, architecture, customs brokerage, geology, and agriculture Retail trade enterprises with a paid-up capital of less than USD 2.5 million Private security agencies Small-scale mining

Up to 20% Foreign Equity

Private radio communications network

Up to 25% 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 undergo international competitive bidding Contracts for the construction of defence-related structures

Up to 30% Foreign Equity

Advertising

Up to 40% Foreign Equity

Exploration, development and utilisation of natural resources Ownership of private lands Operation and management of public utilities Ownership, establishment and administration of educational institutions Operation of deep sea commercial fishing vessels 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

Up to 60% Foreign Equity

Financing of companies regulated by the Philippine Securities and Exchange Commission (SEC) Investment houses regulated by the SEC

Negative Investment List B enumerates areas where foreign ownership is restricted or limited for reasons of national security, defence, public health, safety, and morals.

As a general policy, the Department of Labour and Employment (DOLE) allows the employment of foreigners provided there are no qualified Filipino citizens who can fill the position. BOI-registered companies may employ foreign nationals in supervisory, technical, or advisory positions for five years from registration, extendable for limited periods at the discretion of the BOI. Top positions and elective officers of majority foreign-owned enterprises (i.e., president, general manager, and treasurer or their equivalent) are exempt from these labour restrictions.

Land Ownership
The 1987 Constitution prohibits foreign nationals from owning land in the Philippines. However, foreigners are allowed to lease private land for up to 75 years (50 + 25 year extension). They are also allowed to obtain 40% 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.

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TYPES OF COMPANIES

Some of the more common company types used in the Philippines include sole proprietorships, partnerships, corporations, and corporation organised under foreign laws.

Sole Proprietorship
Sole Proprietorship is a business entity owned by an individual who has full authority of all assets and has full personal liability. This form is usually only suitable for small operations. It is possible for a foreign national to register a sole proprietorship, though minimum capitalisation requirements may apply.

Partnership
Under the Civil Code of the Philippines, a partnership is treated as a juridical person, having a separate legal personality from that of its members. It consists of two or more partners. Partnerships may either be general or limited. In a general partnership all the partners have unlimited liability for the debts and obligations of the partnership. In a limited partnerships one or more partners have unlimited liability, while the limited partners have liability only up to the amount of their capital contributions.

Corporations
Corporations are juridical persons with a personality separate and distinct from that of its shareholders. Corporations are incorporated under the Corporation Code and regulated by the Securities and Exchange Commission. The liability of the shareholders of a corporation is limited to the amount of their share capital.

As indicated in the Foreign Investment and Ownership section above, it is important to determine if a company is subject to foreign equity limitations as it may be necessary to set up the company with a Philippine national as a joint venture partner. If 60% of a corporation is registered to Philippine nationals it is considered to be a domestic corporation. If more than 40% is owned by foreign nationals it is considered to be a foreign-owned domestic corporation. The ratio between foreign and domestic owners may have an impact on what laws and regulations apply for important aspects like land ownership, taxes, and capitalisation requirements.

 

Foreign Corporations Organised under Foreign Laws

Branch Office
A Branch Office is a foreign corporation organised and existing under foreign laws that carries out business activities of the head office and derives income from the host country. It is also considered an extension of the foreign corporation and its liabilities are therefore linked under the single identity concept.

Representative Office
A Representative Office is a foreign corporation organised and existing under foreign laws. It does not derive income from the host country and is fully subsidised by its head office. It deals directly with clients of the parent company as it can undertake such activities like promotion, information and communication as well as quality control.

Regional Headquarters
Any multinational company may establish a regional headquarters as long as they exist under laws other than the Philippines, with branches, affiliates and subsidiaries in the Asia Pacific Region and other foreign markets. A regional headquarters is limited in its activities and is limited to acting as supervisory, communication and coordinating centre for its subsidiaries, affiliates and branches in the Asia-Pacific region. It may not derive income and its operating costs must be covered by the foreign corporation.

A regional operating headquarters (ROHQ) is similar to a regional headquarters but is allowed to derive income from the Philippines, however numerous restrictions apply.

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GUIDE TO INCORPORATION

Additional disclaimer: The guide below is a simplified step-by-step procedure. Other steps or requirements may be necessary depending on the type of business you would like to register.

	Procedure	Estimated Duration
1	Verify the availability of the company name This is done at the Securities and Exchange Commission (SEC) and takes 1 day to complete. A minimum fee is required to reserve the name for a month. The reservation is valid for maximum of 90 days within which the application for incorporation should be filed or renewed.	1 day
2	Obtain bank certificate of deposit for the paid-in capital This is done at a preferred bank and takes 1 day to complete. Fees will vary depending on the bank.	1 day
3	Prepare and register incorporation papers File the incorporation papers with SEC. This takes 7 to 30 days to complete depending on the complexity of provisions in the incorporation documents. The fee will depend on initial capitalisation. Documentation required includes: a verification slip with the company name; bank certificate of deposit; articles of incorporations and by-laws; an affidavit from the treasurer; and other necessary documentation. Forms and check list are available at the SEC.	7 to 30 days
4	Pay Documentary Stamp Tax on original issuance of shares Within the first 5 days of the month, following the issuance by SEC of Certificate of Incorporation, a Documentary Stamp Tax of PHP 1.00 for PHP 200 of par value of shares issued must be paid to the Bureau of Internal Revenues (BIR).	2 days
5	Obtain a company Community Tax Certificate (CTC) This may be obtained from the barangay office or city hall and takes about 2 days.	2 days
6	Apply for Barangay or District Clearance This is filed with the barangay office and takes about 2 days.	2 days
7	Obtain a Mayor’s Business Permit This is done at the City Hall Business Licensing Office and will take 2 weeks minimum. Fee will depend on the declared capital. Ask the licensing office for a checklist with regards to documentation.	At least 2 weeks
8	Register corporation as taxpayer Proceed to BIR. The process will take about 4 days. The registration fee is minimal.	4 days
9	Buy accounting books These can be bought from any bookstore. The local BIR office will have information on the specific book requirements.	1 day
10	Print your official receipts The print shop must be accredited by BIR. The process takes about a week. Fees will vary and depends on the number of booklets ordered.	1 week
11	Stamp all necessary receipts and books This is done at BIR and takes more or less 1 day at no cost. At this point, you can legally operate your business.	1 day
12	Register your employees You will have to visit various offices, such as Social Security System (SSS), Department of Labour and Employment (DOLE), Home Development Mutual Fund (HDMF) and Philippine Health Insurance Corp. (PhilHealth).	4-5 days