Class reporting Notes

Notes Foreign Investments Act of 1991

Republic Act 7042 as amended by RA 8179, also known as the Foreign

Investments Act of 1991, is the basic law that governs foreign investments in the
Philippines. It is considered a landmark legislation because it liberalized the entry
of foreign investments into the country.

Under this law, foreign investors are allowed to invest 100% equity in companies
engaged in almost all types of business activities subject to certain restrictions as
prescribed in the Foreign Investments Negative List (FINL).

The FINL is a shortlist of investment areas or activities which may be opened to

foreign investors and/or reserved to Filipino nationals.

Under the said law, a non-Philippine national may, upon registration with
appropriate government agencies, do business2 or invest in a domestic market
enterprise and/or in an export enterprise up to 100% of its capital, unless
participation of non-Philippine nationals in the enterprise is prohibited or limited to
a smaller percentage by existing laws.Such prohibition or limitation is contained in
the Negative List. Generally, a "non-Philippine national" is an individual who is not
a Filipino citizen or a corporation organized outside of the Philippines or a
corporation organized in the Philippines more than 40% of the voting capital of
which is owned by aliens. Non-Philippine nationals may engage in or invest up to
100% of the capital in any retail trade enterprise subject to certain limitations.3

A domestic market enterprise is an enterprise which produces goods for sale or

renders service or otherwise engages in any business in the Philippines. An export
enterprise is a manufacturer, processor or service (including tourism) enterprise
which exports at least 60% of its output or a trader which purchases products
domestically and exports at least 60% of such purchases.

KEY FEATURES OF THE FIA

Concept of a negative list
Opened domestic market to 100% foreign investment except those in the
Foreign Investment Negative List (FINL)
Redefined export enterprise to mean at least 60% for export
Allowed 100% foreign ownership of business activities outside FINL but
without incentives

Negative List:
The current Negative List, which is administered by the National
Economic and Development Authority ("NEDA"), has two component
lists4:

1. List A enumerates the activities reserved to Philippine nationals by

the Philippine Constitution and specific laws. The current List A, which
may not be exhaustive as it is based on existing legislation, contains the
following restrictions among others:

No foreign equity allowed:

mass media (except recording); practice of a licensed profession;

cooperatives; private security agencies; small-scale mining; utilization of
marine resources.

Limited foreign equity allowed:

a. 25% in private recruitment, whether for local or overseas

employment, and in construction and repair of locally-funded public
works;

b. 30% in advertising;

c. 40% in exploration, development and utilization of natural

resources; ownership of private lands; operation and management of
public utilities; ownership/administration of educational institutions; rice
and corn industry; supply of materials, goods and commodities to
government agencies, government-owned or controlled corporations,
and local government units; Build-Operate and Transfer (BOT) projects
requiring a public utilities franchise; operation of deep sea commercial
fishing vessels; adjustment companies; and ownership of condominiums;

d. 60% in financing companies; investment houses regulated by the

Philippine Securities and Exchange Commission.

2. List B enumerates the activities and enterprises which are

regulated pursuant to law. While the law does not specifically prescribe
any foreign equity restriction on such activities and enterprises, their
inclusion in List B and consequent limitation of foreign equity is deemed
necessary for reasons of national security, health, morals and protection
of small and medium scale enterprises. However, List B may be
revised/amended by NEDA once every 2 years.

List B currently allows only up to 40% foreign equity in enterprises

enumerated therein. These include manufacture and distribution of
firearms and other products requiring clearance from the Philippine
National Police and/or Department of National Defense, and dangerous
drugs; gambling-related activities; and sauna and steam bathhouses,
and massage clinics.

List B also currently includes the following:

(a) domestic market enterprises with paid-in equity capital less than
the equivalent of US$200,000.00 and which do not involve advanced
technology, as certified by the Department of Science and Technology, or
do not employ at least 50 direct employees;

(b) domestic market enterprises involving such advanced technology

or employing at least 50 direct employees but with paid-in equity capital
of less than the equivalent of US$100,000.00.

