General Policy

It is the policy of the State to attract, promote and welcome investments from foreign individuals, partnerships, corporation, and governments, in activities, which significantly contribute to industrialization and socioeconomic development of the country subject to limitations imposed by the Constitution and laws.

The Philippine Constitution and laws guarantee the fundamental rights of all investors, particularly: a) Due process protection and equal protection to investments; b) Freedom from expropriation without just compensation; c) Right to remit profits, capital gains and dividends; d) Right to repatriate proceeds of liquidation of investments; and e) Right to obtain foreign exchange for repatriation of profits, investments, for interest and principal payments of foreign obligations.

Export Enterprises vs. Domestic Market Enterprises

A prospective investor (whether engaged in manufacturing, trading or services) must define his market. The rules are different depending on whether the foreign investor intends to organize an export enterprise or a domestic market enterprise.

An Export Enterprise shall mean a manufacturer, processor or service (including tourism) enterprise exporting sixty percent (60%) more or its output, or wherein a trader purchases products domestically and exports sixty percent (60%) or more of such purchases.

A Domestic Market Enterprise shall mean an enterprise, which produces goods for sale in the Philippine market, or renders service or otherwise engages in any business in the Philippines .

As a general rule, there are no restrictions on extent of foreign ownership of export enterprises. Therefore, an export enterprise can be 100% foreign-owned with no minimum capitalization requirement.

A foreign investor may own up to 100% of a Domestic Market Enterprise but is required to invest a minimum paid-in-equity capital of at least US$ 200,000. This minimum capitalization requirement is reduced to US$ 100,000 if the investment involves an advanced technology or if it will employ at least 50 direct employees. Again, this is the general rule.

Nationality of Investor

The basic rules in determining the nationality of the investor are relevant in understanding the restrictions on areas of investment.

An investor may either be a natural or juridical person (such as partnership, association, or corporation). A Foreign Corporation shall mean one, which is formed, organized or existing under laws other than those of the Philippines .

A Philippine National shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by the citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote and held by citizens of the Philippines.

Therefore, a corporation organized under Philippine laws by foreigners owning 40% of the capital stock and the remaining 60% owned by Filipino citizens is still considered a Filipino owned corporation or a Philippine national.

However, a corporation organized abroad and registered as doing business in the Philippines of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos, is still considered a Philippine National.

Restrictions or Limitations to Foreign Investments

The Philippine government encourages foreign investments. Investment-related rules have been liberalized to facilitate entry of foreign investments. This trend is expected to continue as the country integrates slowly to a global market economy.

Despite this liberalization thrust, the following restrictions for foreign investments remain to date under the Constitutions and various laws:

a) No Foreign Equity Allowed

. Mass Media except recording;

. Services involving the practice of profession ( Law, Medicine, Accountancy, Engineering, Architecture, Geology, Teaching, Social Work, etc.);

. Cooperatives;

. Private Security Agencies;

. Utilization of Marine Resources in Philippine waters;

. Ownership, management and operation of cockpits;

. Manufacture, repair, stockpiling and/or distribution of Nuclear Weapons;

. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons (under various treaties); and

. Manufacture of firecrackers and other pyrotechnic devices.

b) Up to 25% Foreign Equity Allowed

. Private recruitment, whether for local or overseas employment;

. Contracts which are foreign funded or assisted and required locally-funded public works except projects covered by R.A. 7718 and foreign funded or assisted projects that undergo international competitive bidding.

c) Up to 30% Foreign Equity Allowed

. Advertising

d) Up to 40% Foreign Equity Allowed

. Exploration, development and utilization of natural resources, unless full foreign participation through financial or technical assistance agreement with the President of the Philippines ;

. Ownership of private lands (a corporation 40% foreign-owned a 60% owned by Filipinos may own private lands);

. Operation and management of public utilities;

. Ownership, establishment and administration of educational institutions;

. Engaging in rice and corn industry;

. Contracts for the supply of materials and goods to government-owned and controlled corporation, company, agency or municipal corporation;

. Operators of Build Operate Transfer (BOT) projects requiring a public utility franchise;

. Operation of deep sea commercial fishing vessels;

. Adjustment companies;

. Ownership of condominiums (Sec.5, R.A. 4726);

. Contracts for construction of defense related structures;

. Manufacture, repair, storage, and/or distribution used in the manufacture thereof requiring Philippine National Police clearance (firearms, gunpowder, dynamite, blasting supplies, ingredients used in making explosives, telescopic sights, sniperscopes and other similar devices).

. Manufacture, repair, storage and/or distribution of products requiring Department of National Defense clearance (guns and ammunition for warfare, military ordinance and parts thereof, guided missiles, tactical aircraft, combat vessels, weapons repair and maintenance equipment, night vision equipment, etc.);

. Manufacture and distribution of dangerous drugs;

. Sauna and steam bathhouses, massage clinics and other activities regulated by law because of risks to public health and morals.

