Doing Business in the Philippines: An Overview
This is an overview of the Philippine legal system, foreign investment, including restrictions, currency regulations and incentives, corporate vehicles and their relevant restrictions and liabilities. Laws in regulations of employment relationships, swift overviews on competition law, data protection, product liability, and safety are also included. Also summarized are taxations and tax residencies, intellectual property rights over patents, trademarks, and copyright.
Legal system and Judicial Order
The Philippine legal system is a blend of civil law and common law. The civil law origins of statutes and principles are evident in areas such as family relations, property, succession, contract and criminal law, while common law operates in areas such as constitutional law, remedial law, corporation, taxation, banking, insurance and labor.
The Philippine judicial order is a hierarchical organization consisting of the municipal and regional trial courts, the Court of Appeals, and the Supreme Court as the top tier exercising supervision over all lower-level courts, including all court personnel.
Approval of Foreign Investments
As a rule, foreign individuals, corporations or other entities are allowed to engage in business in the Philippines, except in activities or industries that are reserved for Filipino citizens, as provided in the Constitution and existing legislation. In particular, the extent of equity held by foreigners in certain businesses and/or activities is restricted or limited as enumerated in the Foreign Investment Negative List (FINL) issued by the President of the Philippines pursuant to Republic Act No 7042, or the Foreign Investments Act of 1991 (FIA). The maximum equity interest held by a foreigner in a corporation will therefore depend on the type of activity in which the entity will engage.
Philippine law requires foreign corporations to obtain a license from the Securities and Exchange Commission (SEC) to do business in the Philippines. A foreign corporation found to be doing business in the Philippines without a license can be sued in Philippine courts, but cannot sue or maintain suits to enforce its rights. Under the Revised Corporation Code, a foreign corporation may also be subject to fines and penalties at the discretion of the court.
Additionally, the approval of the SEC is required for the primary registration of foreign investments that will trigger the foreign equity restrictions in the FIA and FINL. New corporations with more than 40% foreign equity are required to apply for authority to do business under the FIA by submitting the requisite SEC Application Form (SEC Form No. F-100) and declaring their percentage of foreign equity and intention to operate either a domestic market enterprise or an export market enterprise, as defined under the FIA. Existing corporations increasing their foreign equity to more than 40% are also required to file the requisite SEC Application Form No. F-101 with the SEC, while existing corporations that have more than 40% foreign equity but are increasing the percentage of their foreign equity participation under the FIA are required to file SEC Application Form No. F-102. Such corporations are required to declare whether the increase in foreign equity will be through the allowable assignment of shareholdings to non-Philippine nationals, the issuance of new stocks from the unsubscribed capital stock, an increase/decrease of authorized capital stock, a merger or consolidation, or other means.
Foreign corporations intending to establish a Branch and Representative Office are also required to submit the requisite SEC Application Form prior to registration (SEC Form No. F-103 and F-104, respectively)
Procedure and sanctions in the Event of Non-compliance
Upon receiving the relevant application forms as discussed in 2.1 Approval of Foreign Investments, the SEC evaluates the application to ascertain its compliance with the FIA. The entire evaluation and approval processes take approximately one to two months from the submission of the application and documentary requirements.
If there are incomplete details or inconsistencies in the application forms, the SEC allows the applicant to rectify the deficiency in the form to ensure compliance, instead of denying the application outright. However, the SEC may still deny the application for non-compliance with the requirements of the FIA.
In cases of foreign investment in excess or violation of the allowable foreign equity percentage in the FIA, Section 14 thereof provides that a violation of any provisions of the law or the terms and conditions of registration (which necessarily includes the foreign equity restrictions), shall give rise to fines, penalties and the forfeiture of all benefits granted under the FIA. In addition, the president and/or officials responsible therefor shall also be subject to a fine. The imposition of these penalties, however, is without prejudice to the administrative sanctions that may be imposed by the SEC.
Commitments Required from foreign Investors
The SEC evaluates an application for registration for compliance with the minimum capitalization rules. Certain corporations are subject to minimum capitalization requirements pursuant to special laws, including those engaged in the insurance business or issuance of pre-need plans, and investment houses.
