Foreign investors look for the best possible investment opportunities where they can maximize their potential business operations, and one of the factors usually considered is the ease of doing business in a country they wish to invest in.
To make investments in the Philippines more enticing to prospective investors, the Congress crafted legislation liberalizing foreign participation in certain business industries, as well as enhancing the incentives offered to them, making entry in the Philippine business arena the best possible choice for them.
Once prospective foreign investors decide to establish businesses here in the Philippines, the next question for them would be, “How and where to start?” This article will discuss viable options available to them in setting up a business, the legal and documentary requirements to be complied with, as well as the procedures to be undertaken.
Philippine laws encouraging foreign investments
Productive investments are most welcome in the Philippines to the extent that foreign ownership is allowed under the Constitution and other pertinent laws. With the State’s policy to encourage foreign investments that would significantly expand livelihood and employment opportunities for Filipinos, enhance economic value of Philippine products, promote the welfare of Filipino consumers, expand the scope, quality and volume of exports and their access to foreign markets, and/or transfer relevant technologies in agriculture, industry and support services, the Philippine Congress enacted various laws such as but not limited to:
1) Rep. Act No. 5186, also known as the Investments Incentives Act, which prescribes incentives and guarantees to investments in the Philippines;
2) Rep. Act No. 11595, approved on December 20, 2021 which is an amendment of the Retail Trade Liberalization Act by lowering the required paid-up capital for foreign retail enterprises;
3) Rep. Act No. 11647, approved on March 2, 2022 which is an amendment of the Foreign Investments Act which provides for the creation of an inter-agency investment promotions committee to facilitate and encourage foreign investments in the Philippines; and
4) Rep. Act No. 11659, signed on March 21, 2022 which is an amendment of the Public Service Act, which provides for the relaxation of limited foreign participation in certain industries, to make doing business here in the Philippines more attractive and enticing to invest in.
Relevant regulatory agencies in relation to foreign investments
An individual or entity wanting to do business in the Philippines would typically be dealing with certain government agencies to facilitate its business activity, whether in its startup stage or in ensuring its continuous operations, in case it is already operational.
For individuals, the Department of Trade and Industry (DTI) is the primary government agency that is tasked with facilitating trade, industry and other investment activities in the Philippines. The Board of Investments, which is part of the DTI, is tasked to regulate and promote investments in the Philippines. On the other hand, relevant to partnerships and corporations is the Securities and Exchange Commission (SEC) which has jurisdiction and supervision over all corporations, partnerships, or associations which are grantees of franchises or licenses issued by the Philippine government to operate in the Philippines.
Options for a foreign corporation who wants to do business in the Philippines
A foreign investor, allowed under the limitations provided for under the Constitution and the laws, wanting to either start or expand its business in the Philippines may do so either through a:
(1) subsidiary, an entity created under Philippine laws through the SEC which is considered separate and distinct from its parent company and therefore is not required to obtain a license in the Philippines;
(2) branch office which would carry out the business activities of the head office and thus would derive income from the Philippines. In contrast to a subsidiary, it has no separate and distinct personality from the parent-foreign corporation and thus would require a license to do business in the Philippines; or
(3) a representative office which would deal directly with the clients of the parent-foreign company but would not derive income from the Philippines and which would be fully subsidized by its head office. It undertakes activities such as but not limited to information dissemination and promotion of the company’s product as well as quality control of products (IRR of Republic Act No. 7042, Foreign Investment Act of 1991).
Whether to establish a subsidiary, to put up a branch office, or a representative office, factors such as: (1) the nature or type of business to engage in, (2) the legal and regulatory requirements, including relevant fees, as well as (3) the tax consequences in doing business here in the Philippines, among others, should be taken into consideration.
Digitalization of the application process through the SEC’s Electronic Simplified Processing of Application for Registration of Company
Geared towards promoting efficiency and ease in doing business, the SEC, on 9 April 2021, launched its Electronic Simplified Processing of Application for Registration of Company (SEC–eSPARC), an end-to-end company registration system which applies to domestic corporations, foreign subsidiaries, branch offices, and representative offices. The SEC-eSPARC is an online platform where applicants or their duly appointed representatives may submit their proposed company names, input their company information, and upload the documentary requirements for review by the SEC. The system features a real-time inquiry facility on the status of applications.
Moreover, the SEC-eSPARC has been integrated with the SEC Cashiering System and the SEC's online payment portal to provide a faster, seamless, and convenient means to pay registration fees. Also, the SEC-eSPARC is linked to the Central Business Portal, the national government’s centralized platform that allows the public to access registration forms, fill out information, and submit requirements needed for business registration and related transactions.
