Foreign Ownership in Philippine Construction: Can a Foreign Company Own 100%? (Rules and Options)

Introduction

The Philippines has long maintained a regulatory framework designed to balance attracting foreign investment with protecting national interests, particularly in sectors deemed strategic or sensitive. Foreign ownership in the construction industry is governed by a combination of constitutional provisions, statutory laws, and executive issuances that outline restrictions and exceptions. At its core, the question of whether a foreign company can own 100% of a construction firm in the Philippines hinges on the type of construction activities involved—private versus public, locally-funded versus foreign-assisted—and the licensing requirements enforced by the Philippine Contractors Accreditation Board (PCAB).

While the 1987 Philippine Constitution imposes general limits on foreign participation in certain economic activities, the Foreign Investments Act (FIA) of 1991 (Republic Act No. 7042, as amended) generally allows full foreign ownership in most sectors unless explicitly restricted by the Foreign Investment Negative List (FINL). Construction is partially restricted under the FINL, but not entirely prohibited for 100% foreign equity. This article explores the rules, limitations, exceptions, and practical options for foreign investors, providing a comprehensive overview based on the legal landscape as of mid-2025.

Constitutional and Legal Framework

The 1987 Philippine Constitution

The Constitution sets the foundational restrictions on foreign ownership:

Article XII, Section 2: Reserves the exploration, development, and utilization of natural resources to Filipino citizens or corporations at least 60% owned by Filipinos. While not directly applicable to construction, this can intersect if construction involves resource extraction (e.g., mining infrastructure).
Article XII, Section 7: Prohibits foreign ownership of private lands, limiting foreigners to 40% equity in land-owning corporations. This affects construction firms that own real property for operations.
Article XII, Section 11: Limits foreign ownership in public utilities to 40%, requiring 60% Filipino equity. Construction itself is not classified as a public utility, but projects involving utilities (e.g., power plants, water systems) may trigger this if the construction entity operates or owns the utility.
Article XIV, Section 4: Reserves the practice of professions (e.g., architecture, civil engineering) to Filipino citizens. This impacts construction firms, as key technical roles must be filled by licensed Filipino professionals, even in foreign-owned entities.

These provisions emphasize "Filipino-first" policies but allow flexibility through laws like the FIA.

Foreign Investments Act (RA 7042, as Amended by RA 11647)

The FIA promotes foreign investment by allowing 100% foreign equity in enterprises not listed in the FINL. Key principles:

Foreign investors can register with the Securities and Exchange Commission (SEC) or Board of Investments (BOI) for incentives.
Amendments via RA 11647 (2022) liberalized several sectors by removing them from the FINL or raising equity thresholds, but construction remains subject to specific rules tied to public works.
The FIA defers to the FINL for restrictions, which is updated periodically via Executive Orders (e.g., the 12th FINL under EO 18, s. 2022, and subsequent updates).

Republic Act No. 4566 (Contractors' License Law)

This law establishes the PCAB under the Department of Trade and Industry (DTI) to regulate contractors:

All entities undertaking construction projects exceeding PHP 500,000 must be PCAB-licensed.
Licenses are categorized by size, scope, and type (e.g., general building, engineering).
Foreign participation is addressed through distinctions between regular and special licenses (detailed below).

The Foreign Investment Negative List (FINL)

The FINL, divided into List A (Constitution/law-based restrictions) and List B (defense/national security-related), directly impacts construction:

List A, Item 14: Limits foreign equity to 40% in "contracts for the construction and repair of locally-funded public works," per RA 4566 and Commonwealth Act No. 541.
- "Locally-funded public works" include government infrastructure projects financed by Philippine national or local budgets (e.g., roads, bridges, schools funded by the Department of Public Works and Highways).
- Exceptions: No equity limit for (a) projects under RA 7718 (Build-Operate-Transfer Law, now expanded under the Public-Private Partnership Code, RA 11966 of 2024), which allow full foreign participation in solicited/unsolicited PPPs; and (b) foreign-funded or assisted projects requiring international competitive bidding (e.g., those financed by World Bank, ADB, or JICA loans).
List A, Item 15: 40% foreign equity limit for construction of defense-related structures (e.g., military bases).
Construction for private projects (e.g., commercial buildings, residential developments) is not restricted in the FINL, implying 100% foreign ownership is permissible, subject to licensing.

In summary, the FINL does not blanket-restrict all construction; the 40% cap applies selectively to public works contracts.

Other Relevant Laws

RA 7718 (BOT Law, as Amended): Encourages foreign investment in infrastructure via PPPs, allowing 100% foreign ownership in project companies for build-operate-transfer schemes.
RA 11966 (PPP Code of 2024): Consolidates PPP frameworks, permitting full foreign equity in joint ventures, concessions, or leases for infrastructure, with streamlined approvals.
RA 11659 (Public Service Act Amendments, 2022): Reclassifies certain industries (e.g., telecommunications, transport) as non-public utilities, allowing 100% foreign ownership. While not directly for construction, it enables foreign constructors in these sectors without equity limits.
Anti-Dummy Law (Commonwealth Act No. 108): Prohibits using Filipino nominees to circumvent ownership rules; violations can lead to fines, imprisonment, or license revocation.

