FOREIGN EQUITY RESTRICTIONS

GENERAL RULE

Foreign nationals may engage in any business activity in the Philippines, provided that such activity is not reserved by law to Philippine citizens or to entities that are wholly or partly owned by Philippine citizens. 

The FIA provides for the issuance of a Foreign Investment Negative List (Negative List) – a list of economic activities where foreign equity is either prohibited or limited to a certain percentage. The Negative List has two component lists: List A and List B. List A contains areas of investment where foreign ownership is limited by mandate of the Philippine Constitution or by specific laws. List B contains areas of investment where foreign ownership is limited for reasons of security, defense, risk to health and morals, or protection of local small- and medium-sized enterprises. Except with respect to activities where restrictions on foreign equity are imposed under the Philippine Constitution or statutes, the president of the Philippines may amend the Negative List. Such amendments may not be made more often than once every two years.

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TENTH NEGATIVE LIST OF FIA

Under the Tenth Negative List, which is the current Negative List, the following activities, among others, are limited to Philippine citizens or corporations or associations that are wholly-owned by Philippine citizens:

  1. Mass media

  2. Practice of certain professions

  3. Retail trade enterprises with a paid-up capital of less than USD2.5 million.

On the other hand, the following activities, among others, are subject to foreign equity restrictions:

  1. Private radio communications network (up to 20% foreign equity)

  2. Private recruitment companies, whether for local or overseas employment (up to 25% foreign equity)

  3. Advertising (up to 30% foreign equity)

  4. Exploration, development and utilization of natural resources (up to 40% foreign equity)

  5. Ownership of private lands (up to 40% foreign equity)

  6. Operation of public utilities (up to 40% foreign equity)

  7. Educational institutions other than those established by religious groups and mission boards (up to 40% foreign equity)

  8. Contracts for the supply of materials, goods and commodities to government-owned or controlled corporations, companies, agencies or municipal corporations (up to 40% foreign equity)

  9. Acting as facility operator of an infrastructure or a development facility requiring a public utility franchise (up to 40% foreign equity)

  10. Ownership of condominium units where the common areas of the condominium project are co-owned by owners of the separate units or owned by a corporation (up to 40% foreign equity)

The Tenth Negative List includes a general category of domestic market enterprises with a paid-in equity capital of less than the equivalent of USD200,000, among the activities that are subject to a 40% foreign equity limit. A domestic market enterprise is an enterprise that produces goods for sale or renders services to the domestic market entirely or, if exporting a portion of its output, fails to consistently export at least 60% thereof. This is in contrast to an export enterprise, which is a manufacturer, processor or service (including tourism) enterprise that exports 60% or more of its output, or a trader that purchases products domestically and exports 60% or more of such purchases.

 

Conversely, a foreign national or wholly foreign-owned corporations may engage in a domestic market enterprise in the Philippines, provided that the following conditions are complied with:

  1. It invests in a domestic market enterprise or an export enterprise that is engaged in an activity that is not on the Negative List.

  2. The domestic market enterprise must have a paid-in capital of the peso equivalent of at least USD200,000. The capitalization requirements of a domestic market enterprise may be reduced to the peso equivalent of USD100,000: (i) if its activity involves advanced technology as determined and certified by the Department of Science and Technology, or (ii) if it employs at least 50 direct employees as certified by the appropriate regional office of the Department of Labor and Employment (DOLE).

 

The foreign equity restrictions on domestic market enterprises that do not meet the relevant paid-up capital requirement as discussed above do not apply to export enterprises.

Aside from the Negative List, the rules of the Philippine Contractors Accreditation Board (PCAB) provide that persons who will engage in construction activities in the Philippines are also required to obtain a license from the PCAB, and as a general rule, the regular license is reserved for and issued only to Filipino sole proprietorships or partnerships/corporations with at least 60% Filipino equity participation.

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COMPLIANCE WITH FOREIGN EQUITY RESTRICTIONS

In recent decisions of the Philippine Supreme Court, it has held that when the Constitution and the law speak of capital, generally, it refers to the number shares entitled to vote in the election of directors, or what we call “voting shares,” as the voting rights translate to control over the corporation. In addition, the Supreme Court clarified that Philippine citizens and Philippine nationals must also exercise full beneficial ownership, and not merely legal title, over the required Philippine portion of the capital. 

 

In line with the above decisions, the SEC has issued SEC Memorandum Circular No. 8, Series of 2013 (2013 SEC MC), which applies the required percentage of Filipino ownership in partially nationalized activities to both (a) the total number of outstanding shares of stock entitled to vote in the election of directors; and (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.

 

The SEC Guidelines apply to all corporations engaged in activities specifically reserved, wholly or partly, to Philippine nationals by existing laws, and direct all corporate secretaries to monitor and observe compliance with the provisions on ownership requirements provided in existing laws.

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PHILIPPINE NATIONAL

Shares of stock that are owned by a Philippine national are general considered as Filipino-owned 

 

The FIA defines a “Philippine national” as:

  1. a citizen of the Philippines;

  2. a domestic partnership or association wholly owned by citizens of the Philippines;

  3. a corporation organized under the laws of the Philippines, of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; 

  4. a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code, of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos; or

  5. a trustee of funds for pension or other employee retirement or separation benefits where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine nationals. 

 

Where a corporation and its non- Filipino stockholders own stocks in an enterprise registered with the SEC, at least 60% of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least 60% of the members of the Board of Directors must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national.

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ANTI-DUMMY LAW

The Philippines has an Anti-Dummy Law, which imposes criminal and civil penalties on persons violating foreign equity limitations.

 

Under the Anti-Dummy Law, a person who has, in his or her name or under his or her control a right, franchise, privilege, property or business, the exercise or enjoyment of which is expressly reserved by law to Philippine citizens or to corporations or associations where at least 60% of the capital is owned by such citizens, is prohibited from: (a) permitting or allowing the use, exploitation or enjoyment of such right, franchise, privilege, property or business by a person, corporation or association not possessing the qualifications prescribed by law; or (b) in any manner permitting or allowing any person not so qualified to intervene in the management, operation, administration or control of such right, franchise, privilege, property or business, whether as an officer, employee or laborer, with or without remuneration (except technical personnel whose employment may be specifically authorized by the Secretary of Justice). 

 

However, foreign nationals may serve as members of the board or governing body of corporations engaged in partially nationalized activities in a number proportionate to their actual and allowable equity in the company.

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