The Philippines has emerged as one of the most dynamic economies in the East Asia and Pacific region, driven by strong consumer demand, a vibrant labor market, and robust remittances (World Bank Group). As of 2022, the country housed over 1.1 million business enterprises, with micro, small, and medium enterprises (“MSMEs”) making up 99.59% of this total. MSMEs play a crucial role in the economy, generating approximately 65.10% of total employment, particularly in sectors like wholesale and retail trade, accommodation, and food services (Department of Trade and Industry). Despite facing challenges such as the COVID-19 pandemic, the Philippine economy demonstrated resilience with a growth rate of 5.6% in 2023, aided by ongoing public investments and favorable investment policy reforms (World Bank Group).

Total foreign investments approved in the second quarter of 2024 was recorded at PHP 189.50 billion, an increase of 220.7% from the PHP 59.09 billion total foreign investments in the same quarter of 2023.  Of the total approved foreign investments for the second quarter of 2024, Switzerland posted the highest investment commitment amounting to PHP 172.04 billion or 90.8%. It was followed by Japan at PHP 7.68 billion (4.1%), and Malaysia at PHP 4.53 billion (2.4%) (Philippine Statistics Authority).

Electricity, gas, steam and air conditioning supply industry received the largest amount of approved investments at PHP 172.74 billion or 91.2% of the total approved foreign investments. This was followed by manufacturing with PHP 12.39 billion and administrative and support service activities with PHP 2.84 billion, or shares of 6.5% and 1.5%, respectively (Philippine Statistics Authority).

There are several ways that foreign investors can operate in the Philippines, determined on the business activities that will be undertaken and the applicable foreign investment laws. Greenfield or brownfield projects to build new facilities by foreign companies, mergers, acquisition of businesses (in asset or stock transactions), acquisition of minority interests in existing companies, joint ventures, making portfolio investments in Philippine public equity and debt capital markets, incorporation of Philippine subsidiaries, and obtaining a license to transact business in the Philippines through setting up a branch office, representative office, regional operating headquarters and regional headquarters are typical forms of foreign direct investments in the Philippines. Foreign investors can also enter into Technology Transfer Arrangements and management contracts to the extent allowed by law.

The Foreign Investments Act of 1991 [Republic Act No. 7042] (“FIA”) has liberalized the Philippine economy by allowing foreign investors to own a domestic company, subject to certain constitutional and statutory foreign ownership restrictions in certain industries.

Under the FIA, industry sectors may be classified into:

• Liberalized Industries, where 100% foreign ownership is allowed (i.e. no ownership by Philippine nationals is required);
• Partially Nationalized Industries, where foreign ownership is subject to prescribed ceilings (i.e. minimum ownership by Philippine nationals is required); and
• Nationalized Industries, where no foreign ownership is allowed (i.e. ownership is limited to Philippine nationals).

Liberalized Industries

Under the FIA, foreign investors may own up to 100% Export Enterprises and Domestic Market Enterprises, provided that the products, services, and activities of such enterprises do not fall under partially nationalized or nationalized industries, as discussed below.

An Export Enterprise is a (a) manufacturer, processor, or service enterprise that exports at least 60% of its output or (b) trader that purchases products domestically and exports at least 60% of such purchases.

A Domestic Market Enterprise is an enterprise that (a) produces goods for sale or renders services to the domestic market entirely or (b) exports less than 60% of its output.

Foreign investors may own more than 40% of the equity of a Domestic Market Enterprise only if the paid-in capital of such enterprise is at least US$200,000.00. This minimum paid-in capital requirement is reduced to US$100,000.00 if the Domestic Market Enterprise (a) involves an advanced technology as determined by the Department of Science and Technology; (b) is endorsed as startup or startup enablers by the lead host agencies, namely the Department of Trade and Industry, Department of Science and Technology, or  Department of Information and Communications Technology, pursuant to Republic Act No. 1137, otherwise known as the Innovative Startup Act; or  (c)  a majority of the direct employees are Filipinos, but in no case shall the number of Filipino employees be less than 15, as certified by the Department of Labor and Employment.  Registered foreign enterprises employing foreign nationals and enjoying fiscal incentives are required to implement an understudy or skills development program to ensure the transfer of technology or skills to Filipinos. Compliance with this requirement must be regularly monitored by the Department of Labor and Employment.

