Legal Aspects of Doing Business in the Philippines John A. Cordova Partner Name Lawyer In cooperation with: Sylvette Y. Tankiang Leonardo A. Singson Partners General Legal Considerations • Establishing a presence: choice of business entity • Foreign investment limits • Share capital requirements • Land ownership restrictions • Capital flow restrictions • Intellectual property protection • Labour and employment Investment Considerations : Common Themes ● Investments laws in constant flux ● Be mindful of unwritten laws and practices ● ● ● Know your regulator/government agency: establish early contact Nominee arrangements are illegal & ownership/control regulations differ: structure with caution Risk mitigation: (A) work with local partner and (B) offshore risk Key/Unique Legal Considerations Philippines Myanmar Thailand Malaysia Issues of consistency in regulatory requirements since there may be changing regulations Decentralized multi-agency approvals Local government units have wide latitude in requirements for setting up a business Foreign ownership restrictions on certain activities, including retail trade with capitalization of less than US$2,500,000 Nominee/trust agreements for companies engaged in nationalized activities prohibited if used to circumvent requirements Transfers of shares of private corporations require tax clearances prior to recording and new regulations require appraisal of real property assets of corporation to determine fair market value of shares for purposes of determining proper taxes due Issues of enforceability and transparency in its regulatory environment Differing treatment of local and foreign enterprises Business practices often not documented, based on relationships Contracts typically brief Little publicly available information – due diligence challenges Foreign Investment Law: uncertain regulatory requirements Future investments/expansion subject to separate MIC application M&A done via asset transfer Issues of transparency Laws and regulations are drafted broadly, considerable scope for the exercise of discretion on the part of the officials No concept of binding precedent, judges having a wide discretion when interpreting the laws “Nominee" arrangement is a criminal offence and liable to fines and imprisonment Foreign Investment Restrictions: the Thai Foreign Business Act identifies numerous businesses that foreign investors cannot engage in, unless in partnership with significant Thai shareholders Practical norms may not be identical or similar to the laws and regulations. There could be guidelines issued by the Government which do not have the force of law but there are administrative consequences if not complied with There are federal laws and state laws. Not all federal laws apply nationwide (eg. different employment legislation for West Malaysia and the 2 East Malaysian states) Land rules are determined by each State – 13 States in all Dialogues with regulators useful in obtaining information and expectations from the regulators’ point of view but there may be instances when it is more advantageous not to submit to the regulator and there is no legal requirement to do so Stamp duty generally payable on transfers of assets and shares as well as security documentation and agreements IP law central registration regime in place Banking and financial regulations updated to mitigate risks and ensure sound banking system Generally little restrictions on foreign investment Types of Legal Entities Representative Office Regional / Area Headquarters Regional Operating Headquarters Not allowed to derive income in the Philippines Acts as an administrative branch in the Philippines of a multinational company engaged in international trade and serves as supervision, communications, and coordination center for its subsidiaries, branches, or affiliates in the Asia-Pacific Region and other foreign markets; not allowed to derive income in the Philippines Allowed to engage in any of the following qualifying services: general administration and planning, business planning and coordination, sourcing and procurement of raw materials, corporate finance advisory services, training and personnel management, logistics services, research and development services, product development, technical support and maintenance, data processing and communication, and business development; allowed to derive income in the Philippines for services to affiliates, branches, or subsidiaries only Capital Reqt.: At least USD30,000 required to be remitted into the Philippines Capital Reqt.: At least USD50,000 required to be remitted annually into the Philippines Capital Reqt.: Not less than USD200,000 required to be remitted into the Philippines Applicable Taxes: Not subject to income tax but required to withhold income taxes due on salaries of its employees Applicable Taxes: Not subject to income tax but required to submit an annual information return for a taxexempt corporation Applicable Taxes: Acts as a liaison office between the head office and its Philippine-based clients and may only engage in information dissemination, promotion, and quality control of the foreign company’s products, and the like. Corporate income tax of 