If you’re planning to build your business or invest in Asia, the Philippines should be one of your choices. It is one of the Asian countries that has the fastest economic growth with a GDP of 7.2%. The previous “sick man of Asia” is still behind China, but is still outgrowing its other Southeast Asian neighbors.
The country experienced a robust growth of 6.5 % in 2015. According to World Bank, this growth is expected to continue in 2016. Further, the Philippines has been given investment-grade ratings by major world credit rating agencies such as Moody’s and Fitch, while S&P upgraded the country’s rating from a BBB- to a BBB stable—the highest rating ever given in the country’s history.
Starting a business in the Philippines as a foreigner, though, is no easy task. Aside from the tedious paperwork – from reserving your business name at the Security and Exchange Commission (SEC) to notarizing your articles of incorporation to accomplishing your BIR registration – the Philippine government’s existing corporate laws is also complicated.
One of the greatest challenges that foreign entrepreneurs and investors face when registering their business in the Philippines is the government’s restrictions on foreign equity. While the Philippine government encourages foreign investments under Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), foreign investments are subject to restrictions under the same law. More importantly, resources about the said restrictions are few and far in between.
If you’re considering investing in the Philippines soon, here’s a quick and easy guide to understanding the restrictions of foreign equity in the country.
The Extent of Foreign Equity in the Philippines
Under the law, the general rule for foreign equity in the Philippines is 40%. However, due to the liberalization of the foreign investment law, foreign investors may now capitalize in domestic or export enterprises to as much as 100% of the capital of these enterprises, provided that:
a. these enterprises are not on the Negative List
b. the country or state of the foreign investor also allows Filipinos and their corporations to do business therein
c. if the foreign investor is investing in a domestic enterprise, the domestic enterprise must have a paid-in capital equivalent to USD 200,000.
This cap can be reduced to USD 100,000 if the enterprise employs 50 employees or if it will be using “advanced technology”—which would be determined by the Department of Science and Technology.
However, there are industries that do not allow foreign equity or limits it to a certain percentage. The Foreign Investment Negative List, otherwise known as the Negative List, lists down the industries that prohibit and puts a certain limit on foreign equity.
The Negative List is divided into two: List A and List B. List A contains the areas of investment where foreign ownership is restricted by the mandate of the Philippine constitution or specific laws. These include the following:
No Foreign Equity
• Mass media except recording
• Practice of all professions including but not limited to engineering, medicine and all allied professions, accountancy, architecture, criminology, chemistry, customs brokerage, environmental planning, forestry, geology, interior design, landscape and architecture, law, librarianship, marine desk officers, marine engine officers, master plumbing, sugar technology, social work, teaching, agriculture, fisheries, guidance counselling, real estate service, respiratory therapy, psychology
• Retail trade services
• Private security agencies
• Small-scale mining
• Utilization of marine resources in archipelagic waters, territorial sea, and exclusive economic zones as well as small-scale utilization of natural resources in rivers, lakes, bays, and lagoons
• Ownership, operation, and management of cockpits
• Manufacture, repair, stockpiling, and/or distribution of nuclear weapons, biological, chemical, and radiological weapons and anti-personnel mines
• Manufacture of firecrackers and other pyrotechnic devices
Up to Twenty Percent (20%) Foreign Equity
• Private radio communications network
Up to Twenty-Five Percent (25%) Foreign Equity
• Private recruitment, whether for local or overseas employment
• Contracts for the construction and repair of locally funded public works, except infrastructure/development projects covered by Republic Act No. 7718 (RA 7718) and projects that are foreign funded or assisted and required to undergo international competitive bidding.