On the other hand, foreign investors may own more than 40% of the equity of an Export Enterprise, provided the paid-in capital is at least Php5,000.00.

Partially Nationalized and Nationalized Industries

Partially nationalized and nationalized industries are listed in the Foreign Investments Negative List (“Negative List”), which consists of List A and List B.

List A lists industries where foreign equity is limited by the mandate of the Constitution or by law. List B lists industries where foreign equity is limited to safeguard the following national interests: security, defense, health, morals, and protection of small- and medium-scale enterprises.

Amendments to the Negative list shall not be made more often that once every two (2) years. A new Negative List is prospective in application and should not affect foreign investments existing on the date of its publication.

The 12^th Negative List, which was promulgated on 27 June 2022, is the most recent. A copy of this 12^th Negative List can be accessed through this link: https://www.sec.gov.ph/wp-content/uploads/2024/03/2024_20220627-EO-175-RRD.pdfT

Yes, foreign investors are allowed to invest and hold the same class of stock or other equity securities as domestic shareholders in both private and public companies, provided that applicable foreign equity restrictions as discussed under item 3 above and restrictions in the articles of incorporation, if any, are observed.

The current legal framework in the Philippine allows foreign investors to organize and manage domestic businesses through setting up domestic companies or setting up an extension of the offshore company’s juridical personality in the Philippines in the form of a branch office, representative office, regional operating headquarters and regional headquarters. The decision on the corporate vehicle to establish in the Philippines depends on a variety of factors, including the business activities, objectives, strategy.

We discuss the corporate vehicles further under item 6 below.

Foreign investors are generally allowed to establish any of the following: (a) domestic company; (b) branch office; (c) representative office; (d) regional headquarters; (e) regional operating headquarters; (f) partnership; and (g) sole proprietorship. Each form of corporate vehicle has its own characteristics and features that may work as an advantage or disadvantage depending on the foreign investors’ particular business activities, objectives and strategy.

A sole proprietorship is under the jurisdiction of the Department of Trade and Industry, while the rest of the corporate vehicles are under the jurisdiction of the Securities and Exchange Commission.

Notably, it is uncommon for foreign investors to set up a sole proprietorship and partnership.

Domestic Company

A domestic company is a corporation which, while incorporated and existing under Philippine law, is either wholly-owned or at least majority-owned by a foreign parent corporation. A domestic company has a personality separate and distinct from  that of its stockholders (e.g., foreign parent company) and directors/officers who run and manage its affairs. The liability of the shareholders of a corporation is limited to the amount of their share in the capital.

The scope of activities that may be performed by a domestic subsidiary is broad, limited only by its charter documents, i.e. its Articles of Incorporation and By-Laws, and by applicable Philippine law.  Hence, the business activities that may be performed by the domestic subsidiary must be provided in the charter documents upon incorporation.

The powers of a domestic company are exercised by its board of directors, which shall consist of not less than two but not more than 15 directors. Each director must own and have registered in his name at least one share of the domestic company. Unless the company is engaged in a partially nationalized or nationalized industry, as discussed above, there are no citizenship and residency requirements for a director.

As discussed in item 3 above, a domestic company that qualifies as a Domestic Market Enterprise is required to have a minimum paid-in capital of US$200,000.00. This minimum paid-in capital requirement may be reduced to US$100,000.00 in some instances. The minimum paid-in capital requirement of US$200,000.00 does not apply to a domestic company that qualifies as an Export Enterprise. Please note that there are certain industries which may require higher capitalization requirements.

Branch Office 

A branch office is considered an extension of a foreign corporation which carries out the business activities of the head office. Unlike a domestic company, it has no personality separate and distinct from its parent.  Thus, it may conclude contracts with local entities in its parent’s name and engage in revenue-generating activities in the same manner as its parent.  There is no ring-fencing of assets so the parent company shall be liable for all obligations incurred in the Philippines, not only to the extent of its assets located in the Philippines, but presumably even to the extent of its assets abroad. A branch office can only perform the same activities of that of its parent, except those reserved for Philippine nationals or to entities that require minimum ownership by Philippine nationals.

Under the Foreign Investments Act, the minimum assigned capital of a branch office is the peso equivalent of US$200,000.00. Like domestic companies, this minimum paid-in capital requirement can be reduced to US$100,000.00 if conditions discussed above are met.

