A Comprehensive Guide to Foreign Business Ownership in the Philippines
Located in the heart of Southeast Asia, the Philippines is known as one of the most ideal investment hubs for many foreign investors. Its fast-growing economy supported by investment-friendly regulations provides numerous opportunities for foreign enterprises to enjoy a fruitful business venture.
To help you, this article will discuss several points about the business setting in the Philippines and how investing in the local market can benefit your company significantly.
The Foreign Investments Act (FIA) of 1991
As a response to increasing direct foreign investments, the Philippines introduced Republic Act (RA) No. 7042, more commonly known as the Foreign Investments Act (FIA) of 1991. The act provides numerous incentives to attract, promote, and welcome foreign investors to participate in the industrialization and socio-economic development of the country.
The salient features of the FIA are as follows:
- Opens the domestic market to 100% foreign investment
- Provides restrictions to foreign ownership limited only to sectors covered by existing laws or identified under the Foreign Investments Negative List (FINL)
- Allows 100% foreign ownership of business activities not covered in FINL
- Redefines “export enterprise” to refer to any company that exports at least 60% of its production
As mentioned, FIA opens the domestic market to 100% foreign investment. However, foreign enterprises are subject to restrictions and limitations provided under FIA’s FINL.
Foreign Investments Negative List
The Foreign Investments Negative List (FINL) is a list of economic sectors where foreign ownership and participation in the Philippines are regulated.
There are two component lists provided under FIA:
- List A contains areas of investment where foreign ownership is limited by mandate of the Philippine Constitution or by specific laws; and
- List B contains areas of investment where foreign ownership is limited for reasons of security, defense, risk to health and morals, and protection of local small-and-medium enterprises (SMEs).
Before doing business in the Philippines, it is best to check which industries allow or limit foreign participation to avoid unwanted issues upon registering or availing incentives for your business.
Starting A Foreign-Owned Business in the Philippines
When deciding to start a business in the Philippines, you must familiarize yourself with the different types of business structures in the country. This will help you assess which structure caters to your business needs.
There are six different types of business structures in the Philippines. These are the domestic corporation, one person corporation, branch office, representative office, regional headquarters (RHQ), and the regional operating headquarters (ROHQ).
Similar to a Limited Liability Company (LLC), a domestic corporation incurs its own liabilities and is legally responsible for the payment of its obligations. This limits the liability of shareholders only to their capital contribution.
There are three types of domestic corporations in the Philippines:
- 100% Filipino-owned Domestic Corporation
- 60% Filipino-owned and 40% Foreign-owned Domestic Corporation
- 40% to 100% Foreign-owned Domestic Corporation
The minimum capital requirement will depend on its source of revenue, which can be any of the following:
- Export-Market Enterprise – if at least 60% of the company’s revenues are generated from overseas, the minimum paid-up capital is US$100.
- Domestic-Market Enterprise – if more than 40% of the company’s revenues are generated within the Philippines, the minimum paid-up capital is US$200,000.
One Person Corporation
A One Person Corporation (OPC) is a type of corporation with a single stockholder who shall also be the sole director and president. It offers the full authority and control of a sole proprietorship. This type of business entity is ideal for aspiring entrepreneurs planning to run a corporation independently without the associated risks of incurring personal liabilities and having business partners.
Additionally, an OPC is not required to have minimum authorized capital stock, except as otherwise provided by law. Moreover, no portion of the authorized capital is required to be paid up at the time of incorporation.
A Branch Office is a revenue-generating entity that carries out the business activities of its foreign parent company into the Philippines.
The minimum paid-up capital of a branch office is US$200,000, but can be reduced to the following:
- US$100,000 (if it will engage in business activities involving technology or employ at least fifty  direct employees)
- US$100 (if it seeks to be an Export-Market Enterprise that generates income overseas)
Additionally, branch offices do not have a separate legal entity from their parent company and their liabilities are incurred by the head office from abroad.
A Representative Office is a non-income generating entity that a foreign company can set up in the form of a back office or contact center where they can delegate their administrative and technical operations. It does not have a separate legal entity from its foreign parent company and its liabilities are incurred by the head office from abroad.
The minimum capital requirement of a representative office is US$30,000, which the parent company shall annually remit to support operating expenses.
