Doing Business in the Philippines

Table of Contents: 

1. Establishing an Entity
2. Foreign Business Restrictions
   ØNegative List A
   ØNegative List B
3. Investment Incentives
4. Taxation
5. Audit and Accounting

Establishing an entity

The Philippines has become an increasingly attractive destination for foreign businesses, thanks in part to its liberalized foreign investment laws. This guide provides a high-level introduction to establishing a business entity in the Philippines, taking advantage of the opportunities presented by these regulations. Foreign corporations can enter the Philippine capital market in several ways as discussed below.

I.     Domestic Subsidiary

This is a regular corporation, formed as a stock or non-stock, composed of incorporators, directors (or trustees for non-stock), shareholders (or members for non-stock) and officers.  Depending on the corporation’s primary business activity, foreign stockholdings is generally limited to 40% of the total authorized capital stock.  The 12^th Foreign Investment Negative List provides a comprehensive criteria on which business activities a foreign company can engage in and the percentage allowed for foreign investment.  Foreign restrictions, including the capitalization requirements, are further discussed under the topic “Foreign Investment Restrictions” of this guide.

Incorporators and members of the board are not required to be citizens or residents of the Philippines, but they are required to hold at least one (1) share, usually referred to as “qualifying share”.  There is no minimum or maximum number of incorporators but there can only be a maximum of fifteen (15) directors/trustees.

II.    Branch Office

A Branch Office (or “Branch”)  is a foreign corporation licensed to do business in the Philippines whose business activity is income generating. It is an extension of the foreign corporation’s head office abroad.  Unlike a domestic subsidiary, it is represented by a Resident Agent whose responsibility is to receive summons and other legal processes on behalf of the  Branch.

Within sixty (60) days from the issuance of its License by the Securities and Exchange Commission (the “SEC”), the Branch must deposit with the SEC securities with an actual market value of Five Hundred Thousand Pesos (PhP500,000.00) or such other amount as may be required by the SEC.  The purpose of this is for the benefit of present and future creditors of the Branch.

Capitalization depends on whether the Branch is a domestic market enterprise (or “DME”) or export enterprise (or “EE”).  The minimum capitalization for a DME is Two Hundred Thousand Dollars (USD200,000.00) while that of an EE is Five Thousand Pesos (PhP5,000.00).

III.  Representative Office

Also called a “Liaison Office”, a Representative Office is similar to a Branch office but it does not generate any income in the Philippines.  It is fully subsidized by its head office.  Its activities are limited to information dissemination, marketing, promotion of the company’s products, quality control of its products and the like.  However, similar to a Branch, it is represented also by a Resident Agent.

Capitalization of a Representative Office is Thirty Thousand Dollars (USD30,000.00).

IV.  Regional Operating Headquarters

A Regional Operating Headquarters (or “ROHQ”) is a foreign business entity engaged in international trade with affiliates, subsidiaries, or branch offices in the Asia-Pacific Region and other foreign markets.  Its business activity allows the ROHQ to derive income in the Philippines. It is represented by a Resident Agent and capitalization is Two Hundred Thousand Dollars (USD200,000.00).

V.   Regional Area Headquarters

A Regional Area Headquarters (or “RHQ”), similar to an ROHQ,  is also a foreign company engaged in international trade with affiliates, subsidiaries or branch offices in the Asia-Pacific Region.  However, its activities are limited to acting as a supervisory communications and coordinating center for its affairs, subsidiaries or branches in the region.  It cannot derive any income within the Philippines and cannot participate in any manner, management of any subsidiary or branch office its head office may have in the Philippines.  It is also represented by a Resident Agent and capitalization is Fifty Thousand Dollars (USD50,000.00)

VI.  Partnership

A foreign partnership can also apply for a license to do business in the Philippines.  The requirements, including capitalization, are similar to a Branch Office.

VII. Joint Venture

A foreign corporation can do business in the Philippines by entering into a joint venture agreement or formation of a joint venture company through a corporation or partnership. 

The joint venture agreement must be in line with the business authorized by the foreign corporation’s business purpose.  The necessity of securing a License with the SEC will depend on several factors, mainly whether, by entering in to that joint venture, the activity will fall under the Philippines’ definition of what constitutes “doing business”.

The regulation on the formation of a joint venture company will depend on whether the entity organized is a corporation or a partnership.  In either case, they will have to comply with the requirements under Section I and VI of this Manual.

Foreign business restrictions

The Foreign Investments Act provides a general rule explaining that there are no restrictions on the extent of foreign ownership of export enterprises (i.e., those that consistently export at least 60 percent of their products or services) and in domestic market enterprises (i.e., those that produce goods for sale or render services to the local market entirely or export less than 60 percent of their products or services). 

These changes allow foreigners to invest as much as 100 percent equity except in areas in the Foreign Investment Negative List, which enumerates the business activities subject to nationality requirements or restrictions as provided in the Constitution, existing laws, and governmental policy.

