Setting up a new venture in the Philippines can be a challenge, especially for those coming from the more established economies due to the onerous paper-based steps that need to be followed. Whilst there is a drive from the top to streamline processes within the government, as of today, investors need the sound guidance to navigate the myriad of bureaucracy successfully.
Before entering into the various registrations needed and the numerous requirements to be able to do business in the Philippines, it is - important to establish if any restrictions would apply on the type of activity that can be undertaken due to nationality. Whilst unlikely, prudence at this early stage is well advised.
This first crucial check will be to ensure that the appropriate legal structure is adopted for the venture. After-which the appropriate business registrations can then be sought.
In order to determine any restrictions, the Office of the President of the Philippines publishes a list, referred to as the "Regular Foreign Investment Negative List" which defines the areas of investment or activities which are open to foreign investors and/or reserved for Philippine nationals. This list is further divided into:
List A: As Mandated by the Philippine Constitution and Specific Laws
This list specifically refers to areas of investment or activities where foreign ownership is limited as defined by the Philippine Constitution and Specific Laws. These restrictions are defined as follows:
No Foreign Equity
Among the activities in this list, which have piqued the interest of foreign investors are mass media, practice of professions and retail trade, which are described as follows:
Mass Media has been defined by the Secretary of Justice as any medium of communication, a newspaper, radio, motion pictures, television, designed to reach the masses and that tends to set standards, ideals and aim of the masses.
Professions refers to those activities which can only be done by people licensed to perform, for example: law, medicine, accounting, engineering and customs brokerage.
The retail trade restriction applies only to those whose paid-up capital would be less US$2,500,000.
Other examples of restricted activities within no foreign equity include:
- Private Security Agencies
- Small-scale mining
- Utilisation of marine resources in archipelagic waters, territorial sea, and exclusive economic zone as small-scale utilization of natural resources in rivers, lakes, bays, and lagoons
- Ownership, operation and management of cockpits
- Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-personnel mines; and
- Manufacture of firecrackers and other pyrotechnic devices.
Up to 20% Foreign Equity
This would cover the operation of a private radio communications network, which would also require the securing of a Congressional franchise.
Up to 25% Foreign Equity
Engaging in private recruitment for local or overseas employment is subject to this limit on foreign ownership.
Locally-funded Public Works
Contracts for the construction and repair of locally-funded public works are subject to this restriction except those projects which are governed under a law specifically authorising the financing, construction, operation and maintenance of infrastructure projects by the private sector, which would normally be financed by the government. In addition, foreign funded or assisted projects which are required to undergo international competitive bidding are exempted from this restriction.
Construction of Defence-related Structures
This covers the construction of land, air and sea-coast defences, arsenals, barracks, depots, hangars, landing fields, quarters, hospitals, and all other buildings and structures required for the national defence of the Philippines.
Up to 30% Foreign Equity
This includes the area of advertising, which is defined as the business of conceptualising, presenting or making available to the public, through any form or mass media, fact, data or information.
Up to 40% Foreign Equity
The activities covered by this restriction are the following:
- Exploration, development and utilisation of natural resources
- Ownership of private lands
- Operation of public utilities (e.g. power, water and telecommunications)
- Educational institutions other than those established by religious groups and mission boards
- Culture, production, milling, processing, trading except retailing of rice and corn and acquiring, by barter, purchase or otherwise, rice and corn and their by-products
- Supply of materials, goods and commodities to a government owned or controlled corporation, company, agency or Municipal Corporation
- Facility operator of infrastructure or development facility requiring a public utility franchise (the franchise is granted by an act of the Philippine Congress)
- Operation of deep sea commercial fishing vessels
- Adjustment companies; and
- Ownership of condominium units.
List B: Security, Defense, Risk to Health and Morals and Protection of Small and Medium-Scale Enterprises
This list refers to areas of investment or activities where foreign investment is limited for reasons of security, defence, risk to health and morals and protecting small and medium-scale business enterprises.
Up to 40% Foreign Equity
Requiring Philippine National Police Clearance
This covers activities related to the manufacture, repair, storage and/or distribution of products and/or ingredients requiring clearance from the Philippine National Police (PNP); typically related to firearms and explosives. The manufacture and repair of such items may be authorised by the Chief of the PNP to non-Philippine nationals provided that a substantial percentage of the output is exported.
Requiring Department of National Defence Clearance
This covers entities engaged in the manufacture, repair, storage and/or distribution of products requiring clearance from the Department of National Defence, including military weaponry and related equipment. The repair and manufacture of such items may also be authorised to non-Philippine nationals by the Secretary of National Defence if a substantial percentage of the output is exported.
The manufacture and distribution of dangerous drugs as defined in Philippine law and international conventions is covered by this restriction.
Risk to Public Health and Morals
Based on reasons of risk to public health and morals, foreign ownership in sauna and steam bathhouses, massage clinics and similar activities is also limited to 40%.
Gambling, except those areas covered by investment agreements with the Philippine Amusement and Gaming Corporation (PAGCOR) are also limited to entities with at least 60% Philippine ownership. The PAGCOR is the agency of the Philippine government tasked with regulating gambling activities.
Small and Medium-scale Enterprises
In order to protect domestically focused small and medium-scale Philippine businesses from a potential inability to compete head-on with foreign investors, Philippine law does not allow a foreign investor with a paid-in equity of less than US$200,000 to engage in business in the domestic market. If however, a foreign investor were to use advanced technology or employ at least 50 direct employees, the minimum paid-in equity requirement would be reduced to US$100,000.
Investment in the Philippines by overseas interests is not as straightforward as the more developed economies. It is important to establish if you would be restricted in your investment before venturing too far, before selecting the best investment vehicle for your needs and then securing the various registrations required. Sound legal guidance and a keen determination can help you navigate the complexities of the Philippines business environment and increase your success in your intended venture.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.