Deed of Sale Co-Ownership Foreigner Filipino Philippines

Introduction

In the Philippines, property ownership and transactions are governed by a complex interplay of constitutional provisions, civil laws, and regulatory frameworks, particularly when involving foreigners. A Deed of Sale (DOS) is a legal document that transfers ownership of property from a seller to a buyer or buyers. When the buyers include both a Filipino citizen and a foreigner entering into co-ownership, the transaction raises unique considerations due to restrictions on foreign land ownership. Co-ownership, as defined under Article 484 of the Civil Code of the Philippines, refers to the ownership of a thing or right belonging to different persons in undivided shares.

This article explores the intricacies of executing a Deed of Sale for co-owned property between a Filipino and a foreigner, focusing on real property (such as land and buildings), personal property, and condominium units. It covers legal validity, procedural requirements, potential pitfalls, tax implications, registration processes, and enforcement mechanisms within the Philippine legal system. While personal property transactions face fewer restrictions, real property dealings are heavily scrutinized to comply with the 1987 Philippine Constitution's nationalist provisions.

Legal Framework Governing Foreign Ownership and Co-Ownership

The foundation of restrictions on foreign ownership stems from the 1987 Philippine Constitution, specifically Article XII, Section 7, which states that "save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain." This effectively bars foreigners (aliens) from owning Philippine land, whether individually or in co-ownership, as co-ownership would grant the foreigner an undivided interest in the land, violating the constitutional prohibition.

Supporting laws include:

• Republic Act No. 7042 (Foreign Investments Act of 1991, as amended by RA 8179): Allows foreigners to invest in certain enterprises but maintains the land ownership ban.
• Civil Code of the Philippines (RA 386): Articles 1458-1637 govern sales, while Articles 484-501 detail co-ownership rights and obligations, such as equal sharing of benefits and burdens unless otherwise agreed.
• Presidential Decree No. 957 (Subdivision and Condominium Buyers' Protection Decree): Regulates condominium sales, permitting foreign ownership of units provided the foreign equity in the condominium corporation does not exceed 40%.
• Republic Act No. 4726 (Condominium Act): Reiterates that foreigners may own condominium units but not the underlying land.

For co-ownership specifically:

• If the property is land, co-ownership with a foreigner is generally invalid. The foreigner's share would be considered null and void, potentially leading to the entire transaction's invalidation or forced divestment.
• Exceptions apply to personal property (e.g., vehicles, jewelry) or movable assets, where foreigners face no ownership restrictions.
• In cases of marriage between a Filipino and a foreigner, property acquired during the marriage falls under the conjugal partnership or absolute community regime (Family Code, Articles 75-148). However, land must be titled solely in the Filipino spouse's name to avoid constitutional issues. Co-ownership documentation that implies foreign land interest could be challenged.

Case law reinforces these principles. In Matthews v. Taylor (G.R. No. 164584, June 22, 2009), the Supreme Court ruled that a foreign spouse cannot claim ownership over land acquired during marriage, emphasizing that such property belongs exclusively to the Filipino spouse. Similarly, Muller v. Muller (G.R. No. 149615, August 29, 2006) highlighted that agreements granting foreigners effective control over land (e.g., through dummies or co-ownership disguises) are void ab initio.

Validity of Co-Ownership in Deed of Sale Transactions

The validity of a Deed of Sale for co-owned property hinges on the nature of the asset:

1. Land and Real Property:

   • Direct co-ownership by a foreigner and Filipino is prohibited. If attempted, the deed may be declared void insofar as the foreigner's interest is concerned, with the property reverting to the seller or being subject to escheat proceedings (transfer to the state).
   • Workarounds, such as long-term leases (up to 50 years, renewable for 25 years under RA 7652, Investors' Lease Act), are common. The foreigner leases the land from the Filipino co-owner, but this does not constitute ownership.
   • In practice, structures like corporations (with at least 60% Filipino ownership) can hold land, but the foreigner cannot be a co-owner personally.

2. Buildings and Improvements:

   • Foreigners may own buildings separate from the land (separation of ownership under Civil Code Article 440). A Deed of Sale could transfer co-ownership of the building to the foreigner and Filipino, with the land titled solely to the Filipino.
   • This setup requires clear delineation in the deed to avoid commingling interests.