Under the FIA, a domestic corporation or Philippine subsidiary that produces goods for sale, renders services or otherwise engages in any business in the Philippines is known as a “domestic market enterprise”. Foreigners can invest as much as 100% equity in domestic market enterprises, except in areas included in the FINL. For domestic market enterprises whose equity is more than 40% foreign-owned, the minimum paid-up capital requirement for the establishment of a subsidiary is generally USD200,000. The amount of required minimum capital may be reduced to USD100,000 if the enterprise involves advanced technology, as determined by the Department of Science and Technology, or if it directly employs at least 50 employees, as certified by the Department of Labor and Employment (DOLE).
In addition, certain corporate vehicles require specific minimum paid-up initial capitalization. For the establishment of a Philippine Representative Office, at least USD30,000 must be remitted into the Philippines, or its equivalent in other acceptable foreign currency. For Regional Headquarters (RHQ), an initial inward remittance of USD50,000 is required; thereafter, USD50,000 is required to be inwardly remitted annually to cover operating expenses. The establishment of a Regional Operating Headquarters (ROHQ) requires a one-time remittance of USD200,000 as capital is required.
A Foreign Branch Office engaged in a domestic market enterprise requires a capitalization of at least USD200,000. If the Foreign Branch Office is engaged in an export market enterprise, a capitalization of at least PHP50,000 is required.
The SEC verifies the applicant’s compliance with the following financial ratios:
- solvency, or the ratio of total assets to total liabilities.
- liquidity, or the ratio of current assets to current liabilities; and
- debt to equity, or the ratio of total liabilities over equity.
The applicant shall also be required to deposit securities with an actual market value of at least PHP500,000 with the SEC within 60 days of the issuance of its SEC license.
Most Common Forms of Legal Entities
There are several legal vehicles available for a foreign investor to do business in the Philippines.
The most common form of legal entity is a Domestic Subsidiary. Where a domestic subsidiary of a foreign corporation is created, two separate and distinct corporate entities shall exist, so the Philippine subsidiary becomes a legally independent unit as a domestic corporation.
A Branch Office is considered an extension of the parent company. No independent juridical entity is created by the establishment of a branch office, so any judgment or claim for liability against the branch office in the Philippines is a liability of the head office or the foreign corporation.
A Representative Office is considered a mere extension of a head office in the Philippines. It is not authorized to engage in activities that would generate income/revenue and is fully subsidized by its head office. It deals directly with the clients of the parent company and undertakes activities such as information dissemination and promotion of a company’s product as well as quality control of products.
On the other hand, the activities of an RHQ are limited to acting as a supervisory, communication and coordinating center for its subsidiaries, affiliates, and branches in the Asia-Pacific region. It does not derive income from sources within the Philippines and does not participate in any manner in the management of any subsidiary or branch office it might have in the Philippines.
In general, Philippine corporations are required to file the following annual reports with the SEC:
a General Information Sheet (GIS) must be filed within 30 calendar days of the annual stockholders’ meeting: and the Audited Financial Statements (AFS), as stamped received by the BIR, must be filed with the SEC within 120 calendar days from the end of the fiscal year according to the Financial Statements.
Branch Offices and Representative Offices of foreign corporations, as well as ROHQs and RHQs, are likewise required to file the following with the SEC:
- a GIS within 30 days of the anniversary of the issuance of the SEC License; and
- the AFS, as stamped received by the BIR, within 120 calendar days from the end of the fiscal year according to the Financial Statements.
For domestic corporations, an amended GIS is submitted to the SEC for any relevant changes, including changes in the directors or officers of the corporation during the year. A Notification Update Form is required for any change in the principal office address, officers or additional subsidiaries of Branch Offices and Representative Offices of foreign corporations, as well as ROHQs and RHQs.
Pursuant to SEC Memorandum Circular No 15-2019, all SEC-registered domestic corporations are also required to identify their beneficial owners, which are defined as natural persons who ultimately own, control or exercise ultimate effective control over the corporation. The corporation’s GIS shall include a beneficial declaration page in compliance with said SEC directive.
