Doing Business in the Philippines

2010

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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 2010.

Table of Contents
Introduction.............................................................................................................................................1 The Philippines ..........................................................................................................................1 Quisumbing Torres ....................................................................................................................2 I. Foreign Investments in the Philippines......................................................................................4 1. 2. 3. 4. 5. Extent of Foreign Equity...............................................................................................4 Anti-Dummy Law.........................................................................................................6 Forms of Investment Vehicle........................................................................................6 Domestic Corporation v. Branch ..................................................................................7 Other Types of Corporate Vehicle ................................................................................7 5.1 Representative Office ......................................................................................7 5.2 Regional or Area Headquarters........................................................................8 5.3 Regional Operating Headquarters (“ROHQ”) .................................................8 5.4 Regional Warehouses ......................................................................................9 5.5 Offshore Banking Unit (“OBU”) .....................................................................9 Post-Registration Requirements....................................................................................9 Tax Treaties ................................................................................................................10 National Taxes ............................................................................................................10 2.1 Corporate Income Tax ...................................................................................10 2.2 Individual Income Tax...................................................................................11 2.3 Withholding of Taxes ....................................................................................11 2.4 Fringe Benefits Tax .......................................................................................11 2.5 Business Taxes...............................................................................................12 2.6 Other Imposts of the National Government...................................................13 Local and Real Property Taxes ...................................................................................14 Purchase and Sale of Foreign Exchange.....................................................................14 Foreign Trade Transactions ........................................................................................14 Non-Trade Transactions .............................................................................................14 3.1 Foreign Inward Investments ..........................................................................15 3.2 Outward Investments .....................................................................................15 3.3 Foreign Loans and Guarantees ......................................................................15 3.4 Other Financing Schemes/Arrangements ......................................................15 Enterprises Registered Under the Omnibus Investments Code (“OIC”) ....................15 1.1 Tax Incentives................................................................................................18 1.2 Non-tax Incentives.........................................................................................19 1.3 Additional Incentives.....................................................................................19 Enterprises Registered With the Philippine Economic Zone Authority ("PEZA") ....19 2.1 Tax and Other Incentives...............................................................................20 Enterprises Registered With the Subic Bay Metropolitan Authority (“SBMA”) .......21 Enterprises Located in the Clark Special Economic Zone..........................................22

6. II. 1. 2.

Taxation ...................................................................................................................................10

3. III. 1. 2. 3.

Foreign Exchange Regulations ................................................................................................14

IV.

Incentives Under Special Registrations ...................................................................................15 1.

2. 3. 4. V. VI.

Lease of Private Land ..............................................................................................................22 Environmental Regulation .......................................................................................................22 Specific Areas of Regulation ...................................................................................................23

VII. VIII. IX. X.

Intellectual Property Protection ...............................................................................................24 Border Control Measures.........................................................................................................24 Technology Transfer Arrangements ........................................................................................25 Labor Law................................................................................................................................26 1. Labor Standards ..........................................................................................................26 1.1 Work Hours ...................................................................................................26 1.2 Wages ............................................................................................................26 1.3 Other Compulsory Benefits ...........................................................................26 1.4 Rule on Non-Diminution of Employment Benefits .......................................27 Labor Relations...........................................................................................................27 Welfare Legislation.....................................................................................................27 Classification of Employment.....................................................................................28 Termination of Employment.......................................................................................28 Contract of Employment.............................................................................................28 Work/Employment Requirements ..............................................................................29 1.1 Multiple Entry Special Visa...........................................................................29 1.2 Special Non-Immigrant or 47(a)(2) Visa.......................................................29 1.3 Pre-Arranged Employment or 9(g) Visa........................................................30 1.4 Treaty Trader’s or Investor’s Visa.................................................................30 1.5 Subic Free Port Zone Work Visa ...................................................................30 1.6 Clark Special Economic Zone Work Visa .....................................................30 Special Resident Visas................................................................................................30 2.1 Special Resident Retiree’s Visa (“SRRV”) ...................................................30 2.2 Special Investor’s Resident Visa (“SIRV”) ...................................................31 2.3 SIRV for Investors in Tourist-Related Projects and Tourist Establishments ...............................................................................................31 2.4 Subic Free Port Zone Residency Visas for Retirees ......................................31 Special Visa for Employment Generation (“SVEG”).................................................31 Banking.......................................................................................................................31 Financing Companies .................................................................................................32 Securitization Act of 2004 ..........................................................................................32 Special Purpose Vehicle Act of 2002 .........................................................................33

2. 3. 4. 5. 6. XI. 1.

Immigration .............................................................................................................................29

2.

3. XII. 1. 2. 3. 4. XIII. XIV.

Finance-Related Regulations ...................................................................................................31

Insurance-Related Regulations ................................................................................................33 Entry of Foreign Insurance Companies ...................................................................................33 Arbitration in the Philippines...................................................................................................33 1. Advantages of Arbitration Compared with Court Litigation ......................................34 1.1 Speed..............................................................................................................34 1.2 Flexibility of the Rules ..................................................................................34 1.3 Choice of Arbitrators .....................................................................................34 1.4 Finality of the Award .....................................................................................34 1.5 Arbitrators as Experts ....................................................................................34 1.6 Confidentiality ...............................................................................................34 Definition of Arbitration .............................................................................................34 Arbitration as Contract................................................................................................34 Disputes that may be Referred to Arbitration .............................................................35

2. 3. 4.

................................................ 1.............................................................................36 7..............................36 7.................................... 6.............37 International Arbitration ..5...................................38 The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”)....................... XV........... 10............................5 Grounds for vacating/setting aside a domestic arbitral award ..........................................................36 7...........48 Insolvency in the Philippines ........................47 3...........36 7..1 Voluntary Insolvency... 9.............................. ...........................36 7......5 Recognition and enforcement of international arbitral award ..................................................40 Overview and Introduction to the Jurisdiction/Applicable Legislation ....................................................35 Domestic Arbitration .........38 Construction Industry Arbitration Commission..............1 Suspension of Payments .........................3 Interim measures.....................................................................................................................37 8........37 8. Disputes that are not Arbitrable ..........................47 3.............................................................................................. 2.44 3......................................................6 Confirmation of domestic arbitral award .....................................................................................................................................................................47 3......3 Provisions Applicable to Both Voluntary or Involuntary Insolvency Proceedings....................2 Form.................36 7...........3 Qualifications of an arbitrator........................1 Form of arbitration agreement ..........................................................2 Third parties............................35 Definition of International Arbitration and Domestic Arbitration........44 Proceedings for Solvent Debtors (Individuals or Corporations)...........................................2 Corporate Rehabilitation.......... 7..............44 2............................45 Insolvency Proceedings (Individuals or Corporations).......................................................................................2 Involuntary Insolvency ................4 Interim measures......................37 8................37 8..............................................................................37 8.....................1 Interpretation of the UNCITRAL Model Law (“Model Law”) . 8......................44 2.........................................4 Grounds for setting aside/vacating an international arbitral award ...........................................................................................

resorts. the Philippines is emerging from the effects of the global financial crisis. and retirement villages Production of healthcare and wellness products to promote medical tourism IT-enabled business process outsourcing industry Mining. Coupled with expected low interest rates to stimulate investment. The robust inflow of overseas remittances is projected to propel this increase in private consumption.tourism. the Philippines stands firm as the ideal investment destination in the Southeast Asia Region. and exploration and development of mineral resources Public infrastructure construction and transportation projects Waste treatment and recycling facilities Abundant country resources support these investments:         A vibrant democracy advocating liberalization and deregulation of industries An open economy welcoming 100 percent foreign ownership in many sectors Special economic zones and free ports offering preferential tax incentives Affordable wages contributing to business cost savings Expanded telecommunication infrastructure facilitating global operations Diverse transportation modes supporting the flow of goods across the islands A highly trainable pool of English-speaking workforce staffing the organization Remarkable lifestyle amenities replicating the expatriate’s home environment Sources: Business Monitor Report Philippines Business Forecast Q1 2010 Official Website of the Department of Tourism . is expected to drive economic growth.gov. which accounts for over 70 percent of GDP. Private consumption. investment opportunities abound:         Alternative power generation using environment-friendly technologies Build-Operate-Transfer projects and joint ventures with the government Development of hotels.Doing Business in the Philippines 2010 Introduction The Philippines With an economy that is expected to rebound in 2010.http://www.ph/Pages/PhilippinesAddedValue. Against this economic backdrop.aspx Quisumbing Torres 1 . quarrying.

we retain a strong team of lawyers who specialize in different industries to assist companies in their commercial operations. Environment and Climate Change Financial Services Hotels. and Tourism Information Technology Insurance Manufacturing and Wholesale          Media and Entertainment Mining and Metals Oil. These focus areas include:           Alcohol and Tobacco. Malaysia. Established in 1963 as Collas & Guerrero. Quisumbing Torres lawyers provide clients with a full range of legal services covering these practices:       Banking & Finance Corporate and Commercial Intellectual Property Employment Dispute Resolution Tax Our lawyers stay attuned to the latest trends and understand the challenges in our clients’ industries. and Asia Pacific entities. Indonesia.Quisumbing Torres Quisumbing Torres is the Philippine-based member firm of Baker & McKenzie International. Taiwan. France. Germany. including Australia. Switzerland. REITs. and Petrochemicals Outsourcing Pharmaceuticals and Healthcare Real Estate. Singapore. and the United States. Canada. Our client base currently consists of Philippine. Quisumbing Torres has helped foreign and domestic companies succeed in the Philippines. Food and Beverage Chemicals & Plastics Construction and Infrastructure Consumer Goods and Retail Energy and Utilities. Aviation. we became Quisumbing Torres. Hong Kong. and Automotive For nearly five decades. Quisumbing Torres 2 . it later became known as Guerrero & Torres then Quisumbing Torres & Evangelista. European. India. Aerospace and Defense. In 1998. the world’s largest global legal network. Gas. The firm represents clients doing business abroad and clients from other countries doing business in the Philippines. American. Japan. Resorts. China. We keep abreast with upcoming legislation to provide legal advice that addresses our client’s strategies and business issues. To maintain a proactive role in the growth of priority business segments. Brunei. Korea. and Securities Services Telecommunications Transportation and Logistics. the United Kingdom.

Together with the other member firms of Baker & McKenzie in Asia. clean air. the United Kingdom. media and communications. Quisumbing Torres 3 . mining. Indonesia. Virginia. Many of our lawyers are also admitted to practice in other jurisdictions. Thailand. Quisumbing Torres in Manila provides a convenient coordination point for regional and global work. Singapore. Europe. Some have helped draft significant business laws and regulations. oil and gas.Our lawyers are knowledgeable in the relevant business. hazardous waste. and Washington D. such as the States of California. and the United States. social. New York. and tax. Japan.C. including those dealing with labor. Hong Kong. legal. and the Americas. A number of our lawyers have practiced or have had legal exposure in Australia. intellectual property. and political issues. the Middle East.

it is the policy of the State to attract. Foreigners may hold interests in corporations. the right to remittance of earnings. or protection of local small. A non-Philippine national (please see the definition of “Philippine national” below) may invest in a domestic enterprise or an export enterprise (as these terms are defined below) in the Philippines to the extent of 100 percent of the domestic enterprise’s or the export enterprise’s capital. If the non-Philippine national is investing in a domestic market enterprise. partnerships. b. provided that such corporations. Except with respect to activities where restrictions on foreign equity are imposed under the Philippine Constitution or statutes. or service (including tourism) enterprise that exports 60 percent or more of its output. the President of the Philippines may amend the Negative List. It is investing in a domestic market enterprise or an export enterprise that is engaged in an activity that is not on the Negative List. promote. 4 Quisumbing Torres . As stated in the FIA. risk to health and morals. A domestic market enterprise is an enterprise which produces goods for sale or renders services to the domestic market entirely or. List B contains areas of investment where foreign ownership is limited for reasons of security. The Negative List has two component lists: List A and List B. if exporting a portion of its output. 7042. The c. Philippine laws expressly recognize various rights of foreign investors in the Philippines. the domestic enterprise must have a paid-in capital of the peso equivalent of at least US$200. defense. fails to consistently export at least 60 percent thereof. including the right to repatriation of investments. provided that the following conditions are complied with: a. otherwise known as the Foreign Investments Act of 1991 (“FIA”). 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. To encourage foreign investments.000 (an export enterprise is not required to comply with this minimum capitalization requirement). and freedom from expropriation (except for public use or in the interest of national welfare or defense and upon payment of just compensation). An export enterprise is a manufacturer. and welcome productive investments from foreign individuals. 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.and medium-sized enterprises. Such amendments may not be made more often than once every two years. 1. List A contains areas of investment where foreign ownership is limited by the mandate of the Philippine Constitution or by specific laws. processor. as amended. A new Negative List is prospective in application and will not affect foreign investment that already exists on the date of its publication. 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 governments. partnerships. and other entities in the Philippines. 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. including their political subdivisions. corporations. in activities which 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. or a trader that purchases products domestically and exports 60 percent or more of such purchases. The country or state of the non-Philippine national must also allow Filipino citizens and corporations to do business therein. partnerships.I.

