What Type of Entity Should We Use to Set Up Our Business?

A foreign investor may establish a business presence in the Philippines either as a corporation, branch office, representative office, regional operating headquarters, or regional headquarters.

Corporation

A foreign-owned corporation registered in the Philippines is allowed to undertake any business activity not otherwise reserved to Philippine nationals by the Philippine Constitution and laws.

Branch Office, Representative Office, Regional Headquarters, and Regional Operating Headquarters

If this is the case, the foreign company is required to appoint a resident agent who may either be an individual residing in the Philippines or a corporation organized and registered in the Philippines and lawfully transacting business in the Philippines. The resident agent is responsible for receiving any court or legal summons or documents on behalf of the foreign company.

Branch Office

A branch office may earn income in the Philippines; however, its activities will be limited to those activities which a foreign-owned company in the Philippines may legally

Representative Office

A representative office (sometimes referred to as a liaison office) of a foreign registered company may interact directly with the Philippine customers of its head office overseas but is not allowed to earn income. The representative office must also be fully subsidized by its head office.

A representative office may generally engage in the following activities:

1. Disseminate information
2. Promote the head office’s products
3. Perform quality control on the head office’s products

Regional Headquarters and Regional Operating Headquarters

A Regional Headquarters (“RHQ”) is an administrative branch office of a foreign registered company engaged in international trade and acts as a supervising, communicating, and coordinating center for such foreign company’s subsidiaries, branches, or affiliates in the Asia-Pacific Region and other foreign markets.

The RHQ is not allowed to earn income. It is allowed to operate only as a cost center, and may not participate in the management of any subsidiary or branch office the multinational company may have in the Philippines, or solicit or market any of the head office’s goods or services in the Philippines.

Capital Required

The amount of paid-in capital required for a corporation and the assigned capital required for a branch office, representative office, regional headquarters, or regional operating headquarters are discussed in Chapters 38 and 39.

Registration and Official Fees

Prior to transacting business in the Philippines, foreign-owned corporations, branch offices, representative offices, regional headquarters, and regional operating headquarters are required to obtain a license to do business from the SEC.

What are the Legal Issues Associated with the Start-up of a Company?

1. Incorporators

Any person, partnership, association or corporation, singly or jointly with others but not more than fifteen in number, may organize a corporation for any lawful purpose or purposes. Each incorporator of a stock corporation must own or be a subscriber to at least one share of the capital stock.

1. Timing

Registration of a corporation with the SEC normally takes approximately one to three weeks, depending on the type of business which the corporation will engage in and the availability of documents and information required from the incorporators. Post-incorporation registrations with the BIR, LGU, and others (see above) normally take an additional four to six weeks.

1. Filings

All required documents and applications associated with the registration of a corporation are required to be filed with the main office of the SEC in Metro Manila, or if the principal office is located at an area where an extension office of the SEC exists, at such SEC extension office.

1. Company Name

The first step in the corporation registration process is to reserve the corporation’s proposed name through the SEC’s online verification system at www.sec.gov.ph.

1. Signatures

Each of the incorporators is required to sign the Articles. This may cause logistical problems if the incorporators are located in different parts of the world, since each will be required to sign the same document.

1. Principal Office

When applying for BIR registration and business permit registration, the applicant will be required to submit one of the following as proof of the location of the corporation’s principal office:

1. Proof of ownership of the office space, or
2. A lease contract, or
3. A certificate by the owner of the office premises confirming his permission for the applicant to use the office space as its place of business.

 

1. Articles of Incorporation

The Articles of Incorporation set forth the basic information about the corporation, such as the name of the corporation, the specific purpose or purposes for which the corporation is being incorporated, the location of its principal office, the term for which the corporation is to exist, the names of the incorporators, the number of directors on the board (which shall not be more than 15), the amount of the authorized capital stock, and other relevant information.

8. Capital Stock

Under Philippine law, all or a portion of the corporation’s issued capital may be purchased using past services rendered by subscriber(s) to the corporation in good faith as consideration. In such cases, the value of the services must be ascertainable and based on the fair market value of the services. Future services are not allowed as consideration for share subscription.

1. Minimum Capital

Stock corporations shall not be required to have a minimum capital stock, except as otherwise specifically provided by special law. Higher paid-up capital requirements are applicable to corporations which participate in sectors such as commercial banks, insurance companies, investment houses, retail trade, and other specific industries or businesses.

1. Directors

 Directors (maximum of fifteen) are responsible for the management of the corporation and owe fiduciary duties to the shareholders. Each director is required to hold at least one share of the corporation. Unless the activity of the corporation is nationalized, directors are not required to be residents of the Philippines.

1. Filing Fees

The official filing fees payable to the SEC are discussed in Chapter 37.