Apart from minimum paid-in capital requirements, a branch office is required to deposit with the Securities and Exchange Commission securities with an actual market value of at least Php500,000 within 60 days from the issuance of its License to Transact Business. Additional securities with an actual market value equivalent to 2% of the increase in gross income is required to be deposited within six (6) months after each fiscal year in the event that the licensee’s gross income within the Philippines for fiscal year covered by the latest Financial Statements exceeds Php10,000,000.00. Acceptable securities consist of:

• Government Debt Instruments – bonds and other evidence of indebtedness of the Philippine Government, its political subdivisions and instrumentalities, and state-owned enterprises;
• Equity Instruments –
  • Shares of stock in “registered enterprises” under the Omnibus Investment Code (e.g., export-oriented entities that are registered with the Board of Investments)
  • shares of stock or debt securities which are registered under the Securities Regulation Code
  • shares of stock of domestic corporations listed in the stock exchange; and
  • shares of stock in domestic insurance companies and banks
• Any combination of the foregoing.

This deposit is maintained for the benefit of satisfying claims by creditors of the Branch Office in the Philippines.

Representative office

A representative office is a limited purpose office that has no separate and distinct personality from its parent.  Like a branch office, its parent company shall be liable for obligations incurred in the Philippines, but unlike a branch office, it cannot engage in revenue-generating activities.  By definition, a representative office deals directly with the clients of the parent company but does not derive income from the host country and is fully subsidized by its head office.

A representative office may perform the following activities:

• disseminate foreign market information;
• act as a message center or a communication center between interested parties and its head office;
• render, assist, and give technical know-how and training to existing and future customers of its foreign principal’s products;
• provide and facilitate better communication and contact between its head office and affiliated companies on the one hand and present and future customers on the other;
• inform potential customers of price quotations of the head office and affiliated companies;
• conduct surveys and studies on the market, economic, and financial conditions in the Philippines; and
• attend to the needs of end-users of its foreign principal’s products/services in the Philippines and communicate to its head office problems that call for consultations.

A representative office is not allowed to derive income from its operations.  Thus, a representative office is not allowed to issue a local service invoice for its services or directly engage in a sales transaction.  It is not allowed to charge any fees in the performance of its activities or even receive payments for the transactions of its parent. A representative office cannot directly enter into transactions with clients of its parent company and conclude contracts in its own name, as such, all transactions should be booked, sold or executed outside the Philippine’s jurisdiction.  All transactions entered into through the promotional and marketing efforts of the representative office should be booked only by the parent entity/head office. The representative office cannot charge any fees in the performance of its activities and functions, as it is not authorized to generate income from such activities and functions in the Philippines.

Under the Foreign Investments Act, a minimum amount of US$30,000.00 must be remitted initially to the representative office. This amount can be used for operations.

Regional Headquarters

 A Regional Headquarters is an administrative branch of a multinational company established in the Philippines which acts as a supervision, communications, and coordination center for the multinational company’s subsidiaries, branches, and affiliates in the Asia-Pacific region and in other foreign markets. It cannot solicit or do business or earn income in the Philippines and all its expenses are financed by its principal multinational company; it can only operate as a cost center.

A Regional Headquarters is also not allowed to deal with the clients of its principal, even for purposes of products and/or services promotion.

A minimum of US$50,000.00 must be remitted initially to a Regional Headquarters. Since the principal is required to finance all expenses of the Regional Headquarters, the principal must remit into the Philippines the amount necessary to cover the operations of the Regional Headquarters, which shall not be less than US$50,000.000 for any given year.

Regional Operating Headquarters 

A Regional Operating Headquarters is an operating headquarters of a multinational company established in the Philippines which is allowed to derive income in the Philippines. Such income, however, may only be derived from performing qualifying services to its principal’s subsidiaries, branches, and affiliates in the Asia-Pacific region and in other foreign markets.

Regional Operating Headquarters may only perform the following qualifying services vis-à-vis its principal’s subsidiaries, branches, and affiliates:

• general administration and planning;
• business planning and coordination;
• sourcing and procurement of raw materials and components;
• corporate finance advisory services;
• marketing control and sales promotion;
• training and personnel management;
• logistic services;
• research and development services and product development;
• technical support and communications; and
• business development.

