LETTER

Dear Attorney,

I hope this letter finds you well. I am a concerned entrepreneur planning to invest in real property and a business in the Philippines together with my spouse, who is a Filipino citizen. I am a foreign national, and the funds we intend to use for our prospective acquisition and venture will come from a business we currently operate abroad. Although I will be partly financing the project, this investment belongs to both of us, as we have built our capital together. Given the constitutional limitations on foreign ownership of land in the Philippines, I have considered establishing a corporation to hold title to real property and operate our business. Our plan is to structure the shareholdings in such a way that I, as the foreign investor, own up to forty percent (40%), while my spouse owns forty-nine percent (49%), with the remaining eleven percent (11%) to be held by another Filipino national.

However, I have concerns regarding my wife’s family’s potential claims should my wife pass away, as well as questions about the disposition of my wife’s share in the event of her death. Specifically, I would like to know:

Could my wife’s family have a claim on our jointly purchased property, or against the corporation, if my wife were to pass away?
If my wife’s share in the corporation becomes part of her estate, how does Philippine law address the issue of inheritance for the heirs, and would I still be able to exercise control to sell the property or dissolve the corporation if needed?

I kindly request your expert guidance on these matters. Your advice will help me navigate the complexities of Philippine law to ensure that our investments and future endeavors are secured.

Thank you in advance, and I look forward to your professional opinion.

Sincerely,
A Concerned Entrepreneur

COMPREHENSIVE LEGAL ANALYSIS

In the Philippines, the ownership of real property and business operations by foreigners is governed by a number of constitutional and statutory rules designed to protect national interests. The following sections offer a meticulous discussion of the legal basis for these restrictions, shareholding structures, inheritance rules, and possible scenarios that may arise with respect to the property and corporate shares.

I. Constitutional Framework on Foreign Ownership of Land

Article XII of the 1987 Philippine Constitution explicitly limits land ownership to Filipino citizens or to corporations or associations at least sixty percent (60%) of whose capital or controlling interest is owned by Filipinos. This restriction extends to any form of freehold title over private lands. Consequently, a foreign national cannot directly hold title to land except through hereditary succession and only in certain limited contexts. A foreign spouse cannot directly register land in his or her own name during the existence of the marriage, save for exceptional circumstances such as acquisition through a judicially confirmed inheritance.

II. Corporate Ownership Structure

Since real property can be acquired by a corporation that is at least sixty percent (60%) Filipino-owned, it is common practice to establish a Philippine domestic corporation to hold title over land. In the described scenario, the proposed shareholding structure contemplates dividing the capital stock as follows:

Forty percent (40%) to the foreign national
Forty-nine percent (49%) to the Filipino spouse
Eleven percent (11%) to another Filipino national

This arrangement would satisfy the constitutional requirement of minimum sixty percent (60%) Filipino ownership, enabling the corporation to hold title to the land. Nevertheless, to fully comply, proper due diligence must be done to ensure that no scheme or arrangement effectively circumvents the constitutional limitations, such as a trust that might effectively vest beneficial ownership in the foreigner beyond the authorized threshold. While the basic share split meets the numerical requirement, the actual governance structure, corporate by-laws, and other relevant documents must be carefully drafted to avoid the appearance of a “dummy” arrangement.

III. Inheritance and Possible Claims by the Spouse’s Family

The concern regarding possible claims by the Filipino spouse’s family is understandable. Under Philippine law, the spouse and children (if any) are considered compulsory heirs, along with other classes of heirs such as ascendants (parents) and collateral relatives (siblings, etc.), depending on the circumstances. If the Filipino spouse passes away, her estate will be subject to the laws of succession. The spouse’s ownership stake in the property or corporation will necessarily form part of her estate, which is then subject to distribution among her heirs.

In cases of intestate succession (where the deceased does not leave a valid will), the surviving spouse, legitimate children (if any), and possibly legitimate parents (if there are no children), are entitled to shares in the estate. If there are no children and if the deceased’s parents are also deceased, other relatives may come into the line of succession. When the deceased has left a will (testate succession), the laws on legitimes ensure that compulsory heirs cannot be deprived of their rightful shares, subject to narrow exceptions.

As to your specific concern about your wife’s family intervening, their potential claim would attach to your wife’s share of the corporation. While the corporation remains a separate juridical entity, her heirs will inherit her shares in proportion to their inheritance rights. If you have children with your wife, they would stand ahead of her parents and siblings as compulsory heirs. However, if there are no direct descendants, the distribution scheme changes to accommodate the surviving spouse and other ascendants, among others.

IV. Effect of the Spouse’s Death on the Corporation

Upon the Filipino spouse’s death, the ownership of her corporate shares transfers to her heirs through the estate settlement process. The surviving spouse (the foreign national) might inherit a portion of those shares, but only to the extent allowed under Philippine succession law. If the deceased leaves behind children, those children also become shareholders. If there are no children, the spouse might end up as the sole or main heir alongside other compulsory heirs if they exist.

The question then arises whether the foreign spouse, already at the 40% limit, can lawfully inherit additional shares without breaching the Constitution’s 60%-40% rule. The general principle is that acquisition of land or an interest in land by a foreign national through hereditary succession is permitted by Philippine law as an exception. However, to remain consistent with constitutional guidelines, there may be practical constraints when the inheritance results in foreign ownership exceeding 40%. In such a scenario, some legal commentators suggest that a forced sale or partial divestment might be necessary if foreign ownership in the corporation is raised beyond permissible limits.