establishment. or a trustee of funds for pension or other employee retirement or separation benefits where the trustee is a Philippine national and at least 60 percent of the fund will accrue to the benefit of Philippine nationals. except recording Except in cases prescribed by law. and administration of educational institutions Quisumbing Torres 5 . including. and agriculture Retail trade enterprises with a paid-up capital of less than US$2. whether for local or overseas employment Contracts for the construction and repair of locally funded public works. engineering. the practice of all professions. or (ii) if it employs at least 50 direct employees as certified by the appropriate regional office of the Department of Labor and Employment (“DOLE”). at least 60 percent of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least 60 percent of the members of the Board of Directors must be citizens of the Philippines. but not limited to.5 million Private security agencies Small-scale mining      Up to 25 percent Foreign Equity Private recruitment companies. Where a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise. or a corporation organized under the laws of the Philippines of which at least 60 percent of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. except infrastructure/development projects covered by RA 7718 and projects that are foreign-funded or assisted and required to undergo international competitive bidding Contracts for the construction of defense-related structures       Up to 30 percent Foreign Equity Advertising Up to 40 percent Foreign Equity Exploration. development. or a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100 percent of the capital stock outstanding and entitled to vote is wholly owned by Filipinos. The FIA defines the term “Philippine national” as a citizen of the Philippines. 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. architecture. accountancy. customs brokerage.Doing Business in the Philippines 2010 capitalization requirements of a domestic market enterprise may be reduced to the peso equivalent of US$100. or a domestic partnership or association wholly owned by citizens of the Philippines. geology. and utilization of natural resources Ownership of private lands Operation and management of public utilities Ownership.000 (i) if its activity involves advanced technology as determined and certified by the Department of Science and Technology. medicine. in order that the corporation shall be considered a Philippine national.

trading (except retailing). operation. The foregoing is a non-exhaustive enumeration of the sectors/activities that are subject to foreign equity limitations.      Contracts for the supply of materials.e. is prohibited from (a) permitting or allowing the use. or laborer. a person who has in his name or under his control a right. or business.. or association not possessing the qualifications prescribed by law. whether as an officer. Under the rules of the PCAB. administration. milling. privilege. corporation. foreign nationals may serve as members of the board or governing body of corporations engaged in partially nationalized activities in a number proportionate to their actual and allowable equity in the company. the exercise or enjoyment of which is expressly reserved by law to Philippine citizens or to corporations or associations where at least 60 percent of the capital is owned by such citizens. or business. 2. franchise. and acquisition of rice and corn and the byproducts thereof Acting as project proponent and facility operator of a build-operate-transfer 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 Domestic market enterprises (i. privilege. However. with or without remuneration (except technical personnel whose employment may be specifically authorized by the Secretary of Justice). franchise. 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”). property. processing. goods. 3. agencies. property. employee. or enjoyment of such right. and commodities to government-owned or controlled corporations. property. or (b) in any manner permitting or allowing any person not so qualified to intervene in the management. or business by a person. and corporation (domestic or foreign). Anti-Dummy Law The Philippines has an Anti-Dummy Law that imposes criminal and civil penalties on persons violating foreign equity limitations. Forms of Investment Vehicle There are three general forms of business organizations in the Philippines: sole proprietorship. partnership. franchise. entities that do not export 60 percent or more of their output) with a paid-in equity capital of less than the equivalent of US$200. privilege. companies. or municipal corporations Culture. or control of such right. 6 Quisumbing Torres . production. Under the Anti-Dummy Law. exploitation.

for the contracts which may be entered into in the name and for the account of the partnership. the extent of liability of the parent company/head office. taxation. A branch and a representative office of a foreign corporation are mere extensions of their head offices. 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. The liability of the sole proprietor is unlimited. and foreign corporations to transact business in the Philippines as a branch or a representative office.000 for domestic market enterprises whose activities involve advanced technology or which employ at least 50 direct employees. A representative office may not derive income in the Philippines and is fully subsidized by its head office. Quisumbing Torres 7 . with the intention of dividing the profits among themselves. with all their property and after all the partnership assets have been exhausted. the corporation is generally the most preferred vehicle for investments in the Philippines among the various forms of business organizations. A domestic corporation may be a joint venture or a wholly owned subsidiary. among others. Foreign investors that 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. The partnership has a juridical personality separate and distinct from that of each of the partners. 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. among others. or industry to a common fund. These two types of corporate vehicles have their relative advantages and disadvantages relating to.Doing Business in the Philippines 2010 A sole proprietorship is a business owned and operated by a single natural person. and the administrative costs of maintaining the same. The paid-in capital requirement is reduced to US$100. Domestic Corporation v. Branch Assuming that the proposed activity is not subject to any foreign equity limitation.1 Other Types of Corporate Vehicle Representative Office A representative office may be established to deal directly with the clients of its head office who are in the Philippines and to undertake information dissemination and promotion of the company’s products as well as quality control only. a foreign investor may set up a domestic corporation or a branch of a foreign corporation in the Philippines. and the personality of the business enterprise is not distinct and separate from that of the owner.000. 4. For reasons relating to the exercise of management powers and the extent of liability. A partnership is created by virtue of a contract whereby two or more persons bind themselves to contribute money. Philippine law allows foreign investors to establish and register a domestic corporation. generally. property. 5. Generally. a foreign investor will have to set up a domestic corporation with a Philippine national as a joint venture partner. If the proposed activity is subject to foreign equity limitations. Subject to nationality requirements pertaining to the intended activity. However. A foreign investor may also invest as a limited or general partner in a partnership. 5. all partners are liable pro rata.

h. subsidiaries. affiliates. 5. g. neither may it solicit or market goods or services.000 and thereafter US$50. value-added tax. The regional headquarters is not subject to income tax. k. its head office or parent company must initially remit into the Philippines at least US$50. To fund its operations in the Philippines. communications. or branches in the Philippines or in the Asia Pacific Region and other foreign markets. It enjoys tax.000 annually. A ROHQ is allowed to derive income in the Philippines by performing any of the following qualifying services: a.3 Regional Operating Headquarters (“ROHQ”) A multinational company may establish a ROHQ in the Philippines to service its own affiliates. or affiliates in the Asia Pacific Region and other foreign markets. c. subsidiaries. 5.2 Regional or Area Headquarters A multinational company engaged in international trade may establish a regional or area headquarters in the Philippines to act as an administrative branch of the multinational company and to serve principally as a supervision. whether on behalf of its parent company or its branches. and charges.000 to fund its operations. f. j. except real property tax on land improvements and equipment. e. d. and all local licenses. and coordination center for its subsidiaries. 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 8 Quisumbing Torres . Its expenses must be financed by the head office or parent company from external sources in an acceptable foreign currency. The regional or area headquarters may not earn or derive income in the Philippines. i. or any other company.A representative office must have an initial inward remittance of US$30. branches. b. in managing any subsidiary or branch office it may have in the Philippines. fees. It may not participate.and dutyfree importation of equipment and materials necessary for training and conferences. in any manner.

The activities of the regional warehouse shall be limited to: a. and/or packaging into kits or marketable lots thereof.Doing Business in the Philippines 2010 A ROHQ is prohibited from offering qualifying services to entities other than its affiliates. or subsidiaries. branches.4 Regional Warehouses A multinational company organized and existing under any laws other than those of the Philippines which is engaged in international trade and supplies spare parts. b. deposit. licenses. (Please refer to our discussion below on ecozones. Post-Registration Requirements Upon incorporation/registration with the SEC. and which has established or will simultaneously establish a regional or area headquarters and/or regional operating headquarters in the Philippines. or any other company. components.000. With respect to regional warehouses located or to be located in ecozones with special charters. The OBU may be a branch. and safekeeping of its spare parts. which is the Philippine Central Bank. employee-welfare-related. and cutting or altering to customer’s specification. subsidiaries. and commencement-of-operations permits. affiliates. and raw materials. serving as a supply depot for the storage.5 Offshore Banking Unit (“OBU”) A foreign bank may operate an OBU in the Philippines. whether on behalf of its mother company. certain businesses in highly regulated industries may be subject to special licensing or registration requirements with the government agency having jurisdiction over such industry. In addition to the basic post-registration requirements. and filling up transactions and sales made by its head offices or parent companies. semi-finished products. said license shall be secured from the Board of Investments unless they choose to relocate inside ecozones. including packing. to conduct business with funds from external sources. A ROHQ must initially remit into the Philippines at least US$200. and raw materials to its distributors or markets in the Asia Pacific area and other foreign areas. The regional warehouse may not directly engage in trade nor directly solicit business. promote any sale. Quisumbing Torres 9 . 5. and serving as a storage or warehouse of goods purchased locally by the home office of the multinational for export abroad. labeling. branches. These post-registration requirements include obtaining from certain government agencies and local government offices tax. components. nor enter into any contract for the sale or disposition of goods in the Philippines. subsidiary. 6. marking. may also establish a regional warehouse or warehouses in ecozones in the Philippines after securing a license therefore from the Philippine Economic Zone Authority (“PEZA”).) For existing regional warehouses. mounting. as declared in its registration with the SEC nor shall it be allowed to solicit or market goods and services directly and indirectly. semi-finished products. and registrations. such license shall be secured from the concerned ecozone authorities. or affiliate of a foreign banking corporation authorized by the Bangko Sentral ng Pilipinas (“BSP”). the newly incorporated/registered entity must comply with certain basic registration and licensing requirements with different government agencies. covering. putting up. 5.

The 30 percent corporate income tax rate was 35 percent prior to 1 January 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. Tax Treaties The Philippines has tax treaties with the following countries: Australia Austria Bahrain Bangladesh Belgium Brazil Canada China Czech Republic Denmark Finland France 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 2.1 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. 1. A resident foreign corporation. 10 Quisumbing Torres .II. is taxed only on its net income from Philippine sources at the same rate as a domestic corporation. 2. Taxation Philippine taxes are imposed by both the national government and the local government units. 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. such as a branch.

Doing Business in the Philippines 2010 Income Subject to Different Tax Treatment       Interest and Royalties Interest Dividends 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        2. such as interest and rent income. the trade.2 Foreign International Carrier Non-Resident Cinematographic Film Owner/Lessor/Distributor Non-Resident Lessor of Aircraft or Machinery and Other Equipment 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. business. withheld at source.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. A non-resident alien engaged in trade or business in the Philippines is generally subject to tax on net income from Philippine sources at the same progressive tax rates imposed on resident aliens and citizens. A non-resident alien is deemed engaged in trade or business if he stays in the Philippines for an aggregate period of more than 180 days during any calendar year. 2. or profession of the employer. 2. 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. Quisumbing Torres 11 . The salary and certain other income receipts of residents. are also subject to withholding tax.3 Withholding of Taxes Taxes due on the income of a non-resident alien and a non-resident foreign corporation are withheld at source. or when the fringe benefit is for the convenience or advantage of the employer. or necessary to. Fringe benefits tax is not imposed if the fringe benefit is required by the nature of.

Value-Added Tax (“VAT”) VAT is a tax on consumption levied on the sale. cigars. Excise Taxes In addition to VAT. perfumes. Percentage taxes are normally imposed on gross receipts. are credited or refunded upon submission of proof of actual exportation and receipt of the corresponding foreign exchange payment. excise taxes apply to goods produced in the Philippines for domestic sale or consumption or for any other disposition. subject to certain limitations. and cigarettes Manufactured oils and other fuels Fireworks Cinematographic films Saccharine     Automobiles Non-essential goods (such as jewelry. 12 Quisumbing Torres . whether in their original state or as ingredients or parts of any manufactured goods or products. Excise taxes that are based on the weight or volume capacity or any other physical unit of measurement of the goods are called specific taxes. b.2.5 million.5 Business Taxes a. exchange. and to things imported. Excise taxes that are imposed and based on the selling price or other specified value of the goods are referred to as ad valorem taxes. or lease of goods or properties and services in the Philippines. and toilet water) Yachts and other vessels intended for pleasure or sports Mineral products and quarry resources Excise taxes paid on locally produced goods which are exported without return to the Philippines. and on the importation of goods into the Philippines. barter. A person becomes subject to the 12 percent VAT when his gross sales or receipts for the past 12 months exceed PhP 1. A VAT taxpayer is allowed input VAT credits against his output VAT liability. c. fermented liquor Tobacco products. wines. Percentage Taxes Certain persons are subject to percentage taxes at rates ranging from 1 percent to 30 percent. The following are subject to excise taxes:       Distilled spirits.

