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To : Atty.

Stephen Yu
From : Marjorie C. Sabijon
Re : Corporations and Taxation Concepts

A. Distinctions Between a Subsidiary and a Branch Office of Foreign Corporations

Subsidiary Branch
As to legal Merely an extension of the
personality and It has an entity separate and foreign head office.
attribution of
income:
distinct from its stockholders.
Because of the single entity
It can deal with its foreign parent concept, the transactions and
company, provided that the income of the Philippine branch
transactions are at arm's length. may be attributed to the foreign
head office.
There would be no attribution of
the income of the subsidiary to
the foreign parent company
because of the separate entity
concept.

Creation of
permanent Generally not treated as a It is a permanent establishment;
Establishment:
permanent establishment of the hence, treated as a resident
foreign parent company, foreign corporation subject to
provided that the transactions Philippine income tax on net
between them are at arm's income from sources within the
length. Philippines.

Basis of Income
Taxation Taxable on worldwide income at Taxable on its income from
30% of its net taxable income. sources within the Philippines at
taxable on its income from 30% of its net taxable income.
sources within the Philippines at
30% of its net. There are exempt branches (e.g.,
regional area headquarters and
representative offices) and
special branches subject to
preferential tax rates of 10%.

Stockholder’s extent
of liability The stockholder of a subsidiary is The foreign head office is liable
liable only to the extent of his/its for the liabilities of the Philippine
subscription in such corporation. branch; hence, the assets of the
head office may still be reached
Shares of stock of the by creditors of the Philippine
corporation are issued to its branch.
stockholders.
No shares of stock are issued by
the Philippine branch to its head
office.

B. Representative Office

A representative office in the Philippines is foreign-owned corporation, organized and existing under
foreign laws. It cannot derive income within the Philippines and is fully financed by the foreign
corporation. Its main purpose is to deal directly with the clients of the parent company to conduct
information dissemination, setup communication centers, and market company products. It may be
used to provide customer service and support to the company and its products.

A Philippine representative office is a cost center and is not allowed to earn income in the country, thus,
exempted from 30% income tax and 12% value added tax. It is, however, subject to withholding taxes on
its income payments and compensation, and could be passed on 12% value added tax on its purchases
from VAT-registered suppliers.

To support its operations in the Philippines, it is required an initial capitalization of US$30,000.00 to be


inwardly remitted to the Philippines. It is likewise required to appoint a resident agent on whom
summons and other legal processes against the same may be served in all actions or other legal
proceedings against the Company.

C. Distinctions Between Regional or Area Headquarters and Regional Operating Headquarters