• 2016-09-21

Are you a foreigner or with a foreign-registered company planning to put up a business in the Philippines?

Are you a foreigner or with a foreign-registered company planning to put up a business in the Philippines?

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Here are some smart tips on foreign ownership/equity restrictions to get you started:

The Philippines has been traditionally known to restrict foreign ownership of companies to 40% of total equity only, with 60% equity reserved for citizens. The government, however, has initiated actions in the past to relax this rule in order to attract foreign investments to help grow the country’s economy.

This guide is intended to help prospective foreign investors and/or their local partners or agents to determine how much foreign equity is allowed in their line of business.

1. First thing to check: Foreign investment negative lists

The first law liberalizing foreign investments (Foreign investment act of 1991) resulted in the creation of a foreign investment negative list (FINL) that seeks to define restrictions on foreigner’s and foreign companies’ economic activities in the country.

The FINL is regularly updated and is now on its tenth revision to reflect new laws. The list is divided into two as follows:

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[accordion_dd title=’Negative List A’]

Limits On Foreign Ownership As Mandated By Constitution And Other Laws

No Foreign Equity

  1. Mass Media except recording
  2. Practice of Professions
    • Pharmacy
    • Radiologic and X-Ray technology
    • Criminology
    • Forestry
    • Law
  3. Retail trade enterprises with paid-up capital of less than $2.5 Million
  4. Cooperatives
  5. Private security agencies
  6. Small-scale mining
  7. Utilization of marine resources in archipelagic waters, territorial sea, and exclusive economic zones as well as small-scale utilization of natural resources in rivers, lakes, bays, and lagoons
  8. Ownership, operation and management of cockpits
  9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
  10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-personnel mines
  11. Manufacture of firecrackers and other pyrotechnic devices

Up to Twenty Percent (20%) Foreign Equity

  1. Private radio communications network

Up to Twenty Five Percent (25%) Foreign Equity

  1. Private recruitment, whether for local or overseas employment
  2. Contracts for the construction and repair of locally-funded public works
    • Infrastructure/development projects in RA 7718:

    • Projects which are foreign funded and required to undergo international competitive bidding
    • Contracts for the construction of defense-related structures

Up to Thirty Percent (30%) Foreign Equity

  1. Advertising

Up to Forty Percent (40%) Foreign Equity

  1. Exploration, development and utilization of natural resources
  2. Ownership of private lands
  3. Operation of public utilities
  4. Educational institutions other than those established by religious groups and mission boards
  5. Culture, production, milling, processing, trading except retailing, of rice and corn and acquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof
  6. Contracts for the supply of materials, goods and commodities to government-owned or controlled corporation, company, agency or municipal corporations
  7. Facility operator of an infrastructure or a development facility requiring public utility franchise
  8. Operation of deep sea commercial fishing vessels
  9. Adjustment companies
  10. Ownership of condominium units

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[accordion_dd title=’Negative List B’]

Limits On Foreign Ownership For Reasons Of Security, Defense, Risk To
Health And Morals And Protection Of Small-Medium Scale Enterprises

Up to Forty Percent (40%) Foreign Equity

  1. Manufacture, repair, storage, and/or distribution of products and/or ingredients
    requiring Philippine National Police (PNP) clearance:

    • Firearms, parts of firearms and ammunition therefore, instruments or implements used or intended to be used in the manufacture of firearms
    • Gunpowder
    • Dynamite
    • Blasting supplies
    • Ingredients used in making explosives
    • Telescopic sights, sniper scope and other similar devices
  2. Manufacture, repair, storage, and/or distribution of products requiring
    Department of National Defense (DND) clearance:

    • Guns and ammunition for warfare
    • Military ordinance and parts thereof
    • Gunnery, bombing and fire control systems and components
    • Guided missle/missle systems and components
    • Tactical aircraft, parts and components
    • Space vehicles and component systems
    • Combat vessels and auxiliaries
    • Weapons repair and maintenance equipment
    • Military communication equipment
    • Night vision equipment
    • Stimulated coherent radiation devices, components, and accessories
    • Armament training devices
    • Others as may be determined by the Secretary of the DND
  3. Manufacture and distribution of dangerous drugs
  4. Sauna and steam bathhouses, massage clinics and other activities regulated by law because of risks posed to public health and morals
  5. All forms of gambling except those covered by investment agreements with PAGCOR
  6. Domestic market enterprises with paid-in capital of less than the equivalent of USD$200,000
  7. Domestic market enterprises which involve advanced technology or employ at least 50 direct employees with paid-in equity capital of less than the equivalent of US$100,000

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2. Domestic Corporations and Subsidiaries

Up to 100% foreign ownership is allowed for domestic corporations that:

  • Are not part of the foreign investment negative lists

    *Note that retail businesses (selling directly to consumers) with less than $2.5 Million in paid-up capital is listed under Negative List A.
  • Have at least the peso equivalent of USD $200,000 in paid-in equity capital.
    • This amount can be reduced to USD $100,000 if :

    • the enterprise employs 50 employees or
    • if it will be using “advanced technology”—to be determined by the Department of Science and Technology.
3. Retail Trade Enterprise

Retail Trade Enterprise are businesses that sell directly to consumers.

Under the law (RA 8762 – Retail Trade Liberalization Act of 2000) , up to 100% foreign ownership is allowed for retail trade enterprises for two categories of businesses:

  • Category A: Have a paid-up capital of USD 2.5 Million or more
  • Category B:Specializing in high end or luxury products, provided that the paid-up capital per store is not less than USD 250,000.00 (Sec. 5 of R.A. 8762)

Additional qualification requirements for foreign retailers can be found below:

  • Parent company with USD 200M net worth (USD 50M net worth for luxury brands)
  • At least 5 branches or franchises around the world OR at least one store capitalized at a minimum of USD $25M
  • Five year track record in retailing; and
  • Only nationals from, or juridical entities formed or incorporated in Countries which allow the entry of Filipino retailers shall be allowed to engage in retail trade in the Philippines.

Finally, all retail trade enterprises under category A that exceeds 80% foreign equity must list and offer a minimum of 30% equity in any stock market in the Philippines. This should be done within 8 years from the company’s start of operations.

4. Export Businesses

100% foreign ownership is allowed for export businesses, as long as it doesn’t fall under the negative lists. A business is considered as an export business if at least 60% of its output or sales are exported.

Call centers, BPOs, KPOs, back offices and similar businesses can all be considered as export businesses provided they adhere to the output rule.

Export businesses can also claim tax incentives via various laws (EO 226 / Board of Investments, PEZA law, and other economic zone laws)

We wish to remind the reader that this content should serve as a rough guide only and not to be used as proper legal advice. Please get in touch with an attorney to get specific advice for your situation.

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