Indeed, the launch of SEC-eSPARC is a significant technological innovation for it streamlines the application, registration, and payment processes in the SEC.
For detailed guidelines on how to use and navigate the SEC–eSPARC, you may check the SEC website here.
Requirements to set up a branch office or a representative office
In case a foreign investor opts to set up a branch office or a representative office, the Revised Corporation Code (RCC), specifically Section 142, in relation to the requirements provided in the SEC website, sets forth the following documentary requirements and submissions, among others:
1) Cover sheet;
2) Name verification slip;
3) Application form, i.e., Form F-103 (for branch office) or F-104 (for representative office);
4) Authenticated copy of the Board Resolution authorizing the establishment of the branch/representative office in the Philippines, designating the resident agent, and a stipulation that in the absence of such resident agent or upon cessation of its business in the Philippines, any summons or legal processes may be served to the SEC as if the same is made upon the corporation at its home office;
5) Authenticated copy of the Articles of Incorporation with an English translation thereof if in a foreign language other than English;
6) Financial statements;
7) Compliance with the prescribed financial ratios;
8) Notarized proof of Inward Remittance; and
9) Endorsement/clearance from appropriate government agencies, if applicable.
For instance, foreign banks, pawnshops, and other financial intermediaries with quasi-banking functions, intending to operate a branch office must first secure an endorsement from the Bangko Sentral ng Pilipinas. Likewise, those which intend to operate an insurance or health maintenance organization must secure an endorsement from the Insurance Commission. The list of businesses requiring endorsements from other government agencies is available on the SEC website here.
Note that prior to the issuance of the license, Section 145 of the RCC of the Philippines also requires the appointment of a resident agent for the Philippine courts to acquire jurisdiction over the foreign corporation. The duly appointed resident agent is legally authorized to receive summons and other legal processes for and on behalf of the foreign corporation.
Requirements upon issuance of a license by the SEC
Upon issuance by the SEC of a license to transact business in the Philippines, the licensee, with the exception of foreign banking, insurance, and non-stock corporations, is required to deposit securities to the SEC which include government bonds, shares of stocks, or other debt securities registered under the Securities Regulation Code, per Section 143 of the RCC. This securities requirement is for the benefit of the unpaid creditors of the foreign corporations and is limited in amount, as provided for under the law and SEC issuance/s.
SEC Memorandum Circular (MC) No. 17, Series of 2019 implements this securities requirement and provides that within 60 days after the issuance of the SEC license, securities with an actual market value of at least PHP 500,000.00 must be deposited with the SEC. Non-compliance with this requirement subjects the foreign corporation to fines and penalties, depending on the nature and frequency of violations. See the aforementioned SEC MC for further details.
Requirements for a foreign corporation to set up a subsidiary in the Philippines
As earlier mentioned, setting up a subsidiary in the Philippines does not require a license from the SEC to allow it to do business. Rather, its creation is governed by Philippine law, particularly the RCC of the Philippines. This being the case, the subsidiary is considered a domestic corporation established as an entity separate and distinct from its foreign-parent company.
With the amendment of the old Corporation Code, there is no longer an initial minimum capitalization requirement, unless required by special laws. However, in case of a subsequent increase in capital, the requirements of 25% subscription and 25% payment of such subscription subsist under the RCC, i.e., at least 25% of the increase in capital stock must be subscribed, and at least 25% of such subscription must be paid.
Moreover, the RCC, particularly Section 18, in relation to relevant SEC issuances, sets forth the procedures and documentary requirements to be complied with, such as:
1) Registration of proposed company name with SEC;
2) Articles of Incorporation (which must already include the details previously required to be set forth separately in the treasurer’s affidavit) and By-laws;
3) Registration Data Sheet;
4) Endorsements/Clearances from relevant government agencies, if applicable;
5) Registration of Stock and Transfer Books; and
6) Such other documents and submissions as the SEC may require.
Thereafter, the SEC will issue the certificate of incorporation if it finds that the documents and information submitted are complete and fully compliant with the law, and other relevant rules and regulations.
Requirements upon issuance of a certificate of incorporation by the SEC
Upon issuance by the SEC of the corporation’s certificate of incorporation, a tax identification number (TIN) is likewise assigned to the corporation which would require the latter to register it before the Bureau of Internal Revenue. Moreover, business permits and licenses would likewise have to be obtained with the local government unit where the corporation would operate. Also, registration before the Social Security System, Philippine Health Insurance Corporation, and Home Development Fund by the corporation-employer shall be made.
For a more detailed checklist of the documentary and other necessary documents and procedures, please check the SEC website.
For any legal assistance you may need, you may send your inquiries and other legal concerns to info@gqlaw.com.ph.