Quisumbing Torres 13 .5 million are exempt from VAT but are subject to percentage tax of 3 percent. or conversations transmitted from the Philippines by telephone. and other communication equipment services Banks and non-bank financial intermediaries  Persons or entities subject to percentage taxes are exempt from VAT. importations are generally subject to customs duties. countervailing duty. telegraph.6 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             Annuity policies Indemnity bonds Certificates issued by certain officers Warehousing receipts Jai-alai and horse race tickets Bills of lading Proxies Powers of attorney Leases of real property Mortgages Pledges Deeds of sale of real property and charter parties Other Imposts of the National Government In addition to the 12 percent VAT and any applicable excise tax.Doing Business in the Philippines 2010 Among those subject to percentage taxes are the following:    Keepers of garages and common carriers by land. Documentary Stamp Taxes Documentary stamp taxes must be affixed to certain documents. and discriminating duty under special circumstances. or water for the transport of passengers Entities engaged in the life insurance business Overseas dispatches. air. such as:              2. and papers evidencing business transactions. Business establishments whose gross annual sales or receipts do not exceed PhP 1. telewriter exchange. The Tariff and Customs Code provides for the imposition of anti-dumping duty. d. wireless. instruments. messages. unless they elect to pay the 12 percent VAT. marking duty.

all BSP Regulated Entities may sell foreign exchange to Philippine residents to fund payments of non-trade transactions even without prior BSP approval. Applications for purchasing foreign exchange in excess of US$100. These include foreign inward and outward investments and foreign currency denominated loans and guarantees. a wide variety of merchandise may be imported into and exported from the Philippines. their subsidiary/affiliate foreign exchange corporations. and the development and rationalization of local industry. or its equivalent. international commitments. Foreign Exchange Regulations Purchase and Sale of Foreign Exchange Generally. cities. intercompany open account offset arrangements with the parent company or affiliates abroad.000. Non-Trade Transactions Non-trade transactions refer to all other foreign exchange transactions that are not import or export trade transactions. but subject to reporting requirements and other conditions. III. real property tax applied solely to the lands. As a rule. 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. buildings. Without prior BSP approval. national security. Payments for exports may be made without prior BSP approval under the arrangements prescribed by the BSP. Local and Real Property Taxes Local government units. may levy taxes and impose local license fees pursuant to the Local Government Code. documents against payment.000. “BSP Regulated Entities”). such as provinces. and independent foreign exchange dealers and moneychangers (collectively. 1. open account arrangements. universal and commercial banks may sell foreign exchange to service payment of imports under the arrangements prescribed by the BSP. The BSP.000. documents against acceptance. Furthermore. However. By way of exception. or its equivalent. 3. 2. and export advances. or its equivalent in other foreign currency. the BSP Regulated Entity selling the foreign exchange must require the purchaser to present the documentary requirements 14 Quisumbing Torres . to service advance payment of imports must be filed directly with the BSP for approval. the Bangko Sentral ng Pilipinas regulates the purchase and sale of foreign exchange by authorized agent banks. Foreign Trade Transactions Foreign trade includes import and export trade transactions. consignment. such as letters of credit. with the approval of the President of the Philippines.3. and direct remittance. foreign exchange may be freely bought and sold in the Philippines. However. and other improvements thereon is levied on the assessed value of the real property. without prior BSP approval for partial or full advance payment of imports but subject to the submission by importers to the selling bank of prescribed documents. if the sale of foreign exchange exceeds US$30. documents against payment/cash against documents. and barangays. may exercise its general emergency powers and temporarily suspend or restrict the purchase and sale of foreign exchange. documents against acceptance. municipalities. Generally. The requirements include letters of credit. non-bank BSP-supervised entities. open account arrangement.

with a custodian bank. in case of a partnership or any other association. and such other entities and funds as the BSP may determine as Qualified Investors. Camp John Hay in Baguio City.000. organized under Philippine laws with at least 60 percent of its capital being owned and controlled by citizens of the Philippines. 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 certain incentives. if a natural person. 3. 3. 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 dividends relating to such investment. organized under Philippine laws with at least 60 percent of its Quisumbing Torres 15 . Subic Naval Base. If a foreign investment is not registered with the BSP. or. so that foreign exchange may be sourced from a BSP Regulated Entity to fund the repatriation of the investment and the remittance of profits and dividends. encourages investments in preferred areas of economic activity specified by the BOI in the Investment Priorities Plan (“IPP”). If a foreign loan or guarantee is not registered with the BSP. such as mutual funds. as in the case of a Build-Operate-Transfer arrangement. Enterprises Registered Under the Omnibus Investments Code (“OIC”) The OIC. public or private pension or retirement or provident funds. and variable insurance. unit investment trust funds. and other former US military reservations as well as their extensions into special economic zones. 3.1 Foreign Inward Investments Foreign investments must be registered with the BSP or. Qualified Investors are currently limited to the following: insurance and pre-need companies. in case of a corporation or a cooperative.4 Other Financing Schemes/Arrangements Financing schemes or arrangements which involve an option to purchase or a transfer of ownership after a certain period.2 Outward Investments Prior BSP approval and registration is required for outward investments if foreign exchange exceeding US$30.000 per investor per year will be sourced from BSP Regulated Entities. the following qualifications must be met: a. These requirements may include documents showing that the purchaser has obtained prior BSP approval or registration of the transaction. IV.Doing Business in the Philippines 2010 prescribed by the BSP. a BSP Regulated Entity may not sell foreign exchange to fund payments of such foreign loan or guarantee. The applicant. must be a citizen of the Philippines or. in certain instances. collective/pooled funds.3 Foreign Loans and Guarantees Foreign currency denominated loans and guarantees must be registered with the BSP so that foreign exchange may be purchased from a BSP Regulated Entity to service payments. Investment opportunities in the Philippines have also been created by the Philippine Government’s conversion plan covering Clark Air Base. 1. To qualify for registration and obtain incentives under the OIC. through tax incentives and other benefits. must be registered with the BSP to be eligible for servicing payments using foreign exchange that will be purchased from BSP Regulated Entities. 3.

in the opinion of the BOI. taking into account the risks and magnitude of investment. or (iv) producing non-conventional fuels or manufacturing equipment which utilizes non-conventional sources of energy or using or converting to coal or other nonconventional fuels or sources of energy in its production. to be feasible and highly essential to the attainment of the national goal. If the applicant does not possess the required degree of ownership by Philippine nationals. method. The pioneer area it will engage in is one that is not within the activities reserved by the Constitution or other laws of the Philippines to Philippine citizens or corporations owned and controlled by Philippine citizens. scheme. The applicant is capable of operating on a sound and efficient basis of contributing to the national development of the preferred area in particular and of the national economy in general. or where the applicant is exporting at least 70 percent of is total production. forestry. or system of production or transformation of any element. A registered enterprise which exports 100 percent of its total production need not comply with this requirement. iii. of such a nature that the available measured capacity thereof cannot be readily and adequately filled by Philippine nationals. at least 50 percent of its total production is for export or it is an existing producer which will export part of production under such conditions and/or limited incentives as the BOI may determine. or (iii) engaged in the pursuit of agricultural. or the enterprise is engaged or proposing to engage in the sale abroad of export products bought by it from one or more export producers. whenever available. and relative business risks involved. or raw materials that have not been or are not being produced in the Philippines on a commercial scale. ii. the final product in any of the foregoing instances involves or will involve substantial use and processing of domestic raw materials. professional. including the industrial aspects of food processing whenever appropriate. A “pioneer enterprise” is a registered enterprise (i) engaged in the manufacture. or production. b. technical skills. either directly or through a registered trader. and not merely in the assembly or packaging of goods. manufacturing. or raw materials into another raw material or finished goods which are new and untried in the Philippines. The applicant is proposing to engage in a preferred project listed or authorized in the current IPP within a reasonable time to be fixed by the BOI or. 16 Quisumbing Torres . or other services or in exporting television and motion pictures and musical recordings made or produced in the Philippines. substance. process. in relation to a declared specific national food and agricultural program for self-sufficiency and other social benefits of the project. and mining activities and/or services. commodities. predetermined by the BOI.capital stock outstanding and entitled to vote being owned and held by Philippine nationals and at least 60 percent of its Board of Directors consisting of citizens of the Philippines. processes. in consultation with the appropriate Department. It obligates itself to attain the status of a Philippine national within 30 years from the date of registration or within such longer period as the BOI may require. is. or processing operations. which. the grant of pioneer status with pioneer incentives to certain projects shall be governed by Article 17 of the OIC. or the enterprise is engaged or proposing to engage in rendering technical. taking into account the export potential of the project. products. processing. Provided that. c. the following circumstances must be satisfactorily established: i. considering the nature and extent of capital requirements. or (ii) using a design. It proposes to engage in pioneer projects (please refer to the definition below). As provided under the 2009 IPP. if not so listed. formula.

b. g. business process outsourcing projects (i) that introduce a major innovation in technology or (ii) with project cost of at least US$5 million (excluding cost of land and building) to be put up during the first year of operations may qualify for pioneer status with pioneer incentives. Agriculture/Agribusiness and Fishery Infrastructure Engineered Products Tourism Business Process Outsourcing Creative Industries Strategic Activities Research and Development Mandatory List This covers activities that require their inclusion in the IPP as provided under existing laws. The 2009 IPP grants incentives to the following activities: A.Doing Business in the Philippines 2010 Pioneer status with pioneer or non-pioneer incentives may be granted to projects that meet the minimum investment requirement and other qualifications as may be provided in the 2009 IPP. e. B. h. The Contingency List is a temporary inclusion in the IPP to mitigate the effects of the global crisis and will be delisted upon an official pronouncement by the National Economic and Development Authority that the crisis no longer exists. c. d. Preferred Activities Contingency List a. or increase investments and increase the current number of workers. Job Saving/Creation Projects This covers existing projects and/or activities affected by the global economic crisis that will either:     retain investments and maintain the current number of workers. f. increase investments and maintain the current number of workers. 2. retain investments and increase the current number of workers. For example. Regular List a. as follows: 1. Revised Forestry Code of the Philippines Quisumbing Torres 17 . 1.

b. and accessories imported by new and expanding registered enterprises. 5. and Content Development of Books or Textbooks Downstream Oil Industry Deregulation Act of 1998 Ecological Solid Waste Management Act of 2000 Philippine Clean Water Act of 2004 Magna Carta for Disabled Persons Renewable Energy Act of 2008 Export Activities This covers the following: 1. 6. 8. 3. C. Manufacture of Export Products Export Services Activities in Support of Exporters Autonomous Region of Muslim Mindanao (“ARMM”) List This covers preferred areas of investments in the ARMM. The income tax holiday may not be extended for more than eight years. and four years for non-pioneer firms. 4. Exemption from taxes and duties on machinery. This incentive is granted only if the registered enterprise meets a prescribed capital to labor ratio. d.1 Tax Incentives a. Philippine Mining Act of 1995 Printing. However. D. 3. spare parts. This incentive may be extended in certain instances and upon approval by the BOI. they are not entitled to additional deductions for incremental labor expenses during the period that they avail themselves of this incentive. equipment. An enterprise registered with the BOI enjoys the following tax and non-tax special incentives: 1. Publication. Exemption from taxes and duties on spare parts and consumable supplies imported by a registered enterprise with a customs bonded manufacturing warehouse and exporting at least 70 percent of its production. For the first five years from registration. c. an additional deduction from taxable income of 50 percent of the wages of additional skilled and unskilled workers in the direct labor force. Income tax holiday consisting of income tax exemption for six years from the start of commercial operations for pioneer firms. 7. Expanding firms are entitled to an exemption from income taxes proportionate to their expansion for a period of three years from the start of commercial operations of the expansion. 2. 18 Quisumbing Torres .2.

