Doing Business in the Philippines
The startup and SME guide to starting a business in the Philippines
Philippines is one of the fastest growing economies in Southeast Asia with a strong labor force of more than 73.1 million Filipinos. Highly educated with a 98.18% literacy rate, Filipinos have a good command of the English language which makes the country one of the top countries to set-up a business process outsourcing center.
In the latest Global Startup Ecosystem Report 2019 by the Startup Genome, Philippines is a perfect locator for companies seeking to minimize operating costs while recruiting top talents at less than a quarter of the global average compensation.
This quick guide is meant to provide a brief overview of the corporate structures and restrictions for foreign companies planning to do business in the Philippines.
Recent developments
During the Duterte administration, several laws and regulations have been passed aiming to ease doing business in the Philippines. Some of the major laws affecting startups and SMEs include:
Revised Corporation Code
After a long wait, the much needed update to the corporation code was released early this year. The key amendments include:
- Allowing the registration of corporations with less than five shareholders including one-person corporations;
- Removing the requirement for minimum subscribed (25% of authorized capital) and paid-up capital (25% of subscribed capital) for the registration of a corporation;
- Removing the term limitation of fifty (50) years for corporate life; and
- Exempting corporations with less than Php600 million in assets or liabilities from the submission of audited financial statements.
Comprehensive Tax Reform Program
The CTRP is the flagship program of the Duterte administration aimed at improving tax collection through more efficient tax collections. While business critical packages are yet to be passed by Congress, these are the some of the expected benefits for corporations:
- Lowering of corporate income tax from the current 30% to 20% over a 10-year period with an annual 100 basis point reduction in tax rates;
- Providing amnesty program for corporations with tax delinquencies;
- Increasing the tax deductible bases for certain expenses on-line with national priorities such as research and development and trainings; and
- Facilitating the process for claiming tax credits.
Innovative Startup Act
Passed this year aimed at improving the competitiveness of startups and innovative businesses, we are still waiting for the release of the implementing rules and regulations to be jointly released by the tasked agencies. The benefits of the Innovative Startup Act include:
- Providing visas to foreign owners, investors and employees establishing, investing or working in a qualified innovative startup business or support business;
- Providing incentives and subsidies to startups in the Philippines;
- Establishing Philippine Startup Ecozones; and
- Providing assistance to startups in processing of business registration requirements and protection of intellectual property.
Ease of Doing Business Act
To promote entrepreneurship in the country and improve the country’s position in the global ease of doing business ranking, the government formed the Anti-Red Tape Authority (ARTA) tasked to promulgate the Ease of Doing Business Act, as part of this, ARTA has been actively engaging with different government agencies in establishing timelines for processing of individual and business documents.
Altogether, these recent laws and regulations have improved the business environment in the Philippines. While Package 2 of the CTRP is still contentious with the potential removal of tax incentives offered to existing ecozone locators, careful planning of the right legal and tax structure can still allow foreign companies to maximize the benefit of locating in the Philippines.
“Doing Business” in the Philippines
Establishing a Philippine entity as a foreigner or as a foreign corporation normally begins with a corporate registration with the Philippine Securities and Exchange Commission (SEC). While many foreign companies hire Filipino freelancers without establishing a presence in the Philippines, the Revised Corporation Code (as well as the legacy corporation code) requires the registration of foreign companies “doing business in the Philippines”.
The establishment of a Philippine corporation is aimed at providing the necessary protection to foreign investors in the Philippines. A foreign corporation without a license to do business in the Philippines is not permitted to maintain or intervene in any judicial or administrative action in the Philippines but may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine law.
Foreign Restrictions
Attracting foreign investments in the Philippines has been a key policy of the Philippine government since the 1980s strengthened by the Foreign Investment Act of 1991 (FIA) which covers all investment areas other than banking and financial institutions governed by the Bangko Sentral ng Pilipinas. FIA encourages foreign investments that “significantly expand livelihood and employment opportunities for Filipinos; enhance economic value of farm products; promote the welfare of Filipino consumers; expand the scope, quality and volume of exports and their access to foreign markets; and/or transfer relevant technologies in agriculture, industry and support services.” [Section 2, Declaration of Policy]
Companies that are established primarily for export purposes are not restricted by FIA and referred to as export market enterprises which are service or manufacturing companies with more than 60% of sales or purchases are being exported.
In general, foreign companies are allowed to own more than 40% equity in a Philippine-registered corporation as long as capitalization requirements are met. Domestic market enterprises, businesses in which less than 60% of sales or purchases are exported, can be wholly-owned by a foreigner (individual or corporate) subject to meeting a $200,000 capitalization requirement. However, for retail businesses such as restaurants, the capitalization requirement set by the Retail Trade Liberalization Act is a bit higher at $2.5 million.
The list above is non-exhaustive and based on Executive Order 65 on Promulgating the Eleventh Regular Foreign Investment Negative List (FINL) signed last 29 October 2018. With the 11th FINL, notable liberalization in foreign investments allowed include the following:
- Internet businesses
- Training centers engaged in short-term high-level skills development
Corporate Structures in the Philippines
Depending on the purpose for establishing a presence in the Philippines, foreign investors (individuals and corporations) generally opt to register as a domestic corporation or as a branch office in the Philippines. While foreign investors can register as a proprietor in a sole proprietorship or as a partner in a partnership, these alternative forms of legal structure are not common.
The following are the common corporate structures pursued by foreign investors:
Domestic corporation
Foreign investors can enter the Philippines as a domestic corporation formed in accordance with the laws of the Philippines subject to equity restrictions discussed in the earlier section. A domestic corporation is suited for foreign individual investors seeking to establish a local corporation or a foreign corporate investor seeking to do business in the Philippines other than the continuation of the parent company’s business operations.
As part of the revised corporation code, incorporators and directors are no longer subject to the residency restrictions provided under the legacy corporation code.
Branch
A branch office registration is an alternative for foreign corporations to enter and do business in the Philippines. In general, as a branch office is normally wholly-owned by the foreign corporation serving as the head office, the minimum capitalization of $200,000 for domestic market enterprises will apply.
Representative office
While a branch office registration allows income generation in the Philippines, a representative office is not allowed to derive income from the Philippines. In fact, all operations of a representative office is limited to non-income generating activities such as information dissemination, acting as a communication center, and promotion of the products of its parent company. As a representative office, the minimum paid-up capital is $30,000, representing the initial inward remittance, and all expenses of the representative office should be paid-for by the parent company.
How we can help
Foreign investments in the Philippines require understanding of the legal, tax and financial complexities to avoid future problems on the purpose of business and compliance with the relevant laws and regulations in the Philippines.
Our business registration advisory services team can help you decide on the right corporate structure considering the tax and legal implications while maximizing potential incentives available to foreign investors under the Philippines Board of Investments.
About UpSmart
UpSmart is the premier financial consultancy firm in the startup, SME, and social enterprise industry. UpSmart specializes in strategic finance (e.g., structuring and restructuring of legal entities, valuing and modelling companies, serving as chief financial officer of companies) and operational finance (e.g., optimizing business processes and controls, accounting and bookkeeping support, financial reporting and analysis).
About Filbert
Filbert is the co-founder and managing director of UpSmart. He leads the consulting practice of UpSmart and specializes in handling corporate structuring and financial transformation projects. He was previously a consulting manager at Ernst & Young in the UK. He writes for Tech in Asia, Business Mirror and serves as a mentor at The Final Pitch on CNN.
