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Starting a Philippine Business as a Foreigner

Starting a Philippine business as a foreigner is complicated, and it is difficult to find accurate


information or advice. Equally, most documents governing business activities (i.e. the
Constitution, SEC rulings, Supreme Court rulings, etc.) are not well indexed on the internet, so
self-educating yourself is inherently flawed.
Generally speaking, the Philippines has restrictions on the percentage of equity foreigners can
own of a domestic/Philippine corporation.
Some industries do not allow for any foreign owned equity. Others have defined caps which are
outlined in the Philippine Foreign Investment Negative List (there have been numerous revisions
to this over the years).
This is the link wherein the appropriate percentages of foreign equity may be had when
establishing a corporation. http://www.chanrobles.com/default3.htm#.V2IwBnpyzIW
If the business is on the negative list, the cap is the cap. There is no getting around it.
If it is not, there is a 40% restriction on foreign-owned equity. The cap can be lifted if the initial
capitalization is 200,000 USD or more. It can be further reduced to 100K USD if the business
employs 50 or more employees, or if it will be employing advanced technology (Advanced
Technology, is defined by the Department of Science and Technology).
Companies that export 60% or more of their products/services do not have to comply with the
capitalization requirement in order to be more than 40% foreign-owned.
The Philippines is more business friendly if you are exporting your product or services from the
Philippines. Otherwise, as a foreigner, the legal restrictions make owning a Philippine business a
giant hassle and very risky as it strips you of many protections.

If the industry is on the negative list, you are bound by the equity cap. This relegates you
to minority shareholder with no option for greater ownership.

If the industry is not on the negative list, the capitalization requirements make owning
more than 40% equity during the initial incorporation an absurd undertaking if you are
operating a lean startup.

You cannot be President, nor have a C-level position.

In order to get around the restrictions, it is not uncommon for a foreigner to own more than the
restricted cap allowed by using a nominee shareholder. However, the law is quite clear, and
foreign ownership greater than the allowed amount is prohibited, including shares owned by a
nominee shareholder.

It is hard to get caught though. The nominee shareholder is often a spouse, and since the legal
documents for nominee shareholders can be drafted and litigated anywhere, the Philippine
authorities would be pressed to get a hold of incriminating evidence. This does not mean that it
is legal though, but it does seem to be common practice.
Foreign ownership applies to all shares, including non-voting shares.

So what do you do?


1. Incorporate outside the Philippines in a place that does not have foreign equity
restrictions.
1. Sell into the Philippines Taxes really matter here.
1. Directly to customers. This will burden the customers with a 30% withholding
tax which the Philippine government requires that they pay on your behalf. The
30% tax can be reduced if your company is located in a country that has a tax
treatise with the Philippines (hence why Singapore is a good option). To receive
tax relief, each of your customers must file for it separately with the Philippine
Bureau of Internal Revenue (BIR). Otherwise they are burdened with a 30% tax.
As a foreign entity, you cannot file on their behalf.
2. Via a Philippine-based Partner The Philippine-based company will be subjected
to restrictions on the Negative List and the partner will have to pay withholding
taxes on your behalf. However the partners customers will not have to pay
withholding taxes, and the partner can file for tax relief with the BIR. There are
not a lot of advantages to this option other than more easily reducing the
withholding tax burden.
3. Via a Domestic Subsidiary or Branch Office Both entities are subject to the
Negative List and capitalization requirements. This is the option we chose for our
startup. It allowed me, as the foreigner, to have a greater stake in our Hong Kong
entity, and still have a stake in the local Philippine entity as well.