Foreign Ownership Limits on Realty Company Shares in the Philippines

I. Overview and governing framework

Foreign ownership in Philippine real estate is regulated primarily by the Constitution, which reserves ownership of land to (i) Filipino citizens and (ii) corporations or associations that are at least 60% Filipino-owned. This constitutional rule is implemented and supplemented by statutes, administrative issuances, and jurisprudence, including rules on corporate nationality, anti-dummy arrangements, and registration/transfer practices.

A practical consequence is that foreigners generally cannot own land, but they may participate—within strict limits—in Philippine companies that own land (often referred to in practice as “landholding” or “realty” companies), provided those companies remain constitutionally qualified.

“Realty company shares” therefore raise two distinct but connected questions:

1. Corporate nationality compliance: Is the realty company constitutionally qualified to own land (i.e., at least 60% Filipino-owned)?
2. Transaction validity and registrability: Does the share transfer (and any related rights such as control or beneficial ownership) impermissibly allow foreigners to acquire land ownership or control in circumvention of the Constitution?

II. Constitutional rule: land ownership and corporate qualification

A. Prohibition on foreign land ownership

As a general rule, foreigners (non-Filipino citizens) may not acquire or hold title to private lands. There are narrow constitutionally or statutorily recognized exceptions (e.g., limited hereditary succession in certain circumstances), but these are not the norm and are interpreted strictly.

B. Corporate land ownership: 60% Filipino ownership

Corporations and associations may acquire and hold lands only if at least 60% of their capital is owned by Filipino citizens, commonly expressed as the “60–40 rule.”

For realty companies, this means:

• If the company owns land or intends to acquire land, it must maintain Filipino ownership of at least 60% of the relevant measure of ownership recognized for nationality testing (discussed below).
• Foreign ownership is therefore capped at 40%, but how the cap is measured matters greatly.

III. What “foreign ownership limit” means for shares of a realty (landholding) company

A. Foreign shareholding ceiling: the basic statement

In ordinary shorthand: foreigners may own up to 40% of a Philippine corporation that owns land.

However, compliance is not determined only by what is written on stock certificates. Philippine law looks at substance, including beneficial ownership, voting power, and control arrangements, especially in industries and assets reserved to Filipinos.

B. The key: determining “Filipino-owned capital” for nationality

Nationality tests determine whether the corporation is Filipino. In practice, the analysis hinges on:

1. What class of shares counts (e.g., voting shares; shares entitled to elect directors)
2. How indirect ownership is traced (e.g., if a shareholder is itself a corporation)
3. Whether arrangements effectively transfer control or beneficial ownership to foreigners beyond what formal share ratios indicate

1. Voting control and “control test”

Philippine nationality determinations often begin with a control test: whether 60% of voting stock is owned by Filipinos. For landholding, voting power is crucial because it reflects control over land disposition, encumbrance, and corporate decisions.

2. Beneficial ownership and “economic test” (substance)

Even if voting shares appear compliant, regulators and courts may scrutinize whether foreigners have been granted beneficial ownership or economic rights that effectively circumvent constitutional restrictions. This scrutiny commonly arises when:

• Preferred shares are structured to give foreigners disproportionate economic rights
• Side agreements grant foreigners veto rights over land transactions
• Financing arrangements effectively place land assets under foreign control
• Nominee arrangements conceal foreign beneficial owners

3. Layered ownership and “look-through” analysis

If a shareholder is a corporation, compliance generally requires tracing whether that corporate shareholder is itself Filipino (and to what degree). In structures with multiple corporate layers, the analysis may require “looking through” tiers to determine the ultimate nationality and whether each layer preserves the 60–40 requirement in a manner consistent with constitutional policy.

IV. Realty companies vs. real estate businesses: clarify the scope

The phrase “realty company” can refer to different business models:

1. Landholding company: owns land (directly holds titles).
2. Developer: owns land and develops subdivisions/condominiums.
3. Brokerage/service company: provides services (brokerage, property management) and may not own land.
4. Leasing company: may lease land/buildings and may or may not own land.

Foreign ownership restrictions become most acute when the company owns land (landholding), because land ownership is the constitutional trigger. If a “realty company” does not own land (e.g., purely service-based), restrictions may still apply depending on other regulated activities, but the strict landholding qualification may not be the primary issue.

Because most “realty company share” questions arise precisely because the company holds land, this article focuses on landholding realty corporations.