12. Bank Accounts

As part of the incorporation process, the corporation is required to open a Treasurer-in-Trust account in the same bank where the paid-in capital is deposited. A Treasurer-in-Trust account is established by the initial treasurer of the corporation by opening a bank account in his own name, in trust for the corporation, to which the paid-in capital will be remitted thereafter. Upon issuance of the SEC registration, the corporation may convert the Treasurer-in-Trust account into a regular savings or current account in the name of the corporation.

13. Public Access to Company Details

After corporate registration is complete, details of the corporation such as the shareholders list, list of directors, Articles of Incorporation, the corporation’s address, etc. will be kept on file by the SEC and accessible to the public.

14. Documentary Stamp Tax

At the conclusion of the registration process, the SEC will issue the Certificate of Incorporation. At such time the corporation will be required to pay a stamp tax equivalent to P2.00 for each P200, or fraction thereof, of the par value of the corporation’s subscribed capital stock. The payment of the stamp tax is due on the fifth day of the following month after the incorporation.

What are the Legal Issues Associated with Operating as a Foreign Company?

For purposes of this chapter, a foreign company is defined as one formed, organized, or existing under any laws other than those of the Philippines. A corporation is also considered foreign or a “non-Philippine national” if more than 40% of its capital is held by foreigners.

1. License to Do Business Requirement

Foreign companies establishing either a subsidiary corporation, branch office, representative office, regional operating headquarters, or regional headquarters are required to obtain a license to do business by registering their desired entity with the Securities and Exchange Commission (SEC) prior to commencing operations.

1. Regulated Activities

Philippine law regulates the activities which foreign companies may engage in. There are certain activities which are reserved only for domestic companies wholly owned by citizens of the Philippines, and to companies which are considered as “Philippine nationals.” In general, a company is considered a “Philippine national” if it is organized under the laws of the Philippines, and at least 60% of its capital stock outstanding and entitled to vote in the election of directors are held by citizens of the Philippines.

1. Capitalization Requirements

Generally, corporations registered in the Philippines which have foreign shareholdings exceeding 40% of the total shares (which have voting rights) and that meet the definition of a domestic market enterprise, are required to have a minimum paid-up registered capital of no less than US $200,000 or the equivalent thereof. A domestic market enterprise is an enterprise that produces goods for sale or provides services to the domestic or local market entirely, or whose export sales consistently fail to represent at least 60% of total annual sales.

1. Nominee Shareholders

Generally, nominee shareholders are individuals or companies that agree to hold shares on behalf of the true owner(s) of the shares. In a typical nominee arrangement, the nominee shareholder and the true owner will execute an agreement which provides that the nominee shareholder agrees to hold the shares in the nominee’s name only, but the true owner retains all rights of ownership and control (voting rights, rights of transfer, receiving dividends, etc.) of the shares. However, under Philippine law, any similar type of arrangement which aims to circumvent legal restrictions on the foreign ownership of shares in a corporation is prohibited, and both the guilty foreign and Philippine parties may be subjected to a fine of not less than five thousand pesos and imprisonment of not less than five or more than fifteen years. This law is referred to as the Anti Dummy Law.

What is the Process to Obtain a Work Permit?

Entry into the Philippines

Foreigners who are not classified as “restricted” by the Department of Foreign Affairs (“DFA”) may enter the Philippines without a visa and are granted upon arrival an authorized stay of thirty days. Upon timely application, such 30-day stay may be extended initially for 29 days, referred to as a “visa waiver”, and thereafter for one to two months at a time, for a total stay of not more than twenty-four months for restricted nationals and thirty-six months for non-restricted nationals, starting from the date of applicant’s latest recorded arrival.

Special Work Permit

Foreigners planning to engage in specific activities or render services outside of an employment arrangement temporarily in the Philippines for a maximum period of six months may apply for a Special Work Permit (“SWP”) in order to allow them to work in the Philippines without the need to obtain a work visa. These include but are not limited to the following:

1. Professional athletes, coaches, trainers and assistants;
2. International performers with exceptional abilities;
3. Artists, performers and their staff, who perform before an audience for a fee, subject to compliance with the requirements of the concerned agency, office or body;
4. Service suppliers coming primarily to perform temporary services and who do not receive salary or other remuneration from a Philippine source other than expenses incidental to their temporary stay;
5. Treasure hunters authorized to search for hidden treasures with permit from the concerned government agencies and instrumentalities;
6. Movie and television crews authorized to film in the country by the relevant regulatory office, body or agency;
7. Foreign journalists practicing their profession or covering a specific event in the country;
8. Trainee/s assigned in government instrumentalities, government owned and control corporations (“GOCC”) and private entities;
9. Lecturers, researchers, trainers and others pursuing academic work, who are assigned in schools, universities, educational and research institutions, government agencies and other entities (with or without compensation);
10. Religious missionaries and preachers;
11. Commercial models and talents;
12. Culinary specialists/Chefs;
13. Professionals; and
14. Consultants or specialists.