10% on net income, Tax on branch profit remittances of 15% Taxes on certain passive income Value-added tax of 12% of gross receipts Types of Legal Entities Branch Office Carries out the business activities of its parent company in the Philippines Local Subsidiary Juridical entity separate and distinct from foreign corporation establishing it Same juridical entity as its parent foreign corporation Capital Reqt. At least USD200,000 required to be remitted into the Philippines Except if the enterprise involves advanced technology or directly employs at least 50 employees, in which case only USD100,000 required At least Php100,000 in acceptable securities required to be deposited with the Securities and Exchange Commission for the benefit of present and future domestic creditors Capital Reqt. If foreign equity does not exceed 40% of the corporation’s outstanding capital stock, minimum paid-up capital of P5,000 required If foreign equity exceeds 40% limit, at least USD200,000 capital required Except if the enterprise involves advanced technology or directly employs at least 50 employees, in which case only USD100,000 required Applicable Taxes: Applicable Taxes: 30% corporate income tax on net taxable income 30% corporate income tax on net taxable income Tax on branch profit remittances Tax on certain passive income 12% value-added tax on gross receipts Local taxes imposed by local government units Tax on branch profit remittances Tax on certain passive income 12% value-added tax on gross receipts Local taxes imposed by local government units Share Capital Requirements Minimum Paid-Up Capital Based on Industry Type Examples of industries with Minimum Paid-Up Capital Requirements include: Financing Company Metro Manila and other 1st Class Cities – Php10,000,000.00 Other Classes of Cities – Php5,000,000.00 Health Maintenance Organization – Php10,000,000.00 Investment House – Php300,000,000.00 Mining – Php100,000,000.00 for Authorized Capital Stock Minimum Paid-Up Capital Based on Foreign Equity Domestic Corporations with more than 40% foreign equity Domestic market Enterprise – USD200,000.00 Export Market Enterprise – Php5,000.00 Foreign Branch Office Domestic Market Enterprise – USD200,000.00 Export Market Enterprise – Php5,000.00 Partnership with Foreign Partner Domestic Market Enterprise – USD200,000.00 Export Market Enterprise – Php3,000.00 Foreign Representative Office – USD30,000.00 Regional Area Headquarters (RHQ) – USD50,000.00 Real Estate Investment Trust – Php300,000,000.00 Retail Trade with Foreign Equity – USD2,500,000.00 Regional Operating Headquarters (ROHQ) – USD200,000.00 Government Agencies of the Philippines Securities and Exchange Commission (SEC) – Registrations of foreign corporations Bangko Sentral ng Pilipinas – Registration of foreign investments for purpose of repatriation using foreign exchange sourced from banks Department of Trade and Industry – Registration of Business Name, except if using Corporate Name registered with the SEC Bureau of Internal Revenue – Registration of all entities subject to Philippine taxes Department of Environment and Natural Resources – Issuance of Environmental Compliance Certificate for environmentally critical projects Local Government Units – Issuance of business permit SSS, Philhealth, and Pag-Ibig – Registration of employers and employees and contribution to Government mandated social security, health and housing fund Philippine Economic Zone Authority – Registration and grant of incentives to businesses located in Economic Zones Board of Investments – Registration and grant of incentives to pioneer or non-pioneer enterprises listed in the Government’s Investment Priorities Plan Other Agencies Governing Specific Industries/Businesses Examples of Foreign Investment Limits Mass media except recording Practice of Profession Retail Trade Enterprise with paid-up capital of less than US$2,500,000 Small-scale mining Private security agencies Utilization of marine resources 20% Foreign Equity Private radio communications network 25% Foreign Equity Private recruitment, whether for local or overseas employment Construction of locally-funded public works Construction of defense-related structures 30% Foreign Equity Advertising No Foreign Equity 40% Foreign Equity Exploration, development and utilization of natural resources, i.e. mining (full foreign participation allowed through financial and technical assistance agreement) Ownership of private lands Public utilities, i.e. transportation, telecommunications Educational institutions Government contracts Gambling (subject to certain exceptions) 49% Foreign Equity Lending companies 60% Foreign Equity Financing companies Investment houses Export Enterprise Domestic Market Enterprise with paid-up capital of at least US$200,000, or US$100,000 if involving advanced technology or will employ at least 50 direct employees Retail Trade Enterprise with paid-up capital of at least US$2,500,000 Large-scale exploration, development and utilization of minerals, petroleum and other mineral oils through financial and technical assistance agreement 100% Foreign Equity * The Foreign Investment Negative List contains a complete list of activities subject