Any question about Philippines’ Business Structure?

If you are a foreigner and want to set-up a company or business enterprise in the Philippines, you might want to consider some few tips on what company set up is best for you.

Under Philippine Laws, if you are a foreigner, you can either set up a Corporation, Branch Office, Representative Office, Regional Headquarters (RHQs) or Regional Operating Headquarters (ROHQs).

Let’s differentiate each business structure.

1. Corporation – a corporation is a juridical person established under the Corporation Code of the Philippines and regulated by the Securities and Exchange Commission (SEC) with a personality separate and distinct from that of its shareholders. It consists of a minimum of five (5) to fifteen (15) incorporators each of whom must hold at least one share and must be registered with the SEC with a minimum capital of five thousand pesos (P5,000) only.

If you are looking at minimizing your risk in business in case something goes wrong in your operations in the future, this might be a fit for you as generally, the obligations and liabilities of the shareholders of the corporation are limited to the amount of their share capital.  However, the personal liabilities of corporate directors/shareholders, or officers may validly attach and will go beyond the amount of shareholdings in the corporation if it can be proven that they have committed the following:

• He assents to the (a1) patently unlawful act of the corporation, (a2) bad faith or gross negligence in directing its affairs, or (a3) conflict of interest, resulting in damages to the corporation, its shareholders, or other persons;
• He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;
• He agrees to hold himself personally and solidarily liable with the corporation; or
• He is made, by specific provision of law, to personal answer for this corporate action.

A foreigner can generally own up to a maximum of 40% of the company’s shares of stocks at any given time and the other 60% must be owned by Filipino Citizens.

Exemptions from the 40% cap of the foreign investments are now available under Republic Act (RA) 7042 as amended by RA 8179, also known as the Foreign Investments Act of 1991.  Under this Act, Foreign investors are now allowed to invest 100% equity in companies engaged in almost all types of business activities subject to certain restrictions as prescribed in the Foreign Investment Negative List (FINL) classified as follows:

• List A – cover investment areas/activities which maybe be opened to foreign investors and/or reserved to Filipino Nationals but where foreign equity participation in any domestic or export enterprise engaged in any activity listed therein shall be limited to a maximum of 40% as mandated by the Constitution and other special laws.
• List B – cover investment areas/activities which maybe be opened to foreign investors up to a limited ownership for reasons of security, defense, risk to health and morals and protection of small-and medium-scale enterprises.

If the activities that foreign national would like to invest is clearly not listed or included in the Foreign Investment Negative List and will cater to the domestic market, it can be foreign-owned by more than 40% provided that the required capital must be at least two hundred thousand dollars (US$200,000) or its equivalent in other foreign currencies and converted the same to Philippine currencies.  The capital requirement maybe be lowered to one hundred thousand dollars (US$100,000), if the activity involves advance technology or the company employs at least 50 direct employees.

Income tax applied is 30% of the net taxable income.

2. Branch Office – is a foreign corporation organized and existing under laws other than those of the Philippines that carries out the business activities of the head office and derives income from the host country. It is required to put up a minimum paid-up capitalization of US$200,000 or its equivalent in other foreign currencies and converted the same to Philippine currencies which can be reduced to US$100,000 if (a) activity involves advanced technology or (b) employs at least 50 direct employees. Registration with the Securities and Exchange Commission is required.

Income tax applied is 30% of the net taxable income.

3. Representative Office – or liaison office deals directly, with the clients of the parent company but does not derive income from the host country and is fully subsidized by its head office. It undertakes activities such as but not limited to information dissemination and promotion of the company’s products as well as quality control of products.

It is required to have a minimum inward remittance of US$30,000 or its equivalent in other foreign currencies and converted the same to Philippine currencies.to cover its operating expenses and registration with SEC is required.

Income tax applied is generally 0% as it is not allowed to derive income from the host country.

4. Regional or Area Headquarters (RHQ) – shall mean an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally served as supervision, communications and coordination center for its subsidiaries, branches or affiliated in the Asia-Pacific Region and other foreign markets and which does not earn or derive income in the Philippines and does not participate in any manner in the management of any subsidiary or branch office it might have in the Philippines nor shall it solicit or market goods and services whether on behalf of its mother company or its branches, affiliates, subsidiaries or any other company;

It is required to have a minimum inward remittance of US$50,000 annually or its equivalent in other foreign currencies and converted the same to Philippine currencies to cover its operating expenses.

Income tax applied is generally 0% as it is not allowed to derive income from the host country.

5. Regional Operating Headquarters (ROHQ) – shall mean a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets.

The ROHQ may engage in any of the following qualifying services:

• General administration and planning;
• Business planning and coordination
• Sourcing/procurement of raw materials and components;
• Corporate finance advisory services;
• Marketing control and sales promotion;
• Training and personnel management;
• Logistics services;
• Research and development services, and product development;
• Technical support and maintenance;
• Data processing and communication; and
• Business development.

ROHS are however, prohibited from offering qualifying services to entities other than their affiliates, branches or subsidiaries, as declared in their registration with the Securities and Exchange Commission nor shall they be allowed to directly and indirectly solicit or market goods and services whether on behalf of their mother company, branches, affiliates, subsidiaries or any other company.

Required capitalization is US$200,000 or its equivalent in other foreign currencies and converted the same to Philippine currencies.

Special Income tax rate is 10% the net taxable income.

We will discuss other tax issues and benefits in the next article.

Having clear objectives in setting up your business in the Philippines will help you choose which one is the best corporate set-up or structure that suits you in the end!

Roel R. Baduria, CPA & ORBIS Philippines Partner