List A:
Consists of areas of activities reserved to Philippine nationals where foreign equity
participation in any domestic or export enterprise engaged in any activity listed
therein shall be limited to a maximum of forty percent (40%) as prescribed by the
Constitution and other specific laws.

List B.
Consists of areas of activities where foreign ownership is limited pursuant to law
such as defense or law enforcement-related activities, which have negative
implications on public health and morals, and small and medium-scale
enterprises.

Note:
(Any amendment to List A may be made at any time to reflect changes instituted
in specific laws while amendments to List B shall not be made more often than
once every two years, pursuant to Section 8 of RA 7042 (as amended) and its
revised Implementing Rules and Regulations.)

The FIA clearly states that if the activity to be engaged in: is not included in the
FINL, is more than 40% foreign-owned, and will cater to the domestic market, the
capital required is at least two hundred thousand dollars (US$200,000.00). The
capital may be lowered to one hundred thousand dollars (US$100,000.00), if
activity involves advance technology, or the company employs at least 50 direct
employees.

f the foreign company will export at least 60% of its output, or a trader that
purchases products domestically will export at least 60% of its purchases, the
required capital is only Php5,000.00.

If the company is at least 60% Filipino-40% foreign-owned and will cater to the
domestic market, paid-in capital of the corporation can be less than
US$200,000.00.

Investment Rights of Former Filipino Citizens

A natural-born citizen of the Philippines who has lost his Philippine citizenship and
who otherwise has the legal capacity to enter into contracts under Philippine law
is allowed to acquire private land up to an aggregate area of not more than 5,000
square meters (in the case of urban land), or 3 hectares (in the case of rural land)
and which shall not comprise more than two (2) lots situated in different cities or
municipalities. The land shall be used for business or other purposes (e.g.,
agriculture, industry and services, including leasing out the same but not the
buying and selling thereof).

Subject to the maximum aggregate area limits provided above, such natural-born
Filipino citizen who has lost his Philippine citizenship may, under Batas Pambansa
Blg. 185, also be a transferee of private lands up to a maximum aggregate area of
not more than 1,000 square meters (in the case of urban land), or 1 hectare (in
the case of rural land), which lands may be used for residential purposes.

Where both spouses are qualified to avail of this privilege, the total area to be
acquired by both cannot exceed the maximum area provided above.

Moreover, said former citizens of the Philippines are granted the same investment
rights of a Philippine citizen in the following areas of investment, subject to the
relevant Philippine law on the matter: (1) cooperatives; (2) rural banks; (3) thrift
banks and private development banks; and (4) financing companies.

SPECIFIC AREAS OF EQUAL INVESTMENT RIGHTS FOR FORMER FILIPINO

NATIONALS
While most areas of businesses have limits for foreign investors, Section 9 of the
amended Foreign Investments Act of 1991 lists the following types of businesses
where former natural-born Filipinos can enjoy the same investment rights as a
Philippine citizen.

1. Cooperatives
2. Rural banks
3. Thrift banks and private development banks
4. Financing companies

Former natural born Filipinos can also engage in activities under List B of the
FINL.This means that their investments shall be treated as Filipino or will be
considered as forming part of Filipino investments in activities closed or limited to
foreign participation.

The equal investment rights of former Filipino nationals do not extend to activities
under List A of FINL which are reserved for Filipino citizens under the Constitution.

Former natural born Filipinos have also been given the right to be transferees of
private land up to a maximum of 5,000 square meters in the case of urban land or
three (3) hectares in the case of rural land to be used for business or other
purposes.

QUESTIONS AND ANSWERS:

Q. Who may invest?

Anyone, regardless of nationality is welcome to invest in the Philippines in almost
all areas, and up to the extent of 100 percent ownership. There are however,
some areas of economic activities, which according to law, are reserved for
Philippine nationals. These activities are found in the Foreign Investment Negative
List (FINL).