Listed and public companies, as well as companies with secondary licenses, are subject to more stringent reportorial and disclosure requirements with the SEC, including required reports on changes in beneficial ownership of securities, and the submission of quarterly reports.
There is no explicit requirement for a specific management structure in the Philippines. However, the Revised Corporation Code of the Philippines provides that the Board of Directors or trustees shall exercise the corporate powers, conduct all business, and control all properties of the corporation. Directors are elected by those stockholders who are entitled to vote, in a meeting where the owners of the majority of the outstanding capital stock are present.
In addition, the Revised Corporation Code requires the appointment of the following officers after incorporation:
- a President, who must be a director.
- a Corporate Secretary, who must be a Filipino citizen and a Philippine resident.
- a treasurer, who must be a Philippine resident; and
- such other officers as may be provided in the bylaws.
If the corporation is vested with public interest, the board shall also elect a compliance officer. The officers shall manage the corporation and perform such duties as may be provided in the bylaws and/or resolved by the board of directors.
Directors’, Officers’, and Shareholders’ Liability
A director holds a position of trust and is considered a fiduciary of the corporation. Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation, or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees, shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.
In addition, following the doctrine of separate juridical personality, corporations in the Philippines are treated as separate and distinct legal entities from the natural persons comprising them. By virtue of this doctrine, stockholders of a corporation enjoy the principle of limited liability. Thus, the corporate debt is not the debt of the stockholders.
Nature of Applicable Regulations
The employment relationship is primarily governed by the Labor Code of the Philippines, rules and regulations issued by the DOLE, and cases decided by the Supreme Court. The employment relationship may be further defined by the employment contract and collective bargaining agreement (CBA), if any, as long as such is not contrary to the Labor Code and established case law.
Characteristics of Employment Contract
An employment contract is perfected by mere consent. The Labor Code does not require a specific form or a written employment contract to prove the existence of an employer-employee relationship. However, it is recommended to have a written employment contract to clearly define the relationship between the parties. Notably, an employee is presumed to be a regular employee unless there is a written employment contract showing that he or she is a non-regular employee, such as a probationary, casual, project, seasonal or fixed-term employee.
Employees and employers are encouraged to form labor management councils to facilitate the exercise of the employees’ right to participate in the company’s policy and decision-making processes. Employee representatives to labor management are elected by at least the majority of all employees in the establishment.
Employees also have a constitutionally protected right to self-organization. Rank-and-file and supervisory employees are free to form, join or assist unions of their own choosing for purposes of collective bargaining.
Taxes Applicable to Employees/Employers
Based on Section 42(A)(3) of the Tax Code, compensation for labor or personal services performed within the Philippines is considered as gross income earned from the Philippines, and is therefore subject to Philippine income tax.
As a general rule, an employee who is a resident citizen, non-resident citizen or a resident alien shall be subject to Philippine income tax at the rate of 0% to 35%, depending on the amount of taxable income earned within the Philippines for the taxable year. For the resident citizen, income from compensation rendered abroad is also subject to Philippine income tax. Under Revenue Regulation No 08-2018, taxable income for compensation earners is defined as the gross income minus non-taxable income/benefits such as but not limited to the 13th month’s pay and other benefits, de minimis benefits, and the employee’s share in government-mandated employee social service contributions and union dues.
On the other hand, an employee who is a non-resident alien not engaged in trade or business within the Philippines is subject to Philippine income tax at the rate of 25% of the income received from salaries and wages earned within the taxable year.
The employers are required to withhold certain amounts from compensation to be transmitted to the employees. The amounts to be withheld and transmitted to the National Government directly depend on the taxable income of the employees.