In the usual scenario where the foreign spouse merely ends up with the inherited shares, the constitutional rule contemplates that involuntary acquisition by inheritance is allowed, though from a practical standpoint, the shareholders may opt to restructure or sell the property to avoid potential legal challenges.

V. Disposition of Corporate Assets: Selling the Business or the Land

If a foreign spouse wishes to sell the corporate assets (the land or the business) after the Filipino spouse’s passing, the foreign spouse generally can do so through corporate action, assuming that the corporate by-laws or the shareholders’ agreement authorize such a transaction. Corporate dissolution or liquidation would require affirmative votes from the shareholders in accordance with the corporation’s organizational documents and the Revised Corporation Code of the Philippines.

If the foreign spouse is able to secure a majority or controlling stake (through inheritance plus existing shares or alliances with other Filipino shareholders), obtaining approval for the sale is feasible. In the event that the heirs contest the corporate decisions, disagreements may lead to litigation over the transfer of property, dissolution, or governance issues. Thus, it is prudent to establish clear by-laws and shareholder agreements addressing the possibility of the principal shareholder’s death or incapacitation.

VI. Measures to Protect the Foreign Spouse’s Interests

Pre-Nuptial or Post-Nuptial Agreements
If the marriage is governed by the default regime of absolute community of property under the Family Code of the Philippines (for marriages celebrated after August 3, 1988, without any pre-nuptial contract), all property acquired during the marriage, subject to some exceptions, becomes part of the community property. In some instances, couples enter into pre-nuptial agreements to delineate property rights clearly. These agreements cannot override the constitutional prohibition on foreign land ownership, but they can define how personal property or shares are distributed, how business interests are managed, and how proceeds would be shared in the event of dissolution of the marriage or death.
Last Will and Testament
Encouraging the Filipino spouse to prepare a will could help manage expectations and minimize disputes upon her death. Though legitimes for compulsory heirs cannot be entirely disregarded, a carefully drafted will can provide a plan for distribution that respects these mandatory shares but also clarifies the deceased’s wishes.
Corporate Governance Documents
The corporation’s by-laws, stockholder agreements, voting trust agreements (if permissible), and other governance instruments can stipulate how shares may be transferred upon the death of a shareholder. This can help mitigate conflicts and clarify the procedure for selling or continuing the business.
Life Insurance and Trust Arrangements
While these do not directly circumvent land ownership restrictions, life insurance policies or trusts can provide liquidity for estate taxes or to buy out other heirs’ shares, thereby reducing potential disputes or forced sales.
Careful Selection of the Third Filipino Shareholder
As the 11% holder, this individual or entity should be chosen with diligence, ensuring that the foreign spouse’s interests are protected and that corporate decisions favor continuity of the original intent.

VII. Additional Legal Considerations

Conjugal or Community Property
For marriages governed by Philippine law, property acquired during the marriage, including shares of stock, may be considered part of the couple’s community property. In the event of death, these assets are subject to liquidation of the community property and subsequent distribution among heirs.
Estate Tax
The estate of the deceased Filipino spouse is subject to estate tax. This tax liability must be settled before the shares can be transferred to the heirs. If the estate tax remains unpaid, the Bureau of Internal Revenue can issue a tax lien or prevent the transfer of the shares.
Business Permits and Foreign Investment Regulations
The Foreign Investments Act imposes certain restrictions or requirements for specific industries. If the planned business falls under a partially nationalized or wholly nationalized activity, it is crucial to confirm compliance with the relevant Negative List. Ensure all local business permits and registrations are up-to-date and consistent with the corporation’s primary purpose.
Future Constitutional or Legislative Changes
Laws and regulations may evolve, possibly affecting foreign equity limitations or land ownership rules. Stay updated on legislative developments to ensure your arrangement remains valid and enforceable.

VIII. Conclusion

Establishing a Philippine corporation that meets the 60%-40% Filipino-foreign ownership requirement is a common and lawful mechanism for a foreign national to participate in real estate investments and business operations. Nonetheless, it is crucial to appreciate the complexities that arise when dealing with inheritance, especially involving a Filipino spouse’s potential demise. Her family may indeed have legitimate claims over her estate, including shares in a Philippine corporation, under the country’s laws of succession. If a surviving foreign spouse finds himself or herself in possession of land or corporate shares above the constitutionally permissible limit, this typically falls under the involuntary acquisition exception in the law but may still necessitate remedial measures to ensure compliance.

To protect both spouses’ interests, prudent legal planning is essential. This could entail clarifying property regimes through pre-nuptial or post-nuptial agreements, drafting a will consistent with Philippine inheritance laws, and crafting robust corporate governance structures. Engaging an experienced Philippine attorney—particularly to examine corporate documents, confirm compliance with foreign equity ceilings, and structure inheritance contingencies—will prove invaluable. Thorough preparation and meticulous drafting of all relevant legal instruments help reduce misunderstandings and disputes, ensuring that the shared vision for a secure investment is realized.

In sum, while Philippine law mandates stringent rules on foreign ownership of land, it also provides acceptable solutions for foreigners married to Filipino nationals who wish to invest in real property or start a local business. By understanding constitutional limits, corporate structuring rules, inheritance laws, and best practices for estate planning, couples can confidently proceed with their ventures. With the right legal strategy and compliance measures, the foreign spouse can protect his financial interest and ensure that, in the unforeseen event of his Filipino spouse’s passing, the company and property can still be managed and disposed of appropriately, subject to the relevant laws of succession and the protective mantle of corporate formalities.