Doing Business in the Philippines

Quisumbing Torres Member Firm of Baker & McKenzie
12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West, Bonifacio Global City Taguig City, Philippines 1634 Tel: +63 2 819 4700 (trunkline) Fax: +63 2 816 0080; +63 2 728 7777 For more information and inquiries, please email QTLaw@bakernet.com or log on to www.bakernet.com.

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The material in this publication has been prepared by Quisumbing Torres to provide general information only. It is not offered as advice on any particular matter, whether it be legal, procedural, commercial or otherwise, and should not be taken as such. For this reason, the information contained in this publication should not form the basis of any decision as to a particular course of action; neither should it be relied upon as legal advice nor regarded as a substitute for detailed advice in individual cases. The authors expressly disclaim all liability to any person in respect of consequences of anything done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this publication. This publication is copyrighted. No part of this publication may be reproduced or transmitted by any process or means without the prior permission of Quisumbing Torres. The law is stated as at January 2009.

Table of Contents
INTRODUCTION ..................................................................1
The Philippines...........................................................................................1 Quisumbing Torres .....................................................................................2

I.
1. 2. 3. 4. 5.

FOREIGN INVESTMENTS IN THE PHILIPPINES........3
Extent of Foreign Equity.............................................................3 Anti-Dummy Law .........................................................................5 Forms of Investment Vehicle ......................................................5 Domestic Corporation v. Branch.................................................6 Other Types of Corporate Vehicle ...............................................6
5.1 5.2 5.3 5.4 5.5 Representative Office ...............................................................6 Regional or Area Headquarters .................................................6 Regional Operating Headquarters (“ROHQ”) ...................................7 Regional Warehouses....................................................................7 Offshore Banking Unit (“OBU”) ....................................................8

6.

Post-Registration Requirements ..............................................8

II.
1. 2.

TAXATION....................................................................8
Tax Treaties .................................................................................8 National Taxes ............................................................................8
2.1 2.2 2.3 2.4 2.5 2.6 Corporate Income Tax ..............................................................8 Individual Income Tax ..................................................................9 Withholding of Taxes....................................................................9 Fringe Benefits Tax..................................................................... 10 Business Taxes .......................................................................... 10 Other Imposts of the National Government ............................. 11

3.

Local and Real Property Taxes .............................................. 11

III.
1. 2. 3.

FOREIGN EXCHANGE REGULATIONS............... 12
Purchase and Sale of Foreign Exchange ................................ 12 Foreign Trade Transactions ..................................................... 12 Non-Trade Transactions .......................................................... 12
3.1 3.2 3.3 3.4 Foreign Inward Investments ...................................................... 13 Outward Investments................................................................ 13 Foreign Loans and Guarantees................................................. 13 Other Financing Schemes/Arrangements ................................ 13

IV.
1.

INCENTIVES UNDER SPECIAL REGISTRATIONS .. 13
Enterprises Registered Under the Omnibus Investments Code (“OIC”) ............................................................................. 13
1.1 Tax Incentives ............................................................................ 14 1.2 Non-tax Incentives ..................................................................... 15 1.3 Additional Incentives ................................................................. 15

2.

Enterprises Registered With the Philippine Economic Zone Authority (“PEZA”).................................................................... 15
2.1 Tax and Other Incentives ...................................................... 16

........... Special Visa for Employment Generation (“SVEG”) ............ 6............................. 27 2...................................... 24 Classification of Employment............................................................ IX........2 Special Investor’s Resident Visa (“SIRV”) . 17 3................................... 27 Treaty Trader’s or Investor’s Visa .........................................4 Work Hours .................................................. 28 3.. 25 Contract of Employment ............ 1... 21 LABOR LAW............................... 29 Securitization Act of 2004 .............. VII................ 27 2...................2 SBF Residents ...............................4 Subic Bay Freeport Residency Visas for Retirees ..... 3........ 31 .................................... 22 Wages............................................ Enterprises Located in the Clark Special Economic Zone .................................3 1.......... 18 V................................................................................ 30 Special Purpose Vehicle Act of 2002 .................... LEASE OF PRIVATE LAND..... 21 TECHNOLOGY TRANSFER ARRANGEMENTS ................................ 30 XIV........... 27 2.. 23 Other Compulsory Benefits ................4 1.................................1 Special Resident Retiree’s Visa (“SRRV”) ..................... VIII.................... 17 3.....................................................................3. IMMIGRATION...... Special Resident Visas .............. 4.................3 1..... 19 ENVIRONMENTAL REGULATION .............1 SBF Enterprises ........................ 4............................ 26 1.............................. 23 Rule on Non-Diminution of Employment Benefits ....................................... 2................................................................... 19 INTELLECTUAL PROPERTY PROTECTION..... 26 Pre-Arranged Employment or 9(g) Visa ............................... 25 XI..................................................... 24 Termination of Employment.... 28 XII..........................................................................................1 1 ................................. 26 Special Non-Immigrant or 47(a)(2) Visa........................ Labor Relations............ 27 2...........2 1..... VI.............................................. 28 2.... 27 Subic Bay Freeport Work Visa.........................................3 SIRV for Investors in Tourist-Related Projects and Tourist Establishments ............ X........ FINANCE-RELATED REGULATIONS ......... 1................... 22 Labor Standards .... 30 XIII. INSURANCE-RELATED REGULATIONS.....................................................................2 1........................................... 29 Banking................................ 20 2........................................... 22 1...................... 30 Entry of Foreign Insurance Companies ..............1 1...... 23 Specific Areas of Regulation ........................................ 3..... 5...... 29 Financing Companies .................. Enterprises Registered With the Subic Bay Metropolitan Authority (“SBMA”) ............................... 20 BORDER CONTROL MEASURES .............................. 24 Welfare Legislation .........5 Multiple Entry Special Visa........................................... 1........................... 17 4..................... 26 Work / Employment Requirements ... ARBITRATION IN THE PHILIPPINES....

......3 Provisions applicable to both voluntary or involuntary insolvency proceedings ....................................... 6.............. Advantages of arbitration compared with court litigation .......................................................................1 1................1 Suspension of Payments ... 32 Arbitration as contract . 5........................................... 32 Disputes that may be referred to arbitration ............................................................................... 7.......................................................................1................ 38 Overview and Introduction to the Jurisdiction / Applicable Legislation ........... 3...................2 1......... 33 International Arbitration .... 40 3.3 1....................... 1................................ 36 Construction Industry Arbitration Commission ................................................................ 32 Arbitrators as experts ..5 1..................... 32 Confidentiality.................................. 41 3. 9........... 876 on Domestic Arbitration .......... 10.................................. 4. 41 3...............................................................2 Corporate Rehabilitation . 32 Definition of international arbitration and domestic arbitration 32 Republic Act No .......................................... 38 2.............1 Voluntary Insolvency........6 Speed .... Definition of arbitration ................ 32 2.... 41 ..............................................2 Involuntary Insolvency......... 38 Proceedings for Solvent Debtors (Individuals or Corporations) 38 2.... 2................. 8............ 31 Finality of the award . 31 Choice of arbitrators................. 31 1 ................................................................... 34 The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) ......................................................... INSOLVENCY IN THE PHILIPPINES............................... 39 3......................................................................................... 32 Disputes that are not arbitrable ........... Insolvency Proceedings (Individuals or Corporations)................................................4 1....................... 37 XV............ 31 Flexibility of the rules ......

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quarrying and exploration and development of mineral resources Waste treatment and recycling facilities Nontraditional export-oriented business IT-enabled business process outsourcing industry Office and residential property development and public infrastructure construction Abundant country resources support these investments:       A vibrant democracy advocates liberalization and deregulation of industries. and seminars.gov. Expanded telecommunication infrastructure facilitates smooth global business operations. Remarkable lifestyle amenities replicate the expatriate’s home environment. feeds. and the production of healthcare and wellness products to promote medical tourism Mining. fun-loving Filipinos from multicultural backgrounds play host to a rewarding economic and sociocultural investment. Diverse transportation choices. Affordable wages and utilities contribute to business cost savings. ethics-bound. Special economic zones offer preferential tax incentives. 2008 from National Statistics Office .http://www. fairs. resorts. and islands. A competitive consumer market serves as an arena for showcasing the latest trends in the retail goods sector.Doing Business in the Philippines 2009 INTRODUCTION The Philippines The Philippines stands firm as a strong prospect for conducting business in the Southeast Asia region. organic fertilizers.gov.ph/ Official Website of the Republic of the Philippines . specifically mass rail transport and oil and gas pipeline projects Build-Operate-Transfer (BOT) projects and contractual joint ventures with the government Development of hotels. highly trainable English-speaking Filipino workforce is refreshed with over 400.census. airports. coupled with a modern network of highways. and ports.ph/ 1 . and retirement villages.boi.000 graduates annually. First-rate convention facilities host major local and international exhibits. An open economy welcomes 100 percent foreign ownership in many sectors. support the unencumbered flow of goods within and between cities. and other agricultural or fishery products Alternative power generation using environment-friendly technologies Infrastructure. towns.asp Philippine Board of Investments .gov. Investment opportunities abound in these priority areas:           Production and processing of biofuels.http://www. provinces. A young.      Sources: Information was retrieved on October 27-31.ph/default.http://www. Hardworking.

Singapore. France. Canada. Jr.Quisumbing Torres Quisumbing Torres Your partner every step of the way. and the United States. Quisumbing Torres is a full service law firm with the following areas of practice:        Banking & Finance Corporate and Commercial Immigration Intellectual Property Labor & Employment Litigation Tax For more than 45 years. Quisumbing Torres in Manila provides a convenient coordination point for regional and global work. hazardous waste. Germany. the United Kingdom. the Middle East. Collas. mining. its name was changed to Guerrero & Torres. Evangelista retired. intellectual property. and was later named Collas and Guerrero. and political issues. and Asia Pacific entities. legal. Malaysia. when the firm merged with the law office of Norberto J. Indonesia. Japan. Singapore. the United Kingdom. Some have helped draft significant business laws and regulations. social. Quisumbing Torres has helped foreign and domestic companies succeed in the Philippines. . Brunei. Indonesia. Hong Kong. India. Switzerland. Quisumbing Torres is the Philippine-based member firm of Baker & McKenzie International. Our lawyers are knowledgeable in the relevant business. and the Americas. media and communications. New York. It became Quisumbing Torres & Evangelista on 1 July 1988. including Australia. Hong Kong. The firm adopted its present name when Rafael E. In 1974. The firm represents clients doing business abroad and clients from other countries doingbusiness in the Philippines.C. oil and gas.Thailand. Korea. Quisumbing Torres has over 50 lawyers who provide clients with a full range of legal services. Virginia. American. It was established in 1963 by Juan G. Together with the other member firms of Baker & McKenzie in Asia. European. 2 . and Washington D. Japan. Europe. and tax. such as the States ofCalifornia. Our client base currently consists of Philippine. clean air. China. Many of our lawyers are also admitted to practice in other jurisdictions. Taiwan. A number of our lawyers havepracticed or have had legal exposure in Australia. and the United States. including those dealing with labor.Quisumbing.