Exemption from wharfage duties and any export tax. and the export of processed products. and service-type projects and trading projects with no manufacturing facilities. b. exemption from taxes and duties on the importation of supplies and spare parts for imported equipment and consigned equipment. Deduction of the cost of necessary and major infrastructure works constructed. forestry. raw materials. the government has established several special economic zones (Ecozones). g. For registered enterprises with bonded manufacturing warehouses. and semi-manufactured products used for the manufacture of export products and forming part thereof. impost. or advisory positions for five years from registration. duty. Additional Incentives b.Doing Business in the Philippines 2010 e. f. and treasurer (or their equivalent) of foreign-owned registered firms are not subject to the foregoing limitations. Employment of foreign nationals in supervisory. Simplified customs procedures for the importation of equipment. subject to customs rules and regulations. and fees on exports by a registered enterprise of its nontraditional export products. technical. h. The privilege to operate bonded manufacturing/trading warehouses. 2. general manager. or National Housing Authority sites. spare parts.2 Non-tax Incentives a. The president. b. and supplies. resettlement areas. d. The BOI may completely or partially deny incentives to enterprises dealing in traditional export products. Enterprises Registered With the Philippine Economic Zone Authority ("PEZA") To disperse industry and generate employment in non-urban areas. No restriction on the use of consigned equipment but re-export bond is required. except in the case of: a. c. 1. and processing of minerals and forest products) located in less developed areas: a. Double deduction from taxable income of 50 percent of the wages corresponding to the increment in the number of direct labor. Exemption from local taxes for six years from the date of registration for pioneer enterprises. Applications covering new and expansion projects that will locate in Metro Manila are no longer entitled to income tax holiday. projects locating in governmental industrial estates.3 The following additional incentives are available to projects (excluding mining. and four years for non-pioneer enterprises. extendible for limited periods. supplies. 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. 1. i. Quisumbing Torres 19 . Tax credit for taxes and duties on raw materials.

manufacturing. or electromagnetic characteristics and/or chemical properties. such as: Facilities for Manufacturing Enterprises Facilities for IT Enterprises Retirement Facilities  Establishment. and water supply and distribution systems inside Special Economic Zones An Ecozone Manufacturing Enterprise is an entity engaged in assembly. transcribing. 2. Among the IT Service Activities eligible for incentives are IT-enabled services such as business process outsourcing. call centers. of which 70 percent of total revenues are derived from clients abroad. an Ecozone Enterprise (except a Logistics and Warehousing Services Enterprise. mechanical. or processing activities resulting in the exportation of at least 70 percent of its production. and maintenance of light and power systems. “Assembly” is the process by which semi-finished parts or materials are put together or combined to form a distinct product without substantially changing their physical or mechanical characteristics or electromagnetic and/or chemical properties. “IT Service Activities” are activities which involve the use of any IT software and/or system for value addition. and others.Enterprises may establish their businesses within an Ecozone and register with the PEZA as any of the following enterprises:         Export Manufacturing Enterprise Information Technology (“IT”) Service Export Enterprise Tourism Enterprise Medical Tourism Enterprise Agro-industrial Export Manufacturing Enterprise Agro-industrial Biofuel Manufacturing Enterprise Logistics and Warehousing Services Enterprise Economic Zone Development and Operation. “Manufacturing or processing” is the process by which raw materials or semi-finished materials are converted into a new product through a change in their physical. including programming and adaptation of system softwares and middlewares. software development and application. and processing. and an Ecozone Utilities Enterprise) is entitled to income tax holiday. such as:  Manufacturing Economic Zone IT Park Tourism Economic Zone Medical Tourism Economic Zone Agro-Industrial Economic Zone Retirement Economic Zone Facilities Providers. a Facilities Provider. content development for multimedia or Internet purposes. which may have a duration of four years for new registered non- 20 Quisumbing Torres . An IT Service Export Enterprise is a company operating or offering IT services. data encoding.1 Tax and Other Incentives As a general rule. an Ecozone Developer and Operator. operation.

d. Ecozone Developers and Operators. provided that the total number of foreign nationals employed by an Ecozone Enterprise does not at any time exceed 5 percent of its workforce c. The SFZ is an area within the SSEZ which is fenced in and designated as a Freeport Zone. and investment center in the Philippines. i. breeding stocks. an Ecozone Enterprise becomes entitled to a preferential rate of 5 percent of gross income in lieu of all national and local taxes. Ecozone Enterprises (except Logistics and Warehousing Services Enterprises. capital. A business enterprise may register as an Ecozone Enterprise in the SSEZ or a Freeport Enterprise in the SFZ with the SBMA. A SFZ Enterprise is a business entity located within the SFZ that is duly registered with the SBMA. and consumer items within. VAT zero rating of local purchases of goods and services Exemption from duties and taxes on importation of merchandise. technical and advisory positions. and the former US Naval Base at Subic Bay as well as its extensions located in the municipalities of Hermosa and Morong in Bataan Province. raw materials. Upon expiry of the income tax holiday. A SSEZ Enterprise is a business entity located within the SSEZ that is duly registered with the SBMA to operate any lawful economic activity within the SSEZ. supervisory. Enterprises Registered With the Subic Bay Metropolitan Authority (“SBMA”) The Subic Special Economic Zone (“SSEZ”) and Subic Free Port Zone (“SFZ”) were established by the Philippine Government with the aim of developing the area into a self-sustaining industrial. e. Quisumbing Torres 21 . Facilities Providers. specialized vehicles and other transportation equipment. commercial. or fee Additional deduction for training expenses Tax credit on domestic capital equipment. and supplies of equipment and machineries. specialized office equipment and furniture. and genetic materials (as applicable) Additional deduction for labor expense Unrestricted use of consigned equipment Employment of foreign nationals in executive. g. b. 3. and household effects Tax credit for import substitution Exemption from wharfage dues. the SFZ was established to be operated and managed as a separate customs territory ensuring the free flow or movement of raw materials. into. Expanding firms may be entitled to an income tax holiday of three years from the start of commercial operation of the expansion. The territory of the SSEZ includes the city of Olongapo and the municipality of Subic. including importation of capital equipment. and Ecozone Utilities Enterprises) are further entitled to the following incentives: a. construction materials. export tax. In addition. h.Doing Business in the Philippines 2010 pioneer firms or six years for new registered pioneer firms. financial. equipment. and exported out of the SFZ. f. professional instruments. impost.

and maintenance of the infrastructure. In 2007. With respect to land that the foreign investor will not use exclusively for the purpose of the investment. 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. renewable once for a period of 25 years. 9400. Environmental Regulation The Philippines adheres to a policy of protecting and advancing the right of its people to a balanced and healthful ecology. in lieu of national and local taxes. VI. management. renewable for another 25 years. As provided under the Rules and Regulations to Implement Republic Act No. 9400. 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. PEZA Ecozones may be created within the Clark Special Economic Zone. facilities. The long-term lease will be subject to the following conditions. 4. operation. a. and (ii) 5 percent special tax on gross income earned. The Clark Freeport Zone is operated and managed as a separate customs territory. in lieu of national and local taxes. in lieu of national and local taxes.and duty-free importation of raw materials and capital equipment. Enterprises Located in the Clark Special Economic Zone The Clark Special Economic Zone (“CSEZ”) covers certain areas of Angeles City. among others: (a) the leased area shall be used solely for the purpose of the investment upon the mutual agreement of the parties. with the following incentives available to registered business enterprises located therein: (i) tax rate of 5 percent on gross income earned. and (c) the lease agreement must incorporate certain mandatory conditions. subject only to limitations under the Philippine Constitution. and utilities in those PEZA Ecozones is the Bases Conversion and Development Authority. or land for tourism projects with investments of less than US$5 million. The lease must be registered with the Philippine Board of Investments under the Investors’ Lease Act. The agency in charge of the development. Foreigners investing at least US$5 million in tourism projects may lease private lands for the project for the same period. the municipalities of Mabalacat and Porac. and (ii) tax.and duty-free importation within the SFZ.Registration as a SSEZ/SFZ Enterprise is open to any business enterprise in any area of economic activity. with the Clark Development Corporation as its implementing arm. Republic Act No. subject however to the Comprehensive Agrarian Reform Law and the Local Government Code. with the Clark Development Corporation as its implementing arm. Under the Rules and Regulations to Implement Republic Act No. the province of Pampanga. 9400 converted a portion of the CSEZ into a freeport zone called the Clark Freeport Zone. 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. V. the lease contract may be for a maximum period of 25 years. while a SFZ Enterprise shall be entitled to (i) tax. and the municipalities of Capas and Bamban. The government agency that registers enterprises and grants and administers incentives to those enterprises is the Bases Conversion and Development Authority. (b) the leased premises shall comprise such area as may reasonably be required for the purpose of the investment. a SSEZ Enterprise shall be entitled to the 5 percent special tax on gross income earned. province of Tarlac. 22 Quisumbing Torres .

developed. is the general legislation on pollution prevention and control that is being enforced by the government. distribution. processing. 6969. 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. or the Philippine Clean Air Act of 1999. is the government agency that implements the EIS System. 1586 (“PD 1586”) established the Philippine Environmental Impact Statement (“EIS”) System. treatment. The ECC is a document certifying that based on the representations of the proponent. 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. 984. Environmental impact assessment (“EIA”) is part of project planning and is conducted to identify and evaluate important environmental consequences. the environmental law applicable to a particular business concern depends largely on the activities of that business concern. provides the framework for preventing. managing. Republic Act No. and disposal of toxic substances and hazardous and nuclear wastes. transfer. or implemented in it. Republic Act No. executive decrees. and reversing air pollution from city to countryside. PD 1586 requires proponents of environmentally critical projects (“ECP”) and projects within environmentally critical areas (“ECA”) to obtain an environmental compliance certificate (“ECC”) prior to the commencement of the project.Doing Business in the Philippines 2010 Philippine environmental law consists of a series of legislative enactments. manufacture. use. The DENR is assisted in the formulation and implementation of environmental policies by the Environmental Management Bureau (“EMB”). transport. The EMB of the DENR. The Department of Environment and Natural Resources (“DENR”) is the lead agency in environmental protection and administration. otherwise known as the National Pollution Control Decree of 1976. including social factors that may occur if a project will be undertaken. 8749. Republic Act No. Therefore. calls for the institutionalization of a national program that will manage the control. and other governmental agencies and departments. processing. The ECC contains specific measures and conditions that the project proponent has to undertake. The ECC also certifies that the proponent has complied with all the requirements of the EIS System and has committed to implementing its approved Environmental Management Plan. 9003. Presidential Decree No. Quisumbing Torres 23 . transport. local government units. or the Ecological Solid Waste Management Act of 2000. controlling. and administrative regulations. each addressing a specific area of concern relating to the environment. together with the EIA Review Committee. Specific Areas of Regulation Presidential Decree No. the proposed project or undertaking will not cause significant negative environmental impact. An ECP is a project or program that has high potential for significant negative environmental impact. Measures to eliminate or minimize these impacts are incorporated into project design and operations. and disposal of solid waste in the country.

However. partnerships. adhered to the Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”). scientific. and trade names. and artistic works. Copyrights endure for the lifetime of the creator and for 50 years after his death. The term of registration of an industrial design is 5 years from the date of filing and may be renewed for two consecutive periods of 5 years each. An applicant should file a declaration of use within three years from the date of application. Rights to a mark are acquired by registration. corporations. 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. trademarks. service marks. VII. The registration is renewable at the end of each 10th year from registration so long as the mark is still in commercial use. There is a single procedure for both foreign and local applicants for the registration of marks. trade names. Copyright protection extends to computer programs. and the World Trade Organization and. it primarily applies to the abatement and control of pollution from land-based sources. Border Control Measures The rules of the Bureau of Customs (“BOC”) on border control measures prevent the entry into the Philippines of infringing 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”). coordination. copyrights. A patent for a utility model is valid for 7 years from the date of filing the application and automatically expires at the end of the period. 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. 24 Quisumbing Torres . and issues the corresponding certificates of registration. thus simplifying the determination of who is entitled to own the patent. scholarly. A patent registration for an invention is valid for 20 years from the date of filing the application. Inventions. or arrangement of their contents. Intellectual Property Protection The Philippines is a member of the Paris Convention for the Protection of Industrial Property. and other similarly protected IP rights with the BOC. and service marks owned by persons. Intellectual Property (“IP”) owners may record their products covered by patents. and industrial designs may be patented. VIII. A patent is granted to the inventor who filed his patent application earlier than others. the Berne Convention for the Protection of Literary and Artistic Works. by such membership. Priority is given to whoever applies first for registration. Trademarks. and databases that are original by reason of the selection. The Intellectual Property Office (“IPO”) processes applications for patents. utility models. multimedia works. trademarks. or associations domiciled in the Philippines or in any foreign country may be registered with the IPO. may be copyrighted. The Clean Water Act applies to water quality management in all water bodies.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. whether published or unpublished. Literary. Trademark registration is valid for 10 years.

Philippine courts generally lend great weight to findings of administrative agencies like the Documentation Information and Technology Transfer Bureau (“DITTB”). In the event of litigation over the Agreement. Thus. Registration will allow the Licensee to source currency for royalty payments from the Philippine banking system. Philippine Central Bank regulations provide that banks and foreign exchange companies must require purchasers of foreign currencies that will be used for royalty payments to submit the relevant certificate of registration issued by the DITTB.    Quisumbing Torres 25 . 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. or license all forms of intellectual property rights. Technology Transfer Arrangements A technology transfer arrangement (“TTA”) refers to a contract or an agreement involving the transfer of systematic knowledge for the manufacture of a product. However. there are exceptional cases where exemptions from the prohibitory and/or mandatory clauses may be allowed. except computer software developed for the mass market. The IP Code specifically provides that a trademark registration may be cancelled any time if the registered owner of the mark. A TTA also refers to an agreement to transfer. IX. particularly for license agreements. If the agreement involves the licensing of a trademark. including the licensing of computer software. the IPO has a quasi-judicial jurisdiction to settle disputes regarding technology transfer payments. a trademark license agreement that is not recorded will have no effect against third parties. 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. Under the IP Code. However. without legitimate reason. TTAs should not contain certain prohibited clauses and should contain certain mandatory provisions. 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. including the fixing of the appropriate amount or rate of royalty. there are practical benefits to registering a compliant TTA. These are as follows:  The registration will serve as evidence that the agreements are compliant with the IP Code and are enforceable in this respect. assign. However. A TTA that conforms to the prohibited and mandatory clauses need not be registered with the IPO. If the Licensor intends to avail itself of tax treaty relief with respect to royalty income derived under the agreements. The parties are free to negotiate the amount or the rate of royalties to be paid under the TTA. the DITTB ruling may be used as evidence of the enforceability of the Agreement. There are no restrictions regarding the amount or rate of royalty that may be charged. the registration will facilitate the recordal of the Agreement against the Philippine trademark applications or registrations for the licensed marks. A BOC recordal is valid for two years from the date of recordal. the application of a process. or the rendering of a service.Doing Business in the Philippines 2010 The recordal will be the basis of the BOC for monitoring suspected imports to determine whether they are liable to seizure and forfeiture. Nonconformity to the prohibited and mandatory clauses will automatically render the TTA unenforceable. including management contracts.

