8 Reasons to Set Up a Local Company in the Philippines
By: Noel C Ducusin
8 Reasons to Setup a Local Company in the Philippines
Why would a foreign company go through the extra effort of setting up a local company in the overseas territory it does business in? Is it even worth the effort?
Below are a few reasons why setting up a local company is preferred despite the additional effort it requires:
1. Comfort level of local counterparties
Simply put, many local counterparties will want a local person they can run after in case of breach of obligation. Once this is provided through a local company, then the local counterparty is assured and is less reluctant to provide service or product.
In this regard, there are several key factors to look into when selecting and shortlisting a potential local distributor partner. We will cover this in a separate article on this specific topic.
2. More favorable tax treatment
Understandably, the local taxing authority will be more strict to a foreign company as it will not be able to do a post-audit at a later date. Accordingly, it is common practice that the local taxing authority will simply charge a final income tax on income earned locally, without allowing deductions for expenses.
Please note that even though no income is earned and only expenses are paid to local company employees, fringe benefits tax may apply on these special payments to local employees. This will be covered in a separate article specifically on this topic.
Please note that even if no income is earned, it is still necessary to file the necessary tax reports to the local taxing authority even though the income report is stated to be zero.
3. Local bank accounts
Most countries require, for purposes of regulation and anti-money laundering, that an account owner have a local residence for verification of identity. A local company serves the purpose of having a "local person" with "local residence". Having a local account that you can manage online from overseas makes it easy to pay for local goods and services including payroll, and the like.
4. Work visas
In many countries, work visas require that there be a local/entity that will serve as a guarantor for the foreign national to hold a work visa as well as to provide a means of income or support so that the foreign national will not become a burden on the state. The local company serves this purpose of providing the income requirement for the work visa. Similarly, some states will allow foreign nationals to work only if they belong to specialized fields to protect the local labor market. This limitation is bypassed by using a local company where the foreign national serves not as an employee of the company but as a director/owner.
5. Labor ban on direct hiring
Some states, specifically the Philippines, have strict regulations on deploying workers abroad to guarantee their safe working conditions among others. Regulations can be very strict before deploying local workers to overseas entities. This is called the ban on direct hiring. On the other hand, if the employment contract is with a local company then the rule on ban on direct hiring does not apply even though the owner of the domestic entity is a 100% foreign-owned company.
Note that local labor law is strict concerning terminating employees. One way to go around this is to hire consultants or officers in the company instead. This will be discussed in a separate article specifically for this purpose.
6. Limited liability
Provided that the type of company set up is that of a limited liability company, then liabilities can be isolated assets of the company only and will not spill over to the parent company or its owners even if the local company is 100% foreign owned. In the same way, income and gains of the local entity may, subject to tax treaties, may be protected from the taxes applicable to the parent company in its home country. Also, subject to international financial reporting standards, loans and other financial support given to the local company can be booked as expenses of the parent company in its home country. You will need to check with your local auditor on how this can be implemented from a local auditing standpoint in the parent country.
7. Access to local credit
Similar to the local taxing authority, banks and local creditors prefer to do business with a local entity as there is a local person to go after and local assets to take in case of breach. Thus, not only will the local entity be able to create a local account, a local relationship with a local bank can be started and after a set time, usually 2 years or less, the bank will be able to assess the credit history and income earning potential of the company and on that basis, be able to extend it a loan or other credit line or credit accommodation. This can be the option to the usual standby letter of credit used in overseas trade transactions.
8. Mergers and acquisitions and joint ventures
With a local entity, it is very easy to enter into joint venture agreements and merger or acquisition agreements with other local companies. This is because all domestic legal rules apply. Again, the parent company is isolated from liability given the separate legal personality of the local company.
Of course, joint venture agreements with the foreign parent company and a local partner can also be arranged and that will be the subject of a separate article specifically on that topic.
These are among the few main reasons why setting up a local company is beneficial despite some additional effort involved.
For many, the extra effort and expense make sense especially if they intend to have a long-term presence in the overseas territory they intend to operate in for the long term.
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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 or dense technical material into straightforward actionable legal information for better business decisions.
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