. Domestic market enterprises with paid in equity capital of less than US$ 200,000.

. Domestic market enterprises involving advanced technology or employing at least 50 direct employees with paid-in- equity capital of less than US$ 100,000.

e) Up to 60% Foreign Equity Allowed

. Financing companies regulated by the Securities and Exchange Commission; and

. Investment houses regulated by the Securities and Exchange Commission (subject to reciprocity rights).

Retail Trade

"Retail Trade" shall mean any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption. Not included in the definition are sales by a manufacturer or processor to the general public of products manufactured where the capitalization is less than P 100,000; sales by a farmer or agriculturist; sales in a restaurant operation incidental to hotel business and sales, which are limited only to products manufactured or processes through a single outlet, irrespective of capitalization.

The retail industry has been reserved to citizens of the Philippines for more than four decades. Considering global competition conditions, the paramount need to bring down consumer prices to the benefit of Filipino consumer, empowering them through higher quality goods, better services and wider choices.The Philippine Congress enacted R.A. 1180 (Retail Trade Liberalization Act of 2000) opening the retail trade industry to encourage entry of non-Philippine national and foreign multinational company. Up to 100% foreign equity is allowed.

However, to be able to engage in retail trade, foreign investors are required to maintain the full amount of prescribed minimum capital of at least US$ 2.5 million (under Category B of the law). This means, that as a general rule, retail trade operations with less than US$ 2.5 million capitalization continue to be restricted to Filipino citizens.

If the foreigners' investment in retail trade operations is US$ 7.5 million, he is allowed to open up branches, but the investment per branch or store should not be less than US$ 830,000 (under Category C of the law).

However, if the foreigner will specialize in the retail trade of high-end or luxury products, then minimum paid up capitalization of US$ 250,000 per store is required. "High-end or luxury goods" refer to goods which are not necessary for life maintenance and whose demand is generated in large part by higher income groups, which shall include, but are not limited to, products such as: jewelry, branded or designer clothing and footwear, wearing apparel, leisure and sporting goods, electronics and other personal effects.

Natural-born citizens of the Philippines who have lost their citizenship but who reside in the Philippines are granted the same rights as Filipino citizens under the law.

Conclusion

Foreigners wanting to enter businesses with ownership restrictions or limitations oftentimes try to circumvent the law by electing or appointing Filipino citizens as dummies in corporations, partnerships or associations. This will create problems to investor in case legal conflicts arise. Using dummies is likewise an act punishable civilly and criminally under special laws.

A foreigner planning to make an investment or establish a business in the Philippines must ascertain whether the proposed activity is covered by restrictions in the Constitution or limitations imposed by law. This will affect the legality of investments and consequently the protection accorded to it by law and the government.

INCENTIVES TO INVESTMENTS

Foreigners may invest or establish business in the Philippines and be subject to the normal taxes, conditions and requirements like any other enterprises. Not all businesses established in the Philippines enjoy special incentives. However, by engaging in certain economic and business activities they are provided with investment incentives. Foreigners have choices, such as:

a) Registering the business with the Board of Investments (BOI)

To qualify for BOI incentives, the business must be engaged in:

1) Export activity (at least 50% of production for export, if

Filipino owned company, or at least 70% of production is

for export, if 40% or more of the equity is owned by a

foreign national or company).

2) Business activity covered by the Investment Priority Plan

(IPP). The IPP is formulated by the BOI annually and

approved by the President of the Philippines .

Superior incentives are likewise available if the proposed business activity is a pioneer area, which is important to national economic development. A pioneer activity involves the production of goods not yet available in the Philippines on a commercial scale or uses a new and untried design, formula, scheme, method or process of production. A pioneer activity may include those that are highly essential to the attainment of specific national goals such as food sufficiency, agricultural modernization, etc. Production of non-conventional fuels or manufacturing of equipment that uses non-conventional fuels are likewise categorized as pioneer.

An investment that qualifies for BOI incentives is entitled to the following:

1) Income Tax Holidays (ITH) for six years for pioneer firms and

generally, four years for non-pioneer firms. If a non-pioneer firm is located in a less developed area, it shall be generally be entitled to 6 years (ITH).

2) Tax credit raw materials, supplies, and semi-manufactured Products used in the manufacture or processing of export products.

3) Additional deduction from taxable income for labor expense and infrastructure works (cannot be enjoyed simultaneously with the ITH incentive).

4) Importation of consigned equipment for an unlimited period subject to posting of re-export bond.

5) Employment of foreign nationals, guaranteed repatriation of

foreign investments and earnings thereon.

b) Locating the Investment in the Special Economic Zones

Businesses established within special economic zones shall be entitled to incentives granted to registered enterprises under the BOI. The Philippine Economic Zone Authority (PEZA) administers these economic zones. In addition to BOI incentives, PEZA-registered exporters enjoy tax and duty exemptions on importation of capital equipment, raw materials and other merchandise directly needed in its registered operations.