The Labor Code enumerates the specific instances when an employee may be required to render overtime work and the corresponding overtime pay rate. 1.m. Thus. minimum wages vary according to the location of the business. For work done on rest days and special holidays. among others. These overtime pay rates may vary depending on whether the overtime work is rendered on a regular work day.1 Work Hours   Normal Hours of Work. The minimum wage rate in each region of the country varies and is prescribed by the Regional Tripartite Wages and Productivity Boards. the Labor Code requires the employer to pay a certain amount as additional compensation based on the regular wage of the employee. Wages are generally paid in cash at least twice a month (usually on the 15th and the last day of every month). An employee must be paid a night shift differential equivalent to a certain rate of his regular wage for work done between 10 p. Labor Standards The Labor Code of the Philippines (the “Labor Code”) lays down the minimum terms. 1.m.2 Wages Under the minimum wage law in the Philippines. 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. Any work done in excess of 8 hours in a work day must be paid an overtime rate based on the applicable basic rate. The rules on work hours are not applicable to managerial employees. Labor Law Philippine labor law recognizes the rights of both workers and management.   1. or rest day. and benefits of employment that employers must provide or comply with and to which the employees are entitled as a matter of right.X. All employees are generally entitled to a rest period of not less than 24 consecutive hours for every six consecutive normal working days.3 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 Leave following Surgery caused by Gynecological Disorders 26 Quisumbing Torres . conditions. 1. holiday. Premium Pay for Rest Day or Holiday Work. Night Shift Differential. The normal hours of work should not exceed 8 hours in a work day. and 6 a. Overtime Pay. Employees are entitled to at least 60 minutes time off from work for their regular meals.

may not form or become members of labor unions. employees may form and join workers’ associations and other mutual aid and benefit associations for legitimate purposes. This provides for the benefits in case of non-workrelated illness.4 Rule on Non-Diminution of Employment Benefits If an employee benefit has been granted by reason of employer practice or policy. Employees. other than collective bargaining. retirement. have the right to conduct a strike in accordance with law. Aside from labor unions. Social Security Law. 2. and consistently. the Philippine Health Insurance Corporation (“PhilHealth”. This provides employees in the private sector a more comprehensive benefits program which includes sickness. the employer is required to register itself and its employees with the Social Security System (“SSS”. Under the foregoing welfare legislation. The employer is required to deduct the employee’s contribution and remit the same to the SSS. may negotiate and enter into collective bargaining agreements (“CBAs”) with their employers. c. A labor union has to be registered with the DOLE for it to enjoy all the rights granted by law to labor unions. the SSS also administers the ECSIF). under specified circumstances. 3. b. The employer and the employee both contribute to the common fund from which the benefits are sourced. c. This provides for the benefits in case of work-related illness or injury. b. employees have the right to form and join unions and to engage in concerted activities for their collective protection. under specified circumstances. such as managerial and confidential employees. Employees. together with the employer’s contribution. the benefit becomes part of the terms and conditions of employment and cannot be unilaterally withdrawn or discontinued by the employer.Doing Business in the Philippines 2010 1. Quisumbing Torres 27 . The act is done deliberately. National Health Insurance Act (“NHIA”). disability. and funeral benefits. Certain classes of employees. despite the absence of a legal or contractual requirement to grant the said benefit. PhilHealth administers the NHIA). The act is not a product of erroneous interpretation or construction of a doubtful or difficult question of law. through their union representatives. Welfare Legislation Employee’s Compensation and State Insurance Fund (“ECSIF”). and the Pag-IBIG Fund. has the right to lock out employees. Corollarily. The contributions are based on the salary of the employee. The act of the employer has been done for a long period or is consistently repeated. a. PhilHealth and Pag-IBIG Fund. The following criteria may be used to ascertain the existence of a binding and enforceable employer practice or policy under Philippine law: a. Labor Relations As a general rule. the employer. knowingly. The employees negotiate the terms and conditions of their employment in CBAs. d. It may register as an independent labor union or as a charter of a federation or national union. however. Pag-IBIG Fund. This provides housing loans to employees in the private sector.

For instance. seasonal. For this purpose. the amount of which is subject to the discretion of the court. a dismissed employee has the right to question the validity of his dismissal.Contributions to the ECSIF are shouldered by the employer alone. casual. Reinstatement without loss of seniority rights and other privileges. and discipline employees is the employees’ right to security of tenure. 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. the court will take into consideration the relevant circumstances of each case. including allowances and other benefits. This will protect the employer in the event of a future disagreement as to the terms and conditions of employment. 5. An employment is presumed to be regular or permanent in nature. an employee who is dismissed without procedural due process is entitled to nominal damages. Once questioned before the proper labor authorities. Classification of Employment The Labor Code and jurisprudence classify employment status into regular. project. 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. Even if there may have been a just or authorized cause for termination. and fixed-term. Otherwise. probationary. or their monetary equivalent. unless the legal requirements for the other types of employment are strictly observed. such as the Migrant Workers’ and Overseas Filipinos Act of 1995. Contract of Employment Although not required. computed from the time his compensation was withheld from him up to the time of his actual reinstatement. In the Philippines. 4. Payment of full back wages. he shall be deemed a regular employee from the start of his employment. 28 Quisumbing Torres . 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. 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 has observed procedural due process. b. terminate. 6. the causes for terminating an employer-employee relationship will depend upon the classification of the employee. a probationary employee must be provided with written standards for regular employment at the time he is first engaged. it is best to put the employment contract between the employer and the employee in writing. An employee who is unjustly dismissed from work without a legally defined cause is entitled to the following: a. There are other special laws in the Philippines that govern specific sectors of Philippine labor. The classification of an employee is important because under Philippine law. particularly the gravity of the employer’s failure to follow due process requirements. Termination of Employment Corollary to the employer’s right to hire.

An application will be filed for the conversion of the tourist or 9(a) visa into the appropriate work visa. acting through the appropriate government agencies.. Generally. has exercised this authority by allowing the entry of foreign personnel employed in supervisory. The foreigner may commence work in the local petitioning company upon filing his application for an AEP to the DOLE. the work visa and AEP applications are filed after the foreigner arrives in the country and is admitted on a tourist or 9(a) visa. their spouses and unmarried minor children under 21 years of age. XI.2 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. 1. Upon entry. subject to such conditions as he may prescribe. he will be provided with either a 21-day or 7-day visa. technical. 1034) valid for a period of one year. primarily the Bureau of Immigration (“BI”).e. Except for certain restricted nationals. Immigration Work/Employment Requirements A foreigner who comes to the Philippines to work must obtain a work visa from the relevant government agency. or advisory positions in Quisumbing Torres 29 . The visa and AEP applications must be filed by a local petitioning company on behalf of the foreigner. may be issued multiple entry special visas valid for three years. In cases of short-term employment (i. provided that he has an outbound ticket with him and his passport is valid for not less than six months beyond the contemplated period of stay.Doing Business in the Philippines 2010 It is also advisable for the employer to have an employment handbook which contains the rules and regulations that will govern the employment relation. if accompanying or joining them after their admission into the country as non-immigrants.. Special Non-Immigrant or 47(a)(2) Visa  1. These foreign nationals. less than six months) for positions that are temporary in nature (i. a foreigner will only be required to apply for a special work permit to the BI.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. depending on his nationality. These foreign personnel shall be issued a multiple entry special visa (under Presidential Decree No. consultancy). The holder of this visa is exempted from obtaining an alien employment permit from the DOLE as a condition for working in the Philippines.e. a foreigner may enter the country without a pre-approved tourist or 9(a) visa. as well as an alien employment permit (“AEP”) from the DOLE. and foreign personnel of regional or area headquarters of multinational companies that are officially recognized by the Philippine Government. The President. The following are the more common types of work visa: 1.

These visas allow a foreigner to work in the Philippines. or who is proceeding to the Philippines to engage in any lawful occupation. a foreigner may apply for special resident visas.. whether for wage or salary or for other forms of compensation.6 Clark Special Economic Zone Work Visa Foreign nationals who possess executive or highly technical skills which no Filipino citizen within the Clark Special Economic Zone possesses may apply for this type of work visa to the Clark Development Authority. may apply for this visa to the Subic Bay Metropolitan Authority. The local petitioning company must be majority-owned by US. 1.1 Special Resident Retiree’s Visa (“SRRV”) The SRRV program is available to foreigners and former Filipinos at least 35 years of age who deposit the minimum amount required by law with a bank accredited by the Philippine Retirement Authority (“PRA”). 1. and Special Government Projects (e. or highly confidential position in a local company. The holder of an SRRV may stay in the Philippines indefinitely or visit the country at any time. When granted.5 Subic Free Port Zone Work Visa A foreign national who possesses executive or highly technical skills which no Filipino citizen within the Subic Free Port Zone possesses.4 Treaty Trader’s or Investor’s Visa A foreigner is entitled to a treaty trader or investor visa only if he is a national of the US. The nationality of the foreigner and the majority of the shareholders of the employer company must be the same. where a bona fide employer-employee relationship exists. The visa is generally valid for a one-year period subject to extension upon application. which is in turn granted for a period discretionary to the DOLE. countries with which the Philippines has concluded a reciprocal agreement for the admission of treaty traders or investors. or Japanese interests. MRT. However. Special Resident Visas In addition to work visas. technical. or Japan. subject to other requirements or limitations imposed by law. The foreigner must be employed in a supervisory or executive capacity. the visa may be extended to the foreigner’s spouse and unmarried children below 21 years of age. managerial. 2.g. BOI-registered enterprises. the officers of the BI have the discretion to shorten the validity period of the approved pre-arranged employment visa to one year. German. 30 Quisumbing Torres . The holder may also invest in any of the areas specifically designated by the PRA. usually based on the duration of the assignment of the foreigner. This visa is generally valid for an initial period of one year and is renewable from year to year. Skyway).3 Pre-Arranged Employment or 9(g) Visa This visa is available to a foreigner who will be occupying an executive. 1. as certified by the DOLE. 1. The pre-arranged employment visa is granted for a period co-terminus with the AEP. Germany.Export Processing Zone Enterprises. The following are the different types of special resident visas: 2.

If the moratorium is lifted. provided that they are nominated and their SVEG applications are endorsed by such entity. a foreign bank cannot invest in the voting stock of a new banking subsidiary. partnership. subject to the prior approval of the Monetary Board of the BSP. firm. firm. Special Visa for Employment Generation (“SVEG”) The SVEG is granted to a foreigner or foreigners with controlling interests in an entity. or industry that enables the proportional employment of at least 10 full-time/regular Filipinos on a long-term basis in the Philippines. a foreign bank may also operate in the Philippines. or corporation. shares of stock or bonds. estate funds. enterprise. At present. by owning up to 60 percent of the voting stock of an existing domestic bank. The applicant’s spouse and unmarried children under 21 who are accompanying the applicant may be included in the visa application. 2. Finance-Related Regulations Banking A foreign bank may operate in the Philippines. Quisumbing Torres 31 . of good moral character. firm. partnership. 1. XII.4 Subic Free Port Zone Residency Visas for Retirees This visa requires the applicant to be over 60 years old. no longer employed or not self-employed. Until such moratorium is lifted. 2. 3. and local or foreign currency time deposits may avail themselves of the SVEG upon proof of utilization of such investments into an active and continuous business activity. shall be entitled to a SIRV. mutual plans. and promote employees may apply for the SVEG.3 SIRV for Investors in Tourist-Related Projects and Tourist Establishments A foreigner who invests an amount of at least US$50. or corporation that has the power to hire. Foreigners with other investments in the Philippines consisting of real estate. investment. partnership.Doing Business in the Philippines 2010 2.000 in a qualified tourist-related project or tourism establishment. Thus. or corporation that establishes. or industry in the Philippines. insurance. or rehabilitates a business activity. the only mode for foreign banks to enter the Philippine banking industry is to invest in existing domestic banks.000 investment subsists. 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. subject to the prior approval of the Monetary Board of the BSP. and receiving a pension or passive income which is payable in the Subic Free Port Zone in an amount exceeding US$50. as determined by a governmental committee. with no previous conviction of a crime involving moral turpitude.2 Special Investor’s Resident Visa (“SIRV”) The SIRV is a program offered by the Philippine Government to alien investors wanting to obtain a special resident status with multiple entries for as long as the required US$75.000 per year. dismiss. Foreigners exercising managerial functions in an entity. enterprise. expands. by investing up to 60 percent of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines. investment.

