Foreign Ownership of Restaurant Franchises in the Philippines: A Comprehensive Legal Overview

Introduction

The Philippines, as an emerging market in Southeast Asia, has increasingly attracted foreign investors interested in the food and beverage sector, particularly through restaurant franchises. The country's growing middle class, urbanization, and tourism boom have made restaurant franchises a lucrative opportunity. However, foreign ownership in this area is governed by a complex web of constitutional provisions, statutes, and regulations designed to balance economic liberalization with national interests. This article provides an exhaustive examination of the legal landscape surrounding foreign ownership of restaurant franchises in the Philippines, focusing on permissible structures, restrictions, procedural requirements, tax implications, intellectual property considerations, and potential challenges. All discussions are grounded in the Philippine legal context, drawing from key laws such as the 1987 Constitution, the Foreign Investments Act (FIA) of 1991 (Republic Act No. 7042, as amended), the Retail Trade Liberalization Act (RTLA) of 2000 (Republic Act No. 8762), and related executive orders and administrative issuances.

While restaurant operations are generally open to foreign investment, the franchise model introduces additional layers involving intellectual property licensing and business structuring. Foreign entities can participate as franchisors (licensing their brand to local operators) or as franchisees (owning and operating outlets), but full ownership requires compliance with investment thresholds and corporate formation rules. This article assumes a broad interpretation of "restaurant franchise" to include quick-service restaurants, casual dining, and fast-food chains, excluding purely retail or manufacturing elements unless intertwined.

Legal Framework Governing Foreign Investments

Constitutional Foundations

The 1987 Philippine Constitution sets the foundational restrictions on foreign ownership to protect national patrimony. Article XII, Section 2 reserves the exploration, development, and utilization of natural resources to Filipinos or corporations at least 60% owned by Filipinos. More relevant to business ownership, Section 11 limits foreign equity in public utilities to 40%, and Section 10 promotes Filipino participation in enterprises. However, the Constitution does not explicitly restrict foreign ownership in non-sensitive sectors like food services. Instead, it defers to legislation for implementation, leading to a policy of liberalization post-1986 People Power Revolution.

Foreign Investments Act (FIA) of 1991

The FIA is the cornerstone statute for foreign investments, promoting a "negative list" approach. Under this act, foreigners may invest in any enterprise not listed in the Foreign Investments Negative List (FINL), which is updated periodically via Executive Order (the latest being Executive Order No. 18, series of 2022, amending prior lists).

FINL List A: Covers areas restricted by the Constitution or specific laws, such as mass media (100% Filipino-owned), practice of licensed professions (e.g., law, medicine), and land ownership (foreigners cannot own land but can lease it for up to 50 years, renewable for 25 years under the Investors' Lease Act, Republic Act No. 7652).
FINL List B: Addresses defense, national security, and small-scale enterprises. Critically, for enterprises with paid-up capital of less than US$200,000 (or its peso equivalent), foreign ownership is limited to 40% to protect micro, small, and medium enterprises (MSMEs). This threshold drops to US$100,000 for enterprises involving advanced technology or employing at least 50 Filipinos.

Restaurant franchises typically fall outside both lists unless they qualify as small-scale under List B. Operating a restaurant—classified under the Philippine Standard Industrial Classification (PSIC) Code I5610 (Restaurants and Mobile Food Service Activities)—is considered a service-oriented business open to 100% foreign ownership if the investment meets the minimum capital requirements for non-restricted activities. For franchises, this means a foreign entity can own 100% of a domestic corporation engaged in restaurant operations, provided the capital is at least PHP 2.5 million (approximately US$50,000, though exchange rates fluctuate) for domestic market enterprises, or higher for export-oriented ones.

Retail Trade Liberalization Act (RTLA) of 2000

While restaurants primarily involve food service, franchise models often include retail elements (e.g., selling merchandise or take-out items). The RTLA liberalized retail trade, allowing 100% foreign ownership in retail enterprises with paid-up capital of at least US$2.5 million, provided they do not engage in "small-scale retailing" (e.g., sari-sari stores). For restaurant franchises with retail components:

If the retail aspect is incidental (less than 50% of revenue), the business is treated as a service enterprise under FIA.
If retail dominates, RTLA applies, requiring pre-qualification by the Board of Investments (BOI) or Department of Trade and Industry (DTI) for investments below US$2.5 million, where foreign ownership is capped at 60% for certain categories.

In practice, most international restaurant franchises (e.g., McDonald's, Starbucks) operate through 100% foreign-owned subsidiaries or joint ventures, classifying primarily as food services.

Franchising-Specific Regulations

Franchising is regulated under the Intellectual Property Code of the Philippines (Republic Act No. 8293), which treats franchise agreements as technology transfer arrangements (TTAs). Key provisions:

Franchise agreements must be registered with the Intellectual Property Office (IPO) if they involve trademarks, patents, or know-how.
The agreement must comply with Section 87 of the IP Code, prohibiting clauses that restrict competition, impose excessive royalties, or violate anti-trust laws (e.g., Philippine Competition Act, Republic Act No. 10667).
Foreign franchisors can license their brand to Philippine entities without owning equity, retaining control through royalty fees (typically 5-10% of gross sales) and supply chain requirements.

