Introduction

In the Philippines, real estate investment presents unique opportunities and challenges, particularly for foreign nationals married to Filipino citizens. The Philippine Constitution and related laws impose strict limitations on land ownership by foreigners to preserve national patrimony. However, forming a corporation can serve as a strategic vehicle for foreign spouses to participate in real estate ventures while complying with these restrictions. This approach leverages corporate structures to enable indirect involvement in property ownership and development. This article explores the legal foundations, procedural steps, ownership requirements, tax implications, potential benefits, risks, and best practices for utilizing corporations in this context, all within the Philippine legal framework as governed by the 1987 Constitution, the Corporation Code of the Philippines (Batas Pambansa Blg. 68), and ancillary statutes.

Legal Framework Governing Foreign Ownership of Real Estate

The cornerstone of Philippine land ownership rules is Article XII, Section 7 of the 1987 Constitution, which reserves the acquisition of private lands to Filipino citizens or corporations where at least 60% of the capital is owned by Filipinos. Foreigners are explicitly prohibited from owning land, except in cases of hereditary succession. This restriction extends to foreign spouses, even if married to a Filipino citizen, as the law views property acquired during marriage as potentially circumventing constitutional limits if titled solely in the foreign spouse's name.

However, the Constitution allows foreigners to own up to 40% of a corporation's equity, provided the remaining 60% is held by Filipinos. This enables corporations to own land, buildings, and other real property. For foreign spouses, this corporate route is often employed in real estate investment, where the Filipino spouse or other Filipino nationals hold the majority stake.

Key supporting laws include:

Republic Act No. 7042 (Foreign Investments Act of 1991, as amended by RA 8179): This liberalizes foreign investments but maintains the 60-40 ownership rule for land-holding corporations. It classifies real estate as a partially nationalized activity, requiring majority Filipino ownership.
Anti-Dummy Law (Commonwealth Act No. 108, as amended): This prohibits the use of dummies or nominees to evade foreign ownership restrictions. Violations can lead to penalties, including imprisonment and forfeiture of property.
Family Code of the Philippines (Executive Order No. 209): Under Article 74, property acquired during marriage is presumed to be conjugal unless proven otherwise. For foreign spouses, this means careful structuring is needed to avoid claims that the foreign partner effectively controls land through the marriage.
Presidential Decree No. 957 (Subdivision and Condominium Buyers' Protection Decree): Allows foreigners to own condominium units, but not the underlying land, with foreign ownership in a condominium project capped at 40%.

In practice, foreign spouses often form corporations for real estate development, leasing, or holding purposes, such as residential subdivisions, commercial buildings, or agricultural lands (subject to additional agrarian reform laws like RA 6657).

Eligibility and Ownership Requirements for Foreign Spouses

A foreign spouse married to a Filipino citizen can participate in a corporation for real estate investment, but strict compliance with the 60-40 rule is mandatory. The Filipino spouse must genuinely hold at least 60% of the voting shares and beneficial ownership. The foreign spouse can hold up to 40%, providing capital, expertise, or management roles without violating the Anti-Dummy Law.

Citizenship and Marriage Considerations: The Filipino spouse's citizenship must be verifiable (e.g., via birth certificate or passport). If the marriage is under the absolute community of property regime, corporate shares may be considered conjugal, but land owned by the corporation remains corporate property, not personal.
Minimum Capitalization: For domestic corporations, the minimum paid-up capital is PHP 5,000, but real estate ventures often require higher amounts (e.g., PHP 1 million or more) to demonstrate viability, especially for SEC registration.
Prohibited Activities: Corporations with foreign equity cannot engage in fully nationalized activities, but real estate is permissible under the 60-40 split. Agricultural land has additional limits under the Comprehensive Agrarian Reform Law, where corporations must comply with land ceilings (e.g., 1,024 hectares for corporations).
Dual Citizenship: If the foreign spouse holds dual citizenship (e.g., under RA 9225), they may qualify as a Filipino for ownership purposes, potentially allowing full ownership. However, this requires renunciation of foreign allegiance and SEC approval.

Steps to Form a Corporation for Real Estate Investment

Forming a corporation involves registration with the Securities and Exchange Commission (SEC) and compliance with local government units (LGUs). The process is streamlined via the SEC's online platform but requires legal expertise to avoid pitfalls.