Taxes Applicable to Businesses
Resident Foreign Corporations, including a branch, are subject to the following Philippine taxes:
- Regular Corporate Income Tax (RCIT) at the rate of 25% based on the net taxable income derived during each taxable year from all sources within the Philippines, or Minimum Corporate Income Tax (MCIT) at the rate of 1% based on the gross income derived during each taxable year, beginning on the 4th taxable year, from all sources within the Philippines, whichever is higher;
- Value-Added Tax (VAT) at the rate of 12% of the gross selling price for the sale of goods or properties or 12% of the gross receipts for the sale of services, whichever is applicable;
- Branch Profit Remittance Tax at the rate of 15% of total profits applied or earmarked for remittance;
- Withholding Tax on Compensation at varying rates depending on the taxable income of the employees;
- Expanded Withholding Tax (EWT) on certain expenses provided under Revenue Regulation No 02-98, as amended;
- Final Withholding Tax (FWT) at varying rates depending on the type of passive income; and
- Local Taxes imposed by the Local Government Units (LGU).
Finally, Non-Resident Foreign Corporations are subject to the following Philippine taxes:
- RCIT at the rate of 25% based on the gross income derived during each taxable year from all sources within the Philippines;
- VAT at the rate of 12% of the gross selling price for the sale of goods or properties or 12% of the gross receipts for the sale of services, whichever is applicable; and
- FWT at varying rates depending on the type of passive income.
Other facts on Taxes: Incentives, Consolidation, Capitalization thinning, and Others
The amount of income taxes paid or incurred during the taxable year by a domestic corporation to any foreign country may be claimed as a tax credit in the Philippines. However, there are limitations on the tax credits that may be claimed under the Tax Code.
Tax consolidation is not available in the Philippines. Parent companies, subsidiaries and affiliates are taxed separately. There are no thin capitalization rules in the Philippines.
Transfer pricing rules are applicable in the Philippines. Section 50 of the Philippine Tax Code provides that the Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross income or deductions between or among organizations that are owned or controlled directly or indirectly by the same interests, if he/she determines that such distribution, apportionment or allocation is necessary in order to prevent the evasion of taxes or to clearly reflect the income of any organization.
There are anti-tax evasion rules in the Philippines. Section 254 of the Philippine Tax Code provides that any person who willfully attempts to evade or defeat any tax provided under the Tax Code shall be punished by a fine, in addition to the other penalties provided by law.
The Guidelines on the Computation of Merger Notification Threshold (Merger Rules) provide the rules on determining whether a merger, an acquisition of shares or assets, or a joint venture is subject to compulsory notification.
Notification is compulsory if the transaction breaches the compulsory notification thresholds:
- the aggregate annual gross revenues in, into or from the Philippines, or value of the assets in the Philippines of the ultimate parent entity (UPE) of at least one of the acquiring or acquired entities, including that of all entities that the UPE controls, directly or indirectly, exceeds PHP6 billion (Size of the Party Test);
- and the value of the transaction exceeds PHP2.4 billion (Size of the Transaction Test).
Computing the value of the transaction depends on the type of the transaction.
For mergers or acquisitions of assets in the Philippines, the amount is computed based on the value of the assets that are the subject of the transaction or the gross revenues generated in the Philippines of such assets.
For an acquisition of voting shares of a corporation or of an interest in a non-corporate entity, the amount is computed based on the aggregate value of the assets of the acquired entity or gross revenues generated by such assets in the Philippines. Furthermore, as a result of the proposed acquisition, the entity acquiring the shares, together with their affiliates, should own voting shares or interests of:
- more than 35%; or
- more than 50%, if the entity or entities already own more than 35%.
For joint ventures, the amount is computed based on the aggregate value of the assets that will be contributed into the proposed joint venture or the gross revenues generated by such assets, including any amount of credit or any obligations of the joint venture that any of the joint venture parties agreed to extend or guarantee.
On 15 September 2020, Republic Act No 11494 (otherwise known as the Bayanihan to Recover as One Act, or Bayanihan Law 2) took effect and increased the notification threshold for the review of mergers and acquisitions to PHP50 billion. Mergers or acquisitions with a transaction value of below PHP50 billion are exempted from the Philippine Competition Commission (PCC) compulsory notification requirements for a period of two years from the date of effectivity of Bayanihan Law 2.
Under the Rules for the Implementation of section 4 Of Republic Act No 1194, otherwise known as the Bayanihan to Recover as One Act, relating to the Review of Mergers and Acquisitions (PCC BARO Rules), transactions below the PHP50 billion notification thresholds are likewise exempted from the PCC’s power to review mergers and acquisitions motu proprio for a period of one year from the effectivity of Bayanihan Law 2. However, the transaction below the notification threshold may be reviewed by the PCC motu proprio after one year from the effectivity of the law.
