In recent years, the economic performance of the Association of Southeast Asian Nations (ASEAN) as a whole, and of the individual countries that compose it in particular, has exceeded the global average. So much so that we can assert, without fear of being mistaken, that the new global economic center is increasingly shifting towards the Asia-Pacific region.
The experienced economic growth has sparked significant interest in this region, leading many Spanish companies to consider the option of establishing a business in the Philippines. In turn, these companies are enhancing their appeal to foreign investors through initiatives aimed at liberalizing trade and simplifying regulatory and administrative frameworks.
One of them, of significant importance not only from an economic or commercial standpoint but also historically and culturally, is the Philippines, and this article is precisely dedicated to it. Thus, the Spanish entrepreneur wishing to establish a business in the Philippines can choose from different corporate models, each governed by its own rules and aimed at achieving distinct objectives. The most commonly used ones are:
Corporate Models for Establishing a Business in the Philippines
1.- The Corporation
It can be of two types: the Non-stock Corporation, meaning an entity that does not have capital divided into shares to remunerate its partners and usually operates on a non-profit basis; and the Stock Corporation, on the other hand, does have capital divided into shares and is the most common legal entity in the Philippines, similar to the Spanish Limited Liability Company.
Corporations for establishing a business in the Philippines can be Domestic Corporations when at least 60% of their capital is owned by Filipinos, or Foreign-owned Domestic Corporations when more than 40% of the capital is foreign-owned. The minimum required capital for incorporation, as well as the applicable tax regulations, differs between these two scenarios.
Domestic Corporations
In the first case, the law stipulates that at least 25% must be subscribed at the time of the company’s incorporation, of which at least 25% must be paid up, and in any case, the latter cannot be less than 5,000 PHP.
Foreign-owned Domestic Corporations
In the second case, to establish a Foreign-owned Domestic Corporation, a minimum paid-up capital of 200,000 USD is required (or less than 100,000 if employing more than 50 Filipino workers and utilizing advanced technology) with the business sector not listed in the Negative List for Foreign Investment by the Board of Investments. For an Export Market Enterprise, the capital requirement is reduced to 5,000 PHP.
Regarding this last point, it is worth noting that a few weeks ago, the Filipino Senate approved, on its third and final reading, Senate Bill (SB) 2094 amending the Public Services Act to allow 100% foreign ownership in the following areas for those looking to establish a business in the Philippines:
- Electricity distribution;
- Electricity transmission;
- Airports;
- Seaports;
- Water and sewage pipeline distribution;
- Tollways and highways; and
- Public utility vehicles.
The primary aim of these new measures is to attract foreign investments seeking to establish a business in the Philippines and foreign expertise, similar to what other ASEAN countries are doing, all in an effort to improve public infrastructure and aid the country’s economic recovery, which has been particularly affected by the pandemic.
Furthermore, in an attempt to attract foreign investment, the Filipino legislature has reduced the corporate income tax rate (CIT) from 30% (the highest in ASEAN) to 25% until 2022 for Foreign-owned Domestic Corporations looking to establish a business in the Philippines. Starting in 2023, the CIT rate will decrease by 1% annually until reaching 20% in 2027, not to mention the various tax incentives these companies can request from the Philippine Economic Zone Authority.
Steps to establish a Corporation
The steps to establish a business in the Philippines and form a Corporation are as follows:
- Register the new entity with the Securities and Exchange Commission (SEC) by reserving the business name, providing company bylaws, and presenting the bank certificate verifying capital payment.
- Enroll the company with the Philippine Bureau of Internal Revenue.
- Obtain work permits and register employees with the Social Security System.
- For a Foreign-owned Domestic Corporation, it is important to note that the Corporate Secretary must be a resident Filipino citizen.
2.- The Branch
It is a commercial entity through which a foreign company operates for profit in the Filipino market. In this case, the capital contribution required from the parent company is $200,000 USD, except for companies employing a minimum of 50 Filipino workers or utilizing advanced technology, in which case it is reduced to 100,000 PHP. For companies dedicated to exporting, the required capital is further reduced to 5,000 PHP (approximately $97.37 USD). Profit taxes are levied at 15%, although due to Spain’s Double Taxation Agreement with the Philippines, this percentage is reduced to 10%. Unlike the Foreign-owned Domestic Corporation, a Branch requires a resident representative.
The incorporation process to establish a business in the Philippines in this case involves filling out a form from the SEC signed by all members of the Board of Directors, paying registration fees, depositing capital in a designated bank account, and finally, validating the latest financial statements of the company.
3.- The Representative Office
It is a formula that allows companies to make foreign investments in the Philippines to study, analyze opportunities, and conduct marketing activities without forming an operational entity in the country. However, it is essential to note that this entity cannot generate revenue. The Filipino legislature has set several limitations, such as requiring the representative of the representative office to be a resident individual in the country or a Domestic Corporation already active in the Filipino market. In this case, the minimum fund contribution is $30,000 USD, which must be fully funded by the parent company. Regarding the incorporation process to establish a business in the Philippines, it involves submitting to the SEC the financial statements and bylaws of the parent company and providing the details of the director of the representative office.
Sara Boffo
Legal Trainee
AVCO Legal
madrid@avco.legal