processor. List B contains areas of investment where foreign ownership is limited for reasons of security. defense. partnerships. Extent of Foreign Equity The FIA provides for the formulation of a Foreign Investment Negative List (“Negative List”) – a list of economic activities where foreign equity is either prohibited or limited to a certain percentage. and freedom from expropriation (except for public use or in the interest of national welfare or defense and upon paym ent of just compensation). Foreigners may hold interests in corporations.Doing Business in the Philippines 2009 I. and other entities in the Philippines. According to the FIA. However. partnerships. The Negative List has two component lists: List A and List B. FOREIGN INVESTMENTS IN THE PHILIPPINES The law that governs the participation of foreign entities in economic and commercial activities in the Philippines is Republic Act No. List A contains areas of investment where foreign ownership is limited by the mandate of the Philippine Constitution or by specific laws. It must have a paid-in capital of at least the peso equivalent of US $200. including their political subdivisions. amendments to List B may not be made more often than once every two years. 3 . otherwise known as the Foreign Investments Ac t of 1991 (“FIA”). it is the policy of the State to attract. A non-Philippine national may do business or invest in a domestic enterprise in the Philippines to the extent of 100 percent of its capital . risk to health and moral s. 7042. A new Negative List is prospective in application and willnot affect foreign investment that already exists on the date of its publication. An export enterprise is a manufacturer. the President of the Philippines may amend the Negative List. The maximum amount of foreign equity that is allowed in a company depends on the type of activity that the company is engaged in. and welcome productive investments from foreign individuals. or service (including tourism) enterprise that exports 60 percent or more of its output. promote. or a trader that purchases products domestically and exports 60 percent or more of such purchases. It is investing in a domestic market enterprise in areas outside the Negative List or it is investing in an export enterprise whose products and services do not fall within Lists A and B of the Negative List. including the rights to repatriation of investments. The country or state of the applicant must also allow Filipino citizens and corporations to do business therein. and other entities are not engaged in an activity that is reserved by law only to Philippine citizens or to entities that are wholly owned by Philippine citizens. partnerships. as amended. A domestic market enterprise is an enterprise which produces goods for sale or renders service or otherwise engages in any business in the Philippines. remittance of earnings.000 b. 1. and governments. or protection of local small and medium-sized enterprises. corporations. Philippine laws expressly reco gnize various rights of foreign investors in the Philippines. provided that such corporations. To encourage foreign investments. c. Except with respect to activities where restrictions on foreign equity are imposed under the Philippine Constitution or statutes. in activities whic h significantly contribute to national industrialization and socioeconomic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws. provided that the following conditions are complied with: a.

goods. production.Quisumbing Torres if it will engage in business as a domestic mar ket enterprise (an export enterprise is not required to comply with this minimum capitalization requirement). development. agenciesor municipal corporations Culture. but not limited to. geology. including. or (ii) if it employs at least 50 direct employees as certified by the appropriate regional office of the Department of Labor and Employment. architecture. the practice of all professions. and administration of educational institutions Contracts for the supply of materials. companies. and agriculture  Retail trade enterprises with a paid-up capital of less than US $2. The capitalization requirements of a domestic market enterprise may be reduced to the peso equivalent of US $100. establishment. processing. and acquisition of rice and corn and the byproducts thereof Acting as project proponent and facility operator of a build -operatetransfer project requiring a public utilities franchise Ownership of condominium units where the common areas of the condominium project are co-owned by owners of the separate units or owned by a corporation All forms of gambling        Up to 30 percent Foreign Equity Up to 40 percent Foreign Equity     4 . Some of the activities that are included in the Seventh Negative List (which took effect on 6 January 2007) are as follows: No Foreign Equity   Mass media. milling. accountancy. and utilization of natural resources Ownership of private lands Operation and management of public utilities Ownership. whether for local or overseas employment Contracts for the construction and repair of locally funded public works except infrastructure/development projects covered by RA 7718 and projects that are foreign-funded or assisted and required to undergointernational competitive bidding Contracts for the construction of defense-related structures Advertising Exploration. medicine. and commodities to government-owned or controlled corporations. engineering. except recording Except in cases prescribed by law.000 (i) if its activity involves advanced technology as determined and certified by the Department of Science and Technology. trading (except retailing).5 million     Private security agencies Small-scale mining Up to 25 percent Foreign Equity Private recruitment companies. customs brokerage.

A domestic corporation may be a joint venture or a wholly owned subsidiary. the license is reserved for and issued only to Filipino sole proprietorships or partnerships/corporations with at least 60 percent Filipino equity participation and duly organized and existing under and by virtue of the laws of the Philippines.000 Up to 60 percent Foreign Equity   Financing of companies regulated by the Philippine Securities and Exchange Commission (“SEC”) Investment houses regulated by the SEC  Persons that will engage in construction activities in the Philippines are also required to obtain a license from the Philippine Contractors Accreditation Board (“PCAB”). employee. franchise. Under the Anti-Dummy Law. privilege. 3. property or business by a person. Subject to nationality requirements pertaining to the intended activity. franchise. and corporation. having in his name or under his control a right. A sole proprietorship is a business owned and operated by a single natural person. and there is no distinct and separate personality of the business enterprise from that of the owner. entities that do not export 60 percentor more of their output) with a paid-in equity capital of less than theequivalent of US $200. exploitation or enjoyment of such right. is prohibited from (a) permitting or allowing the use. The foregoing is a non-exhaustive enumeration of the sectors/activities that are subject to foreign equity limitations. or laborer. Anti-Dummy Law The Philippines has an Anti-Dummy Law that imposes criminal and civil penalties on persons violating foreign equity limitations. operation.. privilege. privilege. a branch. Under the rules of the PCAB. foreign nationals may serve as members of the board or gover ning body of corporations engaged in partially nationalized activities in a number proportionate to their actual and allowable equity in the company. 5 . 2. or (b) in any manner permitting or allowing any person not so qualified to intervene in the management. Forms of Investment Vehicle There are three general forms of business organizations in the Philippines: so le proprietorship. corporation or as sociation not possessing the qualifications prescribed by law. franchise. property or business. and a representative office. partnership. Philippine law allows foreign investors to establish and register a domestic corporation. A branch and a representative office are mere extensions of their head offices.Doing Business in the Philippines 2009 Domestic market enterprises (i. with or without remuneration (except technical personnel whose employment may be specifically authorized by the Secretary of Justice). property or bus iness. However. a person who. The liability of the sole proprietor is unlimited . the exercise or enjoyment of which is expressly reserved by law to Philippine citizens or to corporatio ns or associations where at least 60 percent of the capital is owned by such citizens.e. administration or control of such right. whether as an officer. A foreign investor may also invest as a limited or generalpartner in a partnership.

branches. amo ng others. 5. including. 5.000 for domestic market enterprises whose activities involve advanced technology or which employ at least 50 direct employees. or affiliates in the Asia Pacific region. Entities that qualify as export enterprises (enterprises that export 60 percent or more of their output) are not subject to any minimum paid -in capital requirement. and the administrative costs of maintaining the same. in any manner. information dissemination and promotion of the company’s products as well as quality control. communications. A representative office may not derive income in the Philippines and is fully subsidized by its head office. A representative office must have an initial inward remittance of US $30. Foreign investorsthat wish to engage in a business that is not subject to nationality restrictions generally choose between establishing a Philippine subsidiary and establishing a Philippine branch office.a foreign investor may be set up as a domestic corporation or a branch of a foreign corporation in the Philippines. its head office or parent company must initially remit into the Philippines at least US $50. 5. To fund its operations in the Philippines. in managing any subsidiary or branch office it may have in the Philippines. whether on behalf of its parent company or its branches. the corporation is generally the most preferred vehicle for investments in the Philippines among the various forms of business organizations . taxation.000 and thereafter US $50.000. affiliates. It may not participate. Domestic Corporation v. the extent of liability of the parent company/head office. among others.000 to fund its operations. a foreign investor will have to set up a domestic corporation with a Philippine national as a joint venture partner.2 Regional or Area Headquarters A multinational company may establish a regional or area headquarters in the Philippines to serve as supervision. but not limited to. These two types of corporate vehicle have their relative advantages and disadvantages relating to. or coordination center for its subsidiaries. The regional or area headquarters may not earn or derive income in the Philippines. The paid-in capital requirement is reduced to US $100. corporations that are more than 40 percent foreign-owned as well as branches of foreign corporations that are considered domestic market enterprises must have a paid-in capital of at least US $200.1 Other Types of Corporate Vehicle Representative Office A representative office may be established to deal directly with the clients of its parent company in the Philippines and to undertake activities . 4. or any other company. Its expenses must be financed by the head office or parent company from external sources in an acceptable foreign currency. neither may it solicit or market goods or services. If the proposed activity is subject to foreign equity limitations.000 annually. subsidiaries.Quisumbing Torres For reasons relating to the exercise of management powers and the extent of liability. Branch Assuming that the proposed activity is not subj ect to any foreign equity limitation. 6 . Generally.

It may not derive income from Philippine sources. and serving as a storage or warehouse of goods purchased locally by the head office of the multinational for export abroad. and other foreign markets. and raw materials to its distributors or markets in the Asia Pacific region and other foreign areas. in the Asia Pacific region. putting up. promote any sale. b. semi-finished products. The activities of the regional warehouse are limited to: a. semi-finished products. and safekeeping of spare parts. and raw materials. c. and all local licenses. except real property tax on land improvements and equipment. components.4 Regional Warehouses A multinational company which is engaged in international trade and supplies spare parts. 5. labeling and cutting or altering the goods to the customer’s specifications. or branches in the Philippines. j. subsidiaries. The regional warehouse may not engage in trade or directly solicit business. marking. filling up transactions and sales made by its head office or parent company. f. 7 . b. k. A ROHQ is allowed to derive income in the Philippines by performing any of the following qualifying services: a. and which has established or will simultaneously establish a regional or area headquarters and/or ROHQ in the Philippines.Doing Business in the Philippines 2009 The regional headquarters is not subject to income tax. e. It enjoys tax.3 Regional Operating Headquarters (“ROHQ”) A multinational company may establish a ROHQ in the Philippines to service its own affiliates. h. c. 5. g. value -added tax. including packing. deposit. covering.and duty-free importation of equipment and materialsnecessary for training and conferences. fees. i. may also establish a regional warehouse in the Philippines. or enter into any contract for the sale or disposition of goods in the Philippines.000. d. and charges. components. General administration and planning Business planning and coordination Sourcing/procurement of raw materials and components Corporate finance advisory services Marketing control and sales promotion Training and personnel management Logistics services Research and development services and product development Technical support and maintenance Data processing and communication Business development A ROHQ must initially remit into the Philippines at least US $200. and mounting and/or packing these into kits or marketable lots thereof. serving as a supply depot for the storage.

and commencement-of-operations permits. II.1 National Taxes Corporate Income Tax A domestic corporation is taxed on its net income (gross income less allowable deductions) from all sources at the rate of 30 percent. TAXATION Philippine taxes are imposed by both the national government and the local government units. or affiliate of a foreign banking corporation authorized by the Bangko Sentral ng Pilipinas (“BSP”) to conduct business with funds from external sources.5 Offshore Banking Unit (“OBU”) A foreign bank may operate an OBU in the Philippines. the newly incorporated/r egistered entity must comply with certain basic registration and licensing requirements with different government agencies. 8 . and registrations. Post-Registration Requirements Upon incorporation/registration with the SEC. certain businesses in highly regulated industries may be subject to special licensing or registration requirements with the government agency having jurisdiction over such industry. is taxed only on its net income from Philippine sources at the same rate as a d omestic corporation. 2. subsidiary. such as a branch. 6. In addition to the basic post-registration requirements. A resident foreign corporation. The OBU may be a branch. licenses. Australia Austria Bahrain Tax Treaties Germany Hungary India Indonesia Israel Italy Japan Korea Malaysia Netherlands New Zealand Norway Pakistan Poland Romania Russia Singapore Spain Sweden Switzerland Thailand United Kingdom United States Vietnam The Philippines has tax treaties with the following countries: Bangladesh Belgium Brazil Canada China Czech Republic Denmark Finland France 2.Quisumbing Torres 5. employee welfare-related. 1. These post-registration requirements include obtaining from certain government agencies and local government offices tax.