A merger or acquisition consisting of successive transactions that shall take place within a one-year period between the same parties or entities under common control shall be treated as one transaction (Creeping Transactions).
Parties that breach the thresholds are required to notify the PCC within 30 days of the execution of the definitive agreement.
For Creeping Transactions, if a binding preliminary agreement provides for such successive transactions, the entities shall provide notification on the basis of such preliminary agreement. If there is no binding preliminary agreement, notification shall be made when the parties execute the agreement relating to the last transaction that satisfies the thresholds, when taken together with the preceding transactions.
Philippine law prohibits agreements whose object or effect is to substantially prevent, restrict or lessen competition. Nevertheless, agreements that contribute to improving the production or distribution of goods and services, or that contribute to promoting technical or economic progress while allowing consumers a fair share of the resulting benefits, are not considered a violation of Philippine Law on anti-competitive agreements.
A patent is a bundle of exclusive rights granted to the owner of a technical solution, such as a product or process, which is new, involves an inventive step, is industrially applicable, and is not excluded by law from patent protection.
Patent applications must be filed within 12 months from the priority date, if any. A national phase entry application under the Patent Co-operation Treaty (PCT) must be filed within 30 months from the priority date or the international filing date, if no priority is claimed, subject to a one-month extension upon payment of a surcharge fee.
A patent application undergoes both formal and substantive examination. Currently, it takes around three years from filing before an application is examined. Depending on the issues and objections found, the examination stage takes around two years. Once allowed, a Letters Patent Certificate is issued.
Any violation of the patent owner’s exclusive rights constitutes patent infringement. To claim damages and secure an injunction against an infringing activity, the infringement action may be filed as an administrative complaint with the Philippine Intellectual Property Office (IPOPHL), or as a civil case with the commercial courts. A criminal action for patent infringement may only be pursued if the infringement is repeated after a court has found the defendant guilty of a previous infringement.
A trade mark is any visible sign capable of distinguishing the goods or services of an enterprise, including a stamped or marked container of goods.
The Philippines follows the first-to-file rule for trade mark protection. An application is granted a filing date upon the filing of complete requirements, then undergoes substantive examination to determine registrability. If registrable, the mark is published for opposition. If no opposition is filed within 30 days of said publication, the mark is deemed registered and a Certificate of Registration is issued in due course.
A trade mark registration remains in force for ten years, unless it is cancelled or removed sooner. It may be renewed for ten-year periods by filing a request for renewal before the expiration, or within six months after expiration subject to the payment of a surcharge.
An industrial design is a composition or combination of shapes, lines or colours, or a three-dimensional form, which produces an aesthetic and ornamental effect and gives a special appearance to and can serve as a pattern for an industrial product or handicraft.
Only a formality examination is conducted for industrial design applications, which can take around eight months depending on the issues and objections found. Once allowed, a Certificate of Registration is issued.
An industrial design is registered for five years from its filing date, and may be renewed for not more than two consecutive five-year periods.
Like patents, an industrial design owner has the exclusive right to restrain, prohibit and prevent any unauthorised making, using, offering for sale, selling or importing of a registered design, and may pursue an infringement action against violations to claim damages and/or secure an injunction.
Copyright is a statutory right granted to the proprietor of a literary, artistic or scientific work for its exclusive use and enjoyment to the extent specified by the law. Copyright is generally protected until 50 years after the death of the author. An author’s right to attribution shall last his lifetime and in perpetuity after his death, while other moral rights are coterminous with the economic rights.
The author enjoys the exclusive right to use, authorize and prevent others from the reproduction, publication or communication of his work, subject to fair use exceptions. In case of infringement, the author may institute an administrative, civil or criminal case with a claim for damages and injunctive relief within four years from the cause of action.
A trade secret is a plan or process, tool, mechanism or compound known only to its owner and those of his employees to whom it is necessary to confide it. Trade secrets are not registered with the IPOPHL. Philippine laws are instead tailored towards preventing compulsory disclosure of such secrets, and parties usually resort to non-disclosure agreements.