The Act establishes the legal and regulatory framework for asset securitization and grants tax exemptions and other incentives in favor of securitization transactions. financing companies that provide medium. benefits. and other financial institutions organized or operating under other special laws. A financing company must be organized as a stock corporation where citizens of the Philippines own at least 40 percent of the voting stock therein. by a seller to a special purpose entity. In order to promote the development of the Philippine capital market.5 million to PhP10 million. purchasers. A financing company must have a paid-up capital ranging from at least PhP2. and privileges that are granted to other non-bank financial institutions providing similar credit. The issuance of the ABS must be in accordance with the securitization plan approved by the SEC. receivables. or similar financial assets with an expected cash payment stream (“Assets”) are sold. particularly for residential mortgage-backed securities and other housing-related financial instruments. importers. chattel mortgages. or agricultural enterprises by:     direct lending. or privileges that are available to lenders. importation. investment houses. 32 Quisumbing Torres . acquisition. b. or other evidence of indebtedness. on a “without recourse” basis. or other transactions are entitled to the same incentives. The original obligee of the Assets is a bank or any other entity subject to the supervision of the BSP. or is controlled by such bank or entity. Financing Companies Financing companies are corporations that are primarily organized for the purpose of extending credit facilities to consumers and to industrial. The SPE then issues to investors ABS the payment of which depends on the cash flow from the assets. Financing companies providing financial leases in connection with any purchase. leases. The term “financing companies” excludes banks. depending on where the financing company will set up its office in the Philippines. or financial leasing of movable as well as immovable property. discounting or factoring commercial papers or accounts receivables. commercial. The Act also prescribes the rules for the creation and operation of Secondary Mortgage Institutions to develop a secondary market for the ABS. insurance companies. Prior endorsement of the BSP must be obtained in the following cases: a. loans. buying and selling contracts. 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. In addition. savings and loan associations. powers. Securitization Act of 2004 The Securitization Act took effect on 10 April 2004. 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 (“ABS”).and long-term credit to small and medium enterprises are entitled to the same rights. benefits. The SPE is constituted in the form of a special purpose trust. 3. In securitization.2. cooperatives. or other eligible persons in such transactions. exemptions.

b. may be more attractive than court litigation for several reasons. The SPV Act prescribed a period within which the application for organizing and registering an SPV must be filed with the SEC. Arbitration in the Philippines Parties have the option to resort to arbitration in resolving their disputes in the Philippines. or majority-owned by the government of the country of origin.Doing Business in the Philippines 2010 Subject to certain conditions. 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”). To qualify as a branch or a new company incorporated in the Philippines. To be allowed entry.. an applicant foreign insurance corporation must comply with certain capitalization requirements pertaining to minimum paid-up capital and contributed surplus fund. There appears to be a growing clamor from the banking sectors to allow additional time within which interested parties may register an SPV. the top 200 foreign insurance corporations globally. b. This period expired on 18 September 2004. the foreign insurance company must be among: a. from an SPV to a third party. Insurance-Related Regulations Entry of Foreign Insurance Companies Subject to the approval of the Insurance Commission. thus paving the way for the filing of Senate Bill 1830. which seeks to allow registration of SPVs for another five years. Quisumbing Torres 33 . XIV. 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. c. investment in a new insurance company incorporated in the Philippines (i. XIII. Arbitration. subject to certain conditions. ownership of the voting stock of an existing domestic insurance company. The bill is currently pending in the Philippine Senate. b. the Securitization Act grants various tax and fiscal incentives. which is steadily growing in popularity as an alternative mode of dispute settlement.e. a foreign insurance company may be allowed to do business in the Philippines under any one of the following modes of entry: a. Depending on the extent of foreign equity. or establishment of a branch. widely owned and/or publicly listed in its country of origin. the applicant must be: a. and has been doing business for the last 10 years as of the date of the application. a subsidiary). or the top 10 in their country of origin. c.

1 Advantages of Arbitration Compared with Court Litigation Speed Despite the efforts of the Supreme Court to streamline the judiciary.” 3.3 Choice of Arbitrators The parties are free to choose the arbitrators. 2. 1. 1. Unlike judges. or rules promulgated pursuant to law. If there is no agreement to submit a dispute to arbitration. 1. the parties need not be bound by the strict rules of evidence.4 Finality of the Award Philippine law recognizes as valid a stipulation that an arbitral award shall be “final. 1. “Final” means that an arbitral award cannot be modified or reversed except on limited grounds. Arbitration allows the parties to choose or craft the rules that will govern the arbitration proceedings. the remedy of the aggrieved party is to file a case in court. arbitration proceedings are confidential. Definition of Arbitration “Arbitration” is formally defined as “a voluntary dispute resolution process in which one or more arbitrators.6 Confidentiality Whereas court proceedings are open to the public. disputes submitted to arbitration are more speedily resolved. Consequently. Also. The ability to choose the arbitrator is especially attractive to a foreign party who may harbor reservations about the neutrality of a “home court” judge. Since the parties are given a free hand in choosing their arbitrator(s). 34 Quisumbing Torres . “final” does not mean that an arbitral award is beyond judicial review. the higher will be the demand for their services. the outcome becomes more “acceptable.5 Arbitrators as Experts Parties usually appoint arbitrators who are knowledgeable in the subject matter of the dispute.1. The parties may choose arbitrators whose schedules can accommodate the long hours necessary to hear and decide a case.” However. The parties may agree to submit a dispute to arbitration either before or after a dispute arises.2 Flexibility of the Rules Foreign investors who are not familiar with local court procedures may prefer a more neutral process. Arbitration as Contract Arbitration is a creature of contract. The greater their reputation for competence and integrity. Since the procedure is mutually agreed upon. There can be no arbitration unless the parties agree to submit their dispute to arbitration. In contrast. it usually takes several years for the trial courts to hear and resolve the cases filed with them.” On the part of the arbitrators. arbitrators do not have to contend with heavy caseloads. appointed in accordance with the agreement of the parties. the parties have more faith in the integrity of the process. the dockets of Philippine courts remain clogged. resolve a dispute by rendering an award. they have an added incentive to build and nurture a reputation for competence and integrity. They are expected to appoint arbitrators who they regard as honest and competent. An aggrieved party cannot compel the other party to arbitrate. 1. 1.

(g) criminal liability. Disputes that may be Referred to Arbitration All types of commercial disputes may be referred to arbitration. the place of arbitration if determined in. International arbitration is governed by the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law. or b. Domestic arbitration is governed by Republic Act No. On the other hand. Definition of International Arbitration and Domestic Arbitration Arbitration is considered international if: a.” 5. there are a few vital distinctions between the two regimes. the arbitration will be considered domestic. whether contractual or not. (d) any ground for legal separation (of married persons). the arbitration agreement. (c) the validity of a marriage. (f) future legitime. Quisumbing Torres 35 . the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country. 876. otherwise known as the Labor Code of the Philippines. and there is no stipulation in their arbitration agreement that the subject matter of the arbitration agreement relates to another country. Despite the distinction between international and domestic arbitration. as amended. 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 Republic Act No. (e) the jurisdiction of courts.Doing Business in the Philippines 2010 4. Disputes that are not Arbitrable The following disputes may not be submitted to arbitration: (a) labor disputes covered by Presidential Decree No. and their obligations are to be performed in the Philippines. 876. 6. or one of the following places is situated outside the State in which the parties have their places of business: i. the parties to an arbitration agreement have. Thus. and its Implementing Rules and Regulations. ii. if the dispute is between parties who have their place of business in the Philippines. otherwise known as the Arbitration Law. domestic arbitration is simply defined as arbitration that is not international. and (h) those disputes which by law cannot be compromised. or any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject matter of the dispute is most closely connected. at the time of the conclusion of such agreement. (b) the civil status of persons. their places of business in different States (countries). The word “commercial” is broadly defined as “matters arising from all relationships of a commercial nature. 442. a Philippine law that was enacted in 1953. c. or pursuant to.

7. in its discretion. 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. or by his lawful agent. 7. or in refusing to hear evidence pertinent and material to the controversy. 7. Neither should he have a financial. or other undue means. 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.4 Interim measures A party may apply for provisional relief or interim measures to 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. fiduciary.3 Qualifications of an arbitrator An arbitrator must possess the following qualifications: of legal age. or other interest in the controversy.2 Third parties Where a civil action is commenced in court by or against multiple parties. 7. The law prohibits an arbitrator from “championing” or “advocating” the cause of either party. The arbitrators exceeded their powers. the court. or one or more of the arbitrators were disqualified to act as such under Section 10 of Republic Act No.1 Domestic Arbitration Form of arbitration agreement The arbitration agreement must be in writing and subscribed by the party sought to be charged. fraud. 7. or so imperfectly executed them. The award was procured by corruption. d. in full enjoyment of his civil rights. or were guilty of any other misbehavior by which the rights of any party were materially prejudiced. 876 and willfully refrained from disclosing such disqualifications. the court shall refer to arbitration those parties who are bound by the arbitration agreement. the arbitrator should not be related by blood or marriage up to the sixth degree to either party to the controversy. Where an award is vacated. or any personal bias. that a mutual. There was evident partiality or corruption in the arbitrators or any of them. final and definite award upon the subject matter submitted to them was not made.5 Grounds for vacating/setting aside a domestic arbitral award A domestic arbitral award could be vacated on the following grounds: a. An agreement that incorporates by reference a document that contains an arbitration clause gives rise to a valid arbitration agreement. 36 Quisumbing Torres . 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. Furthermore. c. one or more of whom are parties to an arbitration agreement. and can read and write. The arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown. which might prejudice the right of any party to a fair and impartial award. b. 7. although the civil action may continue as to those who are not bound by such arbitration agreement.

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.” For example. Philippine courts. A party may petition the court to confirm the award at any time after the lapse of 30 days from receipt of the arbitral award. since other jurisdictions tend to interfere less with international arbitral awards. 9/264. 8. The one area where the two arbitration regimes may part ways is in the interpretation of the applicable laws.1 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. domestic arbitration and international arbitration will most likely diverge with respect to the scope of judicial review. having regard to the international origin of the Model Law and to the need for uniformity in its interpretation. entitled “International Commercial Arbitration: Analytical Commentary on Draft Text identified by reference number a/CN. a party in an international arbitration may apply for provisional relief or interim measures to 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.2 Form The arbitration agreement shall be in writing.Doing Business in the Philippines 2010 7. in interpreting the Model Law. The ADR Act of 2004 provides that. unless there are grounds to vacate the award. Republic Act No. the winning party has to file with the appropriate Regional Trial Court a petition for confirmation of the arbitral award. In order to convert the domestic arbitral award into an enforceable judgment. or in an exchange of statements of claim and defence in which the existence of an agreement is alleged by one party and not denied by another.6 Confirmation of domestic arbitral award A domestic arbitral award is not self-executory. 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.” 8. as a matter of course. grant the petition. 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. or other means of telecommunication which provide a record of the agreement. should limit the scope of its review to the grounds to set aside an arbitral award under the Model Law. 876. there must be regard to its international origin and to the need for uniformity in its interpretation. telex. telegrams. The definition of “writing” under the Model Law is broader than the definition of “writing” under Republic Act No. 876 (for domestic arbitration) and the Model Law (for international arbitration). The court should. 8. While domestic arbitration awards may be reviewed on appeal on both questions of fact and law. 8. 8.3 Interim measures As with domestic arbitration.4 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: Quisumbing Torres 37 .

the subject matter of the dispute is not capable of settlement by arbitration under the law of this State (the Philippines).5 Recognition and enforcement of international arbitral award An international arbitral award. irrespective of the country in which it was made. shall be enforced unless there exists any of the grounds to set aside/vacate the award. failing any indication thereon. 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. upon application in writing to the competent court. b. could be refused only on the following grounds: “(1) Recognition or enforcement of an arbitral award. 9. or the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties. the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration. under the law of this State. if that party furnishes to the competent court where recognition or enforcement is sought proof that: 38 Quisumbing Torres . or. Section V of the New York Convention provides that the recognition or enforcement of an arbitral award. unless such agreement was in conflict with a provision of the Model Law from which the parties could not derogate. may be refused only: a.a. a party to the arbitration agreement referred to in Article 7 of the Model Law is under some incapacity. in 1967. irrespective of the country in which it was made. if the decisions on matters submitted to arbitration could be separated from those not so submitted. 8. shall be recognized as binding and. d. An application for setting aside an international arbitral award could not be made after three months have elapsed from the date on which the party making that application had received the award. a landmark international instrument. b. c. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) The Philippines acceded to the New York Convention. or contains decisions on matters beyond the scope of the submission to arbitration. 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. or the award is in conflict with the public policy of this State. The petition for enforcement and recognition of an arbitral award may be filed anytime from receipt of the award. only that part of the award which contains decisions on matters not submitted to arbitration could be set aside. failing such agreement. provided that. irrespective of the country in which it was made. An international arbitral award could also be set aside if the court finds that: a. The parties to this convention recognize the validity and binding effect of foreign arbitral awards. at the request of the party against whom it is invoked.

