The Philippines offers a dynamic market for foreign investors, supported by a liberalized regulatory framework and a skilled, English-speaking workforce. However, the legal landscape for establishing a business entity is governed by specific statutes—primarily the Revised Corporation Code (RCC) and the Foreign Investments Act (FIA)—which dictate the structures, capitalization, and compliance requirements for foreign participants.
1. Common Modes of Entry
Foreign corporations generally choose between incorporating a new local subsidiary or registering an existing foreign entity to operate within the country.
A. Domestic Subsidiary
A domestic subsidiary is a local corporation organized under Philippine law. It has a separate juridical personality from its parent company. Under the Revised Corporation Code, a corporation can now be formed by a single person (One Person Corporation or OPC) or by any number of incorporators (up to 15).
B. Branch Office
A Branch Office is an extension of the foreign head office. It carries out the business activities of the head office and derives income from the Philippines. Unlike a subsidiary, the head office remains liable for the liabilities of the branch.
C. Representative Office
A Representative Office is also an extension of the head office but is strictly prohibited from deriving income. Its activities are limited to information dissemination, promotion of company products, and acting as a message center.
D. Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ)
- RHQ: An administrative branch that does not earn income; it serves as a supervision and coordination center for subsidiaries/branches in the Asia-Pacific region.
- ROHQ: Allowed to derive income by performing qualifying services (e.g., general administration, sourcing of raw materials, R&D) to its affiliates.
2. Comparative Overview of Entities
| Feature | Domestic Subsidiary | Branch Office | Representative Office |
|---|---|---|---|
| Legal Personality | Separate from Parent | Extension of Head Office | Extension of Head Office |
| Liability | Limited to Subsidiary Assets | Extends to Head Office | Extends to Head Office |
| Income Generation | Allowed | Allowed | Not Allowed |
| Minimum Capital | US$200,000* | US$200,000* | US$30,000 (Initial Inward Remittance) |
| Governance | Board of Directors | Resident Agent | Resident Agent |
*Note: Minimum capital is reduced to US$100,000 if the enterprise involves advanced technology or employs at least 50 direct Filipino employees.
3. The Foreign Investment Negative List (FINL)
Foreign ownership is generally allowed up to 100%, except in areas reserved for Filipinos by the Constitution or specific laws. The Regular Foreign Investment Negative List (FINL) classifies these restrictions into two categories:
- List A: Areas reserved for Filipinos by the Constitution (e.g., Mass Media - 0% foreign; Advertising - 30%; Natural Resources - 40%).
- List B: Areas restricted for reasons of security, defense, risk to health and morals, and protection of local small-and-medium enterprises.
4. Capitalization Requirements
Under the Foreign Investments Act, a "Domestic Market Enterprise" (an entity that derives at least 60% of its revenue from the Philippines) with more than 40% foreign equity must have a paid-in capital of US$200,000.
If the entity is an "Export Market Enterprise" (exporting at least 60% of its goods or services), the US$200,000 requirement is generally waived, and the minimum capital is governed by the general rules of the SEC (typically much lower).
5. The Registration Process
The establishment of a legal entity involves a multi-agency workflow:
- Securities and Exchange Commission (SEC): * Reservation of Corporate Name.
- Submission of Articles of Incorporation and Bylaws (for subsidiaries).
- Registration of License to Do Business (for branches/representative offices).
- Bureau of Internal Revenue (BIR):
- Obtainment of Tax Identification Number (TIN).
- Registration of Books of Accounts and Authority to Print Receipts.
- Local Government Unit (LGU):
- Obtainment of Barangay Clearance and Mayor’s Business Permit.
- Social Agencies:
- Registration with the Social Security System (SSS), PhilHealth, and Pag-IBIG for mandatory employee benefits.
6. Taxation and Incentives
Corporate Income Tax (CIT)
Under the CREATE Act, the standard Corporate Income Tax rate is 25%. For domestic corporations with net taxable income not exceeding PHP 5 million and total assets (excluding land) not exceeding PHP 100 million, the rate is reduced to 20%.
Branch Profit Remittance Tax (BPRT)
Branches are subject to a 15% tax on profits remitted to the head office, unless a lower rate applies under a tax treaty.
Investment Incentives
Foreign corporations engaged in activities listed in the Strategic Investment Priority Plan (SIPP) may apply for incentives through the Board of Investments (BOI) or the Philippine Economic Zone Authority (PEZA). Benefits include:
- Income Tax Holidays (ITH) for 4 to 7 years.
- Special Corporate Income Tax (SCIT) rate of 5% or Enhanced Deductions after the ITH period.
- Duty-free importation of capital equipment and raw materials.
7. Operational Compliance
- Resident Agent: Foreign corporations (branches/representative offices) must appoint a resident agent in the Philippines upon whom legal processes may be served.
- General Information Sheet (GIS): An annual filing with the SEC detailing the ownership and directorship of the company.
- Audited Financial Statements (AFS): Must be filed annually with both the SEC and the BIR.
- Anti-Dummy Law: Foreigners must ensure they do not intervene in the management, operation, administration, or control of a partially nationalized entity, except as allowed by their proportionate share in capital.