A plant variety may be a seed, transplant, plant, tuber, tissue culture plantlet, and other forms that can be defined by the expression of the characteristics resulting from a given genotype or combination of genotypes, distinguished from any other plant groupings by the expression of at least one characteristic, and considered as a unit about the suitability for being propagated unchanged.
Under Republic Act No 10173, otherwise known as the Data Privacy Act of 2012, the collection, processing, sharing and retention of personal data shall be allowed, subject to adherence to general principles laid out in said law, including the implementation of adequate and appropriate safeguards to ensure the integrity and confidentiality of the same.
In addition, the law requires entities that process or collect data to designate data protection and/or compliance officers to be accountable for establishing compliance with data privacy and security policies under the applicable laws and regulations enacted by the National Privacy Commission (NPC). The law likewise provides for acts made punishable under the law and the consequent penalties for the same.
The Data Privacy Act applies extraterritorially, particularly to an act or practice engaged in and outside of the Philippines by an entity if:
● the act, practice or processing relates to personal information about a Philippine citizen or a resident.
• the entity has a link with the Philippines and is processing personal information in the Philippines, or even if
the processing is outside the Philippines as long as it is about Philippine citizens or residents, such as:
• a contract is entered into in the Philippines.
• a juridical entity is unincorporated in the Philippines but has central
management and control in the country; and
• an entity that has a branch, agency, office or subsidiary in the Philippines and the parent or affiliate of the Philippine entity has access to personal information; and
● the entity has other links in the Philippines, such as but not limited to:
• the entity carries on business in the Philippines; and
• the personal information was collected or held by an entity in the Philippines.
On the Outlook: Upcoming Legal Reforms
Several legislative reforms have been adopted, promulgated or put forward, particularly in response to the COVID-19 pandemic.
Regarding foreign investments, several bills are pending with Congress that seek to relax foreign investments to aid the Philippines’ economic recovery after the COVID-19 pandemic. In particular, Senate Bill No 2094 seeks to update the 83-year-old Commonwealth Act 146, more commonly known as the Public Service Act. Senate Bill No 1156 seeks to amends some provisions of the Foreign Investments Act of 1991 to ease equity restrictions of foreign investments in the Philippines. Likewise, Senate Bill No 1840 seeks to amend the Retail Trade Liberalization Act of 2000 to lower the required paid-up capital for foreign enterprises. These measures are supported by President Duterte, who certified the urgent passage of these economic bills.
As of June 2021, several stimulus package bills are also pending in the Congress to provide measures for economic recovery in the face of COVID-19, such as House Bill No 9411, which is the substitute bill for the known as Bayanihan to Arise as One Act (Bayanihan 3) and Senate Bill No 2123, known as the Expanded Stimulus Package Act of 2021. Both pending bills propose to align funds, provide assistance to certain business sectors, and direct relief to households.
The proposed amendments to Republic Act No 8293, otherwise known as the Intellectual Property Code, as stated in House Bill No 8620 endorsed by the Philippine IPOPHIL, are welcome improvements to the current IP system in the country. The proposed amendments provide more stringent penalties for IP rights violations and stronger enforcement powers for the IPOPHIL, among other matters. IP rights are guaranteed a higher level of protection that would undoubtedly promote their creation, use and commercialization in the Philippines.
Following the promulgation of Republic Act No 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act), which is referred to as Package Two of the Comprehensive Tax Reform Program of the Duterte Administration, it is hoped that Package Three or the Real Property Valuation Reform will be passed into law. Package Three involves proposals to rationalize real property tax administration and collection, including the establishment of a single valuation base through a schedule of market values.
Y Tankiang, S., Navarro, A., Acosta , F., & Doble , K. V. (2021). Doing Business in the Philippines 2021. Retrieved from Chambers and Partners: https://practiceguides.chambers.com/practice-guides/doing-business-in-2021/philippines
For companies looking to do business in the Philippines, contact us:
Israel Chamber of Commerce of the Philippines
Email: [email protected]
Phone Number: +63 906 023 6755