Navigating Business Ventures in the Philippines

Navigating Business Ventures in the Philippines – Your Questions Answered

This Q&A provides a comprehensive guide to essential legal and regulatory factors for businesses in the Philippines. Dive into key areas like setting up business entities, meeting compliance requirements, navigating judicial systems, and understanding dispute resolution. Explore the impact of the Foreign Investment Act, labor laws, tax responsibilities, intellectual property protection, environmental regulations, and the ins and outs of mergers and acquisitions. Plus, get insights into crafting effective commercial contracts.

Conventus Law: What are the essential legal factors to consider when setting up a business entity in the Philippines?

The types of entities

SyCipLaw: An entity that seeks business from Philippine residents would be considered as doing business in this jurisdiction, for which it must secure a primary license from the Philippine Securities and Exchange Commission (“SEC”). That license involves the setting up of a juridical entity such as a domestic stock corporation or branch. This is a general registration required of all entities engaged in income-generating activities in the Philippines regardless of the type of business activity.

In addition to a domestic subsidiary and branch office, other types of legal entities in the Philippines include One Person Corporations (OPCs), representative offices, regional or area headquarters (RHQ), and regional operating headquarters (ROHQs).

Domestic Subsidiary/Stock Corporation

Since a domestic subsidiary has a separate juridical personality distinct from its foreign parent company, the latter is protected from contractual and other liabilities incurred by the domestic subsidiary. The assets are owned by the domestic subsidiary, while the parent company owns the outstanding capital of the domestic subsidiary.

Branch Office

Since the branch office does not have a separate juridical personality distinct from its foreign parent company, the liabilities of a branch office generally extend to those of its home office. Also, the foreign corporation itself conducts the business, and therefore, all assets are owned by it.

Compliance and registration requirements

Domestic Subsidiary/Stock Corporation

A subsidiary generally must have at least two incorporators, and a minimum of two but no more than fifteen directors (although a number higher than two directors is required in respect of entities operating in certain industries). Unless a nationality restriction applies to the subsidiary’s business, directors may be foreign nationals and non-residents. The minimum officers would be the President, Corporate Secretary and Treasurer. The Treasurer must be a Philippine resident, and the Corporate Secretary must be both a citizen and resident of the Philippines.

Branch Office

In the case of a branch, its governing body would be that of its head office, but a Philippine branch must appoint a resident agent the function of whom is to receive summons and other legal processes in all actions or other legal proceedings against the foreign corporation. Moreover, within 60 days after obtaining the license to operate, the branch office is required to deposit marketable securities worth at least PhP500,000 with the SEC which may be withdrawn upon cessation of the Philippine branch’s operations.

Post-incorporation requirements and secondary licenses

After an entity has been set up, it would need to comply with certain standard post-incorporation requirements, including obtaining of a business permit from the local government unit where the entity’s offices will be set up, registration as taxpayer with the Bureau of Internal Revenue, and registration as employer with the Department of Labor and Employment, Social Security System, Philippine Health Insurance Corporation, and Home Development Mutual Fund. In addition, the entity may have to obtain certain secondary licenses from various regulators or government agencies depending on the activities that it will engage in.

(CL) How can businesses effectively navigate the judicial and dispute resolution landscape in the Philippines, and what are the most common disputes faced by foreign enterprises?

Overview of the court system and alternative dispute resolution mechanisms

The Philippine court system is composed of first-level courts, Regional Trial Courts, appellate courts, specialized courts, and the Supreme Court.

The first level courts are the: (i) Metropolitan Trial Courts; (ii) Municipal Trial Courts in Cities; (iii) Municipal Trial Courts in Municipalities; and (iv) Municipal Circuit Trial Courts. These courts exercise exclusive original jurisdiction, among others: (a) over civil actions where the value of the demand does not exceed PhP2,000,000.00; (b) in all civil actions which involve real property where the assessed value of the property does not exceed PhP400,000.00; and (c) over cases of forcible entry and unlawful detainer.

Regional Trial Courts (“RTCs”) are courts of general jurisdiction that exercise exclusive jurisdiction over, among others: (a) civil actions in which the subject of the litigation is incapable of pecuniary estimation; and (b) civil actions which involve real property, where the assessed value exceeds PhP400,000.00. Regional Trial Courts also exercise appellate jurisdiction over all cases decided by the lower courts.

The Court of Appeals exercises exclusive appellate jurisdiction over all final judgments, decisions, or awards of Regional Trial Courts and quasi-judicial agencies, boards or commissions, except those falling within the appellate jurisdiction of the Supreme Court. Other courts on the same level as the Court of Appeals are the Court of Tax Appeals, for tax and tariff cases, and the Sandiganbayan, or the anti-graft court for cases against public officers.