a testament to the near universal recognition of the validity and binding nature of foreign arbitral awards. or 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. or ii. or it contains decisions on matters beyond the scope of the submission to arbitration.Doing Business in the Philippines 2010 i. v. or the said agreement is not valid under the law to which the parties have subjected it or. The New York Convention also seeks to put international arbitration on equal footing with domestic arbitration by providing that the parties to the convention should not impose more onerous conditions on the enforcement of foreign arbitral awards than on the enforcement of domestic awards. that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced. In a recent case. if the court finds that: i. The court shall not set aside a foreign arbitral award but may refuse it recognition and enforcement on any or all of the foregoing grounds. At any time after receipt of a foreign arbitral award. or 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. failing any indication thereon. as opposed to a final foreign award. To date.” ii. the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State. there are more than 140 signatories to the New York Convention. there is no similar convention with respect to the recognition and enforcement of foreign court judgments. iv. Notably. or the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or. iii. if the decisions on matters submitted to arbitration can be separated from those not so submitted. the Philippine Supreme Court recognized the enforcement of a provisional/interim foreign award. b. that award was made. Quisumbing Torres 39 . any party to the arbitration may petition the proper court to recognize and enforce such award. provided that. under the law of the country where the award was made. or the recognition or enforcement of the award would be contrary to the public policy of this State. failing such agreement. or the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration. or under the law of which. was not in accordance with the law of the country where the arbitration took place. a party to the arbitration agreement referred to in article 7 was under some incapacity.

for example.” Thus. courts enjoyed broad discretion in interpreting the arbitration laws. contractor. or vacation of award in domestic arbitration. correction. The CIAC has original and exclusive jurisdiction over construction disputes. if the parties to a construction contract designate Singapore arbitration as the venue of any dispute that may arise between them. regardless of what forum they may choose. due to the absence of specific rules. the “Special Rules”). Now. bondsman or issuer of an insurance policy in a construction project. Prior to the passage of the Special Rules. even if they specifically choose another forum. If the parties do not enter into an arbitration agreement. and appeals to the Court of Appeals and the Supreme Court. Special Rules of Court on Alternative Dispute Resolution (“Special Rules”) The Philippine Supreme Court has recently promulgated the long-awaited “Special Rules of Court on Alternative Dispute Resolution” (hereinafter. The Special Rules reiterate the State policy of promoting arbitration: “It is the policy of the State to actively promote the use of various modes of ADR and to respect party autonomy or the freedom of the parties to make their own arrangements in the resolution of disputes with the greatest cooperation of and the least intervention from the courts. appointment. the procedure for invoking court assistance was not clear and this lack of clarity gave rise to party challenges and delays. and limit the scope of judicial review. particularly arbitration and mediation.” 40 Quisumbing Torres . The significance of the Special Rules could not be overemphasized. project manager. confidentiality/protective orders. 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. the Philippine Supreme Court has held that “as long as the parties agree to submit their dispute to voluntary arbitration. To this end. interim measures of protection. referral to arbitration. either party may still elect to file a request for arbitration with the CIAC. The Special Rules took effect on 26 September 2009. notwithstanding the agreement of the parties to submit their dispute to arbitration in Singapore. set strict deadlines for the filing of pleadings. quantity surveyor. The Special Rules govern the various stages of court participation: challenge to the existence. directly or by reference whether such parties are project owner. validity. recognition and enforcement or setting aside of an international commercial arbitration award. the Special Rules better define the power and role of courts. subcontractor. The CIAC is known for its efficiency. confirmation. the parties will not be precluded from electing to submit their dispute before the CIAC because this right has been vested by law. Construction Industry Arbitration Commission Executive Order No. such that. Also. and termination of arbitrators. 1008 established the Construction Industry Arbitration Commission (“CIAC”). On the other hand. recognition and enforcement of foreign arbitral award. Not surprisingly. and enforceability of arbitration agreements. assistance in taking evidence. the court rulings lacked consistency and tended to invade the province of the arbitrators. an arbitration agreement. challenge. curb a litigious culture and to de-clog court dockets. fabricator. as an important means to achieve speedy and efficient resolution of disputes.” The CIAC is a hybrid of voluntary arbitration and compulsory arbitration. and the CIAC shall assume jurisdiction over the dispute. their agreement will fall within the jurisdiction of the CIAC. impartial justice. the objectives of the Special ADR Rules are to encourage and promote the use of ADR. streamline the court procedure. consultant.10. which shall “include those between or among parties to. design professional. then the construction dispute between them shall be resolved by the courts. or who are otherwise bound by.

or revocation by the arbitral tribunal as may be warranted. and enforceability of an arbitration agreement. only to the extent that the arbitral tribunal has no power to act or is unable to act effectively. revised. or (c) after the constitution of the arbitral tribunal and at any time during arbitral proceedings but.  A party. counsel. the court will act upon the request for referral only if it is made with the agreement of all parties to the case.Doing Business in the Philippines 2010 The following are some of the salient provisions of the Special Rules:  A party may challenge before the courts the existence.  Any party to an arbitration. Assistance may be sought at any time during the course of the arbitral proceedings when the need arises. The court shall assist in the enforcement of an interim measure of protection issued by the arbitral tribunal which it is unable to enforce effectively. the arbitral proceedings may nevertheless be commenced and continue to the rendition of an award while the issue is pending before the court. Any court order granting or denying interim measure/s of protection is issued without prejudice to subsequent grant. modification. and/or enforceability of an arbitration agreement. or revoked an interim measure of protection previously issued by the court to the extent that it is inconsistent with the subsequent interim measure of protection issued by the arbitral tribunal.  A petition for an interim measure of protection may be made (a) before arbitration is commenced. be deemed to have ipso jure modified. Quisumbing Torres 41 . whether domestic or foreign. the arbitral proceedings may nevertheless be commenced or continued. The request for referral shall be made not later than the pre-trial conference. at this stage. Despite the pendency of the court action. validity.  A party to a pending action filed in violation of the arbitration agreement may request the court to refer the parties to arbitration in accordance with such agreement. and an award may be made. while the action is pending before the court. After the pre-trial conference. Despite the pendency of the petition for judicial determination of the existence. revision. In resolving the petition. (b) after arbitration is commenced but before the constitution of the arbitral tribunal. amendment. may request the court to provide assistance in taking evidence. or witness who disclosed or who was compelled to disclose information under circumstances that would create a reasonable expectation. on behalf of the source. upon its issuance. the court must exercise judicial restraint. An interim measure of protection issued by the arbitral tribunal shall. that the information shall be kept confidential has the right to prevent such information from being further disclosed without the express written consent of the source or the party who made the disclosure. amended. deferring as much as possible to the competence or jurisdiction of the arbitral tribunal to rule on its competence or jurisdiction. validity. The challenge may be done either before or after the commencement of the arbitration.

A party could request a protective order anytime there is a need to enforce the confidentiality of the information obtained. Unless a ground to vacate an arbitral award is fully established.  In deciding the petition to vacate a domestic arbitral award. or to be obtained. the court shall confirm the award. except criminal cases. 876. The court shall determine the reasonableness of the claim for attorney’s fees. which shall include reasonable attorney’s fees of the prevailing party against the unsuccessful party. Any person who disobeys the order of the court to cease from divulging confidential information shall be given the proper sanction by the court. In resolving the petition for recognition and enforcement of a foreign arbitral award in accordance with the Special Rules. Any other recourse from the arbitral award.  The court may set aside or refuse the enforcement of the international arbitral award only on grounds under the Model Law. the court shall set the case for hearing. If the court finds that there is a need to conduct an oral hearing. 1 This provision effectively overturns previous court decisions holding that an arbitral award may be questioned by directly filing a petition for review (on questions of fact and law) or petition for certiorari (on a question of jurisdiction) with the Court of Appeals.  A Philippine court shall not set aside a foreign arbitral award but may refuse it recognition and enforcement on any or all of the grounds under Section V of the New York Convention. The court shall give due priority to hearings on petitions under this Rule. Recourse to a court against an arbitral award shall be made only through a petition to set aside the arbitral award and on grounds prescribed by the law that governs international commercial arbitration. in the arbitration proceedings. This case shall have preference over other cases before the court. The court shall disregard any grounds for opposing the recognition and enforcement of a foreign arbitral award other than those specified in the New York Convention. The order enjoining a person or persons from divulging confidential information shall be immediately executory and could not be enjoined while the order is being questioned at the appellate courts. An arbitral award shall enjoy the presumption that it was made and released in due course of arbitration and is subject to confirmation by the court. The decision of the court recognizing and enforcing a foreign arbitral award is immediately executory. the court shall either (a) recognize and enforce or (b) refuse to recognize and enforce the arbitral award. the court shall disregard any grounds other than those specified in Republic Act No. 1 The prevailing party shall be entitled to an award of costs. The court shall not disturb the arbitral tribunal’s determination of facts and/or interpretation of law. 42 Quisumbing Torres . shall be dismissed by the court. The court shall disregard any grounds to set aside or enforce the arbitral award other than those specified in the Model Law. such as by appeal or petition for review or petition for certiorari or otherwise.

Doing Business in the Philippines 2010  An agreement to refer a dispute to arbitration shall mean that the arbitral award shall be final and binding. If the decision of the Regional Trial Court refusing to recognize and/or enforce. a party may file a special civil action for certiorari to annul or set aside a ruling of the Regional Trial Court.  An appeal to the Court of Appeals shall not stay the award. during the pendency of the proceedings before it. The Court of Appeals shall not. and/or setting aside an arbitral award is premised on a finding of fact. and/or set aside an award. the constitution of the arbitral tribunal. or for such other grounds provided under these Special Rules. The petition shall raise only questions of law. or denying a petition to set aside or vacate the arbitral award. in making a ruling under the Special Rules. and adequate remedy in the ordinary course of law. Consequently. or the continuation of arbitration. or resolution sought to be reviewed unless the Court of Appeals directs otherwise upon such terms as it may deem just. or for setting aside an award in an international arbitration under Article 34 of the Model Law. The court shall not set aside or vacate the award of the arbitral tribunal merely on the ground that the arbitral tribunal committed errors of fact. final order. As a general rule. speedy. or with grave abuse of discretion resulting in lack or excess of jurisdiction. Quisumbing Torres 43 . the court may vacate or set aside the decision of an arbitral tribunal only upon a clear showing that the award suffers from any of the infirmities or grounds for vacating an arbitral award under Section 24 of Republic Act No. as the court may not substitute its judgment with that of the arbitral tribunal. to post a bond equal to the amount of the award executed in favor of the prevailing party. and there is no appeal or any plain. The Court of Appeals shall require the party appealing from the decision or a final order of the Regional Trial Court either confirming or enforcing an arbitral award. judgment. Failure of the petitioner to post such bond shall be a ground for the Court of Appeals to dismiss the petition. vacate.  A party desiring to appeal by certiorari from a judgment or final order or resolution of the Court of Appeals issued pursuant to the Special Rules may file with the Supreme Court a verified petition for review of certiorari. or of fact and law. The Court of Appeals shall render judgment within 60 days from the time the case is submitted for decision. or of law. 876 or under Rule 34 of the Model Law in a domestic arbitration. prohibit or enjoin the commencement of arbitration. the Court of Appeals may inquire only into such fact to determine the existence or nonexistence of the specific ground under the arbitration laws of the Philippines relied upon by the Regional Trial Court in refusing to recognize and/or enforce. has acted without or in excess of its jurisdiction.  When the Regional Trial Court. Any such inquiry into a question of fact shall not be resorted to for the purpose of substituting the court’s judgment with that of the arbitral tribunal as regards the latter’s ruling on the merits of the controversy. vacating. a party to an arbitration is precluded from filing an appeal or a petition for certiorari questioning the merits of an arbitral award.

