Foreign Company Registration and Setting Up a Business in the Philippines

Foreign Company Registration and Setting Up a Business in the Philippines: A Comprehensive Legal Overview

Foreign entities looking to establish a presence in Southeast Asia often regard the Philippines as an attractive destination. The country’s growing consumer market, strategic location, and English-proficient workforce provide strong incentives. However, foreign investors must navigate a complex legal environment governed by multiple laws, regulations, and agencies. This article provides a comprehensive legal guide to foreign company registration and business setup in the Philippines.

1. Legal and Regulatory Framework

  1. 1987 Philippine Constitution
    The Constitution sets general limits and guidelines on foreign ownership. Certain sectors, such as mass media, practice of certain professions, and natural resource extraction, are subject to constitutional restrictions or majority Filipino ownership requirements.

  2. Revised Corporation Code of the Philippines (Republic Act No. 11232)
    Enacted in 2019, this law governs the formation, organization, and regulation of domestic corporations in the Philippines, including those with foreign equity. It simplifies corporate governance, allows for a One Person Corporation (OPC), and modernizes registration processes.

  3. Foreign Investments Act (FIA) and the Foreign Investment Negative Lists
    The FIA (Republic Act No. 7042, as amended by RA 11647) and its Implementing Rules and Regulations (IRR) govern foreign investment in the Philippines. It sets out which areas are open to 100% foreign ownership and which are partially restricted. The Foreign Investment Negative List outlines industries or activities partially or wholly reserved for Filipinos.

  4. Anti-Dummy Law (Commonwealth Act No. 108, as amended)
    This law prohibits foreigners from circumventing constitutional or statutory restrictions on foreign ownership by using Filipino “dummy” shareholders or other schemes.

  5. Other Relevant Laws

    • Retail Trade Liberalization Act (RA 11595): Simplifies and liberalizes entry of foreign retailers.
    • Export Development Act (RA 7844): Relevant for businesses engaged in export-related activities.
    • Local Government Code (RA 7160): Governs local permits, fees, and taxes.
    • Labor Code of the Philippines: Regulates employment and labor standards.

2. Government Agencies Involved

  1. Securities and Exchange Commission (SEC)
    The primary agency responsible for company registration, licensing of foreign corporations, partnerships, and other juridical entities. The SEC ensures compliance with the Revised Corporation Code and the FIA.

  2. Department of Trade and Industry (DTI)
    Responsible for registering sole proprietorships and promoting trade and investment. Foreigners setting up small or medium enterprises may first check DTI guidelines on business name registration.

  3. Bureau of Internal Revenue (BIR)
    Handles tax registration, issuance of Tax Identification Numbers (TIN), and oversees the country’s taxation system. All businesses must register with the BIR to comply with tax obligations.

  4. Local Government Units (LGUs)
    Municipal or city governments issue local business permits (Mayor’s Permit), zoning clearances, and other location-specific clearances.

  5. Board of Investments (BOI)
    An agency under the Department of Trade and Industry that grants fiscal and non-fiscal incentives to qualified enterprises based on the government’s Investment Priorities Plan (IPP).

  6. Philippine Economic Zone Authority (PEZA)
    Regulates and promotes businesses located in designated economic zones. Qualified locators can enjoy tax and other incentives.

  7. Other Specialized Agencies
    Depending on the industry, foreign companies may need approvals from agencies like the Bangko Sentral ng Pilipinas (for banking/finance), the Insurance Commission, Department of Energy, Department of Environment and Natural Resources, etc.

3. Common Business Structures for Foreign Entities

  1. Domestic Corporation (Subsidiary)

    • A separate legal entity incorporated under Philippine law.
    • Requires at least two incorporators under the Revised Corporation Code (except for a One Person Corporation), but majority board membership or shareholding by foreigners may be subject to foreign ownership limits depending on the industry.
    • Minimum capital requirement depends on the industry and foreign ownership ratio. For instance, a domestic market enterprise that is more than 40% foreign-owned may require a higher paid-in capital (generally USD 200,000, subject to reduction if exporting at least 60% of output or employing a certain number of employees).

  2. One Person Corporation (OPC)

    • Allows a single individual (who can be a foreigner, if not restricted by the Negative List) to form a corporation.
    • Subject to the same capitalization requirements based on the intended business activity and foreign ownership restrictions.
    • Ideal for small or medium enterprises looking for a simpler corporate structure.