The Negative List in the Philippines is divided in two:

List A: Foreign Ownership is Limited by Mandate of the Constitution and Specific Laws 

Those with no Foreign Equity 

1. Mass media, except recording and internet business
2. Practice of professions, except in cases specifically allowed by the law following the prescribed conditions therein
   1. Professions where foreigners are not allowed to practice in the Philippines, except if the subject to reciprocity as provided in pertinent laws. 
   2. Corporate practice of professions with foreign equity restrictions under pertinent laws;
3. Retail trade enterprises with paid-up capital of less than PHP 25,000,000.00;
4. Cooperatives;
5. Organization and Operation of private detective, watchmen, or security guards agencies; 
6. Small scale mining; 
7. Utilization of marine resources in archipelagic waters, territorial sea and executive economic zone, as well as small-scale utilization of natural resources in rivers, lakes, bays, and lagoons. 
8. Ownership, operation and management of cockpits;
9. Manufacture, repair, stockpiling, and/or distribution of biological, chemical, and radiological weapons and anti-personnel mines;
10. Manufacture, repair, stockpiling, and/or distribution of nuclear weapons;
11. Manufacture of firecrackers and other pyrotechnic devices;

Up to 25% Foreign Equity 

1. Private recruitment, whether for local or overseas employment
2. Contracts for the construction of defense-related structures

Up to 30% Foreign Equity

1. Advertising 

Up to 40% Foreign Equity 

1. Procurement of infrastructure projects in accordance with Section 23.4.2.1(b), (c), and (e) of the Implementing Rules and Regulations (IRR) of RA. 9184
2. Exploration, development, and utilization of natural resources
3. Ownership of private lands, except for a natural-born citizen who has lost his Philippine citizenship and has the legal capacity to enter into a contract under Philippine laws. 
4. Operation of public utilities
5. Educational institutions other than those established by religious groups and mission boards, for foreign diplomatic personnel and their dependents and other foreign temporary residents, or for short-term high-level skills development that do not form part of the formal education system as defined in Section 20 of Batas Pambansa (BP) No. 232 (1982)
6. Culture, production, milling, processing, trading except retailing, of rice and corn and acquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof, subject to a period of divestment.
7. Contracts for the supply of materials, goods, and commodities to Government-Owned and Controlled Corporation (GOCC), company, agency or municipal corporation 
8. Operation of deep-sea commercial fishing vessels
9. Ownership of condominium units
10. Private radio communications network

Up to 60% Foreign Equity 

1. Financing companies regulated by the Securities and Exchange Commission (SEC)
2. Investment housed regulated by the SEC.
    

List B: Foreign Ownership is Limited for Reasons of Security, Defense, Risk to Health and Morals and Protection of Small Medium scale enterprises.  

1. Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National Police (PNP) clearance:
   1. Firearms (handguns to shotguns), parts of firearms and ammunition therefor, instruments or implements used or intended to be used in the manufacture of firearms; 
   2. Gunpowder;
   3. Dynamite;
   4. Blasting supplies;
   5. Ingredients used in making explosives:
      1. Chlorates of potassium and sodium;
      2. Nitrates of ammonium, potassium, sodium barium, copper (11), lead (11), calcium, and cuprite;
      3. Nitric acid;
      4. Nitrocellulose;
      5. Perchlorates of ammonium, potassium, and sodium;
      6. Dinitrocellulose;
      7. Glycerol;
      8. Amorphous phosphorus;
      9. Hydrogen peroxide;
      10. Strontium nitrate powder;
      11. Toluene; and
2. Manufacture, repair, storage and/or distribution of products requiring Department of National Defense (DND) clearance;
   1. Guns and Ammunition for Warfare 
   2. Military Ordnance and parts thereof (torpedoes, bombs, grenades, etc..)
   3. Gunnery, bombing and fire control systems and components. 
   4. Guided Missiles/missile systems and components 
   5. Tactical aircraft 
   6. Space Vehicles and component systems 
   7. Combat Vessels and auxiliaries 
   8. Weapons repair and maintenance equipment 
   9. Military communications equipment 
   10. Night Vision Equipment 
   11. Stimulated coherent radiation devices 
   12. Armament training devices 
   13. Others to be determined by the secretary of the DNC. 
3. Manufacture and distribution of dangerous drugs 
4. Sauna and steam bathhouses, massage clinics, and other like activities regulated by law because of risks posed to public health and morals, except wellness centers
5. All forms of gambling, except those covered by investment agreements with Philippine Amusement and Gaming Corporation (PAGCOR)
6. Domestic market enterprises with paid-in equity capital of less than the equivalent of US$200,000
7. Micro and small domestic markets that involves the following:
   1. Advance technology as determined by Department of Science and Technology (DOST) 
   2. Endorsed as a start-up or start-up enablers by Department of Trade Industry, or DOST
   3. Employ at least fifty (50) direct employees with paid-in equity capital of less than the equivalent of US$100,000

Under the law’s latest amendment (or “Republic Act 11647” or “RA 11647”), micro and small domestic market enterprises with a paid-up capital requirement of $200,000 are still reserved for Philippine nationals unless otherwise set under RA 8762 or the "Retail Trade Liberalization Act" and other relevant laws. Furthermore, it clarified that the paid-up threshold was provided before the amendment, but only the term used is "small- and medium-sized domestic market enterprises.".