9 . A non -resident alien is deemed engaged in trade or business if he stays in the Philippines for an ag gregate period of more than 180 days during any calendar year. The 30 percent corporate income tax rate was 35 percent prior to 1 January 2009. A non-resident alien engaged in trade or business in t he Philippines is generally subject to tax on net income from Philippine sources at the same progressive tax rates imposed on resident aliens and citizens. withheld at source. are also subject to withholding tax. such as interest and rent income. 2.3 Withholding of Taxes Taxes due on the income of a non-resident alien and a non-resident foreign corporation are withheld at source.Doing Business in the Philippines 2009 A non-resident foreign corporation is subject to final withholding tax on its gross income (without the benefit of deductions) from Philippine sources at the rate of 30 percent.2 Non-Resident Owner of Chartered Vessel Foreign Currency Transactions of OBUs Minimum Corporate Income Tax Tax on Improperly Accumulated Earnings Individual Income Tax A resident citizen is taxed on income from all sources at progressive rates ranging from 5 percent to 32 percent of net taxable income. Income Subject to Different Tax Treatment       Interest and Royalties Interest Divide nds Branch Profits Gains from Sale of Real Property Capital Gains from Sale or Exchange of Stock Tax on Initial Public Offer of Shares of Stock Income Taxation for Specific Industries   Foreign International Carrier Non-Resident Cinematographic Film Owner/Lessor/Distributor  Non-Resident Lessor of Aircraft or Machinery and Other Equipment     2. The salary and certain other income receipts of residents. A foreign corporation is considered a resident when it is engaged in trade or business in the Philippines and is licensed by the SEC to engage in trade or business in the Philippines. A non-resident alien not engaged in trade or business in the Philippines is taxed on gross income from Philippine sources at the rate of 25 percent.

wines. ba rter. c.5 mil lion. Percentage Taxes Certain persons are subject to percentage taxes at rates ranging from 1 percent to 30 percent. excise taxes apply to goods produced in the Philippines for domestic sale or consumption or for any other d isposition. and to things imported. 2.5 a. whether in their original state or as ingredients or parts of any manufactured goods or products. are referred to as ad valorem taxes. fermented liquor  Non-essential goods  Tobacco products. A VAT taxpayer is allowed input VAT credits against his output VAT liability. subject to certain limitations. business. Excise taxes. b. exchange. which are imposed and based on the selling price or other specified value of the goods. Percentage taxes are normally imposed on gross receipts. Excise taxes. Fringe benefits tax is not imposed if the fringe benefit is required by the nature of. or when the fringe benefit is for the convenience or advantage of the employer. 10 . Business Taxes Value-Added Tax (“VAT”) VAT is a tax on consumption levied on the sale. are called specific taxes. cigars (such as jewelry. which are based on the weight or volume capacity or any other physical unit of measurement of the goods .4 Fringe Benefits Tax A final tax of 32 percent is imposed on the grossed -up monetary value of fringe benefits furnished or granted to an employee (except rank-and-file) by the employer. or necessary to. the trade. are credited or refunded upon submission of proof of actual exportation and receipt of the corresponding foreign exchange payment.Quisumbing Torres 2. and on the importation of goods into the Philippines. The following are subject to excise taxes:  Automobiles  Distilled spirits. or lease of goods or properties and services in the Philippines. perfumes and cigarettes and toilet water)  Manufactured oils and otherfuels  Fireworks  Cinematographic films  Saccharine  Yachts and other vesselsintended for pleasure or sports  Mineral products and quarry resources Excise taxes paid on locally produced goods which are export ed without return to the Philippines. Excise Taxes In addition to VAT. or profession of the employer. A person becomes subject to the 12 percent VAT when his gross sales or receipts for the past 12 months exceed Ph P1.

Local and Real Property Taxes Local government units.6 Other Imposts of the National Government  Annuity policies  Indemnity bonds  Certificates issued by certain officers  Warehousing receipts  Jai-alai and horse racetickets  Bills of lading  P roxie s  Powers of attorney  Leases of real property  Mortgages  Pledges  Deeds of sale of real property and charter parties In addition to the 12 percent VAT and any applicable excise tax. municipalities. air. and discriminating duty under special circumstances. cities. such as:  Bonds  Debentures  Certificates of indebtedness  Certificates of stock  Certificates of profits or of interests in property or accumulations  Bank checks  Drafts  Certificates of deposit  Promissory notes  Bills of exchange  Letters of credit  Insurance policies  Fidelity bonds 2. countervailing duty.Doing Business in the Philippines 2009 Among those subject to percentage taxes are the following:  Keepers of garages and common carriers by land. may levy taxes and impose local license fees pursuant to the Local Government Code. such as provinces. marking duty. telegraph. or conversations transmittedfrom the Philippines by telephone.5 million are exempt from VAT but are subject to percentage tax of 3 percent. d. and other communication equipment services  Banks and non-bank financial intermediaries Persons or entities subject to percentage taxes are exempt from VAT. Documentary Stamp Taxes Documentary stamp taxes must be affixed to certain documents. and papers evidencing business transactions. messages. and barangays . 3. The Tariff and Customs Code provides for the imposition of anti-dumping duty. telewriterexchange. wireless. and other improvements thereon is levied on the assessed value of the real property. or water for the transport of passengers  Entities engaged in the life insurance business  Overseas dispatches. Furthermore. unless they elect to pay the 12 percent VAT. instruments. Business establishments whose gross annual sales or receipts do not exceed Ph P1. importations are generally subject to customs duties. buildings. real property tax applied solely to the lands. 11 .

if the sale of foreign exchange exceeds US $30. a wide variety of merchandise may be imported into and exported from the Philippines. open account arrangement. As a rule. their subsidiary/affiliate foreign exchange corporations. Non-Trade Transactions Non-trade transactions refer to all other foreign exchange transactions that are not import or export trade transactions. The requirements include letters of credit. such as letters of credit. the Bangko Sentral ng Pilipinas regulates the purchase and sale of foreign exchange by authorized agent banks. open account arrangements. or its equivalent. documents against acceptance.000. may exercise its general emergency powers and temporarily suspend or restrict the purchase and sale of foreign exchange. international commitments. intercompany open account offset arrangements with the parent company or affiliates abroad. and independent foreign exchange dealers and moneychangers (collectively . 3. all BSP Regulated Entities may sell foreign exchange to Philippine residents to fund payments of non-trade transactions even without prior BSP approval. Foreign Trade Transactions Foreign trade includes import and export trade transactions. Payments for exports may be made without prior BSP approval under the arrangements prescribed by the BSP.000 or its equivalent. subject to the submission by importers to the selling bank of prescribed documents. national security.Quisumbing Torres III. documents against payment. foreign exchange may be freely bought and sold in the Philippines. and direct remittance. consignment and export advances. By way of exception.000 . universal and commercial banks may sell foreign exchange to service payments for imports under the arrangements p rescribed by the BSP. These include foreign inward and outward investments and foreign currency denominated loans and guarantees. but subject to reporting requirements and other conditions. These requirements may include documents showing that the purchaser has obtained prior BSP approval or registration of the transaction. 2. to service advance payment of imports must be filed directly with the BSP for approval. documents against payment/cash against documents. FOREIGN EXCHANGE REGULATIONS Purchase and Sale of Foreign Exchange Generally. 1. 12 . with the approval of the President of the Philippines. The BSP. Without prior BSP approval. “BSP Regulated Entities”). or its equivalent in other foreign currency. the BSP Regulated Entity selling the for eign exchange mustrequire the purchaser to present the documentary requirements prescribed by the BSP. without prior BSP approval for partial or full advance payment of imports.However. non-bank BSP-supervised entities. Authorized agent banks may sell foreign exchange to importers up to US $100. the importation or exportation of certain commodities is regulated or prohibited for reasons of public health and safety. However. documents against acceptance. Applications for purchasing foreign exchange in excess of US $100. Generally. and the development and rationalization of local industry.

Subic Naval Base. 1. as in the case of a Build -Operate-Transfer arrangement.1 Foreign Inward Investments Foreign investments must be registered with the BSP or. If a foreign loan or guarantee is not registered with the BSP. so that foreign exchange may be sourced from a BSP Regulated Entity to fund the repatriation of the inv estment and the remittance of profits and dividends. Camp John Hay in Baguio City. Investment opportunities in the Philippines have also been created by the Philippine Government’s conversion plan covering Clark Air Base.000 per investor per year will be sourced from BSP Regulated Entities. such as mutual funds. 3.Doing Business in the Philippines 2009 3. encourages investm ents in preferred areas of economic activity specified by the BOI in the Investment Priorities Plan (“IPP”).000. the nationality requirement is waived if the applicant will either export at least 70 percent of its total production or engage in a pioneer project. in certain instances. 3. Although the incentives under the OIC are generally available only to citizens of the Philippines or to domestic corporations owned and controlled by Philippine nationals. INCENTIVES UNDER SPECIAL REGISTRATIONS Qualified enterprises may register with the Board of Investments (“BOI”) under the Omnibus Investments Code (“OIC”) or with the Philippine Economic Zone Authority (“PEZA”)to avail themselves of incentives. If a foreign investment is not registered with the BSP. 3. and such other entities and funds as the BSP may determine as Qualified Investors. unit investment trust funds and variable insurance. Enterprises Registered Under the Omnibus Investments Code (“OIC”) The OIC. and other former US military reservations and their extensions into special economic zones. through tax exemption and other benefits. collective/pooled funds. must be registered with the BSP to be eligible for servicing using foreign exchange that will be purchased from BSP Regulated Entities. Qualified Investors may apply to the BSP for a higher annual outward investment limit. a BSP Regulated Entity is not allowed to sell foreign exchange to fund the repatriation of such investment and the remittance of profits and divide nds relating to such investment. Qualified Investors are currently limited to the following: insurance and pre-need companies. IV. 13 .2 Outward Investments Prior BSP approval and registration is required for outward investments if foreign exchange exceeding US $30. public or private pension or retirement or provident funds. with a custodian bank.4 Other Financing Schemes/Arrangements Financing schemes or arrangements which involve an option to purchase or a transfer of ownership after a certain period of time.3 Foreign Loans and Guarantees Foreign currency denominated loans and guarantees must be registered with the B SP so that foreign exchange may be purchased from a BSP Regulated Entity to service payments. a BSP Regulated Entity may not sell foreign exchange to fund payments of such foreign loan or guarantee.

b. an additional deduction from taxable income of 50 percent of the wages of additional skilled and unskilled workers in the direct labor force. freedom from expropriation and requisition of investm ent. When the BOI waives the nationality requirement. Exemption from taxes and duties on machinery. protection of patents. e. or production scheme which has not yet been tried in the Philippines. The final product or process should involve substantial use of domestic raw materials. Exemptions from taxes and duties on the importation of breeding stocks and genetic materials within 10 years from the date of registration or commercial operation. exemption from taxes and duties on the importation of supplies and spare parts for imported equipment and consigned equipment. Income tax holiday consisting of income tax exemption for six years from the start of commercial operations for pioneer firms.1 Tax Incentives a. and four years for non-pioneer firms.Quisumbing Torres A pioneer enterprise either manufactures goods that have not been produced in the Philippines on a commercial scale. Tax credit for taxes and duties on raw materials. or employs a formula. A foreign investor is guaranteed repatriation of investments.manufactured products used for the manufacture of export products and forming part thereof. For the first five years from registration. The income tax holiday may not be extended for more than eight years. remittance of profits. Exemption from taxes and duties on spare parts and consumable supplies imported by a registered enterprise with a cu stoms bonded manufacturingwarehouse and exporting at least 70 percent of their production. and other proprietary rights. Howev er. and accessories imported by new and expanding registered enterprises . f. This incentive may be extended in certain instances and upon approval by the BOI. This incentive is granted only if the registered enterprise meets a prescribed capital to labor ratio . However. whenever possible. they are not entitled to additional deductions for incremental labor expenses during the period that they avail themselves of this incentive. or the manufacturing of equipment which utilizes non-conventional sources of energy are similarly classified as pioneer projects. supplies. An enterprise registered with the BOI enjoys the following tax and non -tax special incentives: 1. For registered enterprises with bonded manufacturing warehouses. Agricultural activities or services (especially food processing) contributing to national self-sufficiency. g. 14 . spare parts. Expanding firms are entitled to an exemption from income taxes proportionate to their expansion for a period of three years from commercial operations. the production of non-conventional fuels. equipment. d. and semi. the applicant should attain the status of a Philippine national within 30 years from the date of its registration or such longer periods as may be determined by the BOI. c. process. a registered enterprise exporting 100 percent of its production need not comply with this divestment requirement.