  3. Branch Office

    • An extension of a foreign parent company.
    • Must obtain a License to Do Business in the Philippines from the SEC.
    • Liabilities extend to the parent company.
    • Typically required to have a minimum inward remittance of USD 200,000 as assigned capital unless qualified for reduced capital requirements (e.g., exporting at least 60% of its goods/services).

  4. Representative Office

    • Undertakes only liaison activities such as information dissemination, promotion of the parent company’s products/services, and quality control.
    • Not allowed to generate income in the Philippines.
    • Must remit at least USD 30,000 annually to fund operations.
    • Must secure a License to Do Business from the SEC, similar to a Branch Office but for non-income-generating activities.

  5. Regional or Area Headquarters (RHQ)

    • Serves as an administrative branch of a multinational company.
    • No income generation allowed; activities are limited to supervision, communication, and coordination.
    • Required annual remittance of at least USD 50,000 to cover operating expenses.

  6. Regional Operating Headquarters (ROHQ)

    • Permitted to offer qualifying services (e.g., accounting, business planning, research and development) to affiliates, subsidiaries, or branches in the Asia-Pacific region.
    • Must have a capital of USD 200,000 or more.

  7. Partnerships

    • Governed by the Civil Code and registered with the SEC.
    • May be an option, although foreign participation can be limited by Negative List restrictions.
    • General partners have unlimited liability, while limited partners have liability up to their capital contribution.

4. Step-by-Step Registration Process

While procedures vary depending on the chosen entity and industry, the following overview applies generally to setting up a foreign-owned corporation or branch/representative office:

  1. Name Reservation

    • Conduct a name availability search with the SEC’s online system and reserve the proposed company name.

  2. Document Preparation

    • Draft and notarize the Articles of Incorporation and Bylaws (for a corporation).
    • For Branch/Representative Office: Prepare the application form for a License to Do Business, authenticated Board Resolution, and financial statements of the parent company.

  3. Bank Certificate of Deposit / Inward Remittance

    • Show proof of the required paid-up capital or assigned capital via a bank certificate confirming the deposit.

  4. Submission to SEC

    • File the application, Articles of Incorporation, Treasurer’s Affidavit (for corporations), and other documentary requirements (e.g., foreign parent’s board resolution, financial statements).
    • Pay the required filing fees.

  5. Issuance of SEC Certificate

    • If the application is approved, the SEC issues a Certificate of Incorporation (for local corporations) or a License to Do Business (for branches/representative offices).

  6. Local Business Permits

    • Secure a Mayor’s Permit or Business Permit from the City or Municipality where the office is located.
    • Obtain barangay clearance and other location-specific permits (fire safety, sanitary permits, etc.).

  7. BIR Registration

    • Register with the Bureau of Internal Revenue to obtain a Tax Identification Number (TIN).
    • Secure authority to print invoices and official receipts.
    • Register the books of accounts.

  8. Social Security and Other Statutory Registrations

    • Register employees (if any) with the Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and Home Development Mutual Fund (Pag-IBIG).

  9. Operational Licenses or Special Permits

    • If the business is engaged in regulated industries (banking, insurance, pharmaceuticals, etc.), secure additional licenses from specialized agencies (e.g., Bangko Sentral ng Pilipinas, Insurance Commission, FDA).

5. Foreign Ownership Limits and Negative Lists

  • The Foreign Investment Negative List outlines areas where foreign equity is capped at 0%, 20%, 25%, 30%, 40%, or higher limits.
  • For instance, foreign ownership of land is generally prohibited (with exceptions for condominium units and long-term leases). Some infrastructure, utility, and media sectors have constitutional or statutory caps on foreign equity.

6. Capital Requirements

  • Domestic Market Enterprise with more than 40% foreign equity: Generally, USD 200,000 minimum paid-in capital.
  • Export Enterprise (at least 60% export of goods/services): USD 100,000 minimum paid-in capital under certain conditions.
  • Retail Trade Enterprises: Capital requirements vary based on the Retail Trade Liberalization Act; for larger foreign retailers, a minimum paid-up capital is required, although recent amendments have lowered the threshold.
  • Branch Office: Assigned capital typically USD 200,000, subject to similar reductions if export-oriented or under certain conditions.
  • Representative Office: Annual remittance of at least USD 30,000.

