Letter to a Lawyer

Dear Attorney,

Good afternoon. I hope this message finds you well. I am writing to seek legal advice regarding a matter that is very important to me. As a foreign citizen, I am interested in owning a small house on one of the beautiful shores of the Philippines, particularly in one of its prominent tourist cities. I am aware that Philippine laws impose certain restrictions on foreign property ownership, but I am willing to explore possible legal avenues to achieve this goal, including establishing a company if necessary.

Could you kindly provide me with detailed guidance on the legal framework governing property ownership by foreigners in the Philippines, specifically in relation to owning residential property along the country's shores? I would like to understand all relevant laws, procedures, and potential restrictions or requirements, including the option of forming a company for this purpose.

I appreciate your expertise and detailed insights into this matter. I look forward to your response.

Sincerely,
An Interested Foreign Investor

Legal Article: Owning a Small House on a Philippine Shore as a Foreign Citizen

Overview of Philippine Laws on Property Ownership by Foreigners

The Philippines imposes stringent restrictions on property ownership by foreigners under its 1987 Constitution and various laws. While foreigners cannot directly own land, they can acquire ownership of other types of property and have limited means of acquiring land indirectly or enjoying long-term rights to use land.

To address your specific concern, here is a comprehensive guide on the legal framework governing foreign ownership of residential property in the Philippines:

1. Direct Ownership of Land: A Constitutional Limitation

Prohibition: Article XII, Section 7 of the Philippine Constitution explicitly prohibits non-Filipino citizens from owning land.
Exceptions: The only exceptions to this rule are:
- Inheritance by intestate succession if the foreigner is a legal heir of a Filipino.
- Acquisition prior to the 1935 Constitution.

2. What Foreigners Can Legally Own

While foreigners cannot own land, they can own:

Condominium Units: Foreigners can own up to 40% of the total units in a condominium project, as allowed by the Condominium Act (Republic Act No. 4726).
Buildings or Houses: Foreigners can own buildings or houses, provided they do not own the land on which the property stands.

3. Long-Term Land Use Options

Foreigners can explore the following options for long-term use of land without violating Philippine laws:

a. Lease Agreements

Foreigners can lease land from Filipino owners for a period of up to 50 years, renewable once for an additional 25 years under the Investor's Lease Act (Republic Act No. 7652).

b. Marriage to a Filipino Citizen

If married to a Filipino, a foreigner may acquire property through their spouse. However, the land title must be in the Filipino spouse's name. Upon the Filipino spouse’s death, the foreigner can hold the property but cannot sell it except to a Filipino citizen or a qualified corporation.

c. Corporate Ownership

Foreigners can form a corporation with a maximum foreign ownership of 40%, while the remaining 60% must be owned by Filipino citizens.
The corporation can purchase land on behalf of its shareholders and is subject to the Corporation Code of the Philippines.

4. Forming a Corporation to Own Property

If you are willing to establish a company to own property, you must comply with the following:

a. Legal Framework

The corporation must be registered with the Securities and Exchange Commission (SEC).
The corporate structure must reflect the 60-40 ownership requirement in favor of Filipino citizens.
The corporation must operate as a legitimate business entity and comply with tax, reporting, and operational requirements.

b. Advantages

This is a viable way to indirectly acquire land while maintaining compliance with Philippine law.
The corporation can lease or purchase land for commercial or residential use.

c. Disadvantages

The foreign shareholder has limited control over the corporation due to the minority shareholding.
Managing a corporation involves ongoing regulatory compliance, which can be complex.

5. Special Considerations for Coastal Properties

Coastal areas in the Philippines are subject to additional regulations:

Foreshore Lands: Land directly fronting the sea, such as beaches, is typically classified as public domain and cannot be privately owned. A foreshore lease agreement may be pursued with the Department of Environment and Natural Resources (DENR).
Environmentally Critical Areas: Coastal lands are often designated as environmentally critical, subject to restrictions under the Environmental Impact Assessment System (Presidential Decree No. 1586).
Setback Regulations: Structures near the shoreline must comply with zoning laws and setback requirements.

6. Taxation and Other Costs

Owning or leasing property in the Philippines comes with financial obligations:

Real Property Tax: Imposed annually by local government units.
Capital Gains Tax: If the property is later sold, a 6% capital gains tax applies.
Documentary Stamp Tax and Transfer Fees: These apply during the purchase or lease process.
Corporate Taxes: If a corporation is formed, it is subject to income tax, value-added tax (VAT), and other levies.

7. Steps to Secure Property via a Corporation

Incorporation: Register a Philippine corporation with the SEC.
Filipino Majority Shareholders: Secure Filipino partners for the 60% ownership requirement.
Property Search: Identify a suitable property within the coastal area.
Due Diligence: Conduct a thorough review of the property title, zoning, and environmental compliance.
Acquisition or Lease: Finalize the property purchase or lease through the corporation.

8. Practical Tips for Foreign Investors

Engage a licensed real estate broker to assist with property identification and negotiation.
Consult with a lawyer to navigate legal complexities and ensure compliance.
Verify the property title and ensure it is free from encumbrances.
Work closely with Filipino partners to establish a trustworthy corporate structure.

Conclusion

While direct ownership of land is not permitted for foreigners, the Philippine legal system provides alternative pathways to achieve your goal of owning a small house on a coastal shore. Leasing land, forming a corporation, or utilizing a condominium scheme are viable options, each with its own set of legal and procedural requirements.

To proceed, it is strongly recommended to consult with a local lawyer specializing in property and corporate law to tailor a solution that aligns with your goals while ensuring full compliance with Philippine laws.

Note: This document provides general information based on existing laws as of December 2024. For specific legal advice, it is essential to seek professional counsel.