Can Foreigners Buy Stocks in the Philippines and How Are They Taxed?

Introduction

The Philippines has progressively opened its economy to foreign investment, including in the securities market, as part of its commitment to economic liberalization under various laws and international agreements. Foreigners, whether individuals or corporations, are generally permitted to purchase stocks in Philippine companies listed on the Philippine Stock Exchange (PSE) or traded over-the-counter. However, this access is not unrestricted and is governed by constitutional provisions, statutory laws, and regulatory frameworks that impose limits on foreign ownership in certain sectors. Additionally, taxation on stock transactions and income derived from such investments applies differently to foreigners compared to local residents, often involving withholding taxes and compliance with international tax treaties.

This article provides a comprehensive overview of the legal and regulatory landscape for foreign investment in Philippine stocks, including eligibility requirements, procedural steps for acquisition, ownership restrictions, and the taxation regime. It draws from key Philippine laws such as the 1987 Constitution, the Foreign Investments Act of 1991 (Republic Act No. 7042, as amended), the Corporation Code (Batas Pambansa Blg. 68), the Securities Regulation Code (Republic Act No. 8799), and relevant tax provisions under the National Internal Revenue Code (NIRC, Republic Act No. 8424, as amended by the Tax Reform for Acceleration and Inclusion or TRAIN Law, CREATE Law, and subsequent amendments).

Legal Framework for Foreign Investment in Stocks

The 1987 Philippine Constitution establishes the foundational principles for foreign participation in the economy. Article XII, Section 10 mandates that at least 60% of the capital of corporations engaged in certain nationalized or partially nationalized activities must be owned by Filipino citizens. This "60-40 rule" applies to public utilities, educational institutions, mass media, and the exploration, development, and utilization of natural resources, among others. For stock investments, this means foreigners can own up to 40% of the equity in companies operating in these restricted sectors.

The Foreign Investments Act (FIA) of 1991 further liberalizes foreign investment by adopting a "negative list" approach. The FIA's Foreign Investment Negative List (FINL), periodically updated by executive order (most recently under Executive Order No. 18, series of 2022, and prior iterations), categorizes activities where foreign ownership is limited or prohibited:

List A: Activities reserved for Filipinos due to constitutional or legal restrictions, such as mass media (0% foreign ownership), practice of licensed professions (0%), and small-scale mining (0%).
List B: Activities limited for reasons of security, defense, health, or morals, such as small retail enterprises (0% foreign) and cooperatives (0%).
List C: Activities where existing enterprises adequately serve the market, though this list is often empty or minimal.

For publicly listed companies not falling under these restrictions, foreigners can own up to 100% of the shares. The PSE, as the primary stock exchange, facilitates this through its rules, which allow foreign investors to trade without discrimination, subject to the FINL caps. Over-the-counter (OTC) stocks, traded outside the PSE, follow similar rules but may require additional due diligence.

The Securities and Exchange Commission (SEC) oversees compliance, requiring corporations to monitor and report foreign ownership levels. If a company's foreign ownership approaches the cap (e.g., 40%), it may issue separate classes of shares: "A" shares for Filipinos and "B" shares for foreigners, with the latter often trading at a premium or discount based on demand.

Eligibility and Restrictions for Foreigners

Foreign natural persons (non-resident aliens) and foreign juridical entities (non-resident foreign corporations) are eligible to buy Philippine stocks, provided they comply with anti-money laundering regulations under the Anti-Money Laundering Act (Republic Act No. 9160, as amended) and obtain necessary identifications.

Key restrictions include:

Nationality Requirements: Foreigners cannot invest in stocks of companies in fully reserved sectors (e.g., mass media). In partially reserved sectors, aggregate foreign ownership cannot exceed the prescribed limit (e.g., 40% for public utilities like telecommunications or power distribution).
Minimum Investment Thresholds: There are no general minimum investment amounts for stock purchases, but some brokers may impose their own thresholds for foreign clients.
Prohibited Entities: Investments from sanctioned countries or entities listed under United Nations or Philippine sanctions are barred.
Special Cases: For real estate companies, foreign ownership is limited to 40% under the Constitution, affecting stocks in property developers. In banking, foreign banks can own up to 100% of a local bank subsidiary under Republic Act No. 10641, but stocks in universal banks may have nuances.

Foreigners must also consider bilateral investment treaties (BITs) and free trade agreements (e.g., ASEAN Economic Community frameworks), which may offer additional protections like fair and equitable treatment.

