You probably have this nagging feeling that doing business in the Philippines is more than just registering your local company and then getting a permit to operate from the local city.

You guessed right - there are a few main considerations you will need to take into account, and we will discuss the top five (5) here.

Retail Versus Wholesale

The government's policy is to protect local small and medium enterprises in the retail sector. Accordingly, ownership of these small and medium retail companies is reserved for Philippine nationals only, i.e., the company must be 100% Filipino owned.

The distinction of what is a small and medium enterprise is via the capitalization of the company. Thus, if the capitalization is Php 25 million (with a minimum capitalization of Php 10 million per store), then the company is no longer considered a small and medium enterprise such that the 100% foreign ownership is allowed.

For more information on retail trade regulations applying to foreign-owned businesses, you can click here to access the implementing rules and regulations of the law.

Of course, if your business is not in the retail sector, then there is no point making a distinction as to capitalization. In other words, even if you don't have that the huge capital requirement of Php 25 million, you will generally be able to do business in the Philippines (subject to the rules on “domestic market sale” discussed below). To find out whether you fall under the definition of retail trade

Retail trade, based on the said regulations, is defined as:

(m) "Retail Trade" shall mean any act, occupation, or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption.

(b) "Consumption" shall mean the utilization of the merchandise, commodities, and the satisfaction of want resulting in the immediate destruction, gradual decay or deterioration, or transformation into other goods.

Thus, if you are selling not to the general public but instead only to a distributor who in turn sells to the general public, then you are engaged in wholesale trade and not in retail trade. Similarly, if the good you are selling not immediately destroyed or transformed when utilized/consumed by the user, and you are not engaged in retail trade. Finally, if your goods are not consumable, for example services, then you are also not engaged in retail trade and are exempt from the capital requirement.

Export Sale Versus Domestic Market Sale

Some companies set up shop in the Philippines not to sell to the domestic market but rather to sell to export markets.

A good example of these are business process organizations that locate in the Philippines to take advantage of its comparatively low-cost skilled manpower to service foreign accounts by performing customer or tech support services including accounting, engineering, and software development services. Companies like these are categorized as export enterprises.

On the other hand, if your objective is to sell a product or service to the Philippine domestic market, whether or not this is retail or wholesale, then that is considered “domestic market sale”.

Again, there is a government policy here to protect local small and medium enterprises. The present definition of the law as to what is a small and medium enterprise also references its capitalization, specifically USD 200,000.

Simply put, if you can capitalize your domestic market enterprise with US$ 200,000, then you will be allowed to own the business with 100% foreign equity since you will not be considered competing with local small and medium enterprises.

For a detailed view of the law regarding domestic market enterprises you may click here.

Special Incentives Depending on Industry Type

If you found out that there are special tax and other perks for your business, wouldn't you want to avail of them?

This is of course entirely up to you, and you could very well set up your company without these incentives if you are pressed for time and prefer the least possible hassle. Generally, there is nothing that prevents you from eventually availing of these incentives later on by making the proper application and following the registration process.

The government has certain sectors that it wants to attract. These sectors are diverse and include manufacturing, tourism, information technology, and the like.

Previously, the laws and government bodies regulating these special incentives are separate from one another. Recently, however, the government decided to rationalize and simplify the procedures for investors.

These special incentives and perks are now regulated by the Fiscal Incentives Review Board. You can get more information by clicking on their official website here.

The Foreign Investments Negative List

As you will see, it's a recurring theme throughout that there are certain activities and industries that the government wants to reserve for itself or for its citizens.

Examples would be defense-related industries and other industries involving national security. In these cases, no foreign ownership of the business is allowed.

Fortunately, every now and then, the government through its Department of Trade and Industry, publishes the Foreign Investments Negative List.

The Foreign Investments Negative List provides a simple enumeration (with legal citations) of the industries that are reserved 100% for Philippine citizens and industries where foreign ownership is allowed up to 100%, and everything in between.

You can access the present year 2022 Foreign Investments Negative List here.

