Foreigners Doing Business in the Philippines: Part Two

Aside from doing business as a licensed foreign corporate entity, foreigners may establish their businesses in the Philippines under different organizational structures, as may suit their needs:

Organised under Philippine Laws

Sole Proprietorship

Owned by an individual who exercises full control and direction over the business, owns all of its assets and exclusively enjoys profits, while personally answers for all of the business’ liabilities.

Partnership

Either a general professional partnership or a limited liability partnership, depending on the agreement between the partners as to contributions of assets and answering of the partnership’s liabilities. Treated as a separate juridical person from the partners themselves.
 
Stock and Non-Stock Corporation (may be established as a subsidiary of a foreign parent corporation)

Stock corporations own capital stock divided into shares of stock held by its shareholders. They are authorized to declare and distribute dividends when the corporation has unrestricted retained earnings. Different classes of shares may grant the shareholder different rights as to ownership and control of the corporation, or preference in distribution of dividends or liquidation of the corporation. 

Non-Stock corporations are organized for public welfare, such as for charity, education, culture, science, sports, civic service, religion, or other similar purposes. In lieu of shareholders and shares, they have members and membership dues, and are not authorized to distribute income as dividends to such members.

Organized under Foreign Laws

Branch Office

Foreign corporations may establish branch offices in the Philippines. The branch office carries out business activities of the head office and derives income within the Philippines. Profits made are remitted to the head office.
 
Representative Office

Unlike a branch office, a representative office does not derive income within the Philippines. It is fully financed by the head office, and its sole purpose is to directly deal with the clients of the foreign corporation, such as customer service, information dissemination, setting up communication enters, and marketing company products.

Regional or Area Headquarters (RHQs)

An RHQ is limited to purely administrative functions, such as supervisory, communication, and coordination activities for the subsidiaries, affiliates, branches, and customers of the foreign corporation in the Asia Pacific Region. Since it does not directly manage the subsidiary/branch offices in the Philippines, it does not derive income therein.
 
Regional Operating Headquarters (ROHQs)

ROHQs have a wider scope of services, beyond acting as the administrative arm of the foreign corporation in the region. It may engage other businesses and corporations to source raw materials, conduct research and development, marketing control, and sales promotion.

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Each organisational structure has varying requirements before and after setting up, and differ based on income, startup costs/initial investments, ownership, and tax treatments under Philippine Law.

Respicio & Co. Law Firm can help you determine which structure best suits your needs, assist you in procuring all the necessary requirements, and process your registration in the Philippines.

Forms of Business Organizations for Foreign Investors

Foreign companies may do business in the Philippines by establishing any of the following forms of business organizations: (i) regional headquarter, (ii) regional operating headquarter, (iii) representative office, or (iv) branch.

A regional head quarter or RHQ must be endorsed by the Board of Investments to the Securities and Exchange Commission (SEC). It also needs to be registered with the SEC for its legitimate existence. It must have an annual minimum inward remittance of at least USD 50,000. One condition for approval relates to its functions, which must be relevant to (i) supervisory role, (ii), communication, or (iii) coordination. Another condition is that it does not earn income in the Philippines.

A regional operating headquarter or ROHQ, like the RHQ, must also be endorsed by the Board of Investments to the SEC. Also like the RHQ, it must be approved and registered with the SEC. It must have a minimum inward remittance of at least USD 200,000. The condition for approval and registration in terms of function is that it must perform qualifying services to its affiliates, subsidiaries, and branches. The second condition is that it earns income from such qualifying services. The income earned is subject to 10% tax.

A representative office needs SEC registration as a representative office. It is an extension of the personality of its mother company. Its activities are limited only to liaison work between mother company and its clients. It does not derive income. A representative office must have an initial minimum inward remittance of USD 30,000 to cover its operating expenses.

A branch is a foreign corporation organized and existing under foreign laws that carries out business activities of the head office and derives income from the host country. A branch needs SEC registration as a branch. It carries out the business activities of the parent company. It must have an assigned capital from the head office of at least USD 200,000, which can be reduced to USD 100,000 subject to conditions. These conditions are: (i) the activity involves advanced technology, or (ii) the company employs at least 50 direct employees.

The Foreign Investments Act provides an exception to the USD 100,00 and USD 200,000 capital requirement. This exception is applicable for businesses that are classified as export enterprises. An export enterprise is one which has 60% export sales. It is immaterial whether these are sales of goods or sales of services. These enterprises include foreign-owned branches in the Philippines that function as an outsourcing operation.

Respicio & Co. Law Firm can help foreign companies do business in the Philippines.