It is prohibited from offering qualifying services to entities other than its principal’s subsidiaries, branches, and affiliates, as declared in its registration with the SEC. Additionally, its business activities are subject to the following limitations:

• It shall offer its services only to its affiliates, branches or subsidiaries, as declared in its registration with the SEC.
• It shall not directly and indirectly solicit or market goods and services whether on behalf of their mother company, branches, affiliates, subsidiaries or any other company.
• It cannot directly or indirectly engage in the sale and distribution of goods and services of its mother company, branches, affiliates, subsidiaries or any other company.

Similar to a branch office, representative office, and regional headquarters, a Regional Operating Headquarters does not have a separate and distinct juridical personality from its parent.

Furthermore, under the Foreign Investments Act, a minimum amount of US$200,000.00 must be remitted initially to Regional Operating Headquarters.

Partnership

 A business entity formed by two or more persons (indefinite number) who bind themselves with the intention of dividing profits among themselves.

Similar to a domestic company, a partnership has a personality separate and distinct from that of its partners.

However, unlike a domestic company, a partnership is created by mere agreement of the parties as governed by the Civil Code of the Philippines, while a domestic company is created by operation of law and governed by the Revised Corporation Code.

The partners in a partnership may exercise any power authorized by the partners. All the partners are considered agents and any act of each partner will bind the partnership.

The same capitalization requirements of a domestic company apply to a partnership.

Sole Proprietorship

A sole proprietorship is a business entity formed by an individual who has full control and authority.  It does not have a personality separate and distinct from its owner. Thus, the sole proprietor has unlimited liability such that the creditors of the business can proceed not only against the assets and property of the business but after the owner’s personal assets and property.

The same capitalization requirements of a domestic company apply to a sole proprietorship.

Which form is preferred by domestic shareholders?

Domestic shareholders typically prefer to form a domestic company.

We note, however, that the choice of corporate vehicle depends on several factors, including the business activities, objectives and strategy, and tax.

Which form is preferred by foreign investors/shareholders?

Foreign investors usually prefer a domestic company.

We note, however, that the choice of corporate vehicle depends on several factors, including the business activities, objectives and strategy, and tax.

What are the reasons for foreign shareholders preferring one form over the other?

Foreign shareholders typically favor setting up a domestic company due to its distinct legal identity separate from that of its shareholders. This structure limits the liability and risk to the company itself, providing a safeguard for the assets of the parent company. Additionally, setting up a domestic company offers ease of ownership transfer and flexibility in implementing capital raising activities and business expansion.

The basic requirements in setting up an entity in the Philippines vary depending on the type of corporate vehicle. The list can be through the website of the Philippine Securities and Exchange Commission: https://www.sec.gov.ph/company/primary-registration-2/#gsc.tab=0

Additional requirements may be required depending on whether a juridical entity will act as an incorporator and on the mode of payment for the subscription of shares, among others.

Which governmental entities have to give approvals?

Except for a sole proprietorship which is registered with the Department of Trade and Industry, incorporation of a domestic company or partnership or procuring a license to transact business in the Philippines through a branch office, representative office, regional headquarters, or regional operating headquarters is process with the Securities and Exchange Commission.

Registrations with other government entities, including the Bureau of Internal Revenue, relevant local government unit Social Security System, Home Development Mutual Fund, Philippine Health Insurance Corporation, Department of Labor and Employment, and National Privacy Commission, if applicable, must also be completed after incorporation of a domestic company or issuance of the license to transact business and before start of commercial operations.

What is the process for forming/incorporating a domestic company?

There are two ways to register an entity in the Philippines with the Securities and Exchange Commission, such as (a) zero processing and (b) regular processing. The zero processing option is not available to setting up a partnership and corporation engaged in lending and financing activities and applying for a license to transact business in the Philippines through a branch office, representative office, regional headquarter, and regional operating headquarters,

Under the Securities and Exchange Commission’s zero processing application system, the incorporators and treasurer- in-trust of the New Co. can digitally sign and authenticate the charter documents through the Securities and Exchange Commission’s electronic submission authentication portal (eSAP). Before the incorporators can use the eSAP, they are required to register in the Securities and Exchange Commission’s Electronic SEC User Registration Environment (eSECURE) platform. With the zero processing application system, the incorporators are no longer required to submit hard copies of the constitutive document, signed in wet ink, notarized, and authenticated, if executed abroad.

On the other hand, under the regular processing application of the Securities and Exchange Commission, the incorporators must sign the charter documents in wet ink signature, which must be notarized and authenticated, if executed abroad.

