Establishing a Local Division of a US-Based Company in the Philippines

Below is a comprehensive guide on how a United States (US) company can establish a local division (or presence) in the Philippines, taking into account the pertinent Philippine laws, regulations, and procedures. This guide is designed to provide a well-rounded overview of the legal, regulatory, and administrative considerations.

1. Overview of Legal Framework

1.1 Principal Laws and Regulations

  1. Revised Corporation Code of the Philippines (R.A. No. 11232)

    • Governs the establishment and operation of corporations and other business entities in the Philippines.
    • Introduced new features such as the One-Person Corporation (OPC) and the perpetual corporate term.

  2. Foreign Investments Act of 1991 (R.A. No. 7042), as amended by R.A. No. 11647

    • Provides guidelines for foreign investments in the Philippines.
    • Enumerates which industries have limitations on foreign equity.
    • Introduces the Foreign Investment Negative List that identifies activities or industries restricted or limited to foreign ownership.

  3. Securities Regulation Code (R.A. No. 8799)

    • Overseen by the Securities and Exchange Commission (SEC).
    • Deals primarily with registration requirements for companies, securities, and securities transactions.

  4. Other Relevant Regulations

    • Labor Code of the Philippines for employment rules.
    • National Internal Revenue Code (NIRC) for tax matters, administered by the Bureau of Internal Revenue (BIR).
    • Local Government Code for local taxes, permits, and licenses.
    • Anti-Dummy Law (C.A. No. 108) for compliance with nationality requirements in certain industries.

2. Types of Business Entities Available to Foreign Companies

A US-based company wishing to operate in the Philippines typically may choose from these main entity structures:

  1. Domestic Subsidiary

    • A Philippine-registered corporation, either wholly or partially owned by a US parent company.
    • Subject to the Revised Corporation Code.
    • Minimum capital requirements vary based on the business activity and foreign ownership percentage.

  2. Branch Office

    • The branch in the Philippines is regarded as a mere extension of the foreign corporation.
    • Must secure a License to Do Business in the Philippines from the SEC.
    • Subject to specific capital and operational requirements.

  3. Representative Office

    • Undertakes information dissemination, promotion of the parent company’s products, quality control, etc.
    • Prohibited from deriving income in the Philippines.
    • Must be fully subsidized by the parent company.
    • License to Do Business is also required.

  4. Regional Headquarters (RHQ) or Regional Operating Headquarters (ROHQ)

    • These are special entities allowed under specific laws (e.g., Republic Act No. 8756).
    • RHQ: Acts as an administrative branch overseeing other affiliates; cannot earn income in the Philippines.
    • ROHQ: May derive income from qualifying services provided to branches, subsidiaries, or affiliates of the foreign parent outside the Philippines.
    • Special tax and registration rules apply.

  5. One-Person Corporation (OPC)

    • A relatively new structure under the Revised Corporation Code.
    • It allows one individual or one juridical entity to form a corporation.
    • In practice, foreign investors often prefer subsidiaries or branch offices if they meet capitalization rules and operational goals.

3. Foreign Equity Restrictions and the Negative List

3.1 Foreign Investment Negative List

  • The Philippine government periodically issues the Foreign Investment Negative List, indicating the business activities where:
    • Category A: Foreign ownership is restricted by mandate of the Constitution or specific laws (e.g., ownership of land is restricted to Filipino nationals or to companies with at least 60% Filipino ownership).
    • Category B: Foreign ownership is limited for reasons of security, defense, risk to health and morals, and protection of small- and medium-scale enterprises.

3.2 General Rules on Foreign Ownership

  • Businesses not explicitly restricted on the Negative List may be 100% owned by foreigners.
  • Certain industries (e.g., mass media, retail trade below a certain capitalization, public utilities, etc.) have higher levels of restriction.

