Domestic vs Export Sale Regulatory Differences
By: Noel C Ducusin
This is a follow-up article to the main topic of whether or not foreigners can do business in the Philippines. To view that article, you may click here.
You may have noticed in the foreign investment negative list that the limited amount of foreign ownership of the local company specifically relates to domestic sales.
In other words, if you're setting up a local company in the Philippines to do export business, then the foreign investment negative list does not apply.
As you may have guessed, more restrictions are placed on domestic sales as the government intends to protect local small and medium enterprises.
Thus, if you are not competing with those local small and medium enterprises, then the government will grant you much more leeway and that is particularly true in the case of export businesses.
Note that the situation contemplated in a domestic sale is where there is a local company selling domestically. Therefore, if your offer entity is simply using the local company as a distributor, then there is no domestic sale on your part and there will be no violation of the negative list. Please note, however, this kind of setup would be less advantageous in a tax situation where there will be a much larger final withholding tax applied on the Philippine revenue sources of your offshore company compared to using your own local company.
When it comes to export companies one of the most popular types in the Philippines is the business processing company. These are the companies that provide not just after sales or technical support via call centers, but also include accounting backroom services, coding, and software development, engineering and architectural drafting, financial analysis, as well as data analytics and data mining – all of which leverage the highly skilled, English-speaking, and affordable local workforce.
In this article, we will discuss some of the important things to note depending on whether you are doing an export sale or a domestic sale.
Export Sale
100% Foreign Ownership Allowed
Again, the situation contemplated by the negative list is that of the domestic sale to protect local small and medium enterprises. The protection accorded to small and medium enterprises is done by imposing a foreign equity restriction of up to 40% only.
Since export companies do not compete with said local small and medium industries, 100% foreign equity is allowed. This is very good news for companies that want to do business in this particular area and leverage the highly skilled, English-speaking, and affordable Philippine workforce.
Since 100% foreign ownership is allowed in the local expert entity, the offshore parent company is much greater in control, especially where the local company is set up as a wholly-owned subsidiary of the offshore parent.
No Minimum Capitalization Required
Recent amendments to the Corporation Code removed the minimum capitalization requirement of corporations. This is especially true for export companies. Therefore, you can capitalize on your local export company with whatever capital amount is needed, at its bare minimum, to start local operations.
Limited Domestic Sale Allowed
It is not necessary that 100% of the output of your export company be directed offshore. Up to 40% of your output can be sold domestically and your local company will still be classified and within the legal definition of an "export company".
Finally, please note that for your local company to be considered an "export company", it is not sufficient that you just do export business. It must be clearly stated in the charter of the company/articles of incorporation, specifically its primary purpose, that the company will be engaged in the export business.
For more information on export companies and the regulations applying to them, you may click here to download the implementing regulations of the foreign investment law.
This has been further liberalized under the recently approved law specifically Republic Act 11647 a copy of which you may download here.
Domestic Sale
Minimum Threshold Paid-In Capital For 100% Foreign Equity
As discussed above, the purpose of the negative list when it comes to domestic sales is to protect local small and medium enterprises.
At present, government policy sets the distinction as to whether or not an enterprise is small and medium via the amount of its paid-in capital, i.e. US dollars 200,000.
In other words, if the paid-in capital of your local entity is more than US dollars 200,000, then you will be allowed to own up to 100% of that company.
Again, this will provide the usual advantages of being able to minutely control your local entity especially if you set this up as a wholly owned subsidiary of your parent entity.
Retail versus Wholesale
The kind of domestic sale contemplated here is wholesale, i.e where the sale is directed at someone other than the end-user of the product.
For example, if you are selling aircraft parts, that is essentially a business-to-business (B2B) transaction and you are not selling to the ultimate end-user, i.e. the passenger on a particular flight. Thus, the transaction is not retail.
If, on the other hand, you are selling food products to be eaten and consumed by the customer, then this is retail trade.
The government is more strict when it comes to the retail trade and has very high capitalization requirements not to mention further requirements in some cases of a proven track record in retail sales.
The legal ways to work around these huge capitalization requirements will be the subject of a separate article.
To get a better handle on an understanding of the differences between what constitutes retail and wholesale trade, you can click to get a copy of the retail trade regulations issued by the (National Economic Development Authority).
Paid-In Capitalization as the Primary Metric
It is not sufficient to set your company capital to USD 200,000.
Locally, setting the amount of capital would be the destination of so-called "authorized capital", meaning, the amount of capital that you are allowed to issue to investors or other interested shareholders.
The requirement of the regulations is "paid-in capital". This generally refers to cash or property actually delivered to your local company.
There are many ways within which to repatriate this initial paid-in capital back to the offshore parent entity but that will be the subject of a separate blog article.
Nevertheless, this paid-in capital is not something that you need to invest or hold in Philippine government bonds basically typing up the capital.
You can use this paid-in capital for legitimate business purposes such as payment of rent, salaries, purchase of initial inventory, and the like.
We hope that this article has been helpful to you and has been discussed in a simple and user-friendly manner to help you get a better understanding of your next steps.
We are presently producing an online course on how foreigners can do business in the Philippines which will include this topic. We will keep you posted on the status of this course and let you know when the course nears the launch date. Members of our community and early enrollees in the course will be entitled to discounts.
If you are viewing a summary of this post via email please click below to view the entire post.
Thank you!
Suggest Content
If you are receiving this article via our email newsletter then that means that you are already a member of our Community and may suggest content simply by reply email. If you found this article helpful, please share it by forwarding the email to those who might benefit. Thank you!
If you are not yet a member of our Community or mailing list, please join by clicking the button below. Upon joining, you will also get our Free Guide on the Seven (7) Things To Consider Before Setting Up Your Business in The Philippines.
We look forward to a long-term relationship with you and many thanks in advance
Market Entry Consult
If you are a foreign investor or foreign business owner who is ready to actively explore the local market, partner with local companies, setup your own local subsidiary, or invest in deals, projects, or enterprises in your specific market sector, then you can request at consult at our Market Entry page.
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