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Doing Business in the Philippines for Foreigners and Multinational Corporations


With the occurrence of a global pandemic and some recent changes in Philippine laws and regulations governing corporations, a brief refresher is needed with respect to doing business in the Philippines, particularly for foreigners and multinational corporations. Philippine law provides for various ways of doing business in the country, intended to cater to different businesses and entities while ensuring the protection of its national interests and safety of the public through its licensing and supervisory powers.


Under Philippine law, the term “doing business” is defined in Republic Act No. 7402, otherwise known as the Foreign Investments Act of 1991 (“Foreign Investments Act”), as amended, to include the following activities:


(a) Soliciting orders, service contracts;

(b) Opening offices, whether liaison offices or branches;

(c) Appointing representatives or distributors, operating under full control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more;

(d) Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines;

(e) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to and in progressive prosecution of commercial gain or of the purpose and object of the business organization.


The Implementing Rules and Regulations of the Foreign Investments Act also provides for exceptions, which are activities not deemed as “doing business” in the Philippines.[1]


Foreign Equity Restrictions


The coverage of activities that are considered doing business in the Philippines is important as there are certain restrictions as to what or who may engage in doing business in the Philippines, especially when it comes to foreign nationals or foreign entities or corporations. The Foreign Investments Act mandates the formulation of a Regular Foreign Investment Negative List which is a list of investment areas or activities which are open to foreign investors and/or reserved to Filipino nationals, the most recent of which is the 11th Regular Foreign Investment Negative List (“FINL”),[2] promulgated last 29 October 2018. The restrictions in the Regular Foreign Investment Negative List are still based on the restrictions set by the 1987 Philippine Constitution and other applicable statutes.


Under the 11th FINL, among the investment areas or activities that are currently restricted to 100% Filipino nationals or 100% Filipino-owned corporations are mass media, retail trade enterprises with paid-up capital of less than USD2,500,000, cooperatives, and small-scale mining. Foreign equity is allowed up to 30% in advertising, while up to 40% foreign equity is allowed in exploration, development and utilization of natural resources, ownership of private land, operation of public utilities except power generation and supply of electricity to the contestable market, and other similar businesses or services not covered by the definition of public utilities, domestic market enterprises, either with paid-in equity capital of less than the equivalent of USD 200,000 or which involve advanced technology or employ at least fifty (50) direct employees with paid-in equity capital of less than the equivalent of USD100,000, as well as all forms of gambling except those covered by investment agreements with the Philippine Amusement and Gaming Corporation. The investment areas and activities mentioned above are just examples of the restrictions enumerated in the 11th FINL.


Thus, foreigners and multinational organizations must take into account these current restrictions and any other applicable requirements in considering whether or not to conduct business in the Philippines, and the best approach in doing so.


At present, there are pending bills in the Philippine Senate which seek to ease restrictions in foreign investments. For instance, Senate Bill 2094 aims to distinguish “public utilities” from “public services” so that telecommunications, transportation, power generation, petroleum, wireless communications will fall under the category of “public services” and outside the ambit of the 40% foreign equity limitation for public utilities.[3] Senate Bills 1156 and 1840 are also intended to relax restrictions on foreign investments. Hence, foreign investors may want to observe the development of these Senate Bills if these will be passed into law in the Philippines.


Forms of Business Vehicles in the Philippines


For foreign investors that want to do business in the Philippines, there are several vehicles they can choose from.


1. Sole proprietorship


Foreign investors can choose to set up a sole proprietorship. A sole proprietorship as a form of business organization conducted for profit by a single individual and requires its proprietor or owner to secure licenses and permits, register its business name, and pay taxes to the Philippine government. Philippine law does not vest a separate legal personality on the sole proprietorship.[4]


2. Partnership


Another option for foreign investors is a partnership agreement. In a partnership, two more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves.[5] Philippine law has consistently treated a partnership as having a juridical personality of its own, distinct and separate from its partners, unlike American and English law that does not recognize such separate juridical personality.[6] As a general rule, all partners shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts entered into and for the account of the partnership.[7]


3. Domestic Corporation


Foreign investors may choose to incorporate a domestic corporation in the Philippines as a joint venture with a local entity or as its wholly owned subsidiary. Under Philippine law, a domestic corporation is formed, organized, and existing in accordance with the laws of the Philippines.


In the old Corporation Code of the Philippines, only natural persons can be incorporators of a domestic corporation. But the Revised Corporation Code now allows natural persons, partnerships, and even corporations whether domestic or foreign, or a combination of any of the above, to establish a Philippine domestic corporation, provided that each incorporator must be a subscriber to at least one share of capital stock.


4. Foreign Corporation


Another option for foreign investors is to have a presence in the Philippines through a branch office, regional operating headquarters, or regional area headquarters, The activities for such forms of corporate entities may be more limited than a domestic corporation, but may be more beneficial and appropriate to the foreign investors’ purpose in setting up a business presence in the Philippines.


a. Branch Office of a Foreign Corporation


If a foreign investor is a foreign corporation, it can opt to establish a branch office in the Philippines. To have the right to do business in the Philippines, the branch office must first secure a license to do business in the Philippines and a certificate of authority from the appropriate government agency. The branch office is also required to appoint a resident agent in the Philippines to whom summons and other legal processes may be served in behalf of the foreign corporation. As an extension of its head office outside the Philippines, the branch office does not have a separate juridical personality from its head office.


b. Regional Operating Headquarters


Multinational corporations (“MNCs”) may establish a Regional Operating Headquarters (ROHQ) in the Philippines in order to perform qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets. An ROHQ is allowed to derive income in the Philippines.


c. Regional or Area Headquarters


MNCs may also choose to establish a Regional or Area Headquarters (RHQ) which shall be its administrative branch that serves as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets. An RHQ may not earn or derive income in the Philippines.


5. One Person Corporation


The One Person Corporation (“OPC”) is a very recent creation in the Philippines. In an OPC, there is only a single stockholder who is also the only director and the president of the corporation. Only a natural person, trust, or estate may form an OPC. Hence, if a foreign investor is a natural person, he/she may choose to do business in the Philippines as an OPC instead of a single proprietorship.


In conclusion, it is of paramount importance for a foreign investor who intends to do business in the Philippines to check first the foreign equity restrictions if allowed to do business in the Philippines, and if so, the extent of its allowed foreign equity participation. After carefully assessing the matter, it should then choose which business vehicle is most appropriate for its purpose in the Philippines.


If you have any questions, concerns, or require any additional information, please contact Michael Marlowe Uy at mguy@skylaw.com.ph.



References:- [1] The exceptions are the following: (a) Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; (b) Having a nominee director or officer to represent its interests in such corporation; (c) Appointing a representative or distributor domiciled in the Philippines which transacts business in the representative’s or distributor’s own name and account; (d) The publication of a general advertisement through any print or broadcast media; (e) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; (f) Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export; (g) Collecting information in the Philippines; and (h) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.

[2] Executive Order No. 65 [3] https://www.cnnphilippines.com/news/2021/4/13/duterte-certifies-urgent-economic-bills-relax-foreign-investments-restrictions.html [4] Stanley Fine Furniture v. Gallano, G.R. No.190486, November 26, 2014 [5] Article 1767, New Civil Code of the Philippines [6] Saludo v. Philippine National Bank, G.R. No. 193138, August 20, 2018 [7] Article 1816, New Civil Code of the Philippines

 
 

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