to foreign investment limits Land Ownership and Use Public Lands Private Lands Condominium Units Owned by the State May be leased by domestic corporations with foreign equity not exceeding 40%, for a period of 25 years, renewable for another 25 years May be owned by Filipino citizens or private corporations with foreign equity not exceeding 40% Generally, private lands may be leased by foreigners or foreign-owned corporations for a period of 25 years, renewable for another 25 years, and provided that the terms of the lease should not be tantamount to a transfer of ownership A foreign investor “investing in the Philippines” may be allowed to lease private lands for a period of 50 years, renewable for 25 years If common areas in the condominium project are owned by the unit owners as co-owners - only Filipino citizens or corporations with foreign equity not exceeding 40% can own condominium units in the condominium project If common areas in the condominium project are owned by a condominium corporation - condominium units may be owned by foreigners or foreign-owned corporations provided that foreign equity in the condominium corporation (of which unit owners automatically become members or shareholders) cannot exceed 40% Compliance with Nationality Requirements Determination of Percentage of Capital Owned by Filipinos: In determining compliance with Philippine nationality restrictions, the percentage of capital owned by Filipinos must meet the minimum percentage required to be owned by Filipinos based on both the following: 1. the shares entitled to vote in the election of directors owned by Filipinos over the total number of outstanding shares of stock entitled to vote in the election of directors; and 2. the shares owned by Filipinos over the total number of outstanding shares of stock, including both shares entitled or not entitled to vote in the election of directors.. Determination of Nationality based on Investment Structure: The prevailing rule is the CONTROL TEST where shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. Under the CONTROL TEST, there is no need to trace further the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino. Typical Investment Structure Corporation B (Foreign) Corporation Z (Filipino) 40% Corporation A (Foreign) 60% Corporation Y (Filipino) 40% 60% Corporation X This structure complies with the Control Test. When there is “DOUBT” MBMI Resources (Canadian) Palawan Alpha (Filipino) 40% MBMI Resources (Canadian) 40% 60% Actual Investment: ZERO Patricia Louise Mining 60% Narra Nickel Mining Filipino: 60% x 60% = 36% Foreign: 40% + (60%x40%) = 64% Under the GRANDFATHER RULE, the combined totals in the Investing Corporation the Investee Corporation must be traced (i.e. “grandfathered”) “Corporate layering” isand allowed, except where it is used to circumvent the Constitution and pertinent laws. through the holding companies to determine the total percentage of Filipino Under ownership. the GRANDFATHER RULE, the combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e., “grandfathered”) to determine the total percentage of Filipino ownership. Employment Law Minimum Wage in Metro Manila – PhP466.00 per day (approximately US$10.37) Foreigners may be employed in companies which are not engaged in nationalized activities – An exemption may be obtained to allow foreign technical personnel to be employed in companies engaged in nationalized activities Immigration Visa-free entry for 30 days – Business/Tourist Visa – e.g. Singapore, US, EU passports Short-term employment – Special Work Permit valid for three (3) months (extendible) Long-term employment – Pre-arranged Employee’s 9(g) Visa valid for up to two (2) years (extendible) Immigration Special Investor’s Resident Visa – Indefinite duration – Investment of at least US$75,000 Special Resident Retiree’s Visa – Indefinite duration – Inward remittance of US$10,000 to US$50,000 (depending on age, condition and fund investment) Common Tax Exposures Where the Holding Company to the Philippine Investment is a Singapore Company Tax Rate Remarks 30% on net taxable income Minimum Corporate Income Tax of 2% of Gross Profit, if higher than regular corporate income tax 10% for transfers of shares of stock 6% for transfers of real property CGT on transfers of shares is based on net capital gains, and applies only to shares not listed and traded in the stock exchange Stock Transaction Tax ½ of 1% Applies to shares listed and traded in the stock exchange Branch Office Remittance Tax 15% Value-Added Tax 12% Corporate Income Tax Capital Gains Tax Withholding Tax Rates for Recipients who are Singapore Residents Dividends Interest Royalties In General Under RP-SG Tax Treaty 15% if tax sparing rule is applied 15-25% 20% for foreign loans 0-15% 30% 15-25% Contact Details John Artawat Cordova Partner (Foreign Lawyer): Corporate Commercial Practice Get in touch john.cordova@rajahtann.com (65) 6232 0361 John a partner Corporate Commercial practice. a broad range of corporate John is aispartner in in ourour Corporate Commercial practice. HeHe hashas a broad range of corporate andand banking experience having advised on M&A, banking and capital markets deals around the