The 1987 Philippine Constitution reserves certain investment areas to Filipino citizens. In consonance, the Foreign Investments Act of 1991 (“FIA”) was enacted to promote the policy of the state to attract, promote, and welcome productive foreign investments in activities which significantly contribute to national industrialisation and socioeconomic development.[1]
Under the FIA, the president is tasked to promulgate a foreign investment negative list (“FINL”), setting forth the investment areas or activities that are open to foreign investors and reserved to Filipino nationals.[2] In June 2022, through Executive Order No. 175, the 12th FINL took effect, replacing the 11th FINL which had been in force since 2018.
Save for the activities and products requiring Department of National Defense (“DND”) clearance, the 12th FINL considerably retains the foreign equity restrictions under the 11th FINL. Further, the 12th FINL reflects the recent amendments to the Retail Trade Liberalisation Act (“RTLA”), Public Service Act (“PSA”) and the FIA.
The 12th FINL has the following salient points:
- Amendments to the RTLA allows full foreign ownership of retail trade enterprises with a minimum paid up capital of PHP 25,000,000[3]. The amendment has significantly lowered the minimum capitalisation requirement under the old retail trade law. Previously, any foreign equity participation in retail trading required a minimum capitalisation requirement of USD 2,500,000.
- Amended PSA redefines public utility. The amendment explicitly defines public utility as public service that operates, manages or controls for public use any of the following services: 1) distribution of electricity; 2) transmission of electricity; 3) petroleum and petroleum products pipeline transmission systems, 4) water pipelines distribution systems and wastewater pipeline systems, 5) seaports, and 6) public utility vehicles.[4] Limiting the definition of a public utility is significant because the 1987 Philippine Constitution provides that foreign ownership of public utilities shall be limited to 40 % of the shares of a company. Thus, full foreign ownership is welcome in public utilities not included in the list. For instance, full foreign ownership is now allowed in the areas of telecommunications, domestic shipping, railways and subways, airlines, expressways, tollways, and transport network vehicles services (“TNVS”).[5]
- Amended FIA reduces capitalisation requirement for micro and small domestic market enterprise. Generally, micro and small domestic market enterprises with paid-in capital of less than USD 200,000 are reserved to Philippine nationals. The amended FIA allows micro and small domestic market enterprises to have a reduced capitalisation of USD 100,000 if (1) they involve advanced technology, (2) they are endorsed as startup or startup enablers, or (3) the majority of their direct employees are Filipinos, but in no case shall the number of Filipino employees be less than 15. Previously, to qualify for the reduced capital, micro and small domestic market enterprises must involve advanced technology or employ at least 50 direct employees only. The amended FIA relaxes the longstanding foreign equity restriction while putting in place stronger safeguards against possible threats to national interest in vital industries.[6]
- Activities requiring DND clearance are excluded from the list of nationalised activities. The 12th FINL removes the manufacture, repair, storage and/or distribution of products requiring DND clearance. Previously, these activities were subject to 40% foreign equity limitation. At present, full foreign participation is allowed for activities and products requiring DND clearance.[7]
Implications for business in the Philippines
The 12th FINL, coupled with the recent amendments, is a substantial liberalisation of barriers to foreign investment. These economic reform measures are designed to attract foreign investors and global players resulting in a strong healthy market competition. Lesser constraints on market competition serves the interest of both private investors and consumers alike. It is recognised that “efficiency of market competition is one the best mechanisms for allocating goods and services”[8] and an “unencumbered market competition serves consumers’ interest by allowing their exercise of right of choice over goods and services.”[9]
Conclusion
In line with the recently passed amendments to the RTLA, PSA, and FIA, the 12th FINL aims to further boost the Philippine economy by lowering the barrier to entry of foreign capital in key areas of investments. Such investments will help foster a healthy market competition and will serve as a catalyst in driving further innovation in the country.
If you have any questions or require any additional information, please contact Felix Sy, Reeneth B. Santos and Geia Barrido of Insights Philippines Legal Advisors (a member of ZICO Law).
For further information, please contact:
Felix Sy, Partner, Zico Law
felix.sy@zicolaw.com
This alert is for general information only and is not a substitute for legal advice.
[1] An Act to Promote Foreign Investments, Prescribe the Procedures for Registering Enterprises Doing Business in The Philippines, And for Other Purposes [Foreign Investments Act of 1991], Republic Act No. 7042, §2 (1991).
[2] As a general rule, under the FIA, foreigners can invest as much as 100 % in domestic market enterprises.
[4] An Act Amending Commonwealth Act No. 146, [Public Service Act, As Amended], Republic Act No. 11659 (2022).
[5] See related article Amendments to Philippine Public Service Act Passed available at: https://www.zicolaw.com/resources/alerts/amendments-to-philippine-public-service-act-passed/#_ftn11
[6] See related article Amendments to Philippine Foreign Investments Act Passed available at https://www.zicolaw.com/resources/alerts/amendments-to-philippine-foreign-investments-act-passed/#:~:text=To%20safeguard%20national%20interest%2C%20the,the%20safety%2C%20security%20and%20well%2D
[7] The manufacture, repair, storage and/or distribution of products requiring DND clearance includes (a) guns and ammunition for warfare; (b) military ordnance and parts thereof (e.g., torpedoes, depth charges, bombs, grenades, missiles); (c) gunnery, bombing and fire control systems and components; (d) guided missiles/missile systems and components; (e) tactical aircraft (fixed and rotary-winged), parts and components thereof; (f) space vehicles and component systems; (g) combat vessels (air, land and naval) and auxiliaries; (h) weapons repair and maintenance equipment; (i) military communications equipment; (j) night vision equipment; (k) stimulated coherent radiation devices, components and accessories; (l) armament training devices; and (m) others as may be determined by the Secretary of the DND.
[8] An Act Providing for A National Competition Policy Prohibiting Anti-Competitive Agreements, Abuse of Dominant Position and Anti-Competitive Mergers and Acquisitions, Establishing The Philippine Competition Commission And Appropriating Funds Therefor [Philippine Competition Act], Republic Act No. 10667 (2015).