Q. How much is the minimum investment?

For simple incorporation paid-capital requirements of the Securities and Exchange

Commission, the minimum paid-up capital is P5,000.00. However, higher paid-up
capital is required for specialized businesses like Banks, Lending companies,
Investment Houses and Manning Agencies, business Engage in VOIP Services, and
Recruitment Agencies.

Foreign Investors who wish to own more than 40% to 100% of the business may
also comply Philippine investment laws. Republic Act 8179 amended Republic Act
7042 (Foreign Investment Act) reduced the minimum paid-capital of foreign
companies serving the domestic market from US$500,000 to US$200,000. The
minimum maybe decreased further to US$150,000 if a company uses advanced
technology as certified by the Department of Science and Technology or directly
employs at least 50 employees.

Individual investors may also invest a minimum of US$50,000.00 to US$75,000.00

to qualify for certain visas like Special Investor's Resident Visa and Special
Retirees Resident Visa.

Q. Can a foreign investor be allowed to own a 100% of a business entity?

Yes, one hundred percent (100%) foreign equity may be allowed in all areas of
investments under the Foreign Investments Act (FIA) except financial institutions
and those included in the Regular Foreign Investment Negative List (FINL).
However, for a company that will do business locally or for domestic market, it is
mandatory that the minimum amount of investment should be US$200,000.00 if
foreign ownership is more than 40% to 100%.

Q. Is there an exemption to the minimum capital investment of US$200,000.00 if

the investor would like to own 100% of the company but only invests a minimal
amount?

GTALAW. Yes, there is an exemption. You can apply for an exemption from the
Foreign Investment Act at the Securities and Exchange Commission (SEC),
preferably upon the filing of your application for Incorporation, whenever your
business is considered an export market enterprise - an enterprise wherein a
manufacturer, processor or service (including tourism) enterprise exports sixty
percent (60%) or more of its output, or wherein a trader purchases products
domestically or exports sixty percent (60%) or more of such purchases. But you
have to submit a detailed business plan including the outline of your business
targets and projections.
Q. We are planning to operate a call center business and/or back-office operation
in the Philippines. We will be doing services for all our clients in the United States,
Canada and the UK. Can we own 100% of the business without investing
US$200,000.00?

Yes, but you have to apply for an exemption with the Securities and Exchange
Commission and prove that your business is considered as an export market
enterprise. Business Process Outsourcing, Call Centers and Back Office Operations
are all considered export market enterprise because more than 60% of its service
output is exported.

Q. What are the areas of investments covered by Foreign Investments Act (FIA)?

The FIA covers all investment areas except banking and other financial
institutions, which are governed and regulated by the Bangko Sentral ng Pilipinas
(BSP).

Foreign Investment Negative List - means a list of areas of economic activity

whose foreign ownership is limited to a maximum of forty percent (40%) of the
outstanding capital stock in the case of a corporation or capital in the case of
partnership.

Below are Negative Lists A & B where:

List A: refers to areas reserved to Filipinos by mandate of the Constitution and

Special Laws such as but not limited to:

Mass Media except recording, practice of licensed profession, retail trade,

cooperative and small-scale mining, etc. where foreign ownership is prohibited;
Advertising, ownership of land, operation and management of public utilities, etc.,
where only minority foreign ownership is prohibited.
List B: refers to areas that are defense-related, those with adverse effects on
public health and morals and domestic market enterprises with paid-up capital of
less than US$200,000, provided they involved advanced technology as
determined by the Department of Science and Technology (DOST) or directly
employ at least fifty (50) employees, in which case, the paid-up capital shall be
lowered to US$100,000 only to non-Philippine nationals

Q. When can foreigners do business or invest in a domestic enterprise up to 100%

of its capital?