The type of proceeding that applies to a debtor depends on the particular relief sought. may file a petition with a Philippine Regional Trial Court (the “Court”) to be declared in a state of suspension of payments. If what is sought is merely little financial breathing space.00 PhP 50. Insolvency in the Philippines 1. suspension of payments.00 – if the award exceeds PhP 100. then the remedy is a suspension of payments.000. The applicable laws are the Civil Code of the Philippines (“Civil Code”).000.000. If. there was no standard or schedule for computing the filing fees. the party praying for confirmation or vacation of an arbitral award shall submit a statement under oath confirming the costs he has incurred only in the proceedings for confirmation or vacation of an arbitral award. and the Rules of Procedure on Corporate Rehabilitation. The court shall determine the reasonableness of the claim for attorney’s fees. Overview and Introduction to the Jurisdiction/Applicable Legislation There are three types of remedies available to a financially distressed individual or juridical person.00 – if the award does not exceed PhP 1. 902-A”). others based the computation of the filing fees on the amount found in the arbitral award.000. the Insolvency Law. Some courts charged fixed filing fees.00 PhP 20. 2 44 Quisumbing Torres . 2. it may apply for insolvency and have its assets distributed accordingly among its various creditors.00 – if the award does not exceed PhP 20. and insolvency.00 PhP 30.00 PhP 40.D. and requires temporary protection against both secured and unsecured creditors. on the other hand. The fee 2 for filing a petition to confirm or enforce.000. 902-A (“P.000. Finally. The prevailing party shall be entitled to an award of costs with respect to the proceedings before the court.000.  XV. to wit.00  At the time the case is submitted to the court for decision. corporate rehabilitation.000. 2.1 Proceedings for Solvent Debtors (Individuals or Corporations) Suspension of Payments An individual debtor who possesses sufficient property to cover all of his debts. if the debtor company is no longer capable of or interested in maintaining its business. then the remedy is to seek corporate rehabilitation.000.000.000. but foresees the impossibility of meeting them when they respectively fall due. the rehabilitation of a company entails more radical measures such as changes in organization.000.000. and/or strategy.000. management.00 – if the award does not exceed PhP 100. The petition Prior to the passage of the Special Rules. which shall include the reasonable attorney’s fees of the prevailing party against the unsuccessful party.00 – if the award does not exceed PhP 50. The costs shall include the attorney’s fees the party has paid or is committed to pay to his counsel of record. Presidential Decree No. which provides for the deferment of payments and temporary protection against actions/executions by unsecured creditors.000. Each of these remedies is discussed in more detail below. vacate. or set aside an arbitral award in a domestic arbitration or in an international commercial arbitration shall be as follows: PhP 10.

iii. the proceeding will be terminated and the creditors may enforce their respective credits. except in the ordinary course of the business in which the debtor is engaged. If the objection is found to be unmeritorious. However. If the required vote is achieved but there is an objection from any of the creditors. or association that foresees the impossibility of meeting its debts when they respectively fall due. the Court will proceed as though no objection has been made. the Court will issue an order that the proposed agreement be carried out. a. The petition for rehabilitation must be filed with the Court of the place where the debtor’s principal Quisumbing Torres 45 . c. ii. the payment for such debts is delayed. If the objection is found to be meritorious. and in the deliberations thereat. the rights which the creditors had against the debtor before the agreement shall re-vest in them. iii.” a statement of the debtor’s assets and liabilities.2 Corporate Rehabilitation A debtor which is a corporation. and the debtor’s proposed agreement for the suspension of payments. or any creditor or creditors holding at least 25 percent of such debtor’s total liabilities. in the holding thereof. bars ordinary creditors from instituting proceedings in any Philippine court against the debtor. b. which prejudice the rights of the creditors. 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.Doing Business in the Philippines 2010 must be filed with the Court of the place where the debtor has his residence within six months prior to the filing of the petition. partnership. Objections to the debtor’s proposed agreement The possible grounds for objecting to the proposed agreement are: i. and fraudulent conveyance of claims for the purpose of obtaining the required majority. fraudulent connivance between one or more creditors and the debtor to vote in favor of the proposed agreement. may petition the proper Court to place the debtor under rehabilitation. ii. and prohibits the debtor from disposing of his property or making payments. If the debtor fails wholly or in part to perform the Court-approved agreement. If the required vote is achieved without any objection from the creditors. the Court will conduct a hearing on the objection. If the required vote is not achieved. 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. and such agreement shall be binding on all creditors that have been properly summoned and included in the Schedule of Creditors. the proceeding will terminate. Court Proceedings The petition for suspension of payments must include a “Schedule of Creditors. except executions against properties specially mortgaged. 2. defects in the call for the meeting of the creditors. Effects of a Petition for Suspension of Payments The filing by a debtor of a petition for suspension of payments: i.

whether for money or otherwise and whether such enforcement is by court action or otherwise against the debtor. (d) prohibits the debtor from making any payment of its liabilities outstanding as at the date of filing of the petition. among others. The Court may extend this period only if it appears by compelling evidence that the debtor may successfully be rehabilitated. (b) stays the enforcement of all claims. conditions. or restrictions as the effective implementation and monitoring of the rehabilitation plan may reasonably require. the Court could revoke the approval thereof on the ground that the same was secured through fraud. within 90 days from the approval of the rehabilitation plan. a. (e) prohibits the debtor’s suppliers of goods or services from withholding supply of goods and services 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. Effects of a Petition for Rehabilitation If the Court finds the petition sufficient in form and substance. (c) prohibits the debtor from selling. or disposing of in any manner any of its properties except in the ordinary course of business. and (g) sets an initial hearing on the petition and directs all creditors and interested parties to file their verified comments on or oppositions to the petition before the said initial hearing. The Court may impose such terms. among others: (a) appoints a Rehabilitation Receiver. c. not later than five days from the filing of the petition. On motion by a party or on its own. the Court is satisfied that there is merit in the petition. or agreement made in violation of the Court’s Stay Order or in violation of the Rules on Corporate Rehabilitation. a rehabilitation plan. the Court may declare void any transfer of property or any other conveyance. The Stay Order is effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceeding. (f) directs the payment in full of all administrative expenses incurred after the issuance of the Stay Order. The Stay Order applies to both secured and unsecured creditors. sale. after the initial hearing on the petition for rehabilitation. the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. it will give due course to the petition and refer the same to the Rehabilitation Receiver. encumbering. 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. or for the protection and preservation of the interests of the creditors if the plan fails. Clawback provisions Upon motion by a party or on its own.office is located. The petition for rehabilitation must be accompanied by. Court proceedings If. The Rehabilitation Receiver will evaluate the rehabilitation plan and submit his recommendations to the Court not later than 120 days from the date of the initial hearing. the period for approving or disapproving a rehabilitation plan may not exceed 18 months from the date of filing of the petition. payment. 46 Quisumbing Torres . in its judgment. it will. transferring. b. However. its guarantors and sureties not solidarily liable with the debtor. issue a “Stay Order” which. The Court may approve a rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor if.

Effects of an approved rehabilitation plan on prior agreements between the 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. Court Proceedings The petition for involuntary insolvency must be filed in the Court of the place where the debtor resides or has his principal place of business. the Court will issue an order declaring the debtor insolvent. direct the filing of an additional bond when deemed necessary. The debtor must also include in the petition a schedule of debts and of creditors. in such sum as the Court will direct. among others. the basic premise is that the debtor does not have enough assets/properties to cover his obligations. If the Court finds the petition meritorious. as well as an inventory of all his assets. the Supreme Court of the Philippines ruled that a Stay Order and an approved rehabilitation plan merely suspend the enforcement of the security. 3. a.000 (approximately US$25) may seek a declaration of insolvency against a debtor. The creditors must be Philippine residents whose credits accrued in the Philippines and did not become creditors by assignment within 30 days prior to the filing of the petition. the debtor’s inability to pay all his debts in full and his willingness to surrender all his property. and effects not exempt from execution for the benefit of the creditors. The petition must allege. The petition must be accompanied by a bond.000 (approximately US$25) may seek a declaration of insolvency. estate. 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. or if the debtor is not declared insolvent. Quisumbing Torres 47 . the court will issue an order declaring the debtor insolvent. a. The petition must also allege one or more acts of insolvency. duly authorized by the board of directors. 3. Upon the filing of the petition. the petition may be filed by any officer of the corporation.1 Voluntary Insolvency A debtor owing debts exceeding PhP1. In a recent decision involving a creditor’s security agreement with a debtor under rehabilitation. The filing of the petition is deemed an act of insolvency. upon motion. 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 or withdrawn by the petitioners. and do not prejudice the status of the secured creditor vis-à-vis the unsecured creditors. If the debtor is a corporation. or association) for six months preceding the filing of the petition. and must be verified by at least three of the petitioners. The Court may. Insolvency Proceedings (Individuals or Corporations) In insolvency proceedings.2 Involuntary Insolvency Three or more creditors whose total credits exceed PhP1.Doing Business in the Philippines 2010 d. Insolvency proceedings may be voluntary or involuntary. The Court will require the debtor to show why he may not be declared insolvent. partnership.

b. These credits have preference among themselves in the order of priority of the dates of the instruments and of the judgments. Rights of Secured Creditors A creditor whose credit is secured by a mortgage or pledge is allowed. respectively. either (i) to foreclose the property subject of such security arrangement (notwithstanding the stay effected by the Order of Insolvency) or (ii) to pursue his claim in the insolvency proceeding together with other creditors.e. or the value thereof. No discharge is granted to a corporation that is declared insolvent. But the creditor may be admitted in the insolvency proceeding to recover the balance of the debt after deducting the value of the property foreclosed. or seized on execution. mortgage. 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. assignment. 48 Quisumbing Torres . procures any of his property to be attached. All property of the insolvent not exempt by law from execution will be conveyed to an assignee-in-insolvency elected by the creditors. c. but must be paid concurrently and pro rata. Clawback Provisions The assignee-in-insolvency may recover property given as security. sequestered. Among the Special Preferred Credits. i. being insolvent. Article 2244 provides for the preference of certain claims and credits which. appear in (i) a public instrument (i. without special privilege. within 30 days before the filing of a petition to be declared insolvent by or against him.3 Provisions Applicable to Both Voluntary or Involuntary Insolvency Proceedings a.. the instrument is notarized) or (ii) a final judgment.e.3. Credits that do not enjoy any preference with respect to specific property are satisfied in the order established in Article 2244 of the Civil Code. by releasing or surrendering to the assignee-in-insolvency the properties subject of the pledge or mortgage. if the debtor. credits secured by a pledge or mortgage) do not enjoy priority among themselves. or in contemplation of insolvency. or makes any pledge.g. Preference of Credits In an insolvency proceeding. All the remaining classes of Special Preferred Credits with respect to specific movable or immovable property (e.. such creditor may not participate in the election of the assignee-in-insolvency. If the secured creditor opts for foreclosure.. The creditor recovers the balance by participating in the pro rata distribution of the debtor’s estate. in proportion to the amount of the respective credits. certain types of credits enjoy preference with respect to specific movable or immovable properties (“Special Preferred Credits”). d. he may recover his credit by participating in the pro rata distribution of the debtor’s estate. at its option. taxes and assessments due upon the property to which the claims relate enjoy absolute preference. but will have to relinquish his security and surrender the properties subject of the security to the assignee-in-insolvency. Effect of Order of Insolvency An Order of Insolvency generally suspends all civil proceedings pending against the debtor. By way of exception. If the creditor pursues his claim in the insolvency proceeding.

or conveyance thereof to anyone with a view to: (i) giving a preference to any creditor or person having a claim against him. assignment. or delaying the operation of. or (iii) defeating the object of. except for a valuable pecuniary consideration made in good faith. Furthermore. sale. sale. any pledge. sale. or if such seizure is made under a judgment which the debtor has confessed or offered to allow. Under the Insolvency Law. sequestration.Doing Business in the Philippines 2010 transfer. the attachment. or transfer of the property is not made in the usual and ordinary course of business of the debtor. mortgage. sale. if the pledge. the provisions of the Insolvency Law. conveyance. In such a case. transfer. impeding. is considered void. or transfer of property made by the insolvent within one month before the filing of a petition in insolvency by or against him. assignment. mortgage. that fact will be deemed prima facie evidence of fraud. (ii) preventing the property from being distributed ratably among his creditors. assignment. or conveyance is considered void. mortgage. Quisumbing Torres 49 . seizure. conveyance. pledge. or in any way hindering.

Quisumbing Torres is amember of Baker & McKenzie International. or equivalent.com ©2010 Quisumbing Torres. reference to an “office” means an office of any such law firm.C. All rights reserved. Castro.castro@bakernet.bakernet. reference to a “partner” means a person who is a partner. in such a law firm. Similarly. Bonifacio Global City Taguig City. Jr. .: +63 2 819 4700 Direct: +63 2 819 4902 Fax: +63 2 816 0080 ricardo.com Contact: Ricardo P. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Philippines 1634 Tel. Prior results don’t guarantee a similar outcome.www. a Swiss Verein with member law firms around the world. Net One Center 26th Street corner 3rd Avenue Crescent Park West. In accordance with the common terminology used in professional service organizations. Quisumbing Torres 12th Floor.

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