Legal Aspects of Doing Business in the Philippines

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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
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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

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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
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
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
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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
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

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



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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
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
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
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
* 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
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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
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investments
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Management,
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investments
across
ASEAN.
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Indonesia,
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Thailand,
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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
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grow the firm's ASEAN platform overseeing our expansion into Cambodia, Indonesia,
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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
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firm in Southeast Asia.
N ot to be reproduced or disseminated w ithout permission.
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