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PRIMER ON FOREIGN INVESTMENT IN THE PHILIPPINES Here are some frequently asked questions (FAQ) on investing in the Philippines,

such as choosing the right corporate vehicle, the allowed areas of investment, ta incentives, and other key information! "# How does the Philippines define foreign corporations Foreign $orporations has %een defined as one, which owes its e istence to the laws of another state, and generally, has no legal e istence within another state# &ection "'( of the $orporation $ode as one formed, organi)ed, and e isting under any laws other than those of the Philippines and whose laws allow Filipino citi)ens and corporations to do %usiness in the Philippines# '# !hat is the general polic" of the go#ern$ent for foreign in#est$ents *he government recogni)es the pivotal role of private sector investments and, there%y, commits to continuously enhance the %usiness climate# Foreign investments are encouraged to fill in capital gaps, help provide employment, increase production, and provide a %ase for the overall development of the economy# (# %an a foreign co$pan" in#est in the Philippines +es# *he Foreign ,nvestment Act (-#A# ./0', "11", amended %y -#A# 2".1, "113) li%erali)ed the entry of foreign investment into the Philippines# 4nder the F,A, foreign investors are generally treated like their domestic counterparts and must register with the &ecurities and 5 change $ommission (&5$) (in the case of a corporation or partnership) or with the 6epartment of *rade and ,ndustry7s 8ureau of *rade -egulation and $onsumer Protection (in the case of a sole proprietorship)# 0# !hat is the percentage of foreign e&'it" allowed 'nder the FI( 9ith the li%erali)ation of the foreign investment law, "//: foreign equity may %e allowed in all areas of investment e cept those reserved for Filipinos %y mandate of the Philippine $onstitution and e isting laws# ;# !hat are those )'sinesses with foreign in#est$ent restrictions 9ithin the "11" Foreign ,nvestment Act (F,A) there are two negative lists, also known as the <Foreign ,nvestment =egative >ist?, which defines the foreign investments, which are limited or restricted %y the $onstitution and specific laws# =egative >ist A @ =egative >ist 8# 3# !hat is the co#erage of Negati#e List (

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,n =egative >ist A, foreign ownership is limited %y mandate of the $onstitution and specific laws# *hese are! No Foreign E&'it" "# Aass Aedia e cept recording '# Practice of professions (# -etail trade enterprises with paidBup capital of not less than 4&C ',;//,///#// 0# $ooperatives ;# Private &ecurity Agencies 3# &mallBscale Aining .# 4tili)ation of Aarine -esources in archipelagic waters, territorial sea, and e clusive economic )one 2# Dwnership, operation and management of cockpits 1# Aanufacture, repair, stockpiling andEor distri%ution of nuclear weapons "/# Aanufacture, repair, stockpiling andEor distri%ution of %iological, chemical and radiological weapons and antiBpersonal mines ""# Aanufacture of firecrackers and other pyrotechnic devices *p to Twent" Percent +,-./ Foreign E&'it" "'# Private radio communication network *p to Twent"0Fi#e Percent +,1./ Foreign E&'it" "(# Private recruitment, whether for local or overseas employment "0# $ontracts for the construction and repair of locallyBfunded pu%lic works, e cept! a# infrastructureEdevelopment proFects covered in -A .."2G and%# proFects which are foreign funded or assisted and required to undergo international competitive %idding (&ec# '(a) of -A .."2) ";# $ontracts for construction of defenseBrelated structure *p to Thirt" Percent +2-./ Foreign E&'it" "3# Advertising *p to Fort" Percent +3-./ Foreign E&'it" ".# 5 ploration, development and utili)ation of natural resources "2# Dwnership of Private >ands "1# Dperation and management of pu%lic utilities '/# DwnershipEesta%lishment and administration of educational institutions '"# $ulture, production, milling, processing, trading e cepting retailing, of rice and corn and acquiring, %y %arter, purchase or otherwise, rice and corn and the %yBproducts thereof ''# $ontracts for the supply of materials, goods and commodities to governmentBowned or controlled corporation, company, agency or Aunicipal $orporation '(# ProFect Proponent and facility Dperator of a 8D* proFect requiring a pu%lic utilities franchise '0# Dperation of deepBsea commercial fishing vessels ';# AdFustment $ompanies