Name Verification and Reservation: Search for available corporate names via the SEC's online system. Reserve the name for 30-90 days. Include terms like "Realty" or "Development" to reflect the real estate focus.
Preparation of Documents:
- Articles of Incorporation: Specify the purpose (e.g., "to engage in real estate development, buying, selling, and leasing of properties"). List incorporators (at least 5, majority Filipinos, including the spouses).
- By-Laws: Outline governance, including board composition (majority Filipino directors).
- Treasurer's Affidavit: Certify paid-up capital.
- Proof of Citizenship: For Filipino shareholders.
SEC Registration: Submit documents online or in-person. Pay fees (approximately PHP 2,000-5,000 plus 1% of authorized capital). Obtain Certificate of Incorporation upon approval (typically 3-7 days).
Post-Registration Requirements:
- Bureau of Internal Revenue (BIR): Register for TIN, books of accounts, and VAT if applicable. Real estate corporations are subject to 12% VAT on sales/leases.
- Social Security System (SSS), PhilHealth, and Pag-IBIG: For employee contributions.
- Barangay and Mayor's Permit: From the LGU where the principal office is located.
- If dealing with subdivisions/condominiums: Register with the Housing and Land Use Regulatory Board (HLURB) under PD 957.
Capital Infusion and Share Issuance: Issue shares ensuring the 60-40 split. Use stock certificates and a stock transfer book.
Real Estate Acquisition: Once formed, the corporation can purchase land via a Deed of Absolute Sale, registered with the Register of Deeds. Pay documentary stamp tax (1.5% of consideration) and capital gains tax (6% if seller is an individual).

Tax Implications

Real estate corporations face specific taxes:

Corporate Income Tax: 25% on net income (reduced from 30% under the CREATE Law, RA 11534).
Withholding Taxes: On dividends to foreign shareholders (15-30%, depending on tax treaties).
Property Taxes: Annual real property tax (1-2% of assessed value) paid to LGUs.
VAT and Percentage Tax: On leases (12% VAT) or sales.
Donor's/Gift Tax: If shares are transferred between spouses, this may apply at 6%.
Estate Planning: Upon death, corporate assets are subject to estate tax (6%), but corporate structure can facilitate succession.

Foreign spouses should consider double taxation treaties (e.g., with the US or EU countries) to mitigate taxes on repatriated profits.

Benefits of Using a Corporation

Legal Ownership of Land: Bypasses personal foreign ownership bans.
Limited Liability: Protects personal assets of spouses from corporate debts.
Investment Flexibility: Allows pooling of capital, joint ventures, and scalability for large projects.
Perpetual Existence: Corporation survives death or divorce, aiding estate planning.
Access to Financing: Easier to secure bank loans or attract investors.

Risks and Challenges

Anti-Dummy Violations: If the foreign spouse exerts de facto control (e.g., via proxies), penalties include fines up to PHP 100,000, imprisonment (2-5 years), and property forfeiture.
Conjugal Property Disputes: In divorce or annulment, courts may scrutinize if the corporation is a sham to hide assets.
Regulatory Scrutiny: SEC and BIR audits for compliance; HLURB for developments.
Economic Factors: Real estate market volatility, natural disasters, and political changes (e.g., proposed constitutional amendments on foreign ownership).
Costs: Formation and maintenance fees, legal fees (PHP 50,000-200,000), and annual compliance.
Exit Strategies: Selling corporate shares or assets triggers taxes; winding up requires SEC dissolution.

Best Practices and Case Studies

Engage a Philippine lawyer specializing in corporate and real estate law to draft documents and ensure compliance.
Maintain clear records of ownership and control to defend against dummy allegations.
Consider hybrid structures, like layering with trusts or partnerships, but avoid complexity that invites scrutiny.
Historical cases: In Matthews v. Taylor (GR No. 164584, 2009), the Supreme Court ruled that land titled in a foreign spouse's name is void ab initio. Conversely, properly structured corporations have been upheld in investments like Boracay developments.

Conclusion

Forming a corporation offers a viable pathway for foreign spouses to engage in Philippine real estate investment, balancing constitutional protections with economic openness. While it provides significant advantages, adherence to legal requirements is paramount to avoid severe consequences. Prospective investors should consult professionals for tailored advice, as laws evolve and individual circumstances vary. This structure not only facilitates wealth building but also contributes to the nation's development through responsible investment.