• Contracts for the construction of defense-related structures
Up to Thirty Percent (30%) Foreign Equity
Up to 40 Percent (40%) Foreign Equity
• Exploration, development, and utilization of natural resources
• Ownership of private lands
• Operation and management of public utilities
• Ownership, establishment and administration of educational institutions
• Contracts for the supply of materials, goods and commodities to government-owned or controlled corporations, companies, agencies or municipal corporations
• Culture, production, milling, processing, trading (except retailing), and acquisition of rice and corn and the by-products thereof
• Acting as project proponent and facility operator of a build-operate-transfer project requiring a public utility franchise
• Ownership of condominium units where the common areas of the condominium project are co-owned by owners of the separate units or owned by a corporation
• Operation of deep-sea commercial fishing vessels
• Adjustment companies
• Domestic market enterprises (i.e., entities that do not export 60 percent or more of their output) with a paid-in equity capital of less than the equivalent of USD200,000
Up to 49 percent (49%) Foreign Equity
• Lending companies
Up to 60 percent (60%) Foreign Equity
• Financing companies regulated by the SEC
• Investment houses regulated by the SEC
List B, on the other hand, includes areas of investment where foreign ownership is limited for reasons of security, defense, risk to health and morals, and protection of local small and medium-sized enterprises. These include the following:
Up to Forty percent (40%) Foreign Equity
• Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National Police (PNP) clearance
• Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Department of National Defense (DND) clearance
• Manufacture and distribution of dangerous drugs
• Sauna and steam bathhouses, massage clinics, and other like activities regulated by law because of risks posed to public health and morals
• All forms of gambling, except those covered by investment agreements with PAGCOR pursuant to RA 9847, or the PAGCOR charter (RA 7042 as amended by RA 8179)
• Domestic market enterprises with paid-in equity capital of less than the equivalent of USD 200,000
• Domestic market enterprises which involve advanced technology or employ at least fifty (50) direct employees with paid-in equity capital of less than the equivalent of USD 100,000
The Anti-Dummy Law, otherwise known as Commonwealth Act No. 108, is a law created to penalize those who violate foreign equity restrictions and evade nationalization laws. Under the law, foreign participation is prohibited in the management of a corporation, franchise, property or business that is 60% owned by Filipinos.
The Anti-Dummy Law also prohibits “dummy arrangement,” an arrangement usually done by a foreigner to evade nationality restrictions. An example of this is the ownership of land, which is strictly prohibited to foreigners.
Foreigners may arrange for a Filipino citizen to purchase land and register the land title to the Filipino citizen’s name, but with the agreement that the whole right to the land belongs to the foreigner. In this case, the Filipino citizen is the “dummy,” thus the “dummy arrangement.”
If you’re caught violating the Anti-Dummy Law, you may be convicted for 5-15 years or receive a hefty fine. Foreigners and Filipino citizens who engaged in the dummy arrangement will both be held liable.
What this means for Foreign Entrepreneurs and Investors
If the nature of the business that you’re planning to set up is not on the negative list, then the 40-60 ratio still applies (40% foreign ownership, 60% Filipino ownership). If it is, the restrictions on foreign equity must be strictly followed.
The most common type of investment vehicle that foreign investors use in setting up their business in the Philippines is a domestic corporation. To do so, you would need a Filipino citizen as a joint venture partner.
If you’re establishing a branch of your head office or a subsidiary, you must still comply with the minimum paid-in capital of USD 200,000 unless your company will be exporting goods or services amounting to 60% of your total gross sales. In this case, your business becomes a fully foreign-owned export enterprise.
Export businesses do not have to comply with the capitalization requirement. The company can be registered with as little as PHP 5,000 as your paid-in capital. However, most banks require a minimum of PHP 25,000-50,000 for you to open a corporate account.
Regardless of the type of investment vehicle that you choose in setting up your business, it would still be wise to ask experts for further assistance in business registration in the Philippines.
Investing in the Philippines as a foreigner may seem like a huge ordeal. But as long as you’re mindful of business requirements and accomplish one step at a time, you’ll finish eventually. Whenever you feel stressed, you can cherry pick from the many beautiful beaches of the country to relax and recharge.