2 Non-tax Incentives a. Enterprises Registered With the Philippine Economic Zone Authority (“PEZA”) To disperse industry and generate employment in non -urban areas. Simplified customs procedures for the importation o f equipment. 1. b. extendible for limited periods. the government has established several special economic zones (Ecozones). Exemption from local taxes for six years from date of registration for pioneer enterprises. Exemption from wharfage duties and any export tax. and treasurer (or their equivalent) of foreign-owned registered firms are not subject to the foregoing limitations . The president. or advisory positions for five years from registration. subject to customs rules and regulations. Deduction from taxable income of 50 percent of the wa ges corresponding to the increment in the number of direct labor is doubled . No restriction on the use of consigned equipment but re-export bond is required. 2. Applications covering new and expansion projects that will locate in Metro Manila are no longer entitled to income tax holiday. b. Deduction of the cost of necessary and major infrastructure works constructed. c. raw materials and supplies. Employment of foreign nationals in supervisory. resettlement areas. and processing of minerals and forest products) located in less developed areas : a. Enterprises may establish their businesses within an Ecozone and register with the PEZA as any of the following enterprises:      Export enterprise Tourism enterprise Customs brokerage enterprise Utility enterprise Trucking enterprise 15 . general manager. i.Doing Business in the Philippines 2009 h. d. or National Housing Authority sites. and four years from registration for non-pioneer enterprises. and the export of processed products . service-type projects and trading projects with no manufacturing facilities. 1. im post. spare parts. duty.and fees on exports by a registered enterprise of its nontraditional export products. forestry. except in the case of: a. technical. projects locating in governmental industrial estates. The BOI may completely or partially deny incentives to enterprises dealing in traditional export products. and b. The privilege to operate bonded manufacturing/trading warehouses.3 Additional Incentives The following additional incentives are available to projects (excluding mining.

specialized vehicles and other transportation equipment. 16 . which may have a duration of four years for new registered non -pioneer firms or six years for new registered pioneer firms. e.1 Tax and Other Incentives As a general rule. g.Quisumbing Torres        Security agency Information technology enterprise Service enterprise Freight forwarder Warehousing Logistic service enterprise Facilities enterprise An Ecozone Export Enterprise is an entity engaged in a manufacturing. specialized office equipmentand furniture. and genetic materials Additional deduction for labor expense Unrestricted use of consigned equipment Employment of foreign nationals in executive. or processing activity and exporting 100 percent of its production.professional instruments. An IT Enterprise is also consi dered an export enterprise. provided that the total number of foreign nationals employed by an Ecozone Enterprise does not at any time exceed 5 percent of its work force c. and household effects Tax credit for import substitution Exemption from wharfage dues. technical. d. unless a lower percentage of its production for export is prescribed by the PEZA. b. or fee Additional deduction for training expenses Tax credit on domestic capital equipment. and advisory positions. Ecozone Export and Free Trade Enterprises are further entitled to the following incentives: a. h. An Ecozone IT Enterprise is a company operating or offering IT services. raw materials. construction materials. Upon the expiry of the income tax holiday. assembling. an Ecozone Enterprise is subject to a preferential rate of 5 percent of gross incom e. impost. export tax. supervisory. i. which are defined as activities involving the use of any information technology software or system for value addition. This is in lieu of all national and local taxes. Zero-rated VAT on sales Exemption from duties and taxes on importation of merchandise. and supplies of equipment and machineries. breeding stocks. f. including importation of capital equipment. an Ecozone Enterprise is entitled to the income tax holiday. 2. Expanding firms may be entitled to an income tax holiday of three years from the start of commercial operation of the expansion.

or hasleased within the SBF. subject to certain guidelines.1 SBF Enterprises A SBF Enterprise is any business entity or concern within the SBF that is duly registered with and/or licensed by the SBMA to operate any lawful economic activity withinthe SBF. SBF Residents c. financial. subject to ce rtain guidelines.Doing Business in the Philippines 2009 3. b. commercial. 17 . or service activity. in lieu of which a fina l taxof 5 percent of gross income must be paid. and a natural person as a SBF Resident. trade. A SBF Enterprise which operates facilities or services within the SBF (SBF Facilities Operator) is entitled to additional incentives. any Filipino actually residing within the SBF who is an employee or ownerof a SBF Enterprise. The incentives offered to a SBF Enterprise include: a. subject to certain laws and regulations. 3. right to lease out real property it owns or has leased within the SBF. including: a. 3. and right to make improvements in buildings and other facilities. right to freely engage in any business. subject only to limitations under the Philippine Constitution. c. The territory of the SBF includes the City of Olongapo and the Municipality of Subic. and the immediate members of his family. with the SBMA. registration as a SBF Resident is available to: a. or anyFilipino who has leased or has secured living premises in the SBF. and to acquire and lease land and sell or lease out facilities to SBF Enterprises. right to employ foreign nationals. and investment center in the Philippines. subject to evidence of unavailability of comparably skilled Filipinos within the Philippines.2 Generally. A business enterprise may register as a SBF Enterprise. the former US Naval Base at Subic Bay and its extensions located in the municipalities of Hermosa and Morong in Bataan Province. and exemption from all national and local taxes. or grant contracts or concessions to other private or public parties for the construction or provision of any of the said facilities. financial. and to import and export freely all types of goods into and out of the SBF. and develop infrastructure necessary to enhance the SBF ’s efficient operation. Enterprises Registered With the Subic Bay Metropolitan Authority (“SBMA”) The Subic Special Economic and Free Port Zone (“Subic Bay Freeport” or “SBF”) was established by the Philippine Government with t he aim of developing the area into a self-sustaining industrial. b. right to manage facilities on real property it owns. manufacturing. has acqui red. Registration as a SBF Enterprise is open to any business enterprise in any area of economic activity.

c. Province of Tarlac. The government agency that registers enterprises and grants and administers incentives to those enterprises is the Bases Conversion and Development Authority . Under the Rules and Regulations to Implement Republic Act 9400 (“RA 9400 Rules”). Province of Pampanga. Republic Act No. operation. and (ii) tax . with the Clark Development Corporation as its implementing arm. PEZA-registered enterprises located in PEZA Ecozones within the Clark Special Economic Zone are entitled to the same tax and duty incentives available to PEZA registered enterprises located in other PEZA Ecozones. The incentives offered to SBF Residents include: a.and duty-free importation of raw materials and capital equipment. the Municipalities of Mabalacat and Porac. or otherwise acquire articles from other SBF Residents or Enterprises. b. The agency in charge of the development. free of customs duties and control. and right to purchase. utilize. subject to certain immigration regulations. and a foreign national without prior permanent residency status in the Philippines. The government agency that registers enterprises and grants and administers incentives to those enterprises located in PEZA Ecozones within the Clark Special Economic Zone is the PEZA. a foreign national who is a permanent resident of the Philippines and who is employed or has invested in the SBF. The Clark Freeport Zone is operated and managed as a separate customs territory. PEZA Ecozones may be created within the Clark Special Economic Zone. 18 .Quisumbing Torres b. and the Municipalities of Capas and Bamban. with the following incentives available to registered business enterprises located therein: (i) tax rate of 5% on gross income earned. subject to certain regulations. In 2007. right to import directly. or otherwise consume such goods within the SBF free of national internal revenue taxes and customs duties. Enterprises Located in the Clark Special Economic Zone The Clark Special Economic Zone covers certain areas in Angeles City. lease. and maintain. 9400 (“RA 9400”) converted a portion of the CSEZ into a freeport zone called the Clark Freeport Zone. 4. facilities and utilities in those PEZA Ecozones is the Bases Conversion and Development Authority. with the Clark Development Corporation as its implementing arm. foreign articles in non-commercial quantities. management and mainten ance of the infrastructure. in lieu of national and local taxes.

and other governmental agencies and departments. LEASE OF PRIVATE LAND Foreign investors may lease private lands which will be used exclusively for investments for a period of up to 50 years. among others: (a) the leased area shall be used solely for the purpose of the investment upon the mutual agreement of the parties. The long-term lease will be subject to the following conditions. Therefore.Doing Business in the Philippines 2009 V. renewable for another 25 years. The ECC contains specific measures and conditions that the project proponent has t o undertake. the environmental law applicable to a particular business concern depends largely on the activities of that business concern. the lease contract may be for a maximum period of 25 years. Presidential Decree No. Measures to eliminate or minimize these impacts are incorporated into project design and operations. or land for tourism projects with investme nts of less than US $5 million. and administrative regulations. (b) the leased premises shall comprise such area as may reasonably be required for the purpose of the investment. each addressing a specific area of concern relating to the environment. 19 . With respect to land that the foreign investor will not use exclusively for the purpose of the investment. and (c) the lease agreement must incorporate certain mandatory conditions. PD 1586 requires proponents of environmentally critical projects (“ECP”) and projects within environmentally critical areas (“ECA”) to obtain an environmen tal compliance certificate (“ECC”) prior to the commencement of the project. the proposed project or undertaking will not cause significant negative environmental impact. The Department of Environment and Natural Resources (“DENR”) is the lead agency in environmental protection and administration. The ECC is a document certifying that based on the representations of the proponent. local government units. Environmental impact assessment (“EIA”) is part of project planning and is conducted to identify and evaluate important environmental consequences including social factors that may occur if a project will be undertaken. ENVIRONMENTAL REGULATION The Philippines adheres to a policy of protecting and advancing the right of its people to a balanced and healthful ecology. executive decrees. The DENR is assisted in the formulation and implementation of environmental policies by the Environmental Management Bureau (“EMB”). Foreigners investing at least US $5 million in tourism projects may lease private lands for the project for the same period. The ECC also certifies that the proponent has complied with all the requirements of the EIS System and has committed to implement its approved Environmental Management Plan. VI. 1586 (“PD 1586”) established the Philippine Environment al Impact Statement (“EIS”) System. Philippine environmental law consists of a series of legislative enactments. The lease must be registered with the Philippine Board of Investments under the I nvestors’ Lease Act. renewable once for a period of 25 years. subject however to the Comprehensive Agrarian Reform Law and the Local Government Code.

provided the registrant files with the IPO a declaration of use/justifiable non-use within one year following the fifth anniversary of the date of the registration or renewal. is the general legislation on pollution prevention and control that is being enforced by the government. and disposal of solid waste in the country. trademarks. control. However. Trademarks. use. transfer. Specific Areas of Regulation Presidential Decree No. An ECP is a project or program that has high potential for significant negative environmental impact. partnerships. treatment. or associations domiciled in the Philippines or in any foreign country may be registered with the IPO. The Intellectual Property Office (“IPO”) processes applications for patents. manufacture. VII. and disposal of toxic substances and hazardous and nuclear wastes. 20 . corporations. and service marks owned by persons. INTELLECTUAL PROPERTY PROTECTION The Philippines is a member of the Paris Convention for the Protection of Industrial Property. 9003. processing. Republic Act (RA) No. manage. Priority is given to whoever first applies for registration. is the government agency that implements the EIS System. service marks. There is a single procedure for both foreign and local applicants for the registration of marks. together with the EIA Review Committee. by such membership. 984. or the Ecological Solid Waste Management Act of 2000. and reverse air pollution from city to countryside. The Clean Water Act applies to water quality management in all water bodies. and the World Trade Organization and. trade names. otherwise known as the National Pollution Control Decree of 1976. or implemented in it. distribution. has adhered to the Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”). it primarily applies to the abatement and control of pollution from land based sources.Quisumbing Torres An ECA is an area delineated as environmentally sensitive such that significant environmental impacts are expected if certain types of proposed projects or programs are located. developed. calls for the institutionalization of a national program that will manage the control. The registration is renewable at the end of each 10th year from registration so long as the mark is still in commercial use. transport. Trademark registration is valid for 10 years. Rights to a mark are acquired by registration. The Philippine Clean Water Act of 2004 requires the DENR to implement a comprehensive water quality management program to guarantee effective water utilization and conservation. and trade names. the Berne Convention for the Protection of Literary and Artistic Works. and issues the corresponding certific ates of registration. processing. RA 8749 or the Philippine Clean Air Act of 1999 provides the framework to prevent. An applicant should file a declaration of use within three years from the date of application. RA 6969 or the Toxic Substances and Hazardous and Nuclear Wastes Control Act provides the legal framework for the country’s program to control and manage the importation. The EMB of the DENR. transport.

