“Doing Business in the Philippines” under the Foreign Investments Act (Republic Act No. 7042, as amended by R.A. Nos. 8179 and 11647)

The Foreign Investments Act (FIA) is the primary legal framework governing foreign corporations that intend to conduct business in the Philippines. This law regulates the scope of activities, requirements, and limitations imposed on foreign corporations, defining “doing business” and establishing the conditions under which foreign entities can engage in commercial activities in the Philippines.

1. Definition of “Doing Business” in the Philippines

Under Section 3(d) of the FIA, "doing business" includes any acts or combination of acts that indicate a foreign corporation’s intention to maintain a presence in the Philippines for profit-oriented activities. The law specifies various activities that constitute doing business, including:

Soliciting orders or engaging in transactions within the Philippines.
Appointing representatives or distributors, whether domiciled in the Philippines or otherwise, who act as sales agents or maintain a stock of merchandise in the Philippines.
Participating in any other activity or transaction that implies continuity or commercial presence in the Philippines.

Activities Excluded from the Scope of “Doing Business”

To clarify ambiguities, Section 3(d) provides a list of activities that do not constitute doing business:

Mere investment or equity participation in domestic corporations.
Appointing a distributor that conducts business in its own name and for its own account.
Participating in litigation, arbitration, or settlement of disputes.
Engaging in isolated or one-time transactions that are incidental or occasional rather than regular and repetitive.

2. Foreign Ownership Limitations and the Negative List

The FIA allows foreign corporations to own equity in Philippine businesses but imposes certain restrictions, notably through the Foreign Investment Negative List (FINL), updated periodically by the National Economic and Development Authority (NEDA). The FINL classifies industries into two categories:

List A: Contains activities or industries where foreign equity is restricted due to nationalistic or security considerations mandated by the Constitution or existing laws (e.g., media, public utilities).
List B: Restricts foreign equity in businesses for reasons of security, defense, health, morals, and protection of small- and medium-sized enterprises (e.g., retail trade enterprises below a certain capital threshold).

Amendments through R.A. No. 11647 have progressively liberalized foreign equity participation in sectors previously restricted, intending to make the Philippines a more competitive destination for foreign investment. However, the sectors on the FINL remain non-negotiable without further legislative amendments.

3. Minimum Capitalization Requirements

The FIA mandates a minimum capitalization requirement for foreign investors engaging in retail trade and other specified activities. The general rule under R.A. No. 11647 requires a minimum paid-in capital of USD 200,000 for foreign-owned enterprises in areas open to foreign investments. For enterprises that use advanced technology or employ at least 50 direct employees, the threshold is reduced to USD 100,000.

Retail trade enterprises have specific capitalization requirements set by the Retail Trade Liberalization Act (R.A. No. 11595), which mandates a minimum paid-in capital of PHP 25 million for foreign retailers.

4. Registration and Permits for Foreign Corporations

To legally conduct business in the Philippines, foreign corporations must be registered with the Securities and Exchange Commission (SEC). The forms of registration available include:

Branch Office: Direct extension of a foreign corporation's parent company. It can engage in revenue-generating activities, provided it remits at least USD 200,000 to the Philippines as an initial deposit.
Representative Office: Serves only as a liaison or coordinating office. It cannot earn revenue directly and must be fully funded by its head office with an initial remittance of at least USD 30,000.
Regional or Area Headquarters: Limited to activities such as planning, marketing, and training. It is prohibited from engaging in trade or business in the Philippines.
Regional Operating Headquarters: Permitted to offer qualifying services to its affiliates or subsidiaries and must remit a minimum of USD 200,000 to establish its operations.

These requirements ensure that foreign entities contribute capital to the Philippine economy and adhere to regulatory standards.

5. Incentives for Foreign Investors

The FIA provides several incentives to foreign investors who establish their businesses in the Philippines:

Investment Priority Areas: Foreign entities that invest in sectors listed in the Investment Priorities Plan (IPP) can qualify for tax incentives, such as income tax holidays and tax deductions.
Incentives for Export Enterprises: Businesses that export at least 70% of their output may enjoy tax and duty-free importation of capital equipment and other incentives from the Philippine Economic Zone Authority (PEZA) or Board of Investments (BOI).
Public-Private Partnership (PPP) Projects: Foreign entities involved in PPP projects enjoy certain tax exemptions, provided they operate within the parameters of the Build-Operate-Transfer (BOT) Law and the amended FIA.

6. Liabilities and Taxation of Foreign Corporations

Foreign corporations are liable for taxes only on income derived from Philippine sources. The tax implications vary depending on the corporate structure:

Resident Foreign Corporations (e.g., branch offices) are taxed at 25% of net taxable income earned within the Philippines, though non-resident foreign corporations are typically taxed on gross income sourced from the Philippines.
Representative Offices are exempt from corporate income tax, as they do not generate local revenue.
Foreign corporations must also comply with the Value-Added Tax (VAT) requirements if they engage in the sale of goods or services within the Philippines.

7. Compliance Requirements for Foreign Corporations

Foreign corporations are subject to the same regulatory standards as domestic corporations, including:

Annual Submission of Audited Financial Statements (AFS).
Filing of General Information Sheet (GIS) with the SEC.
Tax Filings: Including income tax returns, VAT, and other relevant returns to the Bureau of Internal Revenue (BIR).
Work Visa Requirements: Foreign employees must secure the appropriate work visas (e.g., 9(g) visa) to be employed in Philippine-based entities.

8. Implications of Failure to Register

Foreign entities that conduct business without proper registration are deemed as “doing business without a license,” which can result in penalties, fines, or legal injunctions to halt operations. Furthermore, contracts entered into by unregistered foreign corporations in the Philippines may be deemed void and unenforceable.

9. Key Amendments Under R.A. No. 11647

The most recent amendment through R.A. No. 11647 reflects the government's ongoing efforts to promote a more investor-friendly climate. Key changes include:

Expanded definitions and criteria of “doing business.”
Updated guidelines for minimal capitalization requirements.
Eased restrictions on foreign participation in certain industries.
Increased incentives for export-oriented businesses and technology-based enterprises.

The amendment underscores the Philippine government’s focus on creating an investment environment conducive to both domestic and international businesses, prioritizing sectors that align with national development objectives and economic growth.

The Foreign Investments Act, as amended, provides a structured pathway for foreign corporations to engage in the Philippine market while balancing the nation’s interest in safeguarding certain industries. Foreign investors interested in the Philippines should remain updated on these evolving laws and seek local counsel to ensure compliance.