Foreign

Corporation
 A foreign corporation is one formed, organized
Definition or existing under any laws other than those of
the Philippines.
 Whether or not a corporation is foreign, we
need to take a look at the place where it is
incorporated or created. If it is in the
Philippines, then it is a domestic corporation.
Rule However, in times of war and/or on issue of
maximum foreign ownership, there is the so
called “control test” and the “grandfather rule”
to observe.
 Is applied in determining whether a
corporation is domestic or foreign. If it is
Incorporation incorporated under Philippine laws, it is
deemed a domestic corporation; if it is
Test incorporated in another state, it is a foreign
corporation, while if it is created, irrespective
of the nationality of the stockholders.
Control Test
or The Control Test is used to determine
corporate nationality for purposes of applying
Liberal Rule laws, e.g., prohibition to acquire lands
applicable to corporations more than 40% of
and the which is owned by non-Filipinos.
Grandfather
Rule
 Under the liberal control test, there is no need
to further trace the ownership of the 60% (or
Liberal Rule more) Filipino stockholders of the investing
corporation, since a corporation which is at
least 60% Filipino-owned is considered as
Filipino.
 The Grandfather Rule is a method of
determining the nationality of a corporation
which in turn is owned by another corporation
by breaking down the entity structure of the
shareholders of the corporation.
The true Filipino ownership is traced all the
Grandfather way to the individual stockholders of the
corporation (A) owning shares in another
Rule corporation (B) by multiplying the Filipino
ownership of the first corporation (A) to the
corresponding ownership of the corporation
(B).
It applies to nationalized activities or those
which require whole or partial Filipino
ownership.
 Only corporation with at least 60% Filipino
ownership will be allowed in this business.
Corporation X is a domestic corporation
registered before the SEC with the following
Grandfather stockholders:
Mr. A, Filipino, 20%
Rule Mr. B, Filipino, 20%
Illustration Corporation C, 20% Filipino Corporation
Mr. D, American, 20%
Mr. E, Japanese, 20%
Is Corporation X qualified?
 Under the Grandfather Rule, there is a need to
determine the ownership of Corporation C
further.
Corporation C is a domestic corporation
registered with the SEC with the following
Grandfather stockholders:
Mr. F, Filipino, 20%
Rule Mr. G, Filipino, 20%
Illustration Mr. H, Filipino, 20%
Mr. I, American, 20%
Mr. J, Japanese, 20%
Did Corporation X now meet the 60-40
requirement?
 Under the Grandfather Rule, there is a need to
determine the ownership of Corporation C
further.
Corporation C is a domestic corporation
registered with the SEC with the following
Grandfather stockholders:
Mr. F, Filipino, 20%
Rule Mr. G, Filipino, 20%
Illustration Mr. H, Filipino, 20%
Mr. I, American, 20%
Mr. J, Japanese, 20%
Did Corporation X now meet the 60-40
requirement?
 There are two acknowledged tests in
determining the nationality of a corporation:
the control test and the grandfather rule.
DOJ Opinion Mo. 020 Series of 2005 provides:
1. Shares belonging to corporations or
Grandfather partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be
Rule considered as of Philippine nationality
(control test).
Application 2. But if the percentage of Filipino ownership
in the corporation or partnership is less
than 60%, only the number of shares
corresponding to such percentage shall be
counted as of Philippine nationality
(grandfather rule).
 As a condition precedent to the grant of
license to do or transact business in the
Philippines, the foreign corporation is required
to designate its resident agent on whom
Resident summons and other legal processes may be
served in all actions or legal proceedings
Agent against such corporation.
A resident agent corporation for a foreign
corporation is now required that it is of sound
financial standing and must show proof that it
is in good standing as certified by the SEC.
 A foreign corporation must secure the
necessary license before it can transact or do
business in the Philippines.
License What constitutes “doing business”? – Doing
business may be determined using the
requirement following tests:
and doing 1. Continuity test – doing business implies a
continuity of commercial dealings and
business arrangements and contemplates to some
extent the performance of acts or works or
without one the exercise of some functions normally
incident to and in progressive prosecution
of the purpose and object of its
organization;
License 2. Substance test – a foreign corporation is
doing business in the country if it is
requirement continuing the body or substance of the
enterprise of business for which it was
and doing organized.
business 3. Contract test – actual performance of
specific commercial acts within the
without one territory of the Philippines.
 1. Mere investment as a shareholder by a
foreign entity in domestic corporation duly
registered to do business, and / or exercise
of rights as such investor, nor
Not doing 2. Having a nominee director or officer to
represent its interest in such corporation;
business nor
3. Appointing a presentative or distributor
domiciled in the Philippines which
transacts business in its own name and for
its own account.
 A foreign corporation shall not be permitted to
Doing maintain or intervene in any action, suit or
proceeding in any court or administrative
business agency of the Philippines; but such corporation
may be sued or proceeded against before
without a Philippine courts or administrative tribunals on
license any valid cause of action recognized under
Philippine laws.
 1. Foreign corporations can sue before the
Philippine Courts if the act or transaction
involved is an ISOLATED TRANSACTION or
the corporation is NOT seeking to enforce
any legal or contractual rights arising from,
or growing out of, any business which it has
Exceptions transacted in the Philippines.
2. Neither is a license required before a
foreign corporation may sue before the
forum if the purpose of the suit is to
PROTECT ITS TRADEMARK, trade name,
corporate name, reputation or goodwill.
 3. Or when it is based on a VIOLATION OF THE
REVISED PENAL CODE.
4. Or merely DEFENDING a suit filed against
Exceptions it.
5. Or when a party is ESTOPPED to challenge
the personality of the corporation by
entering into a contract with it.
 END Thank You
OF For The
COBLA Term
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