( '3# Dwnership of condominium units where the common areas in the condominium proFects are coBowned %y the owners of the separate units or owned %y a corporation *p to Si4t" Percent +5-./ Foreign E&'it" '.# Financing companies regulated %y the &ecurities and 5 change $ommission '2# ,nvestment housed regulated %y the &5$ .# !hat is the co#erage of Negati#e List 6

,n =egative >ist 8, foreign ownership is limited for reason of security, defense, risk to health and morals and protection of smallBandBmediumBscale enterprises# *hese are! *p to Fort" Percent +3- ./ Foreign E&'it" "# Aanufacture, repair, storage andEor distri%ution of products andEor ingredients requiring Philippine =ational Police (P=P) clearance! a# Firearms (handguns to shotguns), parts of firearms and ammunition therefore, instruments or implements used or intended to %e used in the manufacture of firearms %# Hunpowder c# 6ynamite d# 8lasting supplies e# ,ngredients used in making e plosives! f# *elescopic sight, sniper scope and other similar devices '# Aanufacture, repair, storage andEor distri%ution of products requiring 6epartment of =ational 6efense (6=6) clearanceG a# Huns and ammunition for warfare %# Ailitary ordnance and parts thereof (e#g#, torpedoes, depth charges, %om%s, grenades, missiles) c# Hunnery, %om%ing and fire control systems and components d# Huided missilesEmissile systems and components e# *actical aircraft (fi ed and rotary Bwinged), parts and components thereof f# &pace vehicles and component systems g# $om%at vessels (air# land and naval) and au iliaries h# 9eapons repair and maintenance equipment i# Ailitary communications equipment F# =ight vision equipment k# &timulated coherent radiation devices, components and accessories l# Armament training devices m# Dthers as may %e determined %y the &ecretary of the 6=6 (# Aanufacture and distri%ution of dangerous drugs 0# &auna and steam %athhouses, massage clinics and other like activities regulated %y law %ecause of risks posed to pu%lic health and morals ;# All forms of gam%ling, e#g# race track operation 3# 6omestic market enterprises with paidBin equity capital of less than the equivalent of

0 4&C'//,/// .# 6omestic market enterprises, which involve advanced technology or employ at least fifty (;/) direct employees with paidBinBequity capital of less than the equivalent of 4&C"//,/// 2# !hat re&'ire$ents $'st )e co$plied with )efore a foreign corporation can do )'siness in the Philippines A foreign corporation must first secure the necessary licenses or registrations from the appropriate government %odies# ,n the case of corporations or partnerships, the necessary incorporation papers from the &5$ must first %e o%tained# ,n the case of single proprietorship, registration from the 8ureau of *rade -egulation @ $onsumer Protection of the 6epartment of *rade and ,ndustry must %e secured# 1# !hat are the re&'isites for o)taining a license to do )'siness in the Philippines A foreign corporation shall %e granted a license to transact %usiness %y filing a verified application with the &5$ setting forth specifically required data, including certified copies of its articles of incorporation and %yBlaws# "/# Is there a need for the foreign corporation to appoint its local agent in the Philippines +es# Among the things to %e stated in the verified application are the name and address of the foreign corporation7s resident agent authori)ed to accept summons and process in all legal proceedings and, pending the esta%lishment of a local office, all notices affecting the corporation# ""# How will the foreign corporation appoint its Philippine local agent

A written power of attorney must %e filed %y the foreign corporation with the &5$ designating some person who must %e a resident of the Philippines, on whom service of summons and other legal processes may %e served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall %e admitted and held as valid as if served upon the duly authori)ed officers of the foreign corporation at its home office# 7-8 Is there a need for the foreign corporation to e4ec'te an SE% regarding ser#ice of s'$$ons agree$ent with the

+es# ,n consideration of its %eing granted a license to do %usiness in the Philippines, the foreign corporation shall e ecute and file with the &5$ an agreement or stipulation agreeing that if at any time said corporation shall cease to transact %usiness in the

; Philippines or shall %e without any resident agent in the Philippines on whom any summons or other legal processes may %e served, then in any action or proceeding arising out of any transaction or %usiness which occurred in the Philippines, service of any summons or other legal processes may %e made upon the &5$ and that such service shall have the same force and effect as if its is made upon the duly authori)ed officers of the foreign corporation at its home office# 778 !hat is the effect of fail're to appoint or $aintain a local agent *he failure to appoint or maintain a resident agent in the Philippines or failure, after change of its resident agent or his address, to su%mit to the &5$ a statement of such change, are grounds for revocation of a license granted to a foreign corporation to do %usiness# 7,8 Is there an" Reciprocit" %o$pliance