If the proposed activity he intends to venture in is not among those listed in the
Foreign Investment Negative List. If the paid-up capital for domestic market
enterprise is at least US$200,000.00, which may be lowered to US$100,000 if the
following conditions are met: (1)Introduction of advanced technology; or (2)
Employment of at least 50 direct employees.
Q. What are the kinds of investments?

Depending on the type of incentives desired, the kind of investment under E.O.
226 are:

Book I of E.O. 226 - Investment with Incentives

Republic Act No. 8756 Amending Books III and IV of

E.O. 226 - Multinational Companies Establishing Regional or
Area Headquarters or Regional Operating Headquarters in the
Philippines

Book V - Special Investor's Resident Visa

Republic Act 7916 as amended by Republic Act 8748 - Special

Economic Zones Act of 1995

Book II (Foreign Investments Without Incentives) has been repealed by Republic

Act No. 7042 or the Foreign Investments Act of 1991, as amended by Republic Act
No. 8179. Foreign-owned companies not availing of incentives are covered by the
provisions of this Act.

Q. In what form can foreign investments be made?

In general, "foreign investments" which means equity investments, can be made

in the form of foreign exchange or other assets actually transferred to the
Philippines. These non-case assets may be in the form of capital goods, patents,
formulae, or other technological rights or processes.

Q. What are the basic rights and guarantees given to the safety of foreign
investments?

All investors and enterprises are entitled to the basic rights and guarantees
provided in the Philippine Constitution. Among other rights recognized by the
government of the Philippines are the following:

Right to REPATRIATION OF INVESTMENTS

In the case of foreign investments, the right to repatriate the entire proceeds of
the liquidation of the investments in the currency in which the investment was
originally made at the exchange rate prevailing at the time of repatriation.

Right to REMITTANCE OF EARNINGS

The right to remit, at the exchange rate prevailing at the time of remittance, such
as may be necessary to meet the payment of interest and the principal on foreign
loans and foreign obligations arising from technological assistance contracts.

Right to FREEDOM FROM EXPROPRIATION

There shall be no expropriation by the government of the property represented by
the investments or of the property of enterprises except for public use or in the
interest of national welfare and defense and upon payment of just compensation.
In such cases, foreign investors or enterprises shall have the right to remit sums
received as compensation for the expropriated property in the currency in which
the investment was originally made and at the exchange rate prevailing at the
time of remittance.

Right to NON-REQUISITION OF INVESTMENT

There shall be no requisition of the property presented by the investment or of the
property of enterprises, except in the event of war or national emergency and
only for the duration. Just compensation for the requisitioned property may be
remitted in the currency in which the investment was originally made and at the
exchange rate prevailing at the time of remittance.

Q. What is the Foreign Investments Act (FIA) of 1991?

Foreign Investments Act (FIA) of 1991 (or Republic Act 7042 and Republic 8179)
allows foreign ownership of up to 100% in most industries, except those specified
in the Foreign Investment Negative List (FINL).

Investors who do not seek incentives and/or whose chosen activities do not
qualify for incentives, (i.e. the activity is not listed in the IPP, and they are not
exporting at least 70% of their production) may go ahead and make the
investments. They only have to be guided by the FINL.

The FINL clearly defines investment area requiring at least 60% Filipino ownership.
All other areas outside this list are fully open to foreign investors.

Q. Where to file investment applications without incentives?

Partnership or Corporation (whether stock or non-stock), not seeking incentives,

can go directly to the Securities and Exchange Commission (SEC) to register its
Articles of Partnership or Incorporation.

Single proprietorship need only to go to the Bureau of Trade Regulation and

Consumer Protection (BTRCP) or to the DTI Regional offices in the region

Q. What requirements must be complied with before a foreign corporation can

engage in business in the Philippines?

Before a foreign corporation can engage in business in the Philippines, it must first
secure the necessary licenses or registration certificates from the appropriate
government agencies. Generally, the registration process starts with the
Securities and Exchange Commission (SEC).