An SWP is valid for an initial period of three months and is extendible only once for another three months. The SWP is not a work visa and its holder must maintain a valid tourist visa while in the Philippines.

Special Temporary Permit

All foreign nationals who intend to work as professionals in the country for a limited period of time are required to secure a Special Temporary Permit (“STP”) from the Professional Regulation Commission (“PRC”).

Alien Employment Permit

An Alien Employment Permit (“AEP”) is issued by the Department of Labor and Employment (“DOLE”) to foreign nationals who are permitted to work pursuant to an employment arrangement with a Philippine-based company, such that there is an employer-employee relationship. An AEP is one of the requirements for foreign nationals who are applying for the Pre-arranged Employment Visa, a Treaty Trader Visa, and the Philippine Economic Zone Authority (“PEZA”) and Board of Investments (“BOI”) Visas.

Provisional Work Permit

Foreign nationals who intend to commence work while their applications for AEP and working visas are still pending must secure a Provisional Work Permit (“PWP”). The PWP is valid for an initial duration of three months, extendible only once, for another three months.

Visa Conversion

Following their arrival in the Philippines, foreigners may apply for the conversion of their visa status from that of a temporary visitor to any of the several categories of working visas (see below).

Work Visas

For foreigners who will be working in the Philippines under an employment arrangement and/or for a period of more than six months, the most common types of work visas applied for are the pre-arranged employment visa, treaty trader visa, PEZA/BOI visa, and the multiple entry special non-immigrant visa. The factors which determine which working visa is the most appropriate for the foreign employee in a given situation include the structure of the employer corporation and its activities, the corporation’s location, and the nationality of the foreign employee, as discussed below.

What Incentives are Available to Foreign Investors by the Government?

Qualifying foreign investors investing in promoted activities (see below) may apply with the BOI to receive various incentives. Investors seeking to obtain BOI registration and incentives are required to submit a completed application and supporting documents, and pay the filing fee. The application normally takes one to two months to process and, if successful, the BOI will issue a Certificate of Registration to the applicant.

1. Tax Exemptions

The BOI has authority to grant qualifying companies income tax exemptions for the following periods:

1. Six years for new projects granted pioneer status (see below)
2. Six years for projects locating in less developed areas, regardless of status (pioneer or non-pioneer) or type of project (new or expansion) (see below)
3. Four years for new projects granted non-pioneer status
4. Three years for expansion and modernization projects.

 

1. Additional Tax Deductions

An additional income tax deduction representing 50% of the wages paid to skilled and unskilled project workers may also be granted by BOI if the project meets the prescribed ratio of investment in capital equipment to the number of project workers, and the project is not related to mining or forestry. This incentive may not be granted simultaneously with an income tax holiday.

1. Additional Incentives

Additional incentives available to BOI registered companies include i. simplified customs procedures for the importation of equipment, spare parts, raw materials and supplies, and exports of processed products by registered enterprises ii. access to the utilization of the bonded warehousing system in all areas required by the project (subject to such guidelines as may be issued by the BOI upon consultation with the Philippine Bureau of Customs)

Enterprises Registered with Special Economic Zone Authorities

Location-specific incentives are available to enterprises operating in the following areas (known as the Ecozones) and registered with the listed special economic zone authorities:

1. Bases Conversion and Development Authority
2. Subic Bay Metropolitan Authority
3. Clark Development Corporation
4. Philippine Economic Zone Authority
5. Zamboanga City Special Economic Zone Authority
6. Aurora Special Economic Zone Authority
7. Cagayan Economic Zone Authority.

What are the Legal Issues Associated with Foreign Ownership of Land?

1. Condominium Ownership

Philippine law allows foreign individuals and foreign-held companies to purchase and own condominium units, provided that title to the common areas is held by a corporation and foreign interest in the condominium corporation does not exceed 40% as further explained below.

If the common areas are held by a condominium corporation, Philippine law requires that owners of units in the condominium development automatically become shareholders of the condominium corporation in the same proportion to their ownership interests in the common areas.

1. Land Ownership by Foreign Companies

Under Philippine law, only corporations in which foreigners hold no more than 40% of the total outstanding shares may own land.

1. Title Search

The legal status of land title is accessible to the general public and may be verified with the Register of Deeds where the land is located. Any interested individual may conduct a title search to determine the status of the land title, the land area, and whether or not there are registered liens, leases, and other encumbrances.

1. Lease of Private Lands

While foreigners are not allowed to own land, foreigners are allowed to lease private (not government owned) land.