Philippines: Types Of Business Organizations That Foreign Investors May Establish In The Philippines

By: Jesus M. Manalastas and Bob L. Guinto*

There are various business or juridical entities that may be established by a foreign investor interested in conducting business activities in the Philippines. These include the establishment by a foreign corporation of a (i) local subsidiary through a domestic corporation, (ii) a branch office, (iii) a representative office, (iv) a regional or area headquarters, or (v) a regional operating headquarters. Entry into the Philippines can also be achieved through joint ventures with other domestic corporations.

A foreign investor may wish to consider engaging in business in the Philippines by organizing a domestic corporation (where the investor has a majority or controlling equity interest) to serve as its local subsidiary. As a distinct corporation, the subsidiary will have a juridical personality separate from that of the parent corporation. Its shareholders will also enjoy limited liability in that their liability to the public will only be to the extent of their unpaid subscriptions.

Note that a foreign investor may be subject to certain equity or shareholding limits if the domestic corporation will engage in certain restricted activities.

Setting up a subsidiary in the Philippines basically involves the incorporation of a Philippine company. Under the Corporation Code of the Philippines ("Corp. Code"), five (5) or more persons not exceeding fifteen (15), all of legal age, a majority of whom are residents of the Philippines, may form a private stock corporation by complying with certain regulations and submitting to the Philippine Securities and Exchange Commission ("SEC") certain documentary requirements including: the Articles of Incorporation; By-laws; Treasurer's affidavit attesting that at least twenty-five percent (25%) of the authorized capital stock has been subscribed and at least 25% of the total subscription has been paid; a bank certificate of deposit; proof of inward remittance and the required Registration Data Sheet.

Under Sec. 12 of the Corp. Code, there is generally no minimum authorized capital stock required of a stock corporation. Unless the corporation is a domestic market enterprise or will engage in an activity for which the SEC requires a higher paid-up capital, the paid-up capital must generally be at least five thousand pesos (P5,000) (Sec. 13, Corp. Code). The SEC requires that in case of foreign subscribers to the capital stock, their subscriptions must be paid in full. In case the subscription of the foreigner is not fully paid, the foreigner may either (i) cause one of the resident stockholders to assume the unpaid subscription through an affidavit of assumption, or (ii) post a surety bond equivalent to his unpaid subscription.

Under Sec. 8 of the Foreign Investment Act ("FIA"), a domestic market enterprise must have a paid-in equity capital of at least the equivalent of US$200,000.00. The FIA Implementing Regulations define a domestic market enterprise as an enterprise which produces goods for sale, renders service, or otherwise engages in any business in the Philippines. Under the Retail Trade Liberalization Act of 2000, there are different paid-in capital requirements depending on the equity holding of the foreign investor and the particular activity of the retail trade enterprise.

Under the FIA, a branch office of a foreign company "carries out the business activities of the head office and derives income from the host country." Unlike a representative office, a branch office may generate income from its business activities in the Philippines. It is also to be distinguished from a subsidiary in that a branch is a mere extension of the corporate personality of the foreign company and consequently does not have a juridical personality separate and distinct from the parent company.

Registration as a branch office in the Philippines requires the submission to the SEC of a completed application form, together with certain documentary requirements, including but not limited to: certified copies of the foreign company's Articles of Incorporation with an English translation thereof if it is in another language; financial statements for the immediately preceding year as certified by an independent Certified Public Accountant of the home country; proof of inward remittance, such as a Philippine bank certificate attesting that the Peso equivalent of the required capital, e.g. US$200,000 if the branch is a domestic market enterprise, has been inwardly remitted in the Philippines and stands in the account of the foreign company; and certified copies of required board resolutions. Please note that the SEC requires that all documents executed abroad should be authenticated by the Philippine Embassy or Consulate.

Within sixty (60) days from the issuance of license to do business in the Philippines, a foreign corporation is required to deposit with the SEC satisfactory securities with an actual market value of P100,000 in order to secure present and future creditors of the licensee (Sec. 126, Corp. Code).

A representative office (also known as a liaison office) is likewise an extension of the foreign company in the host country. It is distinguished from a branch office in that while a representative office similarly deals directly with the clients of the parent company, the representative office "does not derive income from the host country and is fully subsidized by its head office." It can undertake activities such as but not limited to information dissemination and promotion of the company's products as well as quality control of products (Sec. 1[c], Rule I, FIA Implementing Rules).

Registration of a representative office entails the submission of a completed application form to the SEC, together with certain documentary requirements, including, but not limited to the following: certified copies of the foreign company's Articles of Incorporation with an English translation thereof if it is in another language; financial statements for the immediately preceding year as certified by an independent Certified Public Accountant of the home country; proof of inward remittance such as a Philippine bank certificate attesting that the Peso equivalent of US$30,000 has been inwardly remitted in the Philippines and stands in the account of the foreign company; and certified copies of required board resolutions. Authentication of all documents executed abroad by the Philippine Embassy or Consulate is similarly required.

If the foreign investor is a multinational company that is also engaged in international trade through its affiliates, subsidiaries or branch offices in the Asia-Pacific region and other foreign markets, another mode of entry that may be considered is its establishment in the Philippines of a regional or area headquarters ("RH") pursuant to Presidential Decree No. 218 and the Omnibus Investments Code of 1987 (Executive Order No. 226), as recently amended by R.A. No. 8756. It is similar to a branch office except that it cannot derive income from the Philippines and it is limited to acting as a "supervisory, communications and coordinating center for its affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets" (Sec. 8, P.D. 218 and Sec. 22, [DD], Tax Reform Act of 1997).