As discussed above, once an entity is set up, registrations with other government entities, including the Bureau of Internal Revenue, relevant local government unit, Social Security System, Home Development Mutual Fund, Philippine Health Insurance Corporation, and Department of Labor and Employment, must be processed before starting business operations. We note that certain business activities may require registration with specific government entities, which may not be necessary for other types of businesses.

What is a required capitalization for forming/incorporating a company?

Please refer to the discussion under items 3 and 6 above.

How long does it take to form a domestic company?

Setting up a corporate vehicle in the Philippines may take around 1 to 3 weeks for zero processing and 1.5 to 2 months for regular processing.

It is noteworthy to mention that the Securities and Exchange Commission recently launched the SEC Foreign Investment Registration Station Green Lane Unit (SEC FIRST GREEN LANE UNIT). It is expected that this unit will help facilitate the setting up of foreign-owned entity in the Philippines.

How many shareholders is the company required to have?

Unless a domestic company being set up is a one-person corporation, the minimum number of shareholders is two (2). However, in practice, in cases where the foreign juridical entity (parent company) wholly owns the domestic company, there should be at least three shareholders, namely, the foreign juridical entity and two natural persons who can act as nominee directors of the domestic company. Under the Revised Corporation Code, a regular domestic company must have at least two (2) directors, each holding at least one qualifying in his or her name.

Is the list of shareholders publicly available?

Yes, the list of shareholders is publicly available through requesting a copy of the General Information Sheet from the Securities and Exchange Commission. We note that the details of the ultimate beneficial owner of the domestic company are excluded from the copy that the Securities and Exchange Commission will issue for confidentiality purposes.

A tax clearance, also known as the Certificate Authorizing Registration, must be obtained from the Bureau of Internal Revenue before the corporate secretary can record the transferee of the shares of the stock in the corporate books and issue the corresponding stock certificate, if the shares of stock are fully paid.   The Certificate Authorizing Registration serves as proof that the taxes due on sale of shares are duly paid.

In the case of acquisition of assets involving real properties (e.g., building), a tax clearance (Certificate Authorizing Registration) must also be obtained from the Bureau of Internal Revenue. Clearance is also required from the City or Municipal Treasurer’s Office where the real property is located for transactions involving real property, such as the building and other improvements on the land. Additionally, registration of a transfer of real property is required if the transaction involves a real property, while registration of the transfer with the Land Transportation Office is required if the transaction involves motor vehicles.

If the asset acquisition covers all or substantially all of the assets of the seller, compliance with the bulk sales law, including registration of the bulk sales with the Department of Trade and Industry, must be complied with.

We note that certain industries may require prior approvals from specific government agencies if the acquisition of shares could lead to a change of control.

Subject to compliance with the foreign equity restrictions under the Foreign Investment Act, a foreign investor does not need approval to acquire shares in a public company.

In acquiring shares of a public company in a direct (private) transaction from another shareholder, rules on mandatory tender offer, as discussed under item 10 below, and foreign equity limitations must be observed.

Under the Securities Regulation Code, a tender offer must be made by an investor acquiring outstanding securities of a public company or the outstanding equity securities of an associate or related company of such public company which controls the said public company under any of the following circumstances:

1. Acquisition of 35% of the outstanding voting shares or such outstanding voting shares sufficient to gain control of a public company’s board, by a person or a group of persons, in one or more transactions within 12 months.
2. Acquisition of 35% of the outstanding voting shares or such shares sufficient to gain control of the board directly from one or more stockholders.
3. Acquisition that would result in ownership of over 50% of the total outstanding equity securities of a public company

Public Company refers to (i) any corporation with a class of equity securities listed on an exchange; or (ii) any corporation with assets in excess of PHP 50,000,000.00 and which has 200 or more shareholders each holding at least 100 shares of equity securities.

Under item (a) above, the acquirer is required to make a tender offer to all shareholders for such number of shares as it intends to acquire. On the other hand, under item (b) above, the acquirer is required to make a tender offer for all shareholders for all of the outstanding voting shares. Lastly, under item (c) above, the acquirer is required to make a tender offer to all shareholders for all the outstanding equity securities of the company at a price supported by a fairness opinion provided by an independent financial advisor or equivalent third party.

In addition, an acquirer that intends to acquire at least 15% of the equity securities of a public company is required to make a declaration to that effect with the Securities and Exchange Commission.