7. Taxation Overview

  1. Corporate Income Tax

    • The rate is generally 25% of net taxable income for domestic corporations and resident foreign corporations, under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.
    • Certain preferential rates or reduced tax rates may apply for exporters, PEZA-registered enterprises, or BOI-registered enterprises.

  2. Value-Added Tax (VAT)

    • The standard VAT rate is 12%.
    • Certain transactions are zero-rated or VAT-exempt, depending on the nature of the goods or services, export orientation, or special zone registration.

  3. Withholding Taxes

    • Various withholding tax obligations apply on compensation, professional fees, and other income payments.

  4. Other Local Taxes

    • Business tax, real property tax, and community tax imposed by LGUs.

  5. Tax Incentives

    • BOI Registration: Income tax holiday, duty-free importation of capital equipment, and other perks.
    • PEZA Registration: 5% special corporate income tax (SCIT) on gross income or enhanced deductions, plus other fiscal incentives.

8. Employment Regulations and Work Visas

  1. Alien Employment Permit (AEP)

    • Foreign nationals seeking local employment must secure an AEP from the Department of Labor and Employment (DOLE), unless exempted by law or treaty.

  2. Working Visas

    • Common visas for foreign employees include:
      • 9(g) Pre-Arranged Employment Visa
      • 47(a)(2) Special Non-Immigrant Visa (for PEZA/BOI-registered enterprises or special projects)
      • Special Resident Visa options.

  3. Labor Standards

    • Minimum wage varies by region.
    • Statutory benefits include SSS, PhilHealth, Pag-IBIG, 13th-month pay, and leaves.
    • Employment contracts must comply with the Labor Code of the Philippines.

9. Corporate Governance and Ongoing Compliance

  1. Annual Filing Requirements

    • Submit General Information Sheet (GIS) within 30 days of the annual stockholders’ meeting.
    • File Audited Financial Statements (AFS) to the SEC and BIR.
    • Renew business permits and registrations with the LGU and BIR annually.

  2. Bookkeeping and Accounting

    • Maintain books of account in accordance with Philippine Financial Reporting Standards (PFRS).
    • Keep records for a certain period (usually 10 years) for auditing and inspection.

  3. Corporate Governance Requirements

    • Have at least a Corporate Secretary (Filipino citizen for domestic corporations), and a Treasurer who can be a resident or non-resident as long as the surety bond requirements are met if non-resident.
    • Publicly-listed companies or those with significant public interest must comply with additional governance rules set by the SEC.

10. Special Economic Zones and Incentives

  • Foreign investors seeking tax perks often establish operations in Philippine Economic Zone Authority (PEZA)-accredited locations or Freeport zones such as the Subic Bay Freeport, Clark Freeport, or other IT Parks/Economic Zones.
  • Incentives include income tax holidays, zero-rated VAT on local purchases, or a 5% SCIT on gross income in lieu of national and local taxes (transitioning under the CREATE Act to enhanced deductions or SCIT after the ITH period).

11. Practical Considerations and Best Practices

  1. Seek Professional Advice

    • Engage local legal counsel, tax advisors, or corporate secretarial service providers for registration and compliance.
    • Conduct thorough due diligence on industry-specific restrictions.

  2. Choose the Right Structure

    • Assess the business activity: Does your operation need to generate local income, or is it for liaison or administrative work only?
    • Evaluate liability, tax, and capital requirements.

  3. Plan for Administrative Overheads

    • Budget for annual registrations, permits, and required professional services.
    • Stay updated on policy changes, especially regarding tax incentives and the Negative Lists.

  4. Be Mindful of the Anti-Dummy Law

    • Ensure that Filipino shareholders (if required) have genuine ownership interests, and avoid arrangements that violate statutory or constitutional foreign equity caps.

12. Conclusion

Setting up a foreign-owned business in the Philippines can be a promising venture due to the country’s strategic advantages. However, navigating the legal landscape—constitutional ownership limits, the Revised Corporation Code, the Foreign Investment Negative Lists, and labor and tax regulations—requires careful planning and professional guidance. By selecting the correct corporate structure, complying with capitalization requirements, and securing the necessary permits and incentives, foreign investors can establish a compliant and successful presence in the Philippine market.

Disclaimer: This article is for general information only and does not constitute legal advice. For specific business or investment concerns, consult qualified legal professionals or corporate service providers knowledgeable in Philippine laws and regulations.

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

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