Regional Headquarters (RHQ)
A Regional Headquarters (RHQ) is a non-income generating entity that can only be set up by foreign corporations with subsidiaries, branches, or affiliates worldwide.
An RHQ shall be limited to acting as a supervisory, communication, and coordinating center for its subsidiaries, affiliates, and other branches. Under conditions allowed by law, it may source raw materials, market products, train employees, or conduct research and development in the Philippines.
The minimum capital requirement for setting up an RHQ is US$50,000, which the parent company shall annually remit to support operating expenses.
Regional Operating Headquarters (ROHQ)
A Regional Operating Headquarters (ROHQ) is a revenue-generating entity that carries out the business activities of its foreign parent company into the Philippines.
Under Philippine laws, it is not allowed to directly or indirectly solicit or market goods or services on behalf of its parent company, subsidiaries, branches, or affiliates. It is also prohibited from offering qualifying services to third-party enterprises other than its associated entities.
To support its annual operations, the parent company is required to remit at least US$200,000 to the ROHQ every year.
Whether you wish to establish a local company or expand in the country, all foreign enterprises must register with the Securities and Exchange Commission (SEC) to be legally allowed to operate in the Philippines.
Fiscal and Non-Fiscal Incentives for Foreign Enterprises
To aid the country’s goal in increasing foreign direct investments, the Philippines also introduced numerous regulations that support both local and foreign investments. These regulations provide fiscal and non-fiscal incentives to qualified enterprises.
Investment Promotion Agencies in the Philippines
In addition to BOI and PEZA, there are also 17 investment promotion agencies (IPAs) responsible for promoting, administering, and overseeing tax incentives in their respective regions.
IPAs offer similar incentives to foreign enterprises willing to invest in the Philippine market. However, the incentives granted to foreign enterprises may vary depending on their industry and business activities. Such incentives include, but are not limited to:
- Income tax holiday (ITH) of four to eight years
- ITH bonus of years under certain conditions
- Special corporate income tax (SCIT) rate of 5% based on gross income in lieu of national and local tax rates
- Enhanced deductions (ED) for expenses on production of goods and services, labor, research and development, training, power generation, and domestic input
- Value-added tax (VAT) zero-rating and exemptions on importation or local purchases of goods and services directly and exclusively used on the registered project.
- Duty exemption on imported capital equipment, raw materials, spare parts, or accessories
- Exemption from wharfage dues and export tax, duty, impost, and fees
- Tax credits on imported raw materials
- Tax and duty-free importation of consigned equipment
- Additional deduction for labor expenses
- Employment of foreign nationals in supervisory, technical, or advisory positions
Both BOI and PEZA require foreign enterprises to meet specific criteria to qualify for the incentives provided, such as participating in export-oriented business activities or locating their operations in special economic zones (SEZ).
Tax Reform Programs in the Philippines
In addition to the tax incentives provided by IPAs, the Philippines has been aggressively reforming its taxation system to provide a simpler and more efficient tax system to local and foreign enterprises. The Corporate Tax Reform Program (CTRP) introduces several tax reform packages to boost investment and business activities in the country.
There are four tax reform packages under CTRP:
- Package 1: Tax Reform for Acceleration and Inclusion (TRAIN) Law
- Package 2: Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act
- Package 3: Real Property Valuation Reform
- Package 4: Passive Income and Financial Intermediary Taxation Act (PIFITA)
Among these packages, tax benefits for enterprises in the Philippines fall under Package 2, more commonly known as the CREATE Act.
Passed into law on March 26, 2021, the CREATE Act significantly reduced the corporate income tax (CIT) rate from 30% to 25%, with a yearly deduction of 1% until 2027.
Other salient features under CREATE Act include:
- Reduction of CIT rate to 25%, from the previous 30%, for large corporations. For small and medium-sized enterprises with net taxable income not exceeding ₱5 million, and total assets not exceeding ₱100 million (excluding land), the CIT rate is reduced to 20%
- Reduction of minimum CIT (MCIT) rate from 2% to 1%
- Reduction of percentage tax from 3% to 1%
CIT reductions will vary depending on the type of taxpayer your business falls under.
Choose the Philippines as Your Next Investment Destination for 2021
From business-friendly regulations, tax reform laws, and tax incentives from various government agencies, the Philippines is an ideal investment destination for foreign enterprises seeking to expand their business into the Asian market.