Minimum Capital Requirements for Foreign-Owned Corporations in the Philippines

Introduction

The Philippines actively encourages foreign investments to stimulate economic growth, technology transfer, and job creation. However, to balance national interests with global integration, the country imposes certain regulations on foreign ownership of corporations, including minimum capital requirements. These requirements are designed to ensure that foreign investors contribute meaningfully to the local economy while protecting sensitive sectors from undue foreign control.

A "foreign-owned corporation" in the Philippine context typically refers to a domestic corporation (incorporated under Philippine laws) where foreign nationals or entities hold a significant portion of the equity, often exceeding 40%. Full foreign ownership (100%) is permitted in many sectors, but restrictions apply in areas reserved for Filipinos under the 1987 Philippine Constitution and related laws. The minimum capital requirements vary based on the nature of the business (e.g., export-oriented vs. domestic market), the level of foreign equity, and sector-specific rules.

This article provides a comprehensive overview of the minimum capital requirements for foreign-owned corporations, drawing from key legal frameworks. It covers general rules, exceptions, sector-specific variations, registration processes, and implications of non-compliance. Note that while the requirements are standardized, investors should consult with legal experts or regulatory bodies like the Securities and Exchange Commission (SEC) for case-specific advice, as interpretations may evolve.

Legal Framework

The primary laws governing minimum capital requirements for foreign-owned corporations include:

1987 Philippine Constitution: Limits foreign ownership in certain sectors (e.g., land, natural resources, public utilities) to a maximum of 40% equity, with the rest reserved for Filipinos.
Foreign Investments Act of 1991 (Republic Act No. 7042, as amended by RA 8179 and RA 11647): Establishes the general rules for foreign investments, including minimum capital thresholds. The 2022 amendments under RA 11647 liberalized foreign ownership in several sectors but retained capital requirements for domestic market enterprises.
Revised Corporation Code of the Philippines (Republic Act No. 11232, 2019): Governs the incorporation and operation of all corporations, setting a baseline minimum paid-up capital of PHP 5,000 for domestic corporations without foreign equity restrictions. However, for foreign-owned entities, additional requirements from the FIA apply.
Sector-Specific Laws: Such as the Retail Trade Liberalization Act (RA 8762, as amended), Public Service Act (as amended by RA 11659), and Banking Laws, which impose higher capital thresholds in regulated industries.
Executive Orders and Regulations: Issued by the Department of Trade and Industry (DTI), Board of Investments (BOI), and Philippine Economic Zone Authority (PEZA), which provide incentives and exemptions for certain investments.

The Foreign Investment Negative List (FINL), updated periodically via Executive Order (e.g., EO 18, series of 2022), categorizes activities where foreign ownership is restricted or prohibited. Investments not on the FINL generally allow 100% foreign equity, subject to minimum capital rules.

Definition of Foreign-Owned Corporations

Under Philippine law, a corporation is considered "foreign-owned" if foreigners hold more than 40% of the voting stock or capital. This threshold triggers the application of FIA rules. Corporations with 40% or less foreign equity are treated as domestic and are exempt from foreign-specific capital requirements.

Key distinctions:

Export-Oriented Enterprises: Those exporting at least 60% of their production/output. These face minimal capital hurdles.
Domestic Market Enterprises: Those selling more than 40% of their output locally. These require higher capital if foreign equity exceeds 40%.
Pioneer vs. Non-Pioneer: Under BOI rules, "pioneer" projects (involving new technology or industries) may qualify for incentives, including relaxed capital rules.

General Minimum Capital Requirements

For all corporations under the Revised Corporation Code, the minimum authorized capital stock is not fixed, but at least 25% must be subscribed, and 25% of the subscribed amount paid up, with a floor of PHP 5,000 paid-up capital. However, for foreign-owned corporations, the FIA overrides this with higher thresholds to ensure substantial investment.

Requirements for Domestic Market Enterprises

If foreign equity exceeds 40% and the business targets the local market:

Standard Minimum Paid-Up Capital: USD 200,000 (or its Philippine Peso equivalent, based on the prevailing exchange rate at incorporation).
Purpose: This ensures foreign investors bring significant resources, technology, or expertise to justify majority control in non-export sectors.

Requirements for Export-Oriented Enterprises

No Specific Minimum Capital: Only the general PHP 5,000 paid-up capital under the Corporation Code applies, provided the enterprise exports at least 60% of its output. Registration with BOI or PEZA is often required to avail of incentives like tax holidays.