Real Estate Business Special Considerations

As a general rule, the Philippines does not allow ownership of land by foreigners except under very limited conditions, e.g., by inheritance, by being a former natural born Filipino citizen, et cetera.

However, when it comes to ownership of private land, foreign ownership is allowed if the ownership is held not by an individual but by a corporation that is at least 60% Filipino owned (thus allowing for 40% foreign ownership).

Though you will also note this exception in Foreign Investments Negative List, it is useful to give specific emphasis to this sector because of the usual assumption among foreigners that they are allowed to own land as is usually the case in their home country.

The important distinction to note is that this restriction applies only to to ownership of land. The restriction does not apply to ownership of a building which can be 100% foreign-owned. This is why ownership in condominium units are open to foreigners even in their individual names without using a corporation.

Full-scale operations versus limited operations/coordinating functions

Your options for type of corporate vehicle will also depend on your intended scale of operations in the Philippines.

The most involved type of company setup is that of creating a local corporation. The setup is ideal if your objective is to engage in full-scale commercial operations right away or in the immediate future.

If that is not the case and you would just like to do limited business on a trial basis, then you also have the option of registering your existing foreign company as a foreign branch office in the Philippines. With a foreign branch office, there is no need to set up a whole new company and all that is generally required is to present your foreign company papers and request for a license to do business. While setting up a foreign branch office is much easier, it is also less tax efficient.

Of course, there is also the possibility of simply acquiring a stake in an existing local company which is an even faster way to start doing business. However, acquisitions such as these would entail working with a partner which does not appeal to some owners who would rather control the entire business 100%. You may check our full article on practical mergers and acquisitions for the paid members of this community to said effect.

Number of Shareholders

If you are creating a subsidiary of your foreign parent company then the easiest and fastest way to organize would be to set up a One-Person Corporation (OPC). In this case, the "one-person" does not need to be a natural person and can be a corporation of your choice.

However, if you intended to capitalize in the future by bringing in investors in exchange for shares of stock or equity in the company, then it's best to set up a regular corporation. Under present regulations, the number of directors to set up a regular local corporation has been reduced from the original five (5) to just two (2) persons. Thus, you will still have limited people in the corporation while still being allowed to bring in outside investors.

Business Activities That Require Secondary Licenses from Other Government Agencies

Selected industries require secondary licenses/endorsements from other government regulators that are specific to that industry.

In these cases, it is not sufficient to simply register your company with the main registering authority, i.e., the Securities and Exchange Commission.

In addition to the Securities and Exchange Commission registration, secondary licenses to do business will be required depending on the industry for example, banking, insurance, as well as lending and investments.

For the list of industries that require secondary license at this time, you may check this link at the official website of the Securities and Exchange Commission.

https://www.sec.gov.ph/wp-content/uploads/2019/12/2015PR_Endorsement-Clearance.pdf

We hope the information contained in this article has been helpful to you.

More importantly, we hope that the information has been conveyed in a user-friendly and business-practical manner devoid of any legalese.

Thank you!

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About the Author

Atty. Noel C. Ducusin is the senior and founding partner of the N. Ducusin & Partners Law Offices - a law firm based in Metropolitan Manila, Republic of the Philippines that specializes in Corporate Advisory, Cross Border Regulatory Matters, Mergers & Acquisitions, and Commercial Litigation.

Atty. Ducusin is also the President & Sole Director of DoingBusinessPH OPC - a company dedicated to empowering foreign investors to do business in the Philippines through online executive education programs, digital books, seminars, as well as online and offline events.

His mission for this Community is to help foreign investors, business owners, and managers by breaking down complex legal concepts and dense technical material into simple, straightforward, and actionable legal information for better business decisions. For easy reading, articles and briefs will be in simple everyday language without legal jargon.

This is not the place for academic writing and legalese will not be tolerated here.

The simpler and the more practical the better.

“Everything should be made as simple as possible, but no simpler.” – Albert Einstein