4. Capitalization Requirements

4.1 Domestic Subsidiary

  • If a company is export-oriented (i.e., at least 60% of its products or services are for export), the minimum paid-up capital can be as low as US$100,000.
  • If a company caters primarily to the domestic market and exceeds 40% foreign equity, it generally needs at least US$200,000 in paid-up capital.
    • This can be reduced to US$100,000 if the company uses advanced technology or employs at least 50 direct employees.
  • If foreign equity is 40% or below, the usual minimum subscription (and paid-up) under the Revised Corporation Code may apply (PHP 5,000, though practically higher amounts are required).

4.2 Branch Office

  • Required to remit US$200,000 into the Philippines as minimum assigned capital.
    • This can be lowered to US$100,000 if the branch meets the same criteria: advanced technology or at least 50 direct employees.
  • The SEC may require proof of inward remittance of the assigned capital for the issuance of a License to Do Business.

4.3 Representative Office

  • Must remit at least US$30,000 annually to cover operating expenses.
  • Prohibited from deriving local income.

5. Registration and Establishment Procedures

The main government agency that oversees company registration is the Securities and Exchange Commission (SEC). Local offices of the Department of Trade and Industry (DTI) or local government units (LGUs) will also be involved for specific permits.

5.1 Reserving the Company Name

  • Check name availability with the SEC’s online system.
  • Reserve the desired name to ensure no other entity is using it.

5.2 Drafting and Notarizing Constitutional Documents

  • Articles of Incorporation and By-Laws (for a corporation)

  • For a branch or representative office, prepare:

    1. SEC Application Form (License to Do Business)
    2. Authenticated Board Resolution of the parent company authorizing the establishment of the branch/representative office in the Philippines.
    3. Authenticated Financial Statements of the parent company.

  • Legal documents executed abroad require consularization or apostillization (depending on the jurisdiction) before submission to the SEC.

5.3 Filing with the SEC

  • Domestic Subsidiary: Submit Articles of Incorporation, By-Laws, Treasurer’s Affidavit, bank certificate of deposit (for paid-up capital), and other required forms.
  • Branch / Representative Office: Submit application forms, audited financial statements of the foreign parent, board resolution, and proof of inward remittance of capital.

5.4 Issuance of SEC Certificate or License

  • The SEC will issue a Certificate of Incorporation (for local corporation) or a License to Do Business (for branch/representative office).
  • Once issued, the entity is deemed registered with the SEC.

5.5 Post-Registration Requirements

  1. Mayor’s Permit / Business Permit

    • Secure from the local government (City or Municipality) where the office will be located.
    • Requires location clearance, zoning clearance, and sometimes fire safety inspection, sanitary permit, etc.

  2. BIR Registration

    • Obtain a Tax Identification Number (TIN).
    • Register books of account and official receipts/invoices.
    • File the relevant BIR forms (e.g., Form 1903 for corporations).

  3. Social Security System (SSS), Philippine Health Insurance (PhilHealth), and Home Development Mutual Fund (Pag-IBIG)

    • If hiring local employees, registration with these agencies is mandatory.

  4. Other Special Registrations

    • Certain industries (e.g., banking, pharmaceuticals, insurance, telecommunications) require additional permits from specialized government agencies such as the Bangko Sentral ng Pilipinas (BSP), the Food and Drug Administration (FDA), the Insurance Commission, the National Telecommunications Commission (NTC), etc.

6. Taxation Regime

6.1 Corporate Income Tax

  1. Domestic Corporation:

    • Subject to regular corporate income tax (RCIT) on worldwide income. The current rate is generally 25% or 20% for small and medium-sized enterprises with net taxable income not exceeding PHP 5 million and total assets not exceeding PHP 100 million.

  2. Branch Office:

    • Taxed on Philippine-sourced income only.
    • Subject to the same corporate tax rate (25% or 20%).
    • Additionally, a branch profit remittance tax of 15% may apply to profits remitted to the head office, subject to any tax treaty provisions that might reduce the rate.

  3. Representative Office:

    • As it cannot generate local income, it typically does not pay corporate income tax on revenues in the Philippines. However, it is subject to regular withholding taxes on local purchases (e.g., rent, salaries) and may have to file certain BIR returns.

