Under Philippine law, foreign investments are largely governed by Republic Act No. 7042, also known as the Foreign Investments Act of 1991 (FIA), which was subsequently amended by R.A. No. 8179 in 1996 and R.A. No. 11647 in 2022. The FIA establishes the policies, requirements, and limitations for foreign entities looking to conduct business in the Philippines. The law seeks to balance the country’s economic objectives by encouraging foreign investments while protecting national security, domestic industries, and local employment. Here is a comprehensive breakdown of this statute's provisions on foreign corporations in the Philippines.

1. General Policies on Foreign Investment

The FIA permits foreign entities to invest in various sectors of the Philippine economy, except where explicitly limited. Foreign investment is encouraged under the FIA to generate employment, bring in capital, and transfer technology. This investment liberalization is subject to the Foreign Investment Negative List (FINL), which enumerates sectors with restrictions on foreign ownership due to constitutional, legal, or national security concerns.

2. Definitions under the Foreign Investments Act

Foreign Corporation: A corporation established under foreign laws but authorized to transact business in the Philippines.
Doing Business: Under Philippine law, this encompasses engaging in activities such as maintaining an office, entering into contracts, and participating in business transactions within the Philippines.

3. Scope of Foreign Corporation Activities

Foreign corporations may engage in business in the Philippines subject to compliance with the FIA and other relevant regulations.
They must secure a License to Do Business from the Securities and Exchange Commission (SEC).
Foreign corporations are limited by the FINL, which designates the activities that are either partly or fully restricted to Philippine nationals.

4. The Foreign Investment Negative List (FINL)

The FINL classifies investment areas into three main categories:

List A: Reserved for Philippine nationals as mandated by the Constitution or other laws. For example, certain mass media operations and small-scale mining activities fall under this list.
List B: Limited to a maximum of 40% foreign ownership due to security, defense, risk to health, and morals.
Export Enterprises: Companies exporting at least 60% of their production may be exempt from the FINL’s foreign ownership restrictions.

This Negative List is reviewed every two years to align with changing economic needs.

5. Regulations for Foreign-Owned Corporations in the Philippines

Minimum Capital Requirement: The FIA imposes a minimum capitalization requirement for foreign-owned corporations. As per R.A. 11647, a minimum paid-up capital of USD 100,000 is required, except in cases where businesses employ more than 15 Filipino employees or engage in advanced technology.
100% Foreign Ownership: Allowed in enterprises not covered by the FINL, provided they meet capitalization requirements.
Micro and Small Enterprises: Full foreign ownership in micro and small domestic market enterprises (with paid-in capital less than USD 200,000) is generally prohibited unless they involve advanced technology or employ at least 15 Filipino workers.

6. Key Amendments Introduced by R.A. No. 11647

The amendments under R.A. 11647 in 2022 introduced notable changes to make the Philippines a more attractive destination for foreign investments:

Establishment of the Inter-Agency Investment Promotion Coordination Committee (IIPCC): Created to streamline the registration process for foreign entities and improve coordination among government agencies.
Reduced Capital Requirements: Lowered the minimum paid-up capital for certain foreign entities to USD 100,000 to encourage investments, particularly in high-tech industries.
Foreign Investment Promotion and Marketing Plan: Mandates the Department of Trade and Industry (DTI) to develop a foreign investment promotion strategy, increasing foreign participation in the economy.

7. Taxation of Foreign Corporations

Foreign corporations operating in the Philippines are classified for tax purposes into two types:

Resident Foreign Corporations (RFCs): These are foreign corporations with a license to do business in the Philippines and are taxed on income derived from Philippine sources.
Non-Resident Foreign Corporations (NRFCs): These do not have a license to operate in the Philippines and are only taxed on Philippine-sourced income.

Key tax considerations for RFCs and NRFCs include:

Income Tax: Resident foreign corporations are subject to the regular corporate income tax on their Philippine-sourced income. NRFCs, on the other hand, are subject to final withholding tax rates on specific types of income such as dividends, interest, and royalties.
Branch Profit Remittance Tax: A 15% tax is imposed on profits remitted abroad by a branch of a foreign corporation, excluding entities registered with the Philippine Economic Zone Authority (PEZA) and other tax-incentive-granting bodies.
Dividends: Dividends remitted by a Philippine subsidiary to its foreign parent corporation are subject to a 15% withholding tax, provided that the country of residence of the foreign parent corporation allows a credit for taxes deemed paid in the Philippines.

8. Licensing and Reporting Requirements

Foreign corporations intending to do business in the Philippines must apply for a License to Do Business from the SEC, which is contingent upon providing essential documentation, including:

Articles of Incorporation and By-laws
Board Resolution authorizing the business in the Philippines
Appointment of a Resident Agent authorized to receive notices in the Philippines

Additional requirements may include regular reporting to the SEC, payment of fees, and adherence to corporate governance standards.

9. Compliance with Local Regulations

Foreign corporations must comply with Philippine regulations, which include employment laws, taxation policies, and environmental standards. They are also subject to periodic audits and regulatory reviews. Further compliance mandates under R.A. 11647 include:

Submission of Financial Statements: Annual reports, including audited financial statements, must be filed with the SEC.
Reporting Changes in Ownership: Foreign corporations must promptly report any changes in ownership or control to the SEC.
Environmental Compliance: Foreign corporations, particularly those in manufacturing, must comply with environmental regulations and may be required to secure permits from the Department of Environment and Natural Resources (DENR).

10. Conclusion

R.A. No. 7042, as amended by R.A. Nos. 8179 and 11647, provides a flexible yet regulated framework for foreign corporations in the Philippines. Through the FIA and its recent amendments, the Philippine government seeks to encourage foreign investment while safeguarding sectors essential to national interest. By understanding and adhering to the FIA’s provisions, foreign corporations can establish compliant and prosperous operations within the Philippine economic landscape.