banking experience having advised on M&A, banking and capital markets deals around the ASEAN region. ASEAN region. John is qualified in England Wales practiced two Magic for10 over 10 John is qualified in England andand Wales andand practiced withwith two Magic CircleCircle firmsfirms for over years across a number of jurisdictions from London to Hong Kong. also managed, years across a number of jurisdictions from London to Hong Kong. JohnJohn also managed, and and often led, deal execution for a private investment firm based in Singapore before joining often led, deal execution for a private investment firm based in Singapore before joining us.us. a Thai-Chinese/Filipino native, John speaks fluent and some Mandarin and Tagalog. AsAs a Thai-Chinese/Filipino native, John speaks fluent ThaiThai and some Mandarin and Tagalog. John spends most of his time advising a mix of MNCs, private equity firms and banks on their John spends most of his time advising a mix of MNCs, private equity firms and banks on their investments across ASEAN. Working closely Management, John successfully helped investments across ASEAN. Working closely withwith Management, John alsoalso successfully helped us grow the firm's ASEAN platform overseeing our expansion into Cambodia, Indonesia, us grow the firm's ASEAN platform overseeing our expansion into Cambodia, Indonesia, Myanmar, Malaysia, Thailand, Vietnam 18 months. Wenow are the now the largest Myanmar, Malaysia, Thailand, Vietnam overover the the pastpast 18 months. We are largest law law firm Southeast Asia. firm in in Southeast Asia. Contact Details Sylvette Y. Tankiang Senior Partner, Villaraza & Angangco Get in touch E-mail: sy.tankiang@thefirmva.com (+63) 988 6088 (+63) 917 530 3513 John is a partner in our Corporate Commercial practice. He has a broad range of corporate and banking experience having advised on&M&A, bankinglaw andDepartment. capital markets aroundon theTaxation Ms. Tankiang heads the Corporate Commercial She deals is a lecturer ASEAN region. and Sales at the University of the Philippines College of Law. Ms. Tankiang has special expertise in the fields of taxation, mergers & acquisitions, banking & finance, securities, and power & John is qualified England and Wales and practiced withintwo Magic local Circleand firmsinternational for over 10 law energy. She isinalso an active member and officer various years across a number of jurisdictions from London to Hong Kong. John also managed, and associations. Ms. Tankiang is a member of the Inter-Pacific Bar Association and its Deputy often led, deal Coordinator. execution for She a private investment firm of based Singapore before us. from Committee earned her Bachelor Artsin(Honors) major injoining Economics the De La Salle University, graduating summa cum laude in 1977. She also obtained her AsBachelor a Thai-Chinese/Filipino native, fluentofThai some Mandarin of Laws degree fromJohn the speaks University theand Philippines Collegeand of Tagalog. law in 1981, John spends most of his time advising a mix of MNCs, private equity firms and banks theirfrom graduating cum laude and valedictorian. Ms. Tankiang earned her Master of Laws on degree investments across ASEAN. Working closely with Management, John also successfully helped Harvard University in 1986. She is currently a Trustee and Secretary of the Harvard Club of the usPhilippines. grow the firm's ASEAN platform overseeing our expansion into Cambodia, Indonesia, Myanmar, Malaysia, Thailand, Vietnam over the past 18 months. We are now the largest law firm in Southeast Asia. Contact Details Leonardo A. Singson Junior Partner, Villaraza & Angangco Get in touch E-mail: la.singson@thefirmva.com (+63) 988 6088 (+63) 917 528 7639 John is a partner in our Corporate Commercial practice. He has a broad range of corporate and banking experience having advised on M&A, banking and capital markets deals around the ASEAN region. is a Partner in the Firm’s Corporate and Special Projects Department. His practice Mr. Singson areas include capital markets, banking and securities law, mergers and acquisitions, taxation John qualified in England and Wales and practiced with two Magic Circle firms for over 10 andisimmigration. years across a number of jurisdictions from London to Hong Kong. John also managed, and often deal execution private investment firm based Singapore before joining us. Mr.led, Singson obtained for hisaBachelor of Laws Degree frominthe University of the Philippines in 2006. He holds a Bachelor of Arts Degree in Public Administration from the same university Aswhere a Thai-Chinese/Filipino native, John speaks fluent Thai and some Mandarin and Tagalog. he graduated in 2002. John spends most of his time advising a mix of MNCs, private equity firms and banks on their investments across ASEAN. Working closely with Management, Johnthe alsoFirm successfully Mr. Singson was admitted to the Philippine Bar in 2007 and joined in 2008.helped us grow the firm's ASEAN platform overseeing our expansion into Cambodia, Indonesia, Myanmar, Malaysia, Thailand, Vietnam over the past 18 months. We are now the largest law firm in Southeast Asia. N ot to be reproduced or disseminated w ithout permission.