The Supreme Court is the highest court in the Philippine judiciary and its decisions generally create binding case law or precedent. It exercises appellate jurisdiction over cases decided by lower trial and appellate courts.

The Philippine also has an alternative dispute resolution (“ADR”) law that provides for other forms of dispute resolution, such as mediation, conciliation, and arbitration. Certain industries have their own forms of ADR, such as the construction industry which has its own set of arbitration rules.

Practical tips for litigation management and arbitration

When deciding between arbitration and court litigation, several factors should be considered.

Arbitration is confidential and generally considered to be the more expedited process because of strict procedural timetables and the limited scope of appeals. It offers flexibility in choosing arbitrators experienced in relevant sectors or industries. It can be particularly helpful if one anticipates cross-border disputes for avoidance of jurisdictional complications.

That said, there may be reasons to prefer court litigation given that litigation is less costly and may offer more comprehensive procedural safeguards, including appeal rights. In our experience, some companies choose court litigation because of their familiarity with the legal system and especially where the majority of the parties are domestic.

(CL) Could you outline the key compliance requirements for operating a business in the Philippines?

Annual filings, audit requirements, and corporate governance standards

Once an entity is incorporated or has obtained a license from the SEC, it needs to comply with its reportorial and filing requirements such as the filing of the General Information Sheet (“GIS”) and the Audited Financial Statements (“AFS”) with the SEC. Moreover, there are also recurring filing requirements with other government agencies.

The SEC has also issued a Code of Corporate Governance for Publicly-Listed Companies (SEC Memorandum Circular No. 19, Series of 2016) and a Code of Corporate Governance for Public Companies and Registered Issuers (SEC Memorandum Circular No. 24, Series of 2019). These codes provide for corporate governance standards in respect of, among others: (i) board composition and management, including the appointment of independent directors; (ii) establishment of board committees; (iii) board compensation; and (iv) audit and risk management. These codes do not impose mandatory requirements but instead adopt a “comply or explain” approach.

Depending on their secondary licenses, companies must also adhere to the corporate governance and risk management standards imposed by other regulatory agencies.

Environmental, social, and governance (ESG) regulations

There are a number of key ESG-related regulatory and compliance requirements applicable to companies in the Philippines.

The SEC issued Securities and Exchange Commission Memorandum Circular No. 4, series of 2019 setting out its Sustainability Reporting Guidelines for Publicly-Listed Companies. Under the guidelines, publicly-listed companies must submit its sustainability report together with its annual report (SEC Form 17-A).

The SEC also issued Memorandum Circular No. 11, Series of 2022 or the Rules on Sustainable and Responsible Investment Funds. It sets out the rules governing Sustainable and Responsible Investment (“SRI”) Funds as a recognition of the global trend and continuous growth of SRIs in recent years. The rules are applicable to newly formed or existing investment companies that seek to qualify or have qualified as SRI Funds.

The SEC has also issued regulations on green bonds, social bonds, sustainability bonds, and blue bonds. Other ESG-related rules have been issued by the Bangko Sentral ng Pilipinas (the Philippine Central Bank or “BSP”) and the Insurance Commission.

(CL) What is the impact of the Philippines’ Foreign Investment Act on foreign ownership and control across different industries?

The general rule is that foreign entities may engage in business activities in the Philippines except those activities that are reserved by the 1987 Philippine Constitution and special laws to Philippine nationals. These activities that may be subject to nationality restrictions are summarized in Executive Order No. 175, series of 2022 or the 12^th Foreign Investments Negative List (“FINL”) issued by the Philippine President as mandated by the Foreign Investments Act (“FIA”).

Generally, under the FIA, an entity intending to operate as a domestic market enterprise must have a minimum paid in capital/assigned capital of US$200,000 to be 100% foreign-owned.

The term “domestic market enterprise” means an enterprise which 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 sixty percent 60% thereof.

The FIA considers as a Philippine national, among others, a Filipino citizen or a domestic corporation (i.e., a corporation organized under Philippine law) at least 60% of the capital stock outstanding and entitled to vote of which is owned and held by Filipino citizens.

Foreign-owned entities engaging in activities in violation of nationality restrictions would be enjoined from continuing with the activity. They could also be held liable for the violation under the Anti-Dummy Law (“ADL”) and the FIA.

(CL) What recent trends and developments in Philippine labour laws should foreign businesses be aware of?

Job Contracting Arrangements

Job contracting, while generally allowed in the Philippines, is highly regulated. It is principally governed by Articles 106 to 109 of the Labor Code of the Philippines, as implemented by Department Order No. 174, series of 2017 (“DO 174-17”) issued by the Department of Labor and Employment (“DOLE”).