Building a new facility in the Philippines involves obtaining certain permits or clearances from various government agencies or bodies to ensure compliance with relevant laws and rules and regulations, including the National Building Code, labor laws, and environmental laws. Normally, prior to commencing construction activities, the owner of the new facility should procure an Environmental Compliance Certificate or Certificate of Non-Coverage, as applicable, from the Department of Environment and Natural Resources. Zoning clearance and building permit, including electrical, sanitary, mechanical, structural, electronics, and architectural permits, are also procured from the relevant local government unit. Once the construction of the new facility is completed, the owner is required to obtain an occupancy permit to confirm that the facility is ready for use.

Other environmental permits relating to air pollution, wastewater, and toxic substances and hazardous wastes are also required to be obtained, if applicable. If the business will utilize heavy equipment, a permit to operate such should be obtained from the Department of Labor and Employment.

We note that there may be additional permits or clearances that will be required depending on the location and nature of the business of the company.

Under Philippine laws, transactions can be settled in any currency stipulated by the parties. However, if it is not possible to deliver the stipulated currency, domestic currency must be used.

Is there an approval requirement (e.g. through Central Bank or another governmental agency) to use foreign currency in the country to pay:

• in an acquisition, or
• to pay to contractors, or
• to pay salaries of employees?

Generally, there is no approval requirement from any government agency to use foreign currency to pay contractors, employees, and in other transactions.

Is there a limit on the amount of foreign currency in any transaction or series of related transactions?

 Is there an approval requirement and a limit on how much foreign currency a foreign investor can transfer into the country?

None.

Is there an approval requirement and a limit on how much domestic currency a foreign investor can buy in the country?

None.

However, it should be noted a person may import or export, or bring into or take out of the Philippines, or electronically transfer, legal tender Philippine notes and coins, checks, money order and other bills of exchange drawn in pesos against banks operating in the Philippines in an amount not exceeding PHP50,000.00 without prior authorization by the Bangko Sentral ng Pilipinas (Central Bank of the Philippines).

Amounts in excess of PHP 50,000.00 requires (a) prior written authorization from the Bangko Sentral ng Pilipinas; and (b) in case of physical cross-border transfer of domestic currency, declaration of the whole amount brought into or taken out of the Philippines using the prescribed Currencies Declaration Form.

Can an investor buy domestic currency outside of the country and transfer it into the country to pay for an acquisition or to third parties for goods or services or to pay salaries of employees?

Generally, no.

We note, however, that there are foreign banks that offer PHP offshore for remittance to the Philippines.  These foreign banks actually purchase PHP from local banks.

It is advisable to inwardly remit foreign currency to the Philippines for ease of registration with the Central Bank. While registration of inward remittance by foreign investors with the Central Bank is not required, it is good to have since it will allow the non-resident investor to purchase foreign currency from the Philippine banking system for capital repatriation and remittance of dividends.

A person may import or export, or bring into or take out of the Philippines, or electronically transfer, legal tender Philippine notes and coins, checks, money order and other bills of exchange drawn in pesos against banks operating in the Philippines in an amount not exceeding PHP50,000.00 without prior authorization by the Bangko Sentral ng Pilipinas (Central Bank of the Philippines). Approval should be for each transfer.

Amounts in excess of Php50,000.00 requires (a) prior written authorization from the Bangko Sentral ng Pilipinas; and (b) in case of physical cross-border transfer of domestic currency, declaration of the whole amount brought into or taken out of the Philippines using the prescribed Currencies Declaration Form.

With respect to foreign currency, any person must declare cross-border transaction of foreign currencies, as well as other foreign currency-denominated bearer monetary instruments, in excess of USD $10,000.00 or its equivalent.

We note that banks may require certain documents and forms before selling foreign currency to any person upon reaching a certain threshold prescribed under the Manual of Regulations on Foreign Exchange Transactions published by the Bangko Sentral ng Pilipinas (Central Bank of the Philippines).

The currency conversion itself is not subject to any tax or duty. However, any income arising from an exchange rate difference is subject to tax.

None.

Generally, the tax treatment for both asset acquisition and share acquisition is similar, as both transactions are subject to stamp duty and the seller is liable for income tax on any gains.

However, acquisition of assets may be subject to additional taxes, such as creditable withholding tax and value-added tax, if such assets are booked as ordinary assets (assets used in the trade and business of the seller). If the assets involved are real properties, local transfer tax at the City or Municipal Treasurer’s Office where the real property is located will also have to be settled.