V. Legal consequences of violating foreign ownership limits in a landholding company

A. Invalid acquisition of land and exposure to nullity

If a corporation is not constitutionally qualified (i.e., becomes more than 40% foreign in the relevant sense), its acquisition or holding of land is constitutionally infirm. Consequences can include:

• Inability to validly acquire additional land
• Challenges to the validity of acquisitions
• Complications in registration, transfers, mortgages, and due diligence
• Potential actions involving reconveyance, forfeiture concepts, or other remedies depending on the posture of the case and applicable doctrines

B. Corporate and transactional risk: registrability and enforceability

Even if the land title remains in the corporate name, transactions may be clouded if the corporation’s nationality is suspect. Counterparties (banks, buyers, investors) often impose stringent conditions:

• Proof of Filipino ownership and nationality compliance
• Updated General Information Sheet and ownership schedules
• Declarations on beneficial ownership and anti-dummy compliance
• Legal opinions and certifications

C. Anti-Dummy Law exposure

Arrangements that use Filipinos as “dummies” to skirt foreign ownership limits can expose parties to criminal and administrative liability. The Anti-Dummy framework addresses situations where foreigners, despite formal restrictions, effectively:

• Exercise rights of ownership reserved to Filipinos
• Control or manage a nationalized activity/asset beyond allowable levels
• Use nominees or agreements to obtain prohibited benefits

For landholding companies, high-risk indicators include:

• Shareholders holding shares “in trust” for foreigners
• Undisclosed beneficial owners
• Side letters granting foreigners control over land disposition
• Financing structures where default outcomes effectively transfer land or control to foreigners beyond legal limits

VI. Common structures and compliance pitfalls in realty company shareholding

A. Direct foreign equity up to 40%

The simplest compliant structure is a Philippine corporation with:

• At least 60% Filipino ownership in the relevant qualifying shares, and
• Foreign ownership not exceeding 40%

Care is required in drafting the articles/bylaws and share classifications to avoid inadvertently granting foreigners control beyond allowable levels.

B. Preferred shares and disproportionate rights

Preferred shares are not inherently prohibited, but they become problematic when designed to:

• Confer voting powers that upset Filipino control
• Provide veto rights over fundamental corporate acts involving land
• Function as disguised equity/control instruments for foreigners

Even without formal voting rights, overly strong protective provisions may be viewed as transferring control. Standard investor protections can be permissible, but the line is fact-specific.

C. Negative control and veto rights

A frequent issue is negative control: foreigners holding minority equity but possessing veto power over:

• Sale, lease, mortgage, or encumbrance of land
• Amendment of corporate purposes involving land
• Appointment/removal of key officers controlling land transactions

While minority protections are common in corporate finance, in a nationalized context they can be challenged if they effectively deprive Filipinos of the ability to control land-related decisions.

D. Options, convertibles, and conditional transfers

Instruments that could push foreign ownership beyond 40% (e.g., options, warrants, convertibles) must be carefully structured. Key questions:

• Upon conversion/exercise, will foreign ownership breach the cap?
• Are there automatic conversion triggers that could force a breach?
• Do the instruments grant de facto control prior to conversion?

Deals often include “nationality compliance” conditions: conversion/exercise is allowed only to the extent it will not breach limits.

E. Pledges and security arrangements over shares

Foreign lenders/investors sometimes take share pledges as security. A pledge is not automatically prohibited, but problems arise if foreclosure would result in:

• Foreign ownership exceeding allowable levels; or
• Foreign control of a landholding company in substance

Transactions commonly include fallback mechanisms—e.g., sale to qualified Philippine nationals, or restrictions on transferees—to keep compliance intact.

F. Management contracts and technical assistance

Foreign participation via management or technical agreements must avoid transferring control of land disposition or corporate governance reserved to Filipinos. Contracts that effectively let foreigners run the landholding company as if they own it can raise anti-dummy and nationality concerns.

