Profit-Sharing Agreements Between a Capital Investor and a Manager in the Philippines – A Comprehensive Legal Guide

1. Concept and Commercial Rationale

A profit-sharing agreement allocates net earnings from a business or investment between two parties:

Role	Typical Contribution	Typical Expectation
Capital Investor (money or property partner)	Cash, property, or both	Return of capital + agreed percentage of profits
Manager (industrial/operating partner)	Time, skill, networks, day-to-day control	A stipulated share of profits (may also draw management fees)

The arrangement is popular where the investor does not wish to run the enterprise and the manager lacks—or prefers not to risk—significant capital.

2. Principal Legal Bases

Source	Key Provisions Relevant to Profit Sharing
Civil Code of the Philippines (Arts. 1318, 1767-1833)	Contract essentials; partnership creation; contributions; distribution of profits/losses; industrial partner rules; dissolution & winding-up
Revised Corporation Code (RCC, R.A. 11232)	Sec. 37 (classes of shares); Sec. 44 (management contracts); requirements for approval of related-party management deals
Securities Regulation Code (R.A. 8799)	Sec. 3.1 & jurisprudence: an investment contract with profit sharing may be a “security,” triggering SEC registration
National Internal Revenue Code (NIRC), as amended	Pass-through taxation for partnerships; dividend rules for corporations; withholding taxes on profit remittances; Gross Income Taxation of management fees
Foreign Investments Act (R.A. 7042), Anti-Dummy Law, Constitution (Art. XII)	Nationality restrictions; limitations on managerial control by foreigners

3. Choosing the Legal Vehicle

Vehicle	Salient Features	Profit-Sharing Mechanics
Ordinary Partnership	Formed by contract (public instrument if real-property contributions > ₱5,000; inventory attached – Arts. 1771-1773). Partners are personally liable.	Articles 1797-1800 govern profit/loss ratios. If silent, profits are pro rata by contribution; industrial partner receives “just and equitable” share; industrial partner bears no losses (Art. 1789).
Limited Partnership	At least one general & one limited partner; SEC-registered (RCC applies suppletorily). Limited partner risk is capped at contribution.	Profit split is contractually fixed; limited partner cannot join management without losing limited status (Art. 1848).
Corporation + Management Contract	Investor subscribes to equity; manager executes contract under Sec. 44 RCC (max 3 years, or 5 if interlocking boards/stockholders).	Profit share usually paid as management fee tied to EBITDA or as performance shares/carried interest. Board & stockholder approval thresholds apply (majority + 2/3 if related-party).
Joint Venture/Unregistered Partnership	Courts treat certain profit-sharing JVs as partnerships (e.g., Tuason v. Bolaños, G.R. L-4935).	Absent SEC registration, still subject to Civil Code partnership rules and BIR pass-through taxation.
Trust / Agency	Investor holds beneficial title; manager is trustee/agent.	Manager normally earns fee, not profit share. If remuneration is a slice of profits, arrangement may be re-characterised as partnership (risk of unintended liabilities).

4. Structuring the Profit-Sharing Clause

Definition of “Profits”
Net income after all cash-operating expenses, interest, taxes, depreciation and amortisation, but before non-cash fair-value adjustments.
Distribution Waterfall
1. Return of capital (to investor).
2. Preferred return/hurdle (e.g., 8 % p.a.).
3. Catch-up to manager (to balance promotes).
4. Residual split (e.g., 70 / 30).
Timing – quarterly or annual, subject to audit.
Reinvestment Reserve – retain up to X % for working capital, with investor veto.
Claw-back / True-up – adjust if later losses reverse earlier gains.
Withholding Taxes – state which party shoulders.
Books & Audit Rights – investor access, independent CPA, IFRS/PFRS.
Termination Events – fraud, gross negligence, regulatory revocation, force majeure.
Non-Compete & Confidentiality for manager.
Dispute Resolution – Philippine arbitration (ADR Act), venue in Makati/Taguig; courts for injunctive relief.

5. Regulatory Touchpoints

Regulator	Trigger	Action Items
SEC	Partnership with capital > ₱3,000 or any limited partnership; management contract involving public company; investment contract definition	SEC registration; management contract approval; potential securities registration or exemption filing
Bureau of Internal Revenue	Profit distribution, partner withdrawals, management fees	Secure TINs; file partnership/corporate returns; withhold & remit taxes on profit remittances/dividends; issue BIR Form 2307
Philippine Competition Commission	Large-scale JVs (P = > ₱6 b turnover/ ₱2.4 b transaction value, 2025 thresholds)	File compulsory notification before consummation
Philippine Stock Exchange	If public company issues performance shares to manager	Comply with Listing Rules on employee stock-based compensation

6. Tax Treatment Snapshot (CY 2025)

Structure	Entity-Level Tax	Recipient-Level Tax
General / Limited Partnership	None (pass-through)	Partners: share included in gross income; 0-35 % graduated rates if individual; 25 %/20 % if partner is domestic corp.; 15 % NRFC/NRNP final withholding if non-resident
Corporation (manager holds shares)	25 % RCIT (or 1 % MINIMUM tax)	Cash dividends: 10 % final tax (resident individual); tax-free if ≥ 10 % foreign equity & certain conditions; 25 % NRFC final tax
Management Fee (separate from profit share)	Deductible expense to corporation/partnership	Manager: 0-35 % if individual, 25 %/20 % if corporation; 2 % Creditable WHT by payor
Carried Interest/Performance-based Shares	Taxed as dividends once declared; may qualify for capital gains if shares are sold on PSE

Note: MART (minimum corporate income tax) & local business taxes may apply; VAT exempt on pure profit-share but VATable on management fee if manager is VAT-registered.

