In the Philippines, land ownership is a constitutional privilege reserved primarily for Filipino citizens. However, the intersection of real estate development and international investment has led to a structured legal framework allowing foreign capital to participate in land-holding entities. To do this successfully, one must navigate the "60/40 rule" and the intricacies of the Revised Corporation Code.
1. The Constitutional Foundation
The 1987 Philippine Constitution (Article XII, Section 7) mandates that private lands shall be transferred or conveyed only to individuals, corporations, or associations qualified to acquire or hold lands of the public domain. Under Section 2 of the same Article, a corporation is considered qualified to own land if at least 60% of its capital is owned by Filipino citizens.
This creates a clear ceiling: foreign equity in a land-holding corporation cannot exceed 40%.
2. Determining Nationality: The Control Test vs. The Grandfather Rule
When a corporation has corporate stockholders (i.e., a company owning shares in another company), the Philippine Securities and Exchange Commission (SEC) uses two methods to determine if the 60% Filipino requirement is met.
The Control Test
This is the primary method. If at least 60% of the capital stock outstanding and entitled to vote is owned by Filipino citizens, the corporation is considered Filipino-owned. The foreign link is no longer "grandfathered" to the next level.
The Grandfather Rule
This is a more stringent "look-through" approach. It is applied when there is "doubt" as to the beneficial ownership of the shares. Under this rule, the percentage of Filipino ownership in the investing corporation is multiplied by the percentage of its shareholding in the investee corporation to determine the actual Filipino interest.
Example: If Corporation A (60% Filipino) owns 100% of Corporation B, under the Control Test, Corporation B is 100% Filipino. Under the Grandfather Rule, it would be viewed more granularly to ensure no "dummy" structures are circumventing the law.
3. Structuring Foreign Funding
Foreign investors can provide capital through two main channels without violating ownership caps:
Equity Investment
The foreigner or foreign entity subscribes to a maximum of 40% of the total outstanding capital stock. This gives the foreigner a seat on the Board of Directors proportional to their shareholding, but they cannot exercise sole control over the land.
Debt Financing (Loans)
Foreigners may provide funding via credit facilities or shareholder loans. While a foreigner can be a creditor, they must be careful with collateral. A foreign lender can hold a mortgage on the land, but in the event of foreclosure, they cannot take title to the land. They must instead sell the land to a qualified Filipino buyer within a specific period.
4. Steps to Incorporation
To form a land-holding corporation, the following steps are required under the Revised Corporation Code (RA 11232):
- Name Reservation: Register the corporate name with the SEC.
- Articles of Incorporation (AOI): Define the primary purpose specifically as "to acquire, own, use, and develop real estate."
- Bylaws: Establish the internal rules for management.
- Treasurer’s Affidavit: Although the RCC has relaxed some capitalization requirements, land-holding companies must still meet the minimum paid-up capital necessary for their specific projects.
- SEC Registration: Submit all documents through the SEC’s online portal (eSPARC).
5. Critical Constraints and the Anti-Dummy Law
One cannot simply place 60% in a Filipino’s name while the foreigner retains all decision-making power. The Anti-Dummy Law (Commonwealth Act No. 108) prohibits foreigners from:
- Intervening in the management, operation, administration, or control of the corporation (except as technical personnel with Department of Justice approval).
- Using a Filipino "nominee" or "dummy" to hold title for the benefit of the foreigner.
Violation of these rules can lead to the escheat of the land (the state taking the land) and criminal penalties.
6. Summary of Ownership Structure
| Feature | Filipino Component | Foreign Component |
|---|---|---|
| Equity Cap | Minimum 60% | Maximum 40% |
| Board Seats | Majority (pro-rata) | Minority (pro-rata) |
| Land Title | Held by the Corporation | No direct title |
| Dividends | Entitled to 60%+ | Entitled to 40% or less |
7. The Foreign Investments Negative List (FINL)
The acquisition of land is listed under List A of the Regular Foreign Investment Negative List. This list enumerates areas of economic activity where foreign ownership is prohibited or limited by the Constitution and specific laws. Because land ownership is a List A activity, the 40% cap is non-negotiable regardless of the amount of foreign funding provided.
Properly structuring the entity requires a transparent shareholding agreement that respects the 60/40 ratio while utilizing legitimate debt instruments or hybrid securities (like non-voting preferred shares, provided the 40% total equity cap is maintained) to protect the interests of the foreign funder.