Philippines: Liberalization Of Foreign Investments In The Philippines

Last Updated: 15 January 2001
Article by Jesus M. Manalastas

Individuals and entities who are non-Philippine nationals, as well as former Filipino citizens, have been granted liberalized and expanded investment rights in the Philippines.

Foreign Investments Act

Republic Act No. 7042 (as amended by Republic Act No. 8179), otherwise known as the Foreign Investments Act of 1991, was enacted to promote productive investments from non-Philippine nationals to the extent that such foreign investments1 are allowed by the Constitution and relevant laws.

Under the said law, a non-Philippine national may, upon registration with appropriate government agencies, do business2 or invest in a domestic market enterprise and/or in an export enterprise up to 100% of its capital, unless participation of non-Philippine nationals in the enterprise is prohibited or limited to a smaller percentage by existing laws.Such prohibition or limitation is contained in the Negative List. Generally, a "non-Philippine national" is an individual who is not a Filipino citizen or a corporation organized outside of the Philippines or a corporation organized in the Philippines more than 40% of the voting capital of which is owned by aliens. Non-Philippine nationals may engage in or invest up to 100% of the capital in any retail trade enterprise subject to certain limitations.3

A domestic market enterprise is an enterprise which produces goods for sale or renders service or otherwise engages in any business in the Philippines. An export enterprise is a manufacturer, processor or service (including tourism) enterprise which exports at least 60% of its output or a trader which purchases products domestically and exports at least 60% of such purchases.

The current Negative List, which is administered by the National Economic and Development Authority ("NEDA"), has two component lists4:

1. List A enumerates the activities reserved to Philippine nationals by the Philippine Constitution and specific laws. The current List A, which may not be exhaustive as it is based on existing legislation, contains the following restrictions among others:

No foreign equity allowed:

mass media (except recording); practice of a licensed profession; cooperatives; private security agencies; small-scale mining; utilization of marine resources.

Limited foreign equity allowed:

a. 25% in private recruitment, whether for local or overseas employment, and in construction and repair of locally-funded public works;

b. 30% in advertising;

c. 40% in exploration, development and utilization of natural resources; ownership of private lands; operation and management of public utilities; ownership/administration of educational institutions; rice and corn industry; supply of materials, goods and commodities to government agencies, government-owned or controlled corporations, and local government units; Build-Operate and Transfer (BOT) projects requiring a public utilities franchise; operation of deep sea commercial fishing vessels; adjustment companies; and ownership of condominiums;

d. 60% in financing companies; investment houses regulated by the Philippine Securities and Exchange Commission.

2. List B enumerates the activities and enterprises which are regulated pursuant to law. While the law does not specifically prescribe any foreign equity restriction on such activities and enterprises, their inclusion in List B and consequent limitation of foreign equity is deemed necessary for reasons of national security, health, morals and protection of small and medium scale enterprises. However, List B may be revised/amended by NEDA once every 2 years.

List B currently allows only up to 40% foreign equity in enterprises enumerated therein. These include manufacture and distribution of firearms and other products requiring clearance from the Philippine National Police and/or Department of National Defense, and dangerous drugs; gambling-related activities; and sauna and steam bathhouses, and massage clinics.

List B also currently includes the following:

(a) domestic market enterprises with paid-in equity capital less than the equivalent of US$200,000.00 and which do not involve advanced technology, as certified by the Department of Science and Technology, or do not employ at least 50 direct employees;

(b) domestic market enterprises involving such advanced technology or employing at least 50 direct employees but with paid-in equity capital of less than the equivalent of US$100,000.00.

Investor’s Lease Act

Republic Act No. 7652, otherwise known as the Investor’s Lease Act, allows the long-term lease of private land by foreign investors for the sole purpose of establishing industrial estates, factories, assembly or processing plants, agro-industrial enterprises, land development for industrial or commercial use, tourism, and other similar priority productive endeavors. The lease contract shall initially be for a period not exceeding 50 years; renewable only once for a period not exceeding 25 years; provided that, in the case of renewal, the foreign lessee should be able to show that it has made social and economic contribution to the Philippines.

The leased premises shall comprise such area as may reasonably be required for the purpose of the investment, subject to the provisions and requirements of the Philippine Local Government Code, and approved by the Department of Trade and Industry (the "DTI") or the Bases Conversion and Development Authority/Clark Development Corporation/Subic Bay Metropolitan Authority.

Private agricultural land devoted to agricultural activities, including but not limited to the cultivation of soil, planting of crops, growing of fruits and/or plantations, covered by Republic Act No. 6657, otherwise known as the Comprehensive Agrarian Reform Law, shall not qualify for long-term lease under the Act.

The occurrence of certain events will result in the automatic termination of the lease contract (without prejudice to the right of the lessor to be compensated for damages), including the failure to operate the investment project for any 3 consecutive years or the outright abandonment of the investment project at any time during the approved lease period; provided that the failure to pay the lease rentals for 3 consecutive months coupled with the failure to operate the investment project for the same period shall be deemed an outright abandonment of the project.

Investment Rights of Former Filipino Citizens

A natural-born citizen of the Philippines who has lost his Philippine citizenship and who otherwise has the legal capacity to enter into contracts under Philippine law is allowed to acquire private land up to an aggregate area of not more than 5,000 square meters (in the case of urban land), or 3 hectares (in the case of rural land) and which shall not comprise more than two (2) lots situated in different cities or municipalities. The land shall be used for business or other purposes (e.g., agriculture, industry and services, including leasing out the same but not the buying and selling thereof).

Subject to the maximum aggregate area limits provided above, such natural-born Filipino citizen who has lost his Philippine citizenship may, under Batas Pambansa Blg. 185, also be a transferee of private lands up to a maximum aggregate area of not more than 1,000 square meters (in the case of urban land), or 1 hectare (in the case of rural land), which lands may be used for residential purposes.

Where both spouses are qualified to avail of this privilege, the total area to be acquired by both cannot exceed the maximum area provided above.

Moreover, said former citizens of the Philippines are granted the same investment rights of a Philippine citizen in the following areas of investment, subject to the relevant Philippine law on the matter: (1) cooperatives; (2) rural banks; (3) thrift banks and private development banks; and (4) financing companies.



1 Section 3(c) of Republic Act No. 7042, as amended, defines "foreign investment" as "an equity investment made by a non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank (now, Bangko Sentral ng Pilipinas) which shall assess and appraise the value of such assets other than foreign exchange."

2 Section 3(d) of Republic Act No. 7042, as amended, provides that the phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business" shall not be a deemed to include mere investment as a shareholder in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.

However, Rule I of the Implementing Rules and Regulations of RA 7042 provides that the following acts shall also not be deemed "doing business" in the Philippines:

(1) The publication of a general advertisement through any print or broadcast media;

(2) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;

(3) Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export;

(4) Collecting information in the Philippines; and

(5) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.

3 Retail Trade Liberalization Act (Republic Act No. 8762)

4 Executive Order No. 286, series of 2000.

Disclaimer: The information contained in this article is intended only to provide a general guide to the subject matter. Advice from specialists is still recommended for your specific requirements and particular circumstances.

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