3. Condominium Units:

   • Foreigners can co-own units with Filipinos, as the ownership is of the unit and common areas, not the land (which is owned by the condominium corporation). The Deed of Absolute Sale must comply with the 40% foreign ownership cap for the project.
   • Co-ownership shares can be specified (e.g., 50-50), but the master deed and declaration of restrictions must allow it.

4. Personal Property:

   • No restrictions; a Deed of Sale can freely establish co-ownership, with rights governed by mutual agreement.

Invalid deeds risk legal challenges from third parties, the government, or even the parties themselves. The Bureau of Immigration may investigate for violations, potentially leading to deportation under the Philippine Immigration Act of 1940.

Procedural Requirements for Executing a Deed of Sale

A valid Deed of Sale must be in writing (Civil Code Article 1403) and typically notarized for enforceability against third parties. Key steps include:

1. Drafting the Deed:

   • Identify parties: Seller(s), Filipino buyer, and foreigner buyer.
   • Describe the property: Technical description, title number (from Original Certificate of Title or Transfer Certificate of Title), location, and shares (e.g., "undivided 1/2 interest").
   • Specify consideration (price) and payment terms.
   • Include warranties against encumbrances and eviction.
   • For foreigners, attach proof of legal capacity (e.g., passport, visa).

2. Notarization and Authentication:

   • Notarize before a Philippine notary public. If executed abroad, authenticate via the Philippine consulate (Apostille Convention if applicable).
   • For co-ownership, explicitly state shares to avoid presumptions of equality.

3. Tax Payments:

   • Capital Gains Tax (CGT): 6% of the selling price or zonal value, whichever is higher, paid by the seller (BIR Revenue Regulations No. 7-2003).
   • Documentary Stamp Tax (DST): 1.5% of the consideration.
   • Transfer Tax: Up to 0.75% of the value, paid to the local government unit.
   • Withholding Tax: If the seller is a non-resident foreigner, up to 25% on gains.
   • BIR Clearance: Obtain Certificate Authorizing Registration (CAR).

4. Registration:

   • Register with the Registry of Deeds (RD) in the property's location (PD 1529, Property Registration Decree).
   • Submit the deed, tax receipts, title, and DAR clearance if agricultural land.
   • For co-ownership, the new title will reflect co-owners' names and shares. If involving a foreigner and land, the RD may reject registration.

5. Special Considerations for Foreigners:

   • Secure Alien Certificate of Registration (ACR) or Special Investor's Resident Visa (SIRV) if applicable.
   • Comply with Anti-Dummy Law (Commonwealth Act No. 108) to prevent using Filipinos as fronts.

Tax Implications and Financial Considerations

Beyond initial taxes:

• Income Tax: Gains from sale are taxable for sellers; co-owners report proportionally.
• Estate Tax: Upon death, co-owned property is included in the estate, with foreigners' shares subject to Philippine tax if situated here.
• Value-Added Tax (VAT): Applies if the seller is in business (12% on gross selling price).
• For co-owners, expenses like property taxes (Real Property Tax under RA 7160) are shared.

Foreigners should consider currency regulations under BSP Circulars, requiring inward remittance for repatriation of funds.

Potential Issues and Risks

1. Constitutional Challenges: Government agencies like the Department of Justice may nullify the deed.
2. Disputes in Co-Ownership: Under Civil Code Article 494, a co-owner may demand partition, but for indivisible property, it may lead to sale.
3. Marital Property Issues: If the Filipino and foreigner are spouses, the Family Code requires judicial separation of property if land is involved.
4. Fraud and Simulation: Absolute simulated sales (Civil Code Article 1345) are void; relative simulations may be reformed.
5. Enforcement: Courts have jurisdiction; appeals go to the Court of Appeals and Supreme Court.

Best Practices and Alternatives

• Consult a Philippine lawyer specializing in real estate.
• Use trusts or corporations for indirect control.
• Opt for lease agreements instead of ownership.
• Ensure due diligence: Title search, appraisal, and environmental compliance.

Conclusion

Navigating a Deed of Sale for co-ownership between a foreigner and a Filipino requires strict adherence to constitutional limits, favoring alternatives like leases or condo ownership. While personal property offers flexibility, real property demands caution to avoid invalidation. Comprehensive documentation, tax compliance, and legal advice are essential to safeguard interests in the Philippine context.