The DTI's Philippine Franchise Association (PFA) provides self-regulatory guidelines, but these are not legally binding.

Permissible Ownership Structures

Foreign investors have several options for owning or participating in restaurant franchises:

100% Foreign-Owned Corporation:
- Incorporate under the Revised Corporation Code (Republic Act No. 11232) via the Securities and Exchange Commission (SEC).
- Minimum paid-up capital: PHP 5,000 for basic corporations, but practically PHP 100,000+ for credibility. For foreign-owned entities in non-restricted sectors, no minimum foreign equity is required beyond FIA thresholds.
- The corporation can act as franchisee, owning and operating outlets. Land for restaurant sites must be leased, not owned.
Joint Venture:
- Partner with a Filipino entity, sharing equity (e.g., 60% Filipino, 40% foreign) to mitigate risks or access local expertise. This is common for market entry.
Licensing/Franchisor Model:
- Foreign entity licenses the franchise to a 100% Filipino-owned company, avoiding direct ownership restrictions. This model dominates for brands like KFC or Jollibee (which has international franchises but local ownership roots).
Branch Office or Representative Office:
- Suitable for franchisors providing support services, but not for direct operations. Branches require BOI registration if income-generating.
Special Economic Zones (SEZs):
- Under the Special Economic Zone Act (Republic Act No. 7916), investors in PEZA-registered zones enjoy incentives like tax holidays, but restaurant franchises rarely qualify unless export-oriented (e.g., supplying to tourists).

Procedural Requirements for Establishment

To establish a foreign-owned restaurant franchise:

SEC Registration:
- Submit Articles of Incorporation, Bylaws, and Treasurer's Affidavit. Foreign investors must deposit at least 25% of subscribed capital.
- Obtain SEC Certificate of Incorporation.
BOI or PEZA Registration (if applicable):
- For incentives under the Omnibus Investments Code (Executive Order No. 226), register if the franchise involves pioneer activities or exports 70%+ of production.
DTI Registration:
- For single proprietorships or if retail-involved.
Bureau of Internal Revenue (BIR) Registration:
- Obtain Tax Identification Number (TIN) and register for VAT, withholding taxes.
Local Government Permits:
- Barangay clearance, Mayor's Permit, Sanitary Permit from the Department of Health (DOH), and Fire Safety Inspection from the Bureau of Fire Protection.
Visa and Work Permits:
- Foreign executives need Alien Employment Permit (AEP) from the Department of Labor and Employment (DOLE) and 9(g) Pre-Arranged Employment Visa from the Bureau of Immigration (BI). Intra-corporate transferees can use 9(g) visas.
Franchise Agreement Registration:
- File with IPO for IP protection.

The entire process can take 1-3 months, with costs ranging from PHP 50,000 to PHP 500,000 depending on scale.

Tax Implications

Foreign-owned restaurant franchises face:

Corporate Income Tax (CIT): 25% on net income under the CREATE Act (Republic Act No. 11534), reduced from 30%.
Value-Added Tax (VAT): 12% on gross sales.
Withholding Tax: 15-30% on royalties paid to foreign franchisors, reducible via tax treaties (e.g., US-Philippines treaty caps at 15%).
Branch Profits Remittance Tax: 15% on after-tax profits remitted abroad.
Local Business Tax: Up to 3% of gross receipts.
Incentives: BOI-registered enterprises may enjoy 4-7 year income tax holidays.

Transfer pricing rules (Revenue Regulations No. 2-2013) require arm's-length dealings in franchise royalties to prevent tax evasion.

Intellectual Property and Contractual Considerations

Trademarks and Patents: Must be registered with IPO. Foreign franchisors benefit from the Paris Convention priority.
Non-Compete Clauses: Enforceable if reasonable (e.g., 2-5 years post-termination, limited geography).
Dispute Resolution: Agreements often specify arbitration under the Alternative Dispute Resolution Act (Republic Act No. 9285), with venues like the Philippine Dispute Resolution Center.

Challenges and Risks

Anti-Dummy Law (Commonwealth Act No. 108): Penalizes use of dummies to circumvent restrictions, though inapplicable to unrestricted sectors like restaurants.
Labor Laws: Compliance with Labor Code (e.g., minimum wage, 13th month pay) is mandatory; foreign owners risk DOLE audits.
Cultural and Market Risks: Adapting menus to Filipino tastes; competition from local chains like Jollibee.
Political and Economic Volatility: Changes in FINL or economic policies could affect future investments.
Enforcement Issues: Weak IP enforcement; franchise disputes may lead to costly litigation in Philippine courts.

Conclusion

Foreign ownership of restaurant franchises in the Philippines is largely permissive, allowing up to 100% equity in adequately capitalized enterprises, fostering international brands' expansion. However, success hinges on navigating the regulatory maze, securing local partnerships, and complying with fiscal obligations. Investors are advised to consult legal experts for tailored advice, as amendments to laws like the Public Service Act (Republic Act No. 11659, liberalizing more sectors) signal ongoing liberalization. This framework not only protects national interests but also positions the Philippines as a gateway for ASEAN food industry investments.