Under Sec. 173 of the NIRC, stamp duty or documentary stamp taxes (DST) must be paid upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had. The following, to name a few, are subject to DST:

• Original Issuance of Shares
• Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Shares or Certificates of Stock
• Certificate of Profit or interest in Property or Accumulations
• Bank Checks, Drafts, Certificates of Deposit not Bearing Interest, and Other Instruments
• Debt Instruments
• Bills of Exchange or Drafts
• Acceptance of Bills of Exchange or   order for the payment of money purporting to be drawn in a   foreign country but payable in the Philippines
• Bonds, Debentures, Certificates of Stock or Indebtedness Issued in Foreign Countries
• Foreign Bills of Exchange and Letters of Credit
• Life Insurance Policies
• Policies Of Insurance upon Property
• Fidelity Bonds and other Insurance Policies
• Policies of Annuities or other instruments
• Pre-Need Plans
• Indemnity Bonds
• Certificates of Damage or otherwise and Certificate or document   issued by any customs officers, marine surveyor, notary public and   certificate required by law or by rules and regulations of a public office
• Warehouse Receipts (except if value does not exceed P200.00)
• Jai-alai, Horse Race Tickets, lotto or Other Authorized Number   Games\
• Bills of Lading or Receipts (except charter party)
• Proxies (except proxies issued affecting the affairs of associations or   corporations, organized for religious, charitable or literary purposes)
• Powers of Attorney (except acts connected with the collection of claims due from or accruing to the Government of the   Republic of the Philippines, or the government of any province, city or Municipality)
• Leases and other Hiring agreements or memorandum or contract for hire, use or rent of any lands or tenements or portions thereof
• Mortgage or Pledge of lands, estate, or property and Deeds of Trust
• Deed of Sale, Conveyances, Donations of Real   Property (except grants, patents or original certificate of adjudication issued by the government)
• Charter parties and Similar Instruments
• Stamp Tax on Assignments and Renewals or Continuance of Certain Instruments

DST is essentially imposed on a transaction or the privilege to engage in a transaction, which is evidenced by a document. It has been clarified that absent any document or paper evidencing the transaction, DST can still be imposed provided that the existence of a transaction can be proven.

Yes.

Can the shares be held outside of the home jurisdiction?

Yes, stock certificates evidencing ownership can be held outside of home jurisdiction.

What approval does a foreign investor need to transfer shares to another foreign or domestic shareholder?

A tax clearance, also known as the Certificate Authorizing Registration, must be obtained from the Bureau of Internal Revenue before the corporate secretary can record the transferee of the shares of the stock in the corporate books.

Please note that there are certain industries that may require prior approvals from specific government agencies if the acquisition of shares could lead to a change of control.

Are changes in shareholding publicly reported or publicly available?

Yes, any changes in the shareholding must be reported to the Securities and Exchange Commission by filing an updated General Information Sheet. This General Information Sheet is publicly available.

Yes.

With which agency is it required to be made?

Securities and Exchange Commission and Philippine Competition Commission, if the transaction meets the thresholds that trigger notification to the Philippine Competition Commission.

Specific government agencies governing certain industries may likewise require approval of FDI to ensure compliance with applicable law.

How long does it take to obtain a Foreign Direct Investment (FDI) approval?

Registration of the FDI with the Securities and Exchange Commission is normally processed simultaneously with incorporation of a new company. This may take around 1 to 3 weeks for zero processing and 1.5 to 2 months for regular processing.

If the FDI is infused after incorporation, registration or updating of the FDI registration with the Securities and Exchange Commission may take around 1.5 months to 3 months.

Notification to the Philippine Competition Commission may take at least 2 months, depending on the complexity of the transaction.

Under what circumstances is the mandatory FDI filing required to be made?

Registration of FDI with the Securities and Exchange Commission is required if the foreign equity exceeds 40%.

Notification to the Philippine Competition Commission is required when: (a) the Size of Party(SOP) or the aggregate annual gross revenues in, into, or from the Philippines, or value of the assets in the Philippines of the ultimate parent entity (“UPE”) (i.e., the juridical entity that, directly or indirectly, controls a party to the transaction, and is not controlled by any other entity) of at least one of the acquiring or acquired entities, including that of all entities that the UPE controls, directly or indirectly, exceeds ₱7,800,000,000.00; and (b) the Size of Transaction (SOT) or the value of the transaction, as determined under Rule 4, Section 3(b) of the Implementing Rules and Regulations  of the Philippine Competition Act, exceeds ₱3,200,000,000.00.