Exceptions and Reductions

Several exceptions lower the USD 200,000 threshold for domestic market enterprises:

Advanced Technology: Reduced to USD 100,000 if the investment involves "advanced technology" as certified by the Department of Science and Technology (DOST). This applies to innovations in fields like AI, biotechnology, or renewable energy.
Employment Generation: Reduced to USD 100,000 if the corporation employs at least 50 direct Filipino employees within the first three years.
Startups and Small Enterprises: Under RA 11647 (2022 amendments), startups in priority sectors may qualify for further reductions or waivers, especially if registered under the Innovative Startup Act (RA 11337).
Regional Headquarters (RHQs) and Regional Operating Headquarters (ROHQs): For multinational companies, RHQs require USD 50,000 annually (not a one-time capital), while ROHQs need USD 200,000 one-time remittance. These are not full corporations but branches.
Incentives Programs: BOI-registered projects in preferred activities (e.g., under the Strategic Investment Priority Plan) may have customized capital requirements, often lower for export-oriented or priority industries.

Capital must be inwardly remitted through authorized banks and evidenced by a Bangko Sentral ng Pilipinas (BSP) certificate. It can include cash, equipment, or intellectual property, valued at fair market rates.

Sector-Specific Minimum Capital Requirements

Certain industries have heightened requirements due to national security, public interest, or economic sensitivity. These supersede general FIA rules:

Retail Trade: Under the Retail Trade Liberalization Act (RA 8762, amended by RA 11595 in 2021):
- Foreign equity up to 100% allowed, but minimum paid-up capital is USD 2,500,000 for enterprises engaged in retail.
- For single-brand retail, USD 830,000 per store if foreign equity >80%.
- Exemptions for high-end/luxury goods or small-scale retail with capital below PHP 25 million (but foreign ownership limited).
Banking and Financial Services:
- Foreign banks may establish branches with minimum capital of USD 20 million (for universal/commercial banks) or higher, as set by the BSP.
- For rural banks, foreign equity is capped at 60%, with minimum capital of PHP 5-200 million depending on location.
Public Utilities (e.g., Electricity, Water, Telecommunications): Amended by RA 11659 (2022), allowing 100% foreign ownership, but minimum capital varies (e.g., PHP 100 million for power distribution, subject to Energy Regulatory Commission rules).
Mining: Foreign equity up to 100% for large-scale operations under Financial or Technical Assistance Agreements (FTAAs), with minimum investment of USD 50 million in exploration and development.
Education: Limited to 40% foreign equity, with minimum capital as per Commission on Higher Education (CHED) rules, often PHP 5-10 million for institutions.
Mass Media and Advertising: Prohibited for foreign ownership (100% Filipino), so no applicable minimum for foreigners.
Real Estate and Land Development: Foreigners cannot own land, but corporations with up to 40% foreign equity can. Minimum capital aligns with general rules, but housing projects may require PHP 25 million under Housing and Land Use Regulatory Board (HLURB) guidelines.
Special Economic Zones (PEZA-Registered): Export-oriented firms enjoy no minimum beyond PHP 5,000, with incentives like VAT exemptions.

Registration and Compliance Procedures

To incorporate a foreign-owned corporation:

SEC Registration: Submit Articles of Incorporation, Bylaws, Treasurer's Affidavit (certifying paid-up capital), and proof of inward remittance. For foreign equity >40%, include FIA compliance certification.
BOI/PEZA Endorsement: For incentives or export status, secure approval showing compliance with capital requirements.
BSP Registration: For foreign investments, register to facilitate repatriation of profits/dividends.
DTI Certification: For single proprietorships or partnerships, but corporations go directly to SEC.
Local Government Permits: Business permits, tax registrations, etc.

The process typically takes 1-3 months. Annual reporting to SEC and BSP is required, including audited financial statements proving maintenance of capital.

Consequences of Non-Compliance

Failure to meet minimum capital requirements can result in:

Denial of Registration: SEC rejection of incorporation.
Penalties: Fines up to PHP 1 million, imprisonment, or corporate dissolution under the Corporation Code.
Revocation of Incentives: Loss of BOI/PEZA benefits, tax liabilities.
Anti-Dummy Law Violations: If Filipinos are used as "dummies" to circumvent restrictions, criminal charges under RA 7042.
Deportation: For foreign nationals involved in fraudulent setups.

Recent Developments

As of 2025, ongoing reforms under the CREATE MORE Act (potential successor to CREATE Act of 2021) aim to further reduce barriers, possibly lowering capital thresholds for green and digital investments. The FINL is reviewed every three years, with the latest (2022) expanding foreign access to renewable energy and startups. Investors should monitor updates from the National Economic and Development Authority (NEDA) and DTI.

In summary, while the Philippines offers a welcoming environment for foreign-owned corporations, minimum capital requirements serve as a gatekeeper to ensure genuine economic contributions. These range from negligible for export firms to substantial in protected sectors, with flexibility for innovative or job-creating ventures. Prospective investors are advised to engage local counsel to navigate nuances and leverage incentives effectively.