A number of incentives are granted to a RH such as exemption from the value added tax (Art. 65 of the Omnibus Investments Code, as amended); exemption from all kinds of local taxes, fees or charges (Art. 66, Id.) and tax and duty free importation of training materials and equipment (Art. 67, Id.); and preferential tax rate on the salary of personnel employed by a RH (Art. 61, Id.).

The application to register as an RH is also filed with the SEC, which will however not act on it unless favorably endorsed by the Philippine Department of Trade and Industry's Board of Investment (DTI-BOI). Among the supporting documents that must also be filed are: (1) a certification from the Philippine Embassy or Philippine Foreign Trade Senior Officer in the foreign firm's country that said foreign firm is an entity engaged in international trade through its affiliates, subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets; and (2) certification from the multinational company that the said foreign entity has been authorized by its board of directors to establish its regional headquarters in the Philippines. The required inward remittance is US$50,000 or its equivalent.

A Regional Operating Headquarters (ROH) is a new concept in the Philippines. Like in the case of an RH, the applicant must also be engaged in international trade with through its affiliates, subsidiaries or branches in the Asia-Pacific region and other foreign markets. However, unlike an RH, an ROH may engage in a number of business activities in the Philippines and more importantly, derive income therefrom. Article 59(b)(1) of the Omnibus Investment Code, as amended by R.A. 8756, provides that an ROH may engage in any of the following services: "general administration and planning; business planning and coordination; sourcing/procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communication; and business development." However, an ROH is prohibited from rendering these services other than to its own affiliates, branches or subsidiaries, as declared in their SEC registration. It is likewise prohibited from directly or indirectly soliciting or marketing goods and services whether on behalf of their parent company, branches, affiliates, subsidiaries or any other company.

The application to register as an ROH is also filed with the SEC, which will however not act on it unless favorably endorsed by the DTI-BOI. Among the supporting documents that must also be filed are: (1) a certification from the Philippine Embassy or Philippine Foreign Trade Senior Officer in the foreign firm's country that said foreign firm is an entity engaged in international trade through its affiliates, subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets; and (2) certification from the foreign company that the said foreign entity has been authorized by its board of directors to establish its regional operating headquarters in the Philippines. The required inward remittance is at least US$200,000 or its equivalent, which must be converted into Philippine currency.

Considering that an ROH generates income from its business activities in the Philippines, it is subject to income tax but only at a preferential rate of 10% of its taxable income ((Sec. 28A(6)(b), Tax Reform Act of 1997 and Art. 64 of the amended Omnibus Investment Code).

Other incentives granted to an ROH include: exemption from all kinds of local taxes, fees or charges (Art. 66, Omnibus Investment Code); tax and duty free importation of training materials and equipment (Art. 67, Id.); and preferential tax rate on the salary of the personnel employed by a RH (Art. 61, Id.).

A joint venture is another business organization that may be used by a foreign investor for its business activities in the Philippines. The FIA Rules provides that a joint venture shall mean two or more entities, whether natural or juridical, one of which must be a Philippine national, combining their property, money, efforts, skills or knowledge to carry out a single business enterprise for profit. Generally, a joint venture has the following important elements: community of interest in the business, sharing of profits and losses, and a mutual right of control.¹

Joint ventures may either be structural or contractual or both² and may or may not result in the formation of a Joint Venture Company ("JVC"). Thus, through contractual arrangements embodied in a joint venture agreement ("JVA"), a foreign investor and a local investor or partner may decide to contribute capital, technical know-how, equipment and other resources for the joint pursuit of a commercial undertaking, provided that the nature of the venture is in line with the business authorized by the charters of the corporations involved. If the joint venture will not result in the formation of a new partnership or corporation, such a joint venture does not require any prior registration or approval from the SEC.³ However, if through a JVA, the parties agree to establish a new corporation through which they will undertake their business operations, then the requirements for establishing a domestic corporation discussed in part 1 of this article must be complied with. When the joint venture results in the formation of a JVC, then the JVC acquires a juridical personality separate and distinct from that of its corporate joint venturers.

The foregoing are the types of business organizations that may be established by a foreign investor interested in conducting business activities in the Philippines. The choice of which type of business entity to pursue is essentially dictated by the specific purposes for which entry is sought; the nature and extent of the intended business activities; the limitations that Philippine law may impose on such activities; capital requirements; logistics and personnel; and the incentives that the foreign corporation would like to avail of under Philippine laws.⁴.

* Jesus M. Manalastas and Bob L. Guinto are lawyers at the Ponce Enrile Reyes & Manalastas Law Offices, with office address at the 3rd Floor, Vernida IV Building, Leviste St., Salcedo Village, 1227 Makati City, Philippines. The may be reached by e-mail at pecabar@pecabar.com or at telephone nos. (632) 815-9571 to 80 and fax nos. (632) 818-7355 and (632) 818-7391.

1.Aurbach v. Sanitary Wares Manufacturing Corporation (180 SCRA 130 [1989]).

2. J. P. KARALIS. International Joint Ventures: A Practical Guide (1992) at p. 7.

3. SEC Opinions dated January 26, 1961, Nadelco Incorporated; February 29, 1980, Mr. Antonio Librea; April 29, 1985, DM Consunji Inc.; March 18, 1993, Atty. Myrna T. Trinidad.

4 Fiscal and non-fiscal incentives may be availed of by qualified investors under Philippine law, depending on the nature and scope of business activities and the location of the activities in the Philippines. These incentives include: income tax holidays for a limited period; tax credit for taxes and duties on raw materials for export products; exemption from taxes and duties on imported supplies and spare parts for consigned equipment; exemption from wharfage dues and any export tax and duty impost; unrestricted use of consigned equipment; employment of foreign nationals; tax credit for import substitution; tax and duty-free importation of capital equipment; tax deduction for incremental labor expenses; and a special tax rate on gross income.