6.2 Other Taxes

  • Value-Added Tax (VAT): 12% on sale of goods or services in the Philippines, unless zero-rated or exempt.
  • Withholding Taxes: On compensation and certain payments to suppliers, contractors, or foreign beneficiaries (royalties, dividends, etc.).
  • Local Business Tax: Imposed by the Local Government Unit (city or municipality) based on gross sales or receipts.

6.3 Tax Incentives

  • Board of Investments (BOI): Companies engaged in “preferred” areas of investment (e.g., export, innovative tech, agribusiness, etc.) may enjoy income tax holidays, duty-free importation, etc.
  • Philippine Economic Zone Authority (PEZA): Companies locating in specific economic zones may enjoy special fiscal and non-fiscal incentives (e.g., income tax holidays, 5% Special Corporate Income Tax in lieu of national and local taxes, etc.).
  • Other Investment Promotion Agencies: Clark Development Corporation (CDC), Subic Bay Metropolitan Authority (SBMA), etc.

7. Labor and Employment Considerations

  • The Labor Code of the Philippines governs local employment, including minimum wages, work hours, overtime, holiday pay, and benefits.
  • Foreign employees need valid work visas such as 9(g) Pre-Arranged Employment Visa or 47(a)(2) for special visa categories.
  • The Department of Labor and Employment (DOLE) issues Alien Employment Permits (AEP) for foreign nationals working in the Philippines, except in certain exempt categories (e.g., diplomatic staff).

8. Compliance and Reporting Obligations

  1. Annual Financial Statements and General Information Sheet

    • Must be filed with the SEC.
    • Financial statements must be audited by an independent Certified Public Accountant (CPA) accredited by the Board of Accountancy (BOA) and the SEC.

  2. BIR Annual and Quarterly Returns

    • Regular filing of tax returns (e.g., monthly/quarterly VAT, quarterly/annual income tax).
    • Annual registration fee.

  3. Local Government Renewals

    • Every start of the year, businesses must renew their Mayor’s Permit and pay the local business tax.

  4. Employment-Related Reports

    • Withholding tax returns, SSS/PhilHealth/Pag-IBIG contributions, DOLE reports as required.

9. Special Considerations

  1. Ownership of Land

    • The Philippine Constitution restricts land ownership to Filipino citizens or to corporations with at least 60% Filipino ownership.
    • Foreign entities typically opt to lease land long-term or enter joint ventures with Filipino partners.

  2. Foreign Exchange Regulations

    • Remittance of profits, dividends, or capital requires documentation through the banking system.
    • The Bangko Sentral ng Pilipinas (BSP) has general guidelines ensuring foreign exchange transactions are done through accredited banks.

  3. Intellectual Property Protection

    • The Intellectual Property Office (IPO) handles trademarks, patents, copyrights, and other IP registrations.
    • Protecting trademarks and trade names is highly advisable before commencing operations.

  4. Anti-Dummy Law

    • Prohibits foreign nationals from circumventing nationality requirements by using nominal Filipino shareholders.
    • Strict compliance is advised especially in partially restricted industries.

  5. Data Privacy

    • If the local division handles personal data, it must comply with the Data Privacy Act of 2012 and its Implementing Rules and Regulations.
    • The National Privacy Commission is the regulating body.

10. Conclusion

Establishing a local division of a US-based company in the Philippines requires navigating a well-defined regulatory system that balances foreign investment promotion with national-interest safeguards. Key steps include choosing the right business structure, meeting capitalization requirements, registering with the SEC, and complying with tax and labor rules. Familiarity with the Foreign Investment Negative List ensures awareness of industry-specific restrictions on foreign equity. Once properly established, foreign investors can benefit from various incentives, especially if they target export industries or operate within designated economic zones.

To ensure a successful setup, it is crucial for US companies to coordinate with a Philippine legal counsel, accounting firm, or corporate service provider. This partnership helps streamline registration processes, secure necessary permits, and maintain compliance with ongoing statutory reporting requirements. With the right support and strategic planning, a US business can establish a compliant and profitable presence in the Philippine market.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

Privacy Policy

Terms of Use

Lawyer Login

 
 
Privacy Policy         Terms of Use         Lawyer Login