RA 11647 strives to further technological innovation and create a solid foundation when creating startups or startup enablers following the "Innovative Startup Act" (RA 11337) and lowering the capitalisation requirement to $100,000.

The previous rule of foreign nationals employing at least fifty (50) direct employees to become eligible for the $100,000 capitalisation requirement was enforced. RA 11647 states that enterprises now only need to have most of their direct employees to be Filipinos in order to become eligible for the lower capitalisation rule. However, this will only apply to the number of Filipino employees not less than fifteen (15). Domestic enterprises are mandated to implement an understudy or skills development program if they benefit from said lower capitalisation requirement to ensure the transfer of technology or skills to Filipinos.

Investment incentives

Foreign investors who wish to benefit from investment incentives may register with either the PEZA or the Board of Investments (BOI). The PEZA grants incentives to businesses engaged in exports that are located within identified economic zones. The BOI, on the other hand, administers the grant of incentives to businesses engaging any of the investment priority areas provided under the Investment Priorities Plan (IPP). Incentives that are also available for businesses that wish to operate in special economic and free port zones, such as those located in Subic and Clark, Pampanga.

Some of the incentives granted are exemptions from the payment of tariff and customs duties and other taxes and fees, Income Tax Holiday (ITH) and reduced tax rates.

Taxation

The main taxes imposed on corporations in the Philippines are:

1. Corporate Income Tax
2. Value-Added Tax (VAT) 
3. Withholding Tax (WT). 

Other taxes include Percentage Tax (generally for activities not subject to VAT), Excise Tax, Documentary Stamp Tax, Local Business and Real Property Taxes.

Starting July 2020, Corporate Income Tax rate in general is 25% on net taxable income and 20% for corporations with next taxable income not exceeding Five Million AND total assets not exceeding One Hundred Million. In the 4th year of operations, the tax imposed is either 2% of gross income or 25% or 20% of net taxable income, whichever is higher. For entities covered by special laws (e.g. PEZA entities), a 5% income tax is imposed on the gross income. ROHQs, on the other hand, are entitled to an income tax rate of 10% on taxable income. 

Starting January 2022 special tax rate is no longer applicable and the new effective rate is 25%. Quarterly income tax returns should be filed and the payment should be made, on or before the 60th day following the close of each of the quarters of the taxable year. The annual income tax return shall be filed and the payment made on or before  15th day of the 4^th month  following close of the taxpayer’s taxable year.

VAT at the rate of 12% is imposed on the sale, barter, exchange or lease of goods or properties and services in the Philippines, including the importation of goods. Being an indirect tax, the VAT can be passed on to the buyer or end user of the goods and/ or services. 

On January 10, 2024, congress enacted RA 11976 or the Ease of Paying Taxes (EOPT) Act which amends the treatment of VAT on services which was shift from cash basis to accrual and now will be based on invoices and reported upon billing by the vendor or provider. The EOPT Act mandates single documents for both sales of goods and services. Hence, all references to Sales/Commercial Invoices or Official Receipts shall now be referred to as “INVOICE”.

The VAT returns must be filed and the corresponding payment (if any) made within 20 days following the end of each month (for monthly VAT returns, optional filing) and 25 days following the close of the taxable quarter (for quarterly VAT returns) unless the filer is enrolled under the Electronic Filing and Payment System (EFPS).

The withholding tax system is a means of collecting tax in advance. Withholding tax is a deduction on income payments (e.g. goods, services, rentals, interest, royalties, and dividends). EOPT Act amends the obiligation to deduct and withhold tax, which arises at the time income has become payable. 

Tax rates range from 1% to 25%, depending on the nature of the payment. However, income payments to foreign entities may be subject to lower preferential tax treaty rates provided that a Certificate of Residence for Tax Treaty Relief Form has been accomplished before the payment of income is made. This form applies only to income payments for dividends, interests and royalties. Except for those enrolled under the EFPS, WT returns shall be filed and payment must be made on or before the 10th day of the month following the month of withholding (for monthly WT returns) and not later than the last day of the month following the close of the quarter during which withholding was made (for quarterly WT returns) .

Local business taxes, fees and charges are also levied by local government units (LGUs).

Audit and accounting

All legal entities are required to prepare annual financial statements in accordance to/ with the applicable financial reporting framework that is acceptable in the Philippines [i.e. either full compliance with the Philippine Financial Reporting Standards (PFRS) or PFRS for small and medium-sized enterprises (SMEs) or PFRS for Small Entities (SE), depending on the criteria prescribed by the SEC]. PFRS are broadly aligned with International Financial Reporting Standards (IFRS) while PFRS for SME and SE are fully aligned with IFRS for SMEs.

Threshold:

Entity may avail the exemption by adopting PFRS or PFRS for SMEs if it’s a subsidiary of a company that prepares financial statements in accordance with IFRS or PFRS or PFRS for SMEs.

The annual financial statements are required to be audited by the local independent external auditors before submitting to the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). The performance audit is in accordance with the Philippine Standards on Auditing (PSA) and is also aligned with International Standards on Auditing (ISA).