Process for Foreigners to Buy Stocks

To purchase stocks, foreigners must engage a licensed stockbroker registered with the PSE and SEC. The steps include:

Account Opening: Open a trading account with a PSE-accredited broker. Required documents typically include a valid passport (for individuals), certificate of incorporation (for entities), board resolution authorizing the investment, and proof of address. Foreigners may need to appoint a local custodian bank for settlement.
Tax Identification Number (TIN): Obtain a TIN from the Bureau of Internal Revenue (BIR) if not already possessing one. This is mandatory for tax reporting on dividends and gains.
Funding the Account: Transfer funds via international wire to a peso-denominated account, complying with Bangko Sentral ng Pilipinas (BSP) foreign exchange regulations. Inward remittances for stock investments are freely convertible and repatriable under BSP Circular No. 1389.
Trading: Place buy orders through the broker via the PSE's trading platform. Transactions settle on a T+2 basis (trade date plus two business days).
Custody and Registration: Shares are held in scripless form through the Philippine Depository & Trust Corp. (PDTC), with the broker or a custodian handling registration.

Foreigners can also invest indirectly through mutual funds, unit investment trust funds (UITFs), or exchange-traded funds (ETFs) listed on the PSE, which may have fewer restrictions.

Taxation of Stock Investments for Foreigners

Taxation for foreigners differs based on whether they are non-resident aliens engaged in trade or business (NRA-ETB) or not (NRA-NETB), and for non-resident foreign corporations (NRFC). The NIRC, as amended, imposes taxes on transactions, capital gains, and income. Tax treaties with over 40 countries (e.g., US-Philippines treaty) may reduce rates, requiring a tax treaty relief application (TTRA) from the BIR.

1. Stock Transaction Tax (STT)

Applies to sales of PSE-listed shares: 0.6% (6/10 of 1%) on the gross selling price.
Withheld by the broker and remitted to the BIR.
This tax replaces capital gains tax for listed shares, per Section 127 of the NIRC.
For OTC shares not listed on PSE, STT does not apply; instead, capital gains tax is imposed.

2. Capital Gains Tax (CGT)

For sales of unlisted shares: 15% final tax on net capital gains (gross selling price minus acquisition cost and expenses).
For foreigners (NRA or NRFC), the rate is 15% on net gains from unlisted shares.
Exemptions: Gains from listed shares are exempt if STT is paid. Under the CREATE Law (Republic Act No. 11534), certain reorganizations (e.g., mergers) may defer CGT.

3. Dividend Tax

Cash or property dividends from domestic corporations are subject to final withholding tax.
For NRA-NETB: 25% on gross dividends.
For NRA-ETB: 20% (or lower under treaty).
For NRFC: 15% (reduced from 30% under CREATE Law), or lower per treaty (e.g., 10-15% under many treaties).
If the foreign investor's home country allows a tax credit for Philippine taxes, the rate may be adjusted.
Stock dividends are generally tax-free unless they represent a distribution of earnings.

4. Value-Added Tax (VAT) and Other Taxes

Stock transactions are exempt from VAT under Section 109 of the NIRC.
Documentary Stamp Tax (DST): 1.5% on the par value of original issuances, but not on secondary market transfers of listed shares (exempt under SEC rules).
For foreigners, no estate or donor's tax applies to stock transfers unless the donor/decedent is a resident.

5. Tax Compliance and Reporting

Brokers withhold and remit taxes on behalf of foreigners.
Annual information returns (BIR Form 1604-CF) may be required for dividends.
Foreigners must file a TTRA for treaty benefits, providing proof of residency.
Repatriation of proceeds: Subject to proof of tax payment; BSP requires a Bangko Sentral Registration Document (BSRD) for investments exceeding certain thresholds.
Penalties for non-compliance include fines up to PHP 200,000 and imprisonment under the NIRC.

Recent Developments and Considerations

Amendments under the TRAIN Law (2018) and CREATE Law (2021) reduced corporate tax rates, indirectly benefiting dividend taxation for foreigners. The Public Service Act (Republic Act No. 11659, 2022) redefined public utilities, allowing 100% foreign ownership in telecommunications and transportation sectors previously capped at 40%, expanding stock investment opportunities.

Foreign investors should consult legal and tax advisors for personalized advice, as interpretations can vary. Risks include currency fluctuations, market volatility, and regulatory changes. The SEC and BIR provide online portals for filings, enhancing ease for foreigners.

In summary, while foreigners enjoy broad access to Philippine stocks, adherence to ownership limits and tax obligations is crucial for compliant and profitable investments. This framework balances national interests with global integration, fostering a vibrant capital market.