and other similarly protected IP rights with the BOC. Copyright protection extends to computer programs. or arrangement of their contents. scientific. Intellectual Property (“IP”) owners may record their produc ts covered by patents. BORDER CONTROL MEASURES The rules of the Bureau of Customs (“BOC”) on border control measures prevent the entry into the Philippines of infringi ng merchandise and ensure expedited procedures for the handling and disposition of goods suspected to be imported in violation of the Intellectual Property Code of the Philippines (the “IP Code”). A TTA also refers to an agreement to transfer. There are no restrictions regarding the amount or rate of royalty that may be charged. A BOC recordal is valid for two years from the date of recordal. The recordal will be the basis of the BOC to monitor suspected imports to determine whether they are liable to seizure and forfeiture. However. The parties are free to negotiate the amount or the rate of royalties to be paid under the TTA. including the fixing of the appropriate a mount or rate of royalty.Doing Business in the Philippines 2009 Inventions. or license all of forms of intellectual property rights. copyrights. A patent registration for an invention is valid for 20 years from the date of filing the application. or the rendering of a service including management contracts. TECHNOLOGY TRANSFER ARRANGEMENTS A technology transfer arrangement (“TTA”) refers to a contract or agreement involving the transfer of systematic knowledge for the manufacture of a product. may be copyrighted. The application for recordal serves as the consent of the IP owner for the BOC to conduct physical inspection of imports suspected to be infringing. thus simplifying the determination of who is entitled to own the patent. and data bases that are original by reason of the selection. coordination. multimedia works. Copyrights endure for the lifetime of the creator and for 50 years after his death. A patent is granted to the inventor who filed his patent application earlier than others. trademarks. Literary. A patent for a utility model is valid for sev en years from the date of filing the application and automatically expires at the end of the period. whether published or unpublished. the IPO has a quasi-judicial jurisdiction to settle disputes regarding technology transfer payments. However. scholarly. IX. except computer software developed for the mass market. The term of registration of an industrial design is five years from the date of filing and may be renewed for two consecutive periods of five years each. utility models. Nonconformity with the prohibited and mandatory clauses will automatically render the TTA unenforceable. 21 . including the licensing of computer software. the application of a process. there are except ional cases where exemptions from the prohibitory and/or mandatory clauses may be allowed. assign. and industrial designs may be patented. VIII. TTAs should not contain certain prohibited clauses and should contain certain mandatory provisions. and artistic works.

and benefits of employment that employers must provide or comply with and to which the employees are entitled as a matter of right. These overtime pay rates may vary depending on whether the overtime work is rendered on a regular work day. 1. conditions. In the event of litigation over the Agreement. Registration will allow the Licensee to source currency for royalty payments from the Philippine banking system. Philippine courts generally lend great weight to findings of administrative agencies like the Documentation Information and Technology Transfer Bureau (“DITTB”). These are:  The registration will serve as evidence that the agreements are compliant with the IP Code and are enforceable in this respect. Under the IP Code. or rest day.  22 .Quisumbing Torres A TTA that conforms to the prohibited and mandatory clauses need not be registered with the IPO. The Labor Code enumerates the specific instances when an employee may be required to render overtime work and the corresponding overtime pay rate. labor law recognizes the workers’ right to a just share in the fruits of production and management’s right to a reasonable return on investments. If the Licensor intends to avail of tax treaty relief with respect to royalty income derived under the agreements.1 Work Hours  Normal Hours of Work. the non -recordation of a trademark license may render the registration of the mark(s) covered by the license vulnerable to cancellation actions by third parties due to non -use. the DITTB ruling may be used as evidence of the enforceability of the Agreement. Labor Standards The Labor Code of the Philippines (the “Labor Code”) lays down the minimum terms.    X. particularly for license agreements. The normal hours of work should not exceed eight hours in a work day. there are practical benefits to registe ring a compliant TTA. holiday. and If the agreement involves the licensing of a trademark. a DITTB registration or certificate of compliance must be submitted to the Philippine Bureau of Internal Revenue in support of an application for tax treaty relief. without legitimate reason. Any work done in excess of eight hours in a work day must be paid an overtime rate based on the applicable basic rate. LABOR LAW Philippine labor law recognizes the rights of both workers and management. Thus. Employees are entitled to at least 60 mi nutes time off from work for their regular meals. the registration will facilitate the recordal of the agreement against the Philippine trademark applications or registrations for the licensed marks. fails to use the mark in the Philippines or cause it to be used in the Philippines under license during an uninterrupted period of three years or longer. 1. Thus. The IP Code specifically provides that a trademark registration may be cancelled any time if the registered owner of the mark. a trademark license agreement that is not recorded will have no effect against third parties. However. Philippine Central Bank regulations provide that banks and foreign exchange companies must require purchasers of foreign currencies that will be used for royalty payme nts to submit the relevant certificate of registration issued by the DITTB. Overtime Pay.

the benefit becomes part of the terms and conditions of employment and cannot be unilaterally withdrawn or discontinued by the employer. Premium Pay for Rest Day or Holiday Work. 2 Wages Under the minimum wage law in the Philippines.  1.m. An employee must be paid a night shift differential equivalent to a certain rate of his regular wage for work done between 10 p. The minimum wage rate in each region of the countr y varies and is prescribed by the Regional Tripartite Wages and Productivity Boards.4 Other Compulsory Benefits Holiday Pay Service Incentive Leave Thirteenth Month Pay Retirement Benefits Military Training Leave     Maternity Leave Paternity Leave Parental Leave Leave Due to Violence Rule on Non-Diminution of Employment Benefits If an employee benefit has been granted by reason of employer practice o r policy. The act of the employer was done for a long period of time or was consistently repeated. knowingly. Wages are generally paid in cash at least twice a month (usually on the 15th and the last day of every month). All employees are generally entitled to a rest period of not less than 24 consecutive hours for every six consecutive normal working days. the Labor Code requires the employer to pay a certain amount as additional compensation based on the regular wage of the employee. The following criteria may be used to ascertain the existence of a binding and enforceable employer practice or policy under Philippine law: a. and 6 a.m. b.Doing Business in the Philippines 2009  Night Shift Differential. among others. 23 . 1.3      1. c. and The act was not a product of erroneous interpretation or construction of a doubtful or difficult question of law. and cons istently. despite the absence of a legal or contractual requirement to grant the said benefit. The rules on work hours are not applicable to managerial employees. The act was done deliberately. For work done on rest days and special holidays. minimum wages vary according to the location of the business.

This provides housing loans to employees in the private sector. PhilHealth. may negotiate and enter into collective bargaining agreements (“CBA”) with their employers. A labor union has to be registered with the Department of labor and Employment for it to enjoy all the rights granted by law to labor unions. disability. National Health Insurance Act (“NHIA”). and Pag -IBIG Fund. project. employees may also form and join workers’ associations and other mutual aid and benefit associations for legitimate purposes. probationary. through their union representatives. may not form or become members of labor unions. It may register as an independent labor union or as a charter of a federation or national union. Certain classes of employees. employees have the right to form and join unions and to engage in concerted activities for their collective protection. under specified circumstances.Quisumbing Torres 2. the employer is required to register itself and its employees with the Social Security System (“SSS”. and Pag-IBIG Fund. such as managerial and confidential employees. together with the employer’s contribution. retirement and funeral benefits. 3. This provides for the benefits in case of work -related illness or injury. Social Security Law. Aside from labor unions. 4. however. The employees negotiate the terms and conditions of their employment in CBAs. The contributions are based on the salary of the employee. and the Pag-IBIG Fund. and fixed-term. the Philippine Health Insurance Corporation (“PhilHealth”. other than collective bargaining. Corollarily. Contributions for the ECSIF are shouldered by the employer alone. Classification of Employment The Labor Code and jurisprudence classify employment status into regular. This provides for the benefits for non-work related illness. d. seasonal. casual. PhilHealth administers the NHIA). b. Employees. The employer and the employee both contribute to the common fund from which the benefits are sourced. the SSS also administers the ECSIF). The employment status of an employee is not determined by the specific designation given to it in the employment contract but by the nature of the work being performed by the employee. also has the right to lock-out employees. This provides employees in the private sector a more comprehensive benefits program which includes sickness. Employees. the employer. Labor Relations As a general rule. Welfare Legislation a. under specified circumstances. The employer is required to deduct the employee’s contribution and remit the same to the SSS. Employee’s Compensation and State Insurance Fund (“ECSIF”). 24 . There are other special laws in the Philippines that govern specific sectors of Philippine labor such as the Migrant Workers’ and Overseas Filipinos Act of 1995. have the right to strike in accordance with law. c. Under the foregoing welfare legislations.

an employee who is dismissed without procedural due process is entitled to nominal damages. computed from the time his compensation was withheld from him up to the time of his actual reinstatement. For this purpose. unless the legal requirements for the other types of employment are strictly observed. the amount of which is subject to the discretion of the court. 25 . it is best to put the employment contract b etween the employer and the employee in writing. including allowances and other benefits or their monetary equivalent. An employee who is unjustly dismissed from work without a legally defined cause is entitled to the following: a. It is also advisable for the employer to have an employment handbook which contains the rules and regulations that will govern the employment relation. Otherwise. a dismissed employee has the right to question the validity of his dismissal. terminate.Doing Business in the Philippines 2009 An employment is presumed to be regular or permanent in nature. Termination of Employment Corollary to the employer’s right to hire. The nominal damages serve as a penalty on the employer for its failure to comply with the requirements of procedural due process for terminating employment. 6. b. The classification of an employee is important because under Philippine law. payment of full back wages. Even if there may have been a just or authorized cause for termination. the court will take into consideration the relevant circumstances of each case. reinstatement without loss of seniority rights and other privileges. a probationary employee must be provided with written standards for regular employment at the time he is first engaged. The employees’ right to security of tenure demands that they be removed only for any of the just or authorized causes defined under the Labor Code (called “substantive due process”) and only after the employer observes procedural due process. he shall be deemed a regular employee from the start of his employment. particularly the gravity of the employer’s failure to follow due process requ irements. Once questioned before the proper labor authorities. the employer must establish the validity of the dismissal by proving that the termination was due to a just and/or authorized cause and that the termination was done after complying with due process. and discipline employees is the employees’ right to security of tenure. In the Philippines. 5. This will protect the employer in the event of a future disagreement as to the terms and conditions of employment. Contract of Employment Although not required. For instance. the causes for terminating an employer-employee relationship would depend upon the classification of the employee.

The expatriate.2 Special Non-Immigrant or 47(a)(2) Visa This visa is granted under Section 47(a)(2) of the Philippine Immigration Act that allows the President to issue such visas when public interest so warrants. subject to such conditions as he may prescribe. a foreigner will only be requi red to apply for a special work permit with the BI. as well as an alien employment permit (“AEP”) from the Department of Labor and Employment (“DOLE”). less than six months) for positions that are temporary in nature (i.Quisumbing Torres XI. depending on his nationality.e. and unmarried minor children un der 21 years of age. 1. consultancy). Board of Investments registered enterprises. the Bureau o f Immigration (“BI”). technical or advisory positions in Export Processing Zone Enterprises. may be issued multiple entry special visas valid for one year. Generally. The visa and AEP applications must be filed by a local petitioning company on behalf of the foreigner. Upon entry. if accompanying or joining him/her after his/her admission into the country as a non-immigrant. The foreigner may commence work in the local petitioning company upon the filing of his/her application for an AEP with the DOLE. Skyway). has exercised this authority by allowing the entry of foreign personnel employed in supervisory.. a foreigner may enter the country without a pre-approved tourist or 9(a) visa. The President. MRT. and Special Government Projects (e. provided that he has an outbound ticket with him. acting through the appropriate government agencies. which may be extended from year to year upon legal and meritorious grounds. 26 . 1.g. Except for certain restricted nationals. The following are the more common types of work visas: 1. the work visa and AEP applications are filed after the foreigner has arrived in the country and has been admitted on a tourist or 9(a) visa. In cases of short-term employment (i. This visa is generally valid for an initial period of one year and is renewable from year to year.e. IMMIGRATION Work / Employment Requirements A foreigner who comes to the Philippines to work must obtain a work visa from the relevant government agency. and foreign personnel of regional or area headquarters of multinational companies which are officially recognized by the Philippine Government. An application will be filed for the conversion of the tourist or 9(a) visa into the appropriate work visa. his spouse.. primarily.1 Multiple Entry Special Visa This visa is available to:   foreign personnel of offshore banking units of foreign banks duly licensed by the Central Bank of the Philippines to operate as such. he will be provided either a 21 -day or 7-day visa.