7. Foreign Capital & Control Issues

Equity Cap – Certain sectors are subject to 40 % foreign ownership (or lower). A profit-share that effectively transfers beneficial ownership or control to a foreigner can trigger Anti-Dummy Law liability (criminal penalties, void agreement).
Management Rights – Foreign individual appointed as president/manager of a partially nationalised enterprise must hold at least 40 % of voting stock (People v. Quasha doctrine).
Tax Treaty Relief – Profit remittances to a treaty country investor may enjoy reduced final-tax rates (e.g., PH-Singapore Treaty 15 %). Secure BIR Form 0901-C.

8. Key Supreme Court Decisions to Know

Case	G.R. No.	Holding
Tuason v. Bolaños (1958)	L-4935	Profit-sharing venture can create an unregistered partnership, making parties solidarily liable to third persons.
Ibon Foundation v. Development Bank (2021)	249217	Distinguishes agency from partnership; “participation in profits” is strong but not conclusive evidence of partnership.
Heirs of Malate v. Gamboa (2013)	219421	Silent/capital partner liable to third persons although barred internally from management.
People v. Tan Eng Gee (1951)	85 Phil 337	Profit-sharing that violates nationalisation laws is void and penalised.

9. Drafting Tips & Common Pitfalls

Silence on Loss Sharing – If the contract says nothing, civil-law default rules apply; capital & industry split losses equally, but industrial partner exempt (Art. 1789).
Undefined Accounting Basis – Leads to endless disputes; adopt Philippine Financial Reporting Standards and tie distribution to audited statements.
Open-Ended Duration – May create perpetual partnership; better to state term and renewal process.
Regulatory Filings Overlooked – An unregistered investment contract may be stopped by the SEC and considered syndicated estafa under the RPC/SRC.
Tax Leakage – Forgetting final-tax withholding on partner withdrawals exposes both parties to 25 % surcharge + interest.
Exit Without Valuation Method – Insert buy-out formula (e.g., NAV, EBITDA multiple) or agreed third-party appraisal.

10. Dissolution and Winding-Up

A partnership is dissolved by expiration, mutual agreement, death, insolvency, civil interdiction, or court decree (Arts. 1830-1831). Outstanding contracts survive to wind-up phase. The order of liquidation (Art. 1839):

Third-party creditors
Partner advances other than capital
Return of capital contributions
Surplus distributed as profits

For corporations, liquidation follows Sec. 136 RCC: a 3-year period to wind up, sue, and be sued, handled by trustees or the board.

11. Checklist Before Signing

Term Sheet with headline economics – hurdle rate, waterfall, claw-back.
Legal Due Diligence – corporate/connectivity structure of manager, pending suits.
Tax Opinion – confirm pass-through v. corporate tax, treaty rates.
Draft Partnership Agreement / Management Contract – incorporate civil-code and RCC requirements.
SEC or LGU Business Permits – depending on entity form.
Board & Stockholder Approvals – especially for management contracts or related-party setups.
Regulatory Notifications – PCC, BOI, PEZA, or BIR as may be necessary.
Insurance – fidelity bond for manager, key-man insurance, property-all-risk.

12. Sample Profit-Sharing Provision (Partnership)**

Section 8.1 Profit Allocation. After the close of each Fiscal Year, the Net Adjusted Profit shall be determined by an independent auditor in accordance with PFRS. Net Adjusted Profit shall be distributed within 90 days from receipt of the audited statements in the following order:
(a) Return of Capital to the Capital Partner until its Unreturned Capital Contribution is reduced to zero;
(b) Preferred Return of eight percent (8 %) per annum, cumulative but non-compounding, to the Capital Partner;
(c) Catch-Up to the Industrial Partner until it has received an amount equal to twenty percent (20 %) of aggregate distributions under paragraphs (b) and (c); and
(d) Residual Split of seventy percent (70 %) to the Capital Partner and thirty percent (30 %) to the Industrial Partner.
All distributions shall be net of applicable Philippine taxes which shall be withheld and remitted by the Partnership on behalf of the Partners.

13. Conclusion

Profit-sharing between a capital investor and a manager is flexibly accommodated under Philippine law, chiefly through partnership, limited partnership, or corporate-plus-management-contract structures. While the parties enjoy wide contractual freedom, failure to respect mandatory rules on partnership formation, securities registration, foreign equity caps, and taxation can nullify the agreement or expose participants to civil and criminal liability. Careful structuring, meticulous drafting, and proactive regulatory compliance are therefore indispensable.

Need help tailoring a clause or walking through SEC registration? Feel free to ask, and I can drill down into any of the sections above.