+es# Attached to the application shall also %e a duly e ecuted certificate under oath %y the authori)ed official or officials of the Furisdiction of incorporation of the foreign corporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citi)ens and corporation to do %usiness therein# 728 Is there a need to deposit Sec'rities

+es# 9ithin si ty (3/) days from issuance of the license to do %usiness, such foreign corporation shall deposit with the &5$, for the %enefit of its present and future creditors, Philippine securities in the actual market value of at least Php"//,///#//, su%Fect to further deposit of additional securities every si months after each fiscal year equivalent in actual market value to two percent (':) of the amount %y which the foreign corporation7s gross income for that fiscal year e ceeds Php;,///,///#//# 738 !hat is the effect of )eing iss'ed a license to do )'siness

9hen a foreign corporation is issued the license to do %usiness in the Philippines, it may commence to transact its %usiness in the Philippines and continue to do so for as long as it retain its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended, or annulled# 718 !hat are the conse&'ences of not o)taining a license to do )'siness

A foreign corporation doing %usiness in the Philippines without first o%taining the license to do %usiness (a) shall not %e permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the PhilippinesG (%) %ut such foreign corporation may %e sued or proceeded against %efore Philippine courts or administrative tri%unals on any valid cause of action recogni)ed under Philippine laws# 758 (re there an" ta4 incenti#es for foreign corporations in#esting in the

3 Philippines +es# A corporation investing in the Philippines may avail of ta %reaks and incentives %y registering with the 8D, I 8oard of ,nvestments# *he company must operate a %usiness, which has %een recogni)ed as a preferred area of investment in the Philippines ,nvestment Priority Plan (,PP)# 798 %an )'siness acti#ities not co#ered )" the IPP a#ail of ta4 incenti#es +es, provided the following requirements are met! "# at least ;/: of production E service is for e port, if FilipinoBowned enterprise,G and '# at least ./: of production E service is for e port, if maFority foreignBowned enterprise (more than 0/: foreign equity), 7:8 !hat are the a#aila)le fiscal incenti#es for foreign corporations operating )'sinesses co#ered )" the IPP 7;8 ,ncome *a Holiday 5 emption from *a es and 6uties on ,mported &pare Parts 5 emption from 9harfage 6ues and 5 port *a , 6uty, ,mpost and Fees *a 5 emption on 8reeding&tocks and Henetic Aaterials *a $redits Additional 6eductions from *a a%le ,ncome# !hat are the ad#antages of an Inco$e Ta4 Holida"

$ompanies registered with the 8D, are eligi%le for income ta holidays, which range form ( I 2 years# 0 years for new proFects without pioneer status and 3 years for proFects with pioneer status# A "//: foreign owned corporation may %e entitled to incentives if their %usiness has %een categori)ed as a pioneer proFect and at least ./: of production E service is e ported or the proFect is in one of the lessBdeveloped areas mentioned in the ,PP# $ompanies not e porting "//: of their production E services are o%liged to have 3/: Filipino ownership within a period of (/ years from time of registration with the 8D,# Foreign ownership of corporations in nonBpioneer proFects is limited to 0/: e cept if the company e ports more than ./: of its production E service# ,-8 How does a foreign corporation appl" for 6OI incenti#es

&u%mission of a notari)ed application specifying the nature of the proFects, its inclusion in the ,PP or not, percentage of production for e port, the investors details and a ; year feasi%ility study#

. ,78 !hat are other ta4 incenti#e sche$es a#aila)le for foreign corporations

$ompanies that register and locate within an area that is under the Philippine 5conomic Jone Authority (P5JA) are entitled to various ta incentives and other advantages# =D*5! 4sually, enterprises located in a P5JA approved eco)one are required to e port "//: of their production# ,,8 !hat is the percentage of foreign ownership allowed in enterprises located in a PE<( appro#ed eco=one "//: foreign ownership is allowed e cept in activities, which are limited %y the Foreign ,nvestment =egative >ist# ,28 !hat are the incenti#es pro#ided )" PE<(