Germany or Japan. at least 21 years of age. 1. who deposit the minimum amount required by law with a bank accredited by the Philippine Leisure and Retirement Authority. is granted for a period discretionary to the DOLE. the officers of the BI have the discretion to shorten the validity period of the approved 9(g) visa to one year. The local petitioning company must be majority -owned by US. which no Filipino citizen within the Subic Bay Freeport possesses. a foreigner may also apply for spec ial resident visas. These visas allow a foreigner to work in the Philippines. When granted. which in turn. technical. Special Resident Visas In addition to work visas. The pre-arranged employment visa is granted for a period co -terminus with the AEP. The nationality of the foreigner and the majority of the shareholders of the employer company must be the same. may apply for this visa.000 in the Philippines. German or Japanese interests. The holder may also invest in or establish a business in the Philippines. may apply for this visa with the Subic Bay Metropolitan Authority. The foreigner must be employed in a supervisory or executive capacity. managerial.1 Special Resident Retiree’s Visa (“SRRV”) The SRRV program is available to foreigners and former Filipinos at least 35 years of age.2 Special Investor’s Resident Visa (“SIRV”) Any foreigner. 27 . The holder of an SRRV may stay in the Philippines ind efinitely or visit the country at any time. whether for wage or salary or for other forms of compensation.4 Treaty Trader’s or Investor’s Visa A foreigner is entitled to enter the Philippines as a treaty trader or investor only if he is a national of the US. or highly confidential position in a local company and who is proceeding to the Philippines to engage in any lawful occupation. the visa may be extended to the foreigner’s spouse and unmarried children below 21 years of age. However. The visa is generally valid for a one -year period subject to extension upon application. as certified by the DOLE. 1. subject to other requirements or limitations imposed by law.Doing Business in the Philippines 2009 1. willing and able to invest at least US $75. usually based on the duration of the election or appointment of the foreigner.3 Pre-Arranged Employment or 9(g) Visa This visa is available to a foreigner who will be occupying an executive. 2.5 Subic Bay Freeport Work Visa A foreign national who possesses executive or highly technic al skills. countries with which the Philippines has concluded a reciprocal agreement for the admission of treaty traders or investors. The following are the different types of special resident visas: 2. where a bona fide employer -employee relationship exists. 2.

otherwise known as the SVEG. or industry. directly. 28 . promote. there is no limit to the number of unmarried children that can be included in the application. Special Visa for Employment Generation (“SVEG”) On 20 October 2008. or exclusively engage in a viable and sustainable commercial investment/enterprise in the Philippines. 3. with no previous conviction of a crime involving moral turpitude. and dismiss employees. or  Upon a final determination by competent authority that the foreign national poses a risk to national security.4 Subic Bay Freeport Residency Visas for Retirees This visa requires the applicant to be over 60 years old.  If the SVEG was obtained through fraud or willful misrepresentation of material facts. President Gloria Macapagal-Arroyo enacted executive Order No. The SVEG program will be operational as soon as the implementing rules and regulations are issued. He/she evinces a genuine intention to indefinitely remain in the Philippines. 758 which prescribes guidelines for the issuance of a special visa to non -immigrants for employment generation.  Upon conviction of the foreign national for a crime or offense in the Philippines. may be included in the visa application. or have the authority to hire.3 SIRV for Investors in Tourist-Related Projects and Tourist Establishments A foreigner who invests the amount of at least US $50.000 in a qualified tourist . 2. and His/her commercial investment/enterprise must provide actual employment to at least 10 Filipinos in accordance with Philippine labor laws and other applicable special laws.Quisumbing Torres The applicant’s spouse and unmarried children who are less than 21 years of age. Qualified foreigners who are granted the SVEG shall be considered special non-immigrants with multiple entry privileges and co nditional extended stay. exercise/perform management acts. 2. trade. Unlike the SRRV.related project or tourism establishment. The SVEG is a special visa issued to a qualified no n-immigrant foreigner who shall actually employ at least 10 Filipinos in a lawful and sustainable enterprise. no longer employed or not self-employed. as determined by a governmental committee. He/she is not a risk to national security.000 per year. and receiving a pension or passive income which is payable in the Subic Bay Freeport in an amount exceeding US $50. The privileges of the SVEG may extend to the foreign national’s spouse and dependent unmarried children below 18 years of age. of good moral character. accompanying the applicant. Foreign nationals who wish to avail of the SVEG must comply with the following conditions:  He/she must actually.    The SVEG may be revoked by the Bureau of Immigration:  If the SVEG holder fails to maintain compliance with any of the above conditions. shall be entitled to an SIRV.

powers. or agricultural enterprises by:     direct lending. benefits. subject to the prior approval of the Monetary Board of the BSP. buying and selling contracts. importers. chattel mortgages. the only mode for foreign banks to enter the Philippine banking industry is to invest in existing domestic banks. FINANCE-RELATED REGULATIONS Banking A foreign bank may operate in the Philippines. A foreign national may own stock in any financing company if the country of which he is a national accords the same reciprocal rights to Filipinos. or other transaction are entitled to the same incentives. savings and loan associations. the BSP has imposed an indefinite moratorium on the establishment of new banks except in cities and municipalities where there are no existing banking offices. discounting or factoring commercial papers or accounts receivables. a foreign bank cannot invest in the voting stock of a ne w banking subsidiary. or financial leasing of movable as well as immovable property. by owning up to 60 percent of the voting stock of an existing domestic bank.Doing Business in the Philippines 2009 XII. 2. Financing companies providing financial leases in connection with any purchase. commercial. The term “financing companies” excludes banks. Until such moratorium is lifted. at least 40 percent of the voting stock of which is owned by citizens of the Philippines. investment houses. and privileges that are granted to other non-bank financial institutions providing similar credit. purchasers. financing companies that provide medium and long-term credit to small and medium enterprises are entitled to the same rights. a foreign bank may also operate in the Philippines. and other financial institutions organized or operating under other special laws. leases. 1. A financing company must be organized as a stock corporation. A financing company must have a paid-up capital ranging from at least Ph P2. Financing Companies Financing companies are corporations that are pri marily organized for the purpose of extending credit facilities to consumers and to industrial. benefits. exemptions. insurance companies. acquisition. cooperatives. If the moratorium is lifted. or otherevidence of indebtedness. 29 . In addition. or other eligible person in such transactions. by investing in up to 60 percent of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines. importation. subject to the prior approval of the Monetary Board of the BSP. At present. or privileges that are available to lenders. Thus.5 million to Ph P 10 million depending on where the fi nancing company will set up its office in the Philippines.

the Securitization Act grants various tax and fiscal incentives. Prior endorsement of the BSP must be obtained in the following cases: a. or if the SPE is constituted in the form of a special purpose trust. In order to promote the development of the Philippine capital market. the Act seeks to create a favorable environment for the establishment of Special Purpose Entities (“SPE”) and the issuance by such entities of a wide range of asset-backed securities. b. In securitization. or similar financial assets with an expected cash payment stream (“Assets”) are sold. on a “without recourse” basis. The bill is currently pending in the Philippine Senate. The Act establishes the legal and regulatory framework for asset securitization and grants tax exemptions and other incentives in favor of securitization transactions. INSURANCE-RELATED REGULATIONS Entry of Foreign Insurance Companies Subject to the approval of the Insurance Commission. loans. from an SPV to a third party. ownership of the voting stock of an existing domestic insurance company. 4. Special Purpose Vehicle Act of 2002 The Special Purpose Vehicle Act of 2002 (“SPV Act”) provides the framework for the creation and regulation of Special Purpose Vehicles (“SPVs”) that acquire or invest in the non-performing assets (“NPA”) of financial institutions (“FI”). which seeks to allow registration of SPVs for another five years. The Act also prescribes the rules for the creation and operation of Secondary Mortgage Institutions to develop a secondary market for the asset-backed securities. or any other entity subject to the supervision of the BSP. The issuance of the ABS must be in accordance with the securitization plan approved by the SEC. The SPV Act granted tax and fiscal incentives and exemption privileges to transactions involving the transfer of NPAs from an FI to an SPV and. Securitization Act of 2004 The Securitization Act took effect on 10 April 2004. a foreign insurance company may be allowed to do business in the Philippines under any one of the following modes of entry: a. 30 . subject to certain conditions. if the original obligee of the Assets is a bank. There appears to be a growing clamor from the banking sectors to allow additional time within which interested parties may register an SPV. by a seller to a special purpose entity. particularly for residential mortgage-backed securities and other housing-related financial instruments. The SPE then issues to investors asset-backed securities (“ABS”) that depend for their payment on the cash flow from the Assets. This period expired on 18 September 2004. thus paving the way for the filing of Senate Bill 1830. XIII. Subject to certain conditions. receivables. The SPV Act prescribed a period within which the application to organize and register an SPV must be filed with the SEC.Quisumbing Torres 3. or is controlled by such bank or entity.

Doing Business in the Philippines 2009 b. an applicant foreign insurance corporation must comply with certain capitalization requirements pertaining to minimum paid -up capital and contributed surplus fund. ARBITRATION IN THE PHILIPPINES Parties have the option of resorting to arbitration to resolve their disputes in the Philippines. Also. Consequent ly.e. The parties are expected to appoint arbitrators whom they regard as honest and competent.2 Flexibility of the rules Foreign investors who are not familiar with local court procedures may prefer a more neutral process.3 Choice of arbitrators The parties are free to choose the arbitrators. To qualify as a branch or a new company incorporated in the Philippines. 1. or majority-owned by the government of the country of origin. c. 1. widely owned and/or publicly listed in its country of origin. Unlike judges. To be allowed entry. 1. the parties need notbe bound by the strict rules of evidence. the outcome becomes more “acceptable. Since the parties are given a free handin choosing their arbitrator(s). the foreign insurance company must be among: a. Depending on the extent of foreign equity. it usually takes several years for the trial courts to hear and resolve the cases filed with them. The pa rties can choose arbitrators whose schedules can accommodate the long hours necessary to hear and decide a case. a subsidiary). Since the procedure is mutually agreed upon. XIV.the parties have more faith in the integrity of the process. 1 Advantages of arbitration compared with court litigation Speed Despite the efforts of the Supreme Court to streamline the judiciary. or the top 10 in their country of origin. and has been doing business for the last 10 years as of the date of the application.. 1. the applicant must be: a. investment in a new insurance company incorporated in the Philippines (i. which is steadily growing in popularity as an alternative mode of dispute settlement. b. arbitrators do not have to contend with heavy caseloads. In contrast. The ability to choose the arbitrator is especially attractive to a foreign party who ma y harbor reservations about the neutrality of a “home court” judge. the top 200 foreign insurance corporations globally. or establishment of a branch. b. may be more attractive than court litigation for several reasons. Arbitration allows the parties to choose or craft the rules that will govern the arbitration proceedings. c. the dockets of Philippine courts remain clogged.” 31 . Arbitration. disputes submitted to arbitration are more speedily resolved.