If the proposed project or activity qualifies for incentives, the foreign investor may
file its application with the appropriate government agency depending on the
projects location.

Q. Are investment incentives transferable?

In general, investment incentives are not transferable. Tax credit certificates may,
however, be transferred subject to certain conditions. In the case of tax credit
certificates issued pursuant to the Export Development Act of 1994, said
documents are considered negotiable instruments and may be transferred to any
person, natural or juridical, except to local government units.

Q. Does our proposed project qualify for registration with the BOI/PEZA?

To qualify for registration with the BOI for incentive purposes, the proposed
foreign investment must be made in any of the following:

preferred areas of investment listed in the current Investment Priorities Plan(IPP).

A preferred area may be declared pioneer if it: (1) involves the manufacturing or
processing (not merely assembly or packaging) of goods or raw materials that
have not been produced in the Philippines on a commercial scale; (2) uses a
design, formula, scheme, method, process or system of production or
transformation of any element or raw material into another raw material or
finished good which is new and untried; (3) engages in agricultural
activities/services essential to the achievement of the country's self-sufficiency
program; and (4) produces non-conventional fuels or manufactures equipment
which utilize non-conventional sources of energy; provided that the final product
in any of the foregoing instances involves substantial use and processing of
domestic raw materials;

Enterprises engaged in preferred non-pioneer areas and exporting at least 70% of

their output; and

Projects in less-developed areas provided that the activities in all of the above
cases are not reserved for Philippine nationals.

On the other hand, the projects that may qualify for registration with PEZA are
those that involve manufacturing for export and the domestic market, free trade,
tourism, information technology, utilities, facilities enterprises including those
engaged in warehousing and trading operations in the ecozones and development
and operation of ecozones.

Q. How does one file an application with the BOI/PEZA?

An application shall be made in the form prescribed by the BOI / PEZA in two (2)
copies and properly sworn to before a notary public. A project feasibility study is
required as one of the primary documents supporting the application for
registration.

Q. What possible obstacles would our application meet?

The obstacles normally encountered in the filing of applications include
noncompliance with the criteria set by the BOI, misinterpretation of the coverage
of activities listed in the IPP, failure to submit the required supporting documents
and project feasibility study and possible opposition from sectors or enterprises
which might be adversely affected by the proposed project. The BOI requires
publication of the notice of application and conducts hearings if objections to the
application are received. For PEZA applicants, the usual problem consists of non-
compliance with some of the criteria set by PEZA and failure to submit required
documents and information.

Q. How long will it take to obtain BOI/PEZA approval once all requirements are
complied with?

Under the 1987 Omnibus Investments Code, applications filed with the BOI shall
be considered automatically approved if not acted upon by the Board within
twenty (20) working days from official acceptance thereof, subject to the usual
terms and conditions.

In the case of PEZA, the processing and evaluation by the appropriate department
usually takes about two weeks. The decision on the project is made during the bi-
monthly meetings of the PEZA Board.

Q. Assuming approval is obtained, what restrictions are ordinarily attached?

A list of general and specific terms and conditions is normally attached to the
approval letter issued by the BOI/PEZA upon approval of the application for
registration. The general conditions include certain management, financial,
operational and marketing restrictions which must be properly complied with so
as to avoid grounds for cancellation of registration. The specific terms and
conditions which may include nationality, operational and reporting requirements
vary depending upon the nature of the business enterprise.

Q. How much time is an investor allowed to start his project?

The amount of time allowed for starting a registered project depends on the type
of the proposed project and the period set by the proponent in the feasibility
study with the approval of the BOI/PEZA.

References:
1. http://www.gtalawphil.com/FAQ.htm
2. http://boiown.gov.ph/db-main-final/foreign-investments/
3.http://www.mondaq.com/x/9612/Investment+Strategy/Liberalization+Of+Foreig
n+Investments+In+The+Philippines