VII. Due diligence for acquiring shares in a Philippine landholding (realty) company

A prudent share buyer—foreign or Filipino—typically reviews:

1. Corporate documents

   • Articles of Incorporation and By-Laws (share classes, voting rights)
   • Stock and Transfer Book
   • General Information Sheets and ownership disclosures
   • Board resolutions relating to share issuance/transfer

2. Ownership and nationality analysis

   • Breakdown of voting shares and beneficial owners
   • Layered ownership tracing for corporate shareholders
   • Verification of citizenship of individual shareholders
   • Checks for nominee arrangements and trusts

3. Side agreements

   • Shareholders’ agreements and veto rights
   • Options/warrants/convertibles and nationality caps
   • Voting trusts, proxies, management contracts

4. Land and asset profile

   • Titles, tax declarations, encumbrances
   • Confirmation that land is indeed held by the company
   • Restrictions/annotations affecting transfer or use

5. Regulatory and compliance

   • Past issues involving nationality or anti-dummy allegations
   • Litigation that could question landholding validity

VIII. Practical rules for share transfers involving foreigners

A. The cap must be respected at all times, not only after closing

A transfer that temporarily breaches foreign limits—even briefly—can create risk. Transaction sequencing matters.

B. Board approval and restrictions on transfers

Corporations may impose restrictions (consistent with corporate law) requiring board approval for share transfers, especially to ensure nationality compliance.

C. Representations, warranties, and covenants

Share purchase agreements involving realty companies commonly include:

• Representations that the corporation is and will remain at least 60% Filipino-owned
• Covenants to maintain compliance
• Indemnities for losses arising from nationality violations
• Conditions precedent requiring updated ownership schedules

D. Remedies for breach: forced sale and rebalancing mechanisms

Contracts may provide that if foreign ownership would exceed permissible levels, parties must:

• Reallocate shares to qualified Filipino buyers
• Trigger redemption of shares
• Restrict conversion/exercise of instruments
• Implement call options in favor of Filipino shareholders (structured carefully to avoid being a dummy mechanism)

IX. Condominiums and the frequent misconception about “realty shares”

A distinct rule applies to condominium units: foreigners may purchase and own condominium units up to 40% of the total units (or total area) in a condominium project, depending on how compliance is measured under condominium law and practice.

This condominium rule is often confused with ownership of shares in realty corporations:

• Owning condominium units is not the same as owning land.
• A condominium corporation’s structure and the project’s compliance tracking differ from a landholding corporation.
• Foreign equity in a developer that owns land is governed by constitutional corporate landholding limits; foreign purchases of condo units are governed by condominium-specific rules and project-level caps.

A foreign buyer who cannot own land may still:

• Lease land long-term (within lawful bounds), or
• Own condo units subject to the applicable foreign ownership ceiling for the project, or
• Invest up to 40% in a landholding corporation—provided the corporation remains constitutionally qualified and arrangements do not circumvent the law.

X. Public policy rationale and interpretive posture

Philippine restrictions on foreign ownership of land reflect a constitutional policy of reserving land ownership to Filipinos and Filipino-controlled entities. As a result:

• The rules are generally interpreted protectively toward Filipino ownership.
• Courts and regulators may look beyond form to substance, especially where arrangements appear designed to evade nationality limits.

XI. Common compliance scenarios

Scenario 1: Foreigner buys 30% of voting shares in a landholding corporation

Typically permissible if:

• Filipino ownership remains at least 60% in qualifying shares
• No side deals grant foreign negative control over land disposition
• Beneficial ownership is transparent and legitimate

Scenario 2: Foreigner buys 40% but holds extensive veto rights on land sales and mortgages

High risk because veto rights can amount to control over land transactions, undermining the constitutional policy even if share ratios are technically compliant.

Scenario 3: Foreigner “funds” land acquisition, Filipino holds shares “in trust”

High risk under anti-dummy principles and can expose parties to invalidity and liability.

Scenario 4: Foreigner takes pledge over shares; foreclosure would exceed 40%

Structure should ensure that foreclosure does not result in an impermissible foreign transfer and should include mechanisms for sale to qualified buyers.

XII. Key takeaways

1. A Philippine corporation that owns land must remain at least 60% Filipino-owned in the manner relevant to constitutional nationality testing.
2. Foreigners may generally hold up to 40% equity in a landholding (realty) corporation, but the legal risk lies in control, beneficial ownership, and circumvention.
3. Structures that appear compliant on paper may still be problematic if they grant foreigners de facto control over land assets or corporate governance.
4. Transactions involving shares of a landholding corporation should be documented with nationality safeguards, and due diligence must extend to share classes, voting rights, side agreements, and beneficial ownership.
5. Condominium foreign ownership rules are separate and should not be conflated with corporate landholding restrictions.