In case of a joint venture, notice to the Philippines Competition Commission is required if either the aggregate value of the assets that will be combined in the Philippines or contributed into the proposed joint venture exceeds ₱3,200,000,000.00 or the gross revenues generated in the Philippines by assets to be combined in the Philippines or contributed into the proposed joint venture exceeds ₱3,200,000,000.00. In determining the assets of the joint venture, the following shall be included:

1. All assets which any entity contributing to the formation of the joint venture has agreed to transfer, or for which agreements have been secured for the joint venture to obtain at any time, whether or not such entity is subject to the requirements of the Philippine Competition Act; and
2. Any amount of credit or any obligations of the joint venture which any entity contributing to the formation has agreed to extend or guarantee, at any time.

If a mandatory filing is not required, can a transaction be reviewed by a governmental authority and be blocked?

Generally, while unusual, the government can review or audit any transactions involving FDI. Any violation will be subject to penalties, including annulment of the transaction, forfeiture of all benefits granted to the foreign investor and/or company, or revocation of registration with the Securities and Exchange Commission.

If a transaction is outside of the home jurisdiction (e.g. a global transaction where shares of a foreign incorporated parent company are being bought by another foreign company, but the parent company that’s been acquired has a subsidiary in your jurisdiction, could such a transaction trigger a mandatory FDI filing in your jurisdiction?

Yes, if the thresholds discussed above are met.

Can a governmental authority in such a transaction prohibit the indirect transfer of control of the subsidiary?

Yes, a notifiable transaction without the approval of the Philippine Competition Commission is considered void. In such case, the transfer or change of ownership in the Philippine subsidiary will not be recognized in the Philippines.

Typical exit transactions for foreign investors include share/equity sale, asset sale, merger, and dissolution. Failing business can also file for rehabilitation or insolvency / bankruptcy.

It is difficult to generalize that private companies prefer pursuing an IPO, as the decision to go public largely depends on the company’s specific strategy and objectives.

It Is difficult to generalize whether agreements stipulate dispute resolution in domestic courts or through international arbitration. The decision on the dispute resolution mechanism is determined by a lot of factors, including, the value of the contract, costs, nationality of the parties, and timeline.

The length of a contract dispute in the Philippines significantly varies due to several factors, including the complexity of the case, the actions of the parties and opportunities for settlement, and case docket of the trial courts.

Yes. In fact, the Supreme Court of the Philippines has issued the Strategic Plan for Judicial Innovations for 2022 to 2027 to improve the administration if justice.

Yes, many instances of abuse by foreign investors stem from the misuse of company funds. These cases can range from intra-corporate disputes to criminal fraud cases. In addressing these issues, Philippine courts strive to handle cases with fairness and objectivity.

Yes, international arbitral awards are recognized and enforced in the Philippines pursuant to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards to which it is a state party of.  An international commercial arbitral award may not be appealed and may only be refused enforcement in accordance with the grounds set out in the said convention. Moreover, Article 2044 of the Civil Code of the Philippines states any stipulation that the arbitrators’ award or decision shall be final, is valid.

Yes. The Philippines has entered into bilateral investment agreements with 37 countries and entities, including Argentina, Australia, Austria, Bangladesh, the Belgium-Luxembourg Economic Union, Cambodia, Canada, Chile, China, the Czech Republic, Denmark, Finland, France, Germany, India, Indonesia, Iran, Italy, Kuwait, Mongolia, Myanmar, the Netherlands, Pakistan, Portugal, the Republic of Korea, Romania, the Russian Federation, Saudi Arabia, Spain, Sweden, Switzerland, Syria, Taiwan, Thailand, Turkey, the United Kingdom, and Vietnam.

Additionally, the Philippines is a participant in ASEAN regional trade agreements, which include an investment chapter with trading partners such as Australia, New Zealand, the Republic of Korea, India, Japan, and China. It also has an investment agreement with Iceland, Liechtenstein, Norway, and Switzerland through the Philippines-European Free Trade Association (EFTA) Free Trade Agreement. The Philippines, along with 14 other Asia-Pacific countries, also signed the Regional Comprehensive Economic Partnership (RCEP) trade agreement.