1. arbitration proceedings are confidential. at the time of the conclusion of such agreement. Disputes that are not arbitrable The following disputes cannot be submitted to arbitration: (a) labor disputes covered by Presidential Decree No. or Arbitration is considered international if: 32 . the higher will be the demand for their services. and (h) thosedisputes which by law cannot be compromised. 4. (b) the civil status of persons.6 Confidentiality Whereas court proceedings are open to the public. 1. or rules promulgated pursuant to law. The parties may agree to submit a dispute to arbitration either before or after a dispute arises. 6. Definition of arbitration “Arbitration” is formally defined as “a voluntary dispute resolution process in which one or more arbitrators.” However.Quisumbing Torres On the part of the arbitrators. (f) future legitime. 1. (c) the validity of a marriage. Definition of international arbitration and domestic arbitration (a) the parties to an arbitration agreement have. 442. “Final” means that an arbitral award cannot be modified or reversed except on limited grounds. 2. “final” does not mean that an arbitral award is beyond judicial review. An aggrieved party cannot compel the other party to arbitrate. appointed in accordance with the agreement of the parties. whether contractual or not.” 5. The greater their reputation for competence and integrity. Disputes that may be referred to arbitration All types of commercial disputes may be referred to arbitration. resolve a dispute by rendering an award. their places of business in different States (countries). If there is no agreement to submit a dispute to arbitration. (d) any ground for legal separation (of married persons). they have an added incentive to build and nurture a reputation for competence and integrity. The word “commercial” is broadly defined as “matters arising from all relationships of a commercial nature. Arbitration as contract Arbitration is a creature of contract. otherwise known as the Labor Code of the Philippines.” 3. and its Implementing Rules and Regulations. the remedy of the aggrieved party is to file a case in court. as amended. (g) criminal liability. (e) the jurisdiction of courts. There can be no arbitration unless the parties agree to submit their dispute to arbitration.5 Arbitrators as experts Parties usually appoint arbitrators who are knowledgeable in the subject matter of the dispute.4 Finality of the award Philippine law recognizes as valid a stipulation that an arbitral award shall be “final.

Furthermore. or any personal bias. (ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which th e subject matter of the dispute is most closely connected. and their obligations are to be performed in the Philippines. and there is no stipulation in their arbitration agreement that the su bject matter of the arbitration agreement relates to another country. T h i r d pa r t i e s Where a civil action is commenced in court by or against multiple parties. otherwise known as the Arbitration Law. there are few vital distinctions between the two regimes. or other interest in the controversy. Domestic arbitration is governed by Republic Act No. The law prohibits an arbitrator from “championing” or “advocating” the cause of either party. the arbitration agreement. or pursuant to. 876. b. one or more of whom are parties to an arbitration agreement. the court shall refer to arbitration those parties who are bound by the arbitration agreement. and must know how to read and write. which might prejudice the right of any party to a fair and impartial award. fiduciary. An agreement that incorporates by reference a document that contains an arbitration clause gives rise to a valid arbitration agreement. Republic Act No . although the civil action may continue as to those who are not bound by such arbitration agreement. or by his lawful agent. the arbitrator should not possess any of the following disqualifications: He should not be related by blood or marriage within the sixth degree to either party to the controversy. Despite the distinction between international and domestic arbitration. or (c) the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country. c. Thus. 33 .Doing Business in the Philippines 2009 (b) one of the following places is situated outside the State in which the parties have their places of business: (i) the place of arbitration if determined in. International arbitration is governed by the United Nations Commission on International Trade Law (UNCITRAL) Model Law. The reason for this is that the Alternative Dispute Resolution Act of 2004 (“ADR Act of 2004”) has grafted several of the UNCITRAL Model Law provisions onto R. On the other hand. 7. No. in full enjoyment of his civil rights. 876 on Domestic Arbitration Form of arbitration agreement The arbitration agreement must be in writing and subscribed by the party sought to be charged. Neither should he have a financial.A. 876. the arbitration will be considered domestic. domestic arbitration is simply defined as arbitration that is not international. Qualifications of arbitrator An arbitrator must possess the following qualifications: He must be of legal age. if the dispute is between parties who have their place of business in the Philippines. a Philippine law that was enacted in 1953. a.

A. The one area where the two arbitration regimes may part ways is in the interpretation of the applicable laws. Where an award is vacated. 876 (for domestic arbitration) and the Model Law (for international arbitration). In order to convert the domestic arbitral award into an enforceable judgment. The petition to vacate a domestic arbitral award must be filed with the appropriate Regional Trial Court within 30 days from receipt of the award. or (iii) The arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown. and any provision limiting the time in which the arbitrators may make a decision shall be deemed applicable to the new arbitration and to commence from the date of the court's order. or other undue means. grant the petition. Grounds for vacating/setting aside a domestic arbitral award (i) The award was procured by corruption. the court. Confirmation of domestic arbitral award A domestic arbitral award is not self-executory. 34 . e. and definite award upon the subject matter submitted to them was not made. or so imperfectly executed them. International Arbitration Interpretation of the UNCITRAL Model Law (“Model Law”) The provisions on domestic arbitration are more or less similar to the provisions on international arbitration. R. or (iv) The arbitrators exceeded their powers. A domestic arbitral award may also be appealed directly to the Court of Appeals on questions of fact and law. or were guilty of any other misbehavior by which the rights of any party were materially prejudiced. in its discretion. The court should. as a matter of course. No. final. and willfully refrained from disclosing such disqualifications. No. unless there are grounds to vacate the award.A. a. 876.Quisumbing Torres d. 8. or in refusing to hear evidence pertinent and material to the controversy. Interim measures A party may apply for provisional relief or interim measures with the courts prior to the constitution of the arbitral tribunal or even during the arbitration proceedings to the extent that the arbitral tribunal has no power to act or is unable to act ef fectively. that a mutual. fraud. or one or more of the arbitrators were disqualified to act as such under Section 10 of R. the winning party has to file with the appropriate Regional Trial Court a petition for confirmation of the arbitral award. or A domestic arbitral award may be vacated on the following grounds: (ii) There was evident partiality or corruption in t he arbitrators or any of them. may direct a new hearing either before the same arbitrators or before a new arbitrator or arbitrators to be chosen in the manner provided in the submission or contract for the selection of the original arbitrator or arbitrators. f.

since other jurisdictions tend to interfere less with international arbitral awards. entitled “International Commercial Arbitration: Analytical Commentary on Draft Text identified by reference number a/CN. failing any indication thereon. in interpreting the Model Law. The definition of “writing” under the Model Law is broader than the definition of “writing” under R. or 35 . provided that. d. Grounds for setting aside/vacating an international arbitral award An international arbitral award may be set aside by the courts only if the party making the application furnishes proof that: (i) a party to the arbitration agreement referred to in Article 7 of the Model Law was under some incapacity. should limit the scope of its review to the grounds to set aside an arbitral award under the Model Law. 9/264. While domestic arbitration awards may be reviewed on appeal on both questions of fact and law. Form The arbitration agreement shall be in writing. A.” c. or contain s decisions on matters beyond the scope of the submission to arbitration. or (ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case. b. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement provided that the contract is in writing and the reference is such as to make that clause part of the contract. Interim measures As with domestic arbitration. telegrams or other means of telecommunication which provide a record of the agreement. only that part of the award which contains decisions on matters not submitted to arbitration may be set aside. and resort may be made to the travaux preparatories and the report of the Secretary General of the United Nations Commission on International Trade Law dated 25 March 1985. 876. regard shall be had for its international origin and to the need for uniformity in its interpretation. under the law of this State. having regard for the international origin of the Model Law and to the need for uniformity in its interpretation. No. Philippine courts. or in an exchange of statements of claim and defense in which the existence of an agreement is alleged by one party and not denied by another. or (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration. or the said agreement is not valid under the law to which the parties have subjected it or. telex.” For example. a party in an international arbitration may apply for provisional relief or interim measures with the courts prior to the constitution of the arbitral tribunal or even during the arbitration proceedings to the extent that the arbitral tribunal has no power to act or is unable to act effectively. if the decisions on matters submitted to arbitration can be separated from those not so submitted.Doing Business in the Philippines 2009 The ADR Act of 2004 provides that. domestic arbitration and int ernational arbitration will most likely diverge with respect to the scope of judicial review. The Model Law considers an agreement to be in writing “if it is contained in a document signed by the parties or in an exchange of letters.

irrespective of the country in which it was made. may be refused only on the following grounds: “(1) Recognition or enforcement of an arbitral award. that part of the award which contains decisions on matters submitted to arbitr ation may be recognized and enforced. upon application in writing to the competent court. provided that. or (ii) the party against whom the award is invoked was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case. or. irrespective of the country in which it was made. or (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration. irrespective of the country in which it was made. Recognition and enforcement of international arbitral award An international arbitral award. may be refused only : (a) at the request of the party against whom it is invoked. or An international arbitral award may also be set aside if the court finds that: (i) the subject matter of the dispute is not capable of s ettlement by arbitration under the law of this State (the Philippines). in 1967. unless such agreement was in conflict with a provision of the Model Law from which the parties cannot derogate.Quisumbing Torres (iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties. shall be enforced unless there exists any of the grounds to set aside/vacate the award. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) The Philippines acceded to the NewYork Convention. 9. a landmark international instrument. failing such agreement. or (ii) the award is in conflict with the public policy of this State. Section V of the NewYork Convention provides that the recognition or enforcement of an arbitral award. The parties to this convention recognize the validity and binding effect of foreign arbitral awards. or 36 . was not in accordance with the Model Law. or the said agreement is not valid under the law to which the parties have subjected it or. shall be recognized as binding and. An application for setting aside an international arbitral award may not be made after three months have elapsed from the date on which the party making that application received the award. if the decisions on matters submitted to arbitration can be separated from those not so submitted. or it contains decisions on matters beyond the scope of the submission to arbitration. under the law of the country where the award was made. e. failing any indication thereon. if that party furnishes to the competent court where recognition or enforcement is sought proof that: (i) a party to the arbitration agreement referred to in article 7 was under some incapacity.

was not in accordance with the law of the country where the arbitration took place. as opposed to a final foreign award. On the other hand. consultant. there is no similar convention with respect to the recognition and enforcement of foreign court judgments. for example.Doing Business in the Philippines 2009 (iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or. 10. or who are otherwise bound by. If the parties do not enter into an arbitration agreement. then the construction dispute between them shall be resolved by the courts. Construction Industry Arbitration Commission Executive Order No. bondsman or issuer of an insurance policy in a construction project. The NewYork Convention also seeks to put international arbitration on equal footing with domestic arbitration by providing that the parties t o the convention should not impose more onerous conditions on the enforcement of foreign arbitral awards than on the enforcement of domestic awards. fabricator. a testament to the near-universal recognition of the validity and binding nature of foreign arbitral awards. or under the law of which. subcontractor. 37 . and the CIAC shall assume jurisdiction over the dispute. the Philippine Supreme Court recognized the enforcement of a provisional/interim foreign award. the Philippine Supreme Court has held that “as long as the parties agree to submit their dispute to voluntary arbitration.” The CIAC is a hybrid of voluntary arbitration and compulsory arbitration. even if they specifically choose another forum. The CIAC has original and exclusive jurisdiction over construction disputes. To date. quantity surveyor. such that. or (b) if the court finds that: (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State. that award was made. if the parties to a construction contract designate Singapore arbitration as the venue of any dispute that may arise between them. failing such agreement. directly or by reference whether such parties are project owner. Notably. contractor. their agreement will fall within the jurisdiction of the CIAC.” In a recent case. or (ii) the recognition or enforcement of the award would be contrary to the public policy of this State. project manager. either party may still elect to file a request for arbitration with the CIAC notwithstanding the agreement of the parties to submit their dispute to arbitration in Singapore. The CIAC is known for its efficiency. which shall “include those between or among parties to. t he parties will not be precluded from electing to submit their dispute before the CIAC because this right has been vested by law. 1008 established the Construction Industry Arbitration Commission (“CIAC”). an arbitration ag reement. there are more than 140 signatories to the NewYork Convention.”Thus. or (v) the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which. design professional. regardless of what forum they may choose. It takes the CIAC an average of around six months from the time of filing of the request for arbitration to hear the case and render an award.