Exporters using local materials enjoy the same benefits under the Export Development Act of 1994 if they use local inputs as raw materials. After the lapse of their BOI incentives, enterprises shall pay a preferential rate of 5% of their gross income as final tax in lieu of all local and national taxes.

There are special laws creating special zones providing similar incentives such as the Subic Bay Freeport (SBF) and Clark Special Economic Zone (under the Bases Coversion Development Act), Poro Point Special Economic Zone, Cagayan Special Economic Zone and Zamboanga City Special Economic Zone.

c) Establishing 100% Foreign-Owned Regional Headquarters (RHQs), Regional Operating Headquarters (ROHQs) and Regional Warehouses (RWs) of multinational companies

The RHQs, ROHQs and RWs are special entities conceived to encourage investors to make the Philippines the home base of foreign multinational companies regional administrative operations and the trans-shipment point of their products for their Asia-Pacific markets. A multinational company is defined as a foreign company with business establishments in two or more countries.

Regional Headquarters (RHQs) act as a supervisory, communications and coordinating center for its subsidiaries, affiliates and branches in the Asia-Pacific region and other foreign markets and which does not earn or derive income in the Philippines . This definition sets the limit of what the RHQ can do in the Philippines . It is not allowed to market goods or services whether on behalf of its mother company or its branches and affiliates.

Regional Operating Headquarters (ROHQ) is defined by law as a foreign entity allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, Asia-Pacific Region and other foreign markets. These qualifying services include general administration and planning, business planning and coordination, sourcing of raw materials and components, financial advisory services, marketing control and sales promotion, training and personnel management, logistic services, research and development, technical support and maintenance, data processing and business development.

The incentives given by law to RHQs and ROHQs are summarized below:

Foreign expatriates of RHQ and ROHQ are entitled to avail of a) Multiple Entry Visa valid for 3 years including spouse and unmarried children under twenty one (21) years of age; b) preferential withholding income tax of 15% on compensation income received from RHQ and ROHQ, which privilege may likewise be enjoyed by Filipino counterparts; c) Tax and duty- free importation of personal effects; and d) Travel tax exemption including their dependents.

A Regional Warehouse (RW) may be established as a mere auxiliary of the foreign company's RHQ or ROHQ. The activities of the RW is limited to serving as supply depot for the storage, deposit, safekeeping of its spare parts, components, semi-finished products and raw materials including the packing, covering, marking, labeling according to customers specifications.

The Regional Warehouse is prohibited from directly engaging in trade or soliciting business, promoting any sale or entering into any contract for the sale or disposition of goods in the Philippines .

Imported goods stored in the Regional Warehouse may be allowed to be withdrawn for delivery to an authorized distributor in the Philippines subject to payment of customs duties, taxes and regular income taxes.

d) Investing in 100% Foreign-Owned IT Business

The Information Technology (IT) Services include software development, support and knowledge-based services and business process outsourcing. Foreign investors engaged in IT activities may choose to establish a 100% foreign owned branch or domestic corporation using the Philippines as base for local and international operations.

Companies venturing into IT business may avail of income tax holidays (6 years if classified as pioneer by the Board of Investment, otherwise 4 years), additional deduction of 50% labor cost for purposes of calculating taxable income, simplified customs procedure of the importation of equipment, spare parts, materials and supplies, unrestricted use of consigned equipment and employment of foreign nationals.

e) Individual Foreigner's Investment under SPECIAL INVESTOR'S RESIDENT VISA (SIRV), SPECIAL RETIREE'S VISA (SRRV) and SIRV in TOURISM-RELATED PROJECTS

Investment incentives are granted to Foreigners in the form of permanent resident status (which extend to their spouse and children) by investing minimal amounts into the country.

The Board of Investments (BOI) administers the Special Investors Resident Visa (SIRV). The minimum investment required is US$ 75,000 or its equivalent. The holder of the SIRV including the spouse and unmarried children under (21) years of age shall be entitled to reside in the Philippines indefinitely while his investment subsist. Acceptable forms of investment are shares of stocks in public-listed corporations, activities in the investment priority program (IPP) lists and manufacturing and service sectors.

On the other hand, the Philippine Leisure and Retirement Authority (PLRA) administers the retirement visa, and foreigners who invested the following amounts in the form of US Dollar time deposits shall be qualified:

A Foreigner who invests the amount of the least US$ 50,000 in a tourist-related projects and tourist establishment shall be entitled to a Special Investor Resident Visa under Executive Order No. 63. The investor, his wife and unmarried minor children shall be permitted to enter and reside in the Philippines as special investor residents for as long as the investment subsists.

f) Other Incentives

There are other incentives available to a foreign investor under special statutes, which may be inquired upon depending on the economic or business activities by the proponent. Some of these laws are the amended Build Operate Transfer (BOT) Law (R.A. No. 7718), Agricultural and Fisheries Modernization Act (R.A. 8435), incentives in specific industries such as mining, iron and steel, book publishing, and others.