,ncome *a Holiday (,*H) or e emption from corporate income ta for 0 years, e tenda%le to a ma imum of 2 yearsG after which a special ;: ta on gross income (sales less direct costs) shall %e paid in lieu of all national and local ta es# *he income ta holiday is not availa%le for locators in the &u%ic 8ay Aetropolitan Authority (&8AA) and $lark Freeport JoneG they are entitled to the special ;: ta on gross income as descri%ed a%ove# 5 emption from duties and ta es on imported capital equipment, spare parts, supplies, and raw materials# *a credits will %e issued on %reeding stocks or genetic materials when they are sourced locally# ,38 !hat are the other a#aila)le incenti#es

B P5JA may grant the right to the locator on a caseBtoBcase %asis the sale of up to (/: of production to the domestic market# B 5 emption from wharfage dues and e port ta es, imposts and fees# B Permanent resident status for foreign investors and immediate family mem%ers# B 5mployment of foreign nationals# B &implified import and e port procedures# ,18 %an foreign corporations ac&'ire or own land in the Philippines

+es, provided the following requirements are met! (a) it must %e a private land, which means any land of private ownershipG and (%) the foreign equity in the corporation must not e ceed forty percent (0/:)# ,58 !hat will happen if foreign ownership e4ceeds fort" percent +3-./

*he effect would %e that the foreign corporation would lose its capacity to hold the private land# *hey may, however, %e granted temporary rights such as a lease contract which is not prohi%ited %y the $onstitution#

,98 !hat are the other e4ceptions to the ownership of land )" foreign in#estors and corporations a# Acquisition through hereditary successionG %# Purchase %y a former naturalB%orn Filipino citi)en pursuant to the 6ual $iti)enship >aw which states that a former Filipino reBacquiring his Filipino $iti)enship shall %e deemed not to have lost his Philippine citi)enship, thus ena%ling them to enFoy all the rights and privileges of a FilipinoG c# ,f a former naturalB%orn Filipino who has %ecome a naturali)ed citi)en of another state opts not to reBacquire Filipino citi)enship according to the 6ual $iti)enship Act, he may nonetheless own land %ut limited to the following according to 8P "2; and -A 2".1)! i# For residential use! "# 4p to ",/// square meters of residential land '# 4p to " hectare of agricultural land ii# For %usiness or commercial use "# 4p to ;,/// square meters of ur%an land '# 4p to ( hectares of rural land d# Purchase of not more than 0/: interest in a condominium proFectG and e# Dwnership through Filipinos who are married to aliens who retain their Filipino citi)enship ,:8 land %an foreign corporations own real properties in the Philippines other than

+es# Foreign corporations can acquire other immova%le or real properties such as %uildings and other improvements on the land# ,;8 (re foreigners and foreign corporations allowed to lease lands in the Philippines +es# Foreign investors investing in the Philippines can now lease private lands up to .; years# 8ased on -#A# =o# .3;', entitled <In#estor>s Lease (ct?, lease agreements may %e entered into with Filipino landowners# >ease period is ;/ years, renewa%le once for another '; years# For tourism proFects, the lease shall %e limited to proFects with an

1 investment of not less than 4&C;A, ./: of which shall %e infused in said proFect within ( years from signing of the lease contract# 2-8 (re ar)itration cla'ses accepted in the Philippines

+es# $onsistent with 4=$,*-A> Aodel >aw, the Alternative 6ispute -esolution (A6-) Act of '//0 was recently enacted# *he >aw promotes the use of different modes of A6for the speedy and impartial dispensation of Fustice# *he A6- Act e pressly adopted under &ection "1 thereof the 4=$,*-A> Aodel >aw as the law governing international commercial ar%itration in the Philippines# Ein short, the A6- Act has now opened the window for the Philippines to %e a venue for international commercial ar%itration and mediation# 278 %an foreign corporations participate in )idding for pro?ects )" the Philippine Go#ern$ent +es# 4nder the <Hovernment Procurement -eform Act of '//(?, all procurement shall %e done through competitive %idding, a method of procurement which is open to participation %y any interested party#

(*his article was is a product of Jam%rano and Hru%a >aw Dffices (www#)glaw#com) of Aanila, Philippines and is not to %e construed as legal advice or create an attorneyBclient relationship# For inquiries on this article, please email Kack Advincula, a partner of Jam%rano and Hru%a, at apadvinculaL)glaw#com)