INSOLVENCY IN THE PHILIPPINES Overview and Introduction to the Jurisdiction / Applicable Legislation There are three types of remedies available to a financially distressed individual or juridical person. a. except executions against properties specially mortgaged. which provides for the deferment of payments and temporary protection against actions/executions by unsecured creditors. If the required vote is achieved without any objection from the creditors. Presidential Decree No. 2. the rehabilitation of a company entails more radical measures such as changes in organization. and Prohibits the debtor from disposing of his property or making payments. The proposed agreement must be approved by two thirds (2/3) of the creditors representing at least three fifths (3/5) of the debtor’s total liabilities. may file a petition with a Philippine Regional Trial Court (the “Court”) to be declared in a state of suspension of payments.D. management. and requires temporary protection against both secured and unsecured creditors. Each of these remedies is discussed in more detail below. suspension of payments. the Insolvency Law.” a statement of the debtor’s assets and liabilities. Effects of a Petition for Suspension of Payments The filing by a debtor of a petition for suspension of payments: i. and/or strategy. except in the ordinary course of the business in which the debtor is engaged. iii. If the required vote is not achieved. Bars ordinary creditors from instituting proceedings in any Philippine court against the debtor. and such 38 . and the Rules of Procedure on Corporate Rehabilitation. Court Proceedings b. 902-A”). on the other hand. then the remedy is to seek corporate rehabilitation. If. and insolvency. the proceeding is terminated and the creditors may enforce their respective credits. and the debtor’s proposed agreement for the suspension of payments. the Court will issue an order that the proposed agreement be carried out. 902-A (“P. The petition must be filed with the Court of the place where the debtor has his/its residence within six months prior to the filing of the petition.1 Proceedings for Solvent Debtors (Individuals or Corporations) Suspension of Payments An individual debtor who possesses sufficient property to cover all of his/its debts but foresees the impossibility of meeting them when they respectively fall due. 2. if the debtor company is no longer capable of or interested in maintaining its business. then the remedy is a suspension of payments. to wit. corporate rehabilitation. The petition for suspension of payments must include a “Schedule of Creditors. it may apply for insolvency and have its assets distributed accordingly among its various creditors. The type of proceeding that applies to a debtor depends on the particular relief sought. The applicable laws are the Civil Code of the Philippines (“Civil Code”).Quisumbing Torres XV. ii. Finally. If what is sought is merely a little financial breathing space. 1. Suspends all pending executions against the debtor’s properties.

The amount of the debts of the debtor is not affected by a suspension of payments. among others. the payment for such debts is delayed. its guarantors and sureties not solidarily liable with the debtor. which prejudice the rights of the creditors. whether for money or otherwise and whether such enforcement is by court action or otherwise. among others: (a) appoints a Rehabilitation Receiver. or disposing in any manner any of its properties except in the ordinary course of business. against the debtor. or association. (d) prohibits the debtor from making any payment of its liabilities outstanding as at the date of filing of the petition. the Court will conduct a hearing on the objection. The petition for rehabilitation must be accompanied by. If the objection is found to be unmeritorious. The petition for rehabilitation must be filed with the Court of the place where the debtor’s principal office is located.the rights which the creditors had against the debtor before the agreement shall re-vest in them. (f) directs the payment in full of all administrative expenses incurred after the issuance of the Stay Order. ii. 39 . 2. The Stay Order applies to both secured and unsecured creditors. fraudulent conveyance of claims for the purpose of obtaining the required majority. which is a corporation. If the required vote isachieved but there is an objection from any of the creditors. However. If the objection is found to be meritorious. issue a “Stay Order” which. the proceeding will terminate. and directs all creditors and interested parties to file their verified comments on or oppositions to the petition before the said initial hearing. If the debtor fails wholly or in part to perform the Court-approved agreement. or any creditor or creditors holding at least 25 percent of such debtor’s total liabilities. it will. (e) prohibits the debtor’s suppliers of goods or services from withholding supply of goods and servic es in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order.Doing Business in the Philippines 2009 agreement shall be binding on all creditors that have been properly summoned and included in the Schedule of Creditors. Objections to the debtor’s proposed agreement The possible grounds for objecting to the proposed agreement are as follows: i. encumbering. in the holding thereof. and (g) sets an initial hearing on the petition. may petition the proper Court to have the debtor placed under rehabilitation. that foresees the impossibility of meeting its debts whe n they respectively fall due. transferring. The Stay Order is effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceeding.2 Corporate Rehabilitation A debtor. Effects of a Petition for Rehabilitation If the Court finds the petition to be sufficient in form and substance. and in the deliberations thereat. iii. defects in the call for the meeting of the creditors. fraudulent connivance between one or more creditors and the debtor to vote in favor of the proposed agreement. a. not later than five days from the filing of the petition. (b) stays the enforcement of all claims. a rehabilitation plan. (c) prohibits the debtor from selling. partnership. the Court will proceed as though no objection had been made. c.

However. 40 . Insolven cy proceedings may be voluntary or involuntary. On motion by a party or on its own. The Court may extend this period only if it appears by compelling evidence that the debtor may successfully be rehabilitated. the Supreme Court of the Philippines ruled that a Stay Order and an approved rehabilitation plan merely suspend the enforcement of the security. the Court may decla re void any transfer of property or any other conveyance. conditions. the Court is satisfied that there is merit in the petition. In a recent decision involving a creditor’s security agreement with a debtor under rehabilitation. d. Effects of an approved rehabilitation plan on prior agreements betweenthe debtor and creditor(s) Contracts and other arrangements between the debtor and its creditors will continue to be effective to the extent that these contracts and other arrangements do not conflict with the approved rehabilitation plan. the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. the Court may revoke the approval thereof on the ground that the same was secured through fraud. the period for approving or disapproving a rehabilitation plan may not exceed 18 months from the date of filing of thepetition. payment. c. in its judgment. it will give due course to the petition and refer the same to the Rehabilitation Receiver. or restrictions as the effective implementation and monitoring of the rehabilitation plan may reasonably require. The Court may impose such terms. or agreement made in violation of the Court’s Stay Order or in violation of the Rules on Corporate Rehabilitation.Quisumbing Torres b. The petition will be dismissed if no rehabilitation plan is approved by the Court upon the lapse of 180 days from the date of the initial hearing. sale. Insolvency Proceedings (Individuals or Corporations) In insolvency proceedings. Clawback provisions Upon motion by a party or on its own. and do not prejudice the status of the secured creditor vis-à-vis the unsecured creditors. or for the protection and preservation of the interests of the creditors should the plan fail. The Court may approve a rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor if. 3. within 90 days from the approval of the rehabilitation plan. the basic premise is that the debtor does not have enough assets/properties to cover his obligations. after the initial hearing on the petition for rehabilit ation. The Rehabilitation Receiver will evaluate the rehabilitation plan and submit his recommendations t o the Court not later than 120 days from the date of the initial hearing. Court proceedings If.

The petition must also allege one or more acts of insolvency. or withdrawn by the petitioners.000 (approx. The filing of the petition is deemed an act of insolvency. Upon the filing of the petition.1 Voluntary Insolvency A debtor owing debts exceeding Ph P1. and effects not exempt from execution for the benefit of the creditors. If the Court finds the petition meritorious. conditioned upon the payment to the debtor of all costs and damages occasioned by the proceedings in insolvency if the petition is dismissed by the Court. The Court will require the debtor to show cause why he/it should not be declared insolvent. partnership or association) for six months preceding the filing of the petition. 3. Court Proceedings The petition for voluntary insolvency must be filed in the Court of the place where the debtor has resided (in case of an individual) or has had its principal office (in case of a corporation. 41 . upon motion. his/its willingness to surrender all his/its property. The petition must be accompanied by a bond. and must be verified by at least three of the petitioners. in such sum as the Court will direct. The Court may. direct the filing of an additional bond when deemed necessary.2 Involuntary Insolvency Three or more creditors whose total credits exceed Ph P1. US $25) may seek a declaration of insolvency against a debtor. The debtor must also include in the petition a schedule of debts and of creditors. the petition may be filed by any officer of the corporation. the Court will issue an order declaring the debtor insolvent. and an inventory of all his/its assets. duly authorized by the board of directors.Doing Business in the Philippines 2009 3.000 (approx. the court will issue an order declaring the debtor insolvent. the debtor’s inability to pay all his/its debts in full. 3. a. The petition m ust allege. a. If the debtor is a corporation.3 Provisions applicable to both voluntary or involuntary insolvency proceedings a. among others. and did not become creditors by assignment within 30 days prior to the filing of the petition. Court Proceedings The petition for involuntary insolvency must be filed in the Court of the place where the debtor resides or has his/its principal place of business. or if the debtor is not declared insolvent. US $25) may seek a declaration of insolvency. The creditors must be Philippine residents whose credits accrued in the Philippines. and an application to be adjudged inso lvent. Effect of Order of Insolvency An Order of Insolvency generally suspends all civil proceedings pending against the debtor. estate.

. b. If the creditor pursues his claim in the insolvency proceeding. Credits that do not enjoy any preference with respect to sp ecific property are satisfied in the order established in Article 2244 of the Civil Code.e.e.Quisumbing Torres All property of the insolvent not exempt by law from execution will be conveyed to an assignee-in-insolvency elected by the creditors. c. The creditor recovers the balance by participating in the pro-rata distribution of the debtor’s estate. at its option.. Rights of secured creditors A creditor whose credit is secured by a mortgage or pledge is allowed. Preference of Credits In an insolvency proceeding. he may recover his credit by participating in the pro-rata distribution of the debtor’s estate. credits secured by a pledge or mortgage) do not enjoy priority among themselves. without special privilege.g. appear in (i) a public instrument ( i. Article 2244 provides for the preference of certain claims and credits which. If the secured creditor opts for foreclosure. or (ii) to pursue his/its claim in the insolvency proceeding together with other creditors. Among the Special Preferred Credits. but will have to relinquish his security and surrender the properties subject of the security to the assignee-in-insolvency. in proportion to the amount of the respective credits. either (i) to foreclose the property subject of such security arrangement (notwithstanding the stay effected by the Order of Insolvency). by releasing or surrendering to the assignee -in-insolvency the properties subject of the pledge or mortgage. certain types of credits enjoy preference with respect to specific movable or immovable properties (“Special Prefer red Credits”). taxes and assessments due upon the property to which the claims relate enjoy absolute preference. 42 . the debtor’s property that is subject of a pledge or mortgage is not included in the debtor’s assets that are assigned to the assignee -in-insolvency for the satisfaction of the debtor’s general creditors. after deducting the value of the property foreclosed. These credits have preference among themselves in the order of priority of the dates of the instruments and of the judgments.. respectively. But the creditor may be admitted in the insolvency proceeding to recover the balance of the debt. All the remaining classes of Special Preferred Credits with respect to specific movable or immovable property (e. such creditor canno t participate in the election of the assignee-in-insolvency. No discharge is granted to a corporation that is declared insolvent. the instrument is notarized) or (ii) a final judgment. but must be paid concurrently and pro rata. By way of exception. i.

mortgage. or delaying the operation of the provisions of the Insolvency Law. or seized on execution. that fact is deemed as prima facie evidence of fraud. or conveyance thereof to anyone with a view to: (i) giving a preference to any creditor or person having a claim against him. 43 . if the pledge. or if such seizure is made under a judgment which the debtor has confessed or offered to allow. seizure . conveyance. if the debtor. transfer. or (iii) defeating the object of. impeding. transfer. Furthermore. any pledge. or transfer of the property is not made in the usual and ordinary course of business of the debtor. sequestered. pledge. mortgage. or makes any pledge. mortgage. In such a case. procures any of his property to be attached. is considered void. sequestration. conveyance. Clawback provisions The assignee-in-insolvency may recover property given as security. sale. Under the Insolvency Law.Doing Business in the Philippines 2009 d. assignment. or in contemplation of insolvency. assignment. sale. being insolvent. sale. assignment. within 30 days before the filing of a petition to be declared insolvent by or against him. assignment. or conveyance is considered void. mortgage. except for a valuable pecuniary consideration made in good faith. or (ii) preventing the property from being distributed ratably among his creditors. the attachment. or the value thereof. sale. or transfer of property made by the insolvent within one month before the filing of a petition in insolvency by or against him. or in any way hindering.

com Quisumbing Torres is a member firm of Baker & McKenzie International. or equivalent. . reference to an “office means an office of any such law firm. a Swiss Verein with member law firms around the world. Net One Center 26th Street corner 3rd Avenue Crescent Park West. reference to a “partner” means a person who is a partner. Similarly.Quisumbing Torres 12th Floor. Metro Manila Philippines 1634 Phone: +63 2 819 4700 Fax: +63 2 816 0080. ©2009 Quisumbing Torres All rights reserved. in such a law firm. 728 7777 QTLaw@bakernet. In accordance with the common terminology used in professional service organizations. Bonifacio Global City Taguig.

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