Can a Foreign Company Own 100% of a Construction Firm?

The short answer is yes, but with significant limitations. A 100% foreign-owned company can be incorporated in the Philippines for construction activities, but its operational scope is restricted:

Allowed Activities:
- Private sector projects (e.g., building malls, factories, or homes for private clients).
- Foreign-funded public infrastructure (e.g., ODA projects).
- PPP projects under RA 7718/11966.
- Subcontracting for licensed Filipino firms.
Prohibited or Restricted Activities:
- Bidding on or directly undertaking locally-funded government public works contracts (requires 60% Filipino ownership).
- Unlimited operation without project-specific approvals.

To operate legally, the company must secure a PCAB license, which differentiates between foreign and domestic entities.

PCAB Licensing for Foreign Entities

Regular Contractor's License: Reserved for Filipino citizens or corporations/partnerships with at least 60% Filipino equity and control. Allows unlimited bidding and operation across projects. Foreigners are ineligible for this if owning more than 40%.
Special Contractor's License: Available to 100% foreign-owned firms for a single, specific project. Requirements include:
- Proof that the project involves technology, equipment, or expertise not available from Filipino contractors.
- The project must be foreign-assisted, PPP-based, or of national significance.
- Approval from the PCAB Board, often requiring endorsements from relevant agencies (e.g., DPWH for infrastructure).
- Validity: Limited to the project's duration, renewable only for extensions.
- Capitalization: Minimum paid-up capital varies by license category (e.g., PHP 1 billion for AAA category).
Application Process: Submit to PCAB with SEC registration, financial statements, technical personnel list (must include Filipino licensed engineers/architects), and project details. Processing takes 30-60 days; fees range from PHP 10,000 to PHP 100,000+.

Foreign firms must also comply with immigration laws (e.g., Alien Employment Permits for expat workers) and tax obligations (e.g., 12% VAT on services).

Options for Foreign Investors

Foreign companies have several strategies to navigate restrictions and achieve greater operational flexibility:

100% Ownership with Special License:
- Ideal for one-off, high-value projects (e.g., a foreign firm specializing in skyscrapers wins a private contract).
- Pros: Full control, no equity dilution.
- Cons: Limited to one project at a time; cannot scale broadly.
Joint Venture (JV) or Partnership:
- Form a new entity with a Filipino partner, ensuring 60% Filipino equity for regular PCAB licensing.
- Common structure: 60% Filipino, 40% foreign.
- Pros: Access to government bids; local expertise.
- Cons: Shared control; potential conflicts. Use a JV agreement to define roles (e.g., foreign provides tech, Filipino handles licensing).
Public-Private Partnerships (PPPs):
- Under RA 11966, foreign firms can own 100% of the project company for infrastructure (e.g., airports, railways).
- Solicited bids or unsolicited proposals; incentives include tax holidays via BOI.
- Pros: No equity limit; long-term concessions (up to 50 years).
- Cons: Competitive bidding; regulatory hurdles.
Subcontracting or Consortium:
- 100% foreign firm acts as subcontractor to a licensed Filipino prime contractor.
- Pros: Leverages foreign expertise without ownership changes.
- Cons: Dependent on the prime; limited profit share.
Branch Office or Representative Office:
- Register a branch (100% foreign-owned) for non-construction activities (e.g., consulting), then partner for actual builds.
- Not suitable for direct construction but useful for market entry.
Acquisition or Merger:
- Acquire up to 40% of an existing Filipino construction firm.
- For full control, structure as a holding company, but comply with Anti-Dummy Law.
Technology Transfer or Licensing Agreements:
- Foreign firm licenses tech to a Filipino entity without equity involvement.
- Pros: Low risk.
- Cons: No direct ownership.

Challenges and Considerations

Enforcement and Compliance: PCAB conducts audits; violations (e.g., unlicensed work) result in fines (PHP 100,000+), blacklisting, or deportation.
Capital Requirements: Vary by PCAB category (e.g., PHP 450 million net worth for AA category).
Tax Implications: Foreign firms face 25% corporate income tax (reduced from 30% post-CREATE Law, RA 11534); withholding taxes on dividends.
Labor Rules: At least 70% of employees must be Filipino in skilled/unskilled roles, per DOLE rules.
Recent Trends: Post-2022 liberalizations have increased foreign participation in infrastructure, with projects like the NAIA rehabilitation involving 100% foreign consortia. However, nationalist sentiments and bureaucratic delays persist.
Risks: Political changes could tighten FINL; economic nationalism may favor local firms in bids.

Conclusion

Foreign companies cannot freely own 100% of a construction firm with unlimited access to all markets in the Philippines due to PCAB licensing and FINL restrictions on public works. However, full ownership is viable for private, foreign-funded, or PPP projects via special licenses or specific structures. Investors should consult legal experts, the SEC, BOI, and PCAB for tailored advice, as rules evolve with economic policies. This framework aims to foster growth while safeguarding Filipino interests, making strategic partnerships key to success.