Sunday, 15 November 2020 11:30

Philippines: Restriction on foreign equity

One of the greatest challenges that foreign entrepreneurs and investors face when registering their business in the Philippines is the government’s restrictions on foreign equity. The first questions that we always received from our clients is: “Am I allowed to establish my company with a 100% foreign equity? Is there any restrictions if ever I want to open my business?”. Our answer is always: “depends on what activities are we going to set up and what is the primary scope of this company in the country”.

For all those who doesn’t know the Philippine government encourages foreign investments under Foreign Investments Act of 1991. Under this code 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. The key to discover if the company that we are going to set up is allowed or not to have 100% foreign equity is to study the foreign investment negative list. This law has been regulated to ease restriction on foreign participation in certain investment areas or activities. This regulation define industries in which foreign companies cannot invest and specifies restrictions or bans on certain types of foreign investment.

The Foreign Investment Negative list is divided into List A and List B. 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.

No foreign equity is allowed for mass media, retail trade enterprises with paid-up capital of less than 2.5 million USD and utilization of marine resources in archipelagic waters, territorial sea, and exclusive economic zone as well as small-scale utilization of natural resources in rivers, lakes, bays, and lagoons. Investors are allowed to establish a company up to 25% foreign equity if the primary scope of the business is private recruitment and if the corporation has a contracts for construction of defense-related structures. An advertising company may have up to 30% foreign equity. Ownership of private lands, operation of public utilities, exploration, development and utilization of natural resources, ownership of condominium units, operation of deep sea commercial fishing vessel and many more are allowed to have a maximum of 40% foreign ownership. Any activities not among those listed in the FINL is allowed to establish with 100% foreign equity.

Last 2018 the President Duterte has issued the 11th Foreign investment negative list. The latest list allows full foreign participation in five business areas that were previously either restricted or not explicitly discussed. The government made these exceptions to welcome foreign investment in these certain areas: Internet Business, Teaching at higher education levels provided the subject being taught is not a professional subject, Training centers that are engaged in short-term high level skills development that do not form part of the formal educations system, Adjustment companies, lending companies, financing companies, and investment houses and Wellness centers.