Section 8 of DO 174-17 provides that contracting arrangements are permissible or legitimate provided that certain requirements are met. If these are absent, the contracting arrangement will be considered as “labor-only contracting” arrangement, which is prohibited under the law as it is seen to undermine the security of tenure of employees.

Telecommuting

Telecommuting, work-from-home (WFH), and hybrid work arrangements have become more common in recent years.

Under the Telecommuting Act, an employee in the private sector is allowed to work from an alternative workplace with the use of telecommunication and/or computer technologies. This is done on a voluntary basis, and upon such terms and conditions as the employer and employee may agree upon, provided they are not less than the minimum labor standards set by law.

(CL) What key aspects of employment law should companies consider when hiring employees?

Labor laws, employment contracts, and dispute resolution

Registration with Social Legislation Agencies

An employer is required to register as a member of the Social Security System (“SSS”), Philippine Health Insurance Corporation (“PhilHealth”) and Home Development Mutual Fund (“HDMF”). Thereafter, so long as the company has employees, it will have to continue reporting and remitting contributions to these agencies.

Hiring of Foreign Nationals

Foreign nationals who intend to engage in gainful employment in the Philippines (i.e., do work in the Philippines) need to obtain an Alien Employment Permit (“AEP”) from the DOLE and a Philippine work visa, such as the 9(g) visa (Pre-Arranged Employee Visa), from the Bureau of Immigration. Other types of work visas are the Special Working Permit (“SWP”), for short-term engagements not exceeding six months, and the 47(A)(2) visa, a special non-immigrant visa for expatriates who will work for Philippine companies that are registered either with the Philippine Economic Zone Authority (“PEZA”) or the Board of Investments (“BOI”).

Dispute Resolution

The National Labor Relations Commission (“NLRC”) acts as the principal labor court in the Philippines. Under the Labor Code, the labor arbiters of the NLRC have jurisdiction generally over, among others, unfair labor practices and termination disputes.

The NLRC has exclusive appellate jurisdiction over all cases decided by labor arbiters. Cases arising from the interpretation or implementation of collective bargaining agreements and those arising from the interpretation or enforcement of company personnel policies must be disposed of by the labor arbiter by referring the same to the grievance machinery and voluntary arbitration as may be provided in said agreements.

Employee benefits, wages, and working conditions

Statutory Benefits to Rank-and-File Employees and Minimum Wages

Under the Labor Code, companies must comply with the payment of statutory benefits to rank-and-file employees, such as minimum wage, the rate to be applied for overtime pay, nightshift differential pay, rest day premium, and 13^th month pay.

Mandatory Leave Benefits

Employers must comply with the following mandatory leave benefits under various laws: (i) 105 days of maternity leave benefits; (ii) seven days of paternity leave; (iii) seven days of solo parents leave; (iv) two months of special leave for women under the Magna Carta of Women; (v) ten days of leave benefits for victims under the Violence against Women and Children Act; and (vi) adoption leave.

Mandatory Workplace Policies

Employers must also comply with mandatory workplace policies required by the DOLE.

(CL) What impact does the Philippine Data Privacy Act have on businesses, and what measures should companies implement to ensure compliance?

Companies will generally have to comply with the provisions of the Data Privacy Act of 2012 (“DPA”), its implementing rules and regulations (“DPA Rules”), and the relevant issuances of the National Privacy Commission (“NPC”).

In general, the DPA requires that all processing of personal data be based on a lawful criterion, such as consent of the data subject, legitimate interests of the PIC, or compliance with a legal obligation. Where a controller processes sensitive personal information (as opposed to personal information), consent is the likely available basis for the processing. It also imposes specific obligations on controllers and processors.

Under NPC Circular No. 2022-04, a controller or processor of personal information must register its data processing system with the NPC if certain conditions are met. A controller or processor who does not fall under mandatory registration and does not undertake voluntary registration must submit to the NPC a sworn declaration that it does not meet the registration requirements.

Controllers and processors must also: (i) appoint a data protection officer; (ii) establish a privacy management program (as embodied in privacy manuals, policies, notices, and consent forms, and conduct of data privacy training for employees); (iii) conduct a privacy impact assessment (PIA); and (iv) form a data breach response team and notify the NPC and affected data subjects of notifiable data breaches.

Controllers are allowed to outsource or subcontract the processing of personal data provided that a contractual agreement is entered into, which ensures that appropriate security standards are in place and that the requirements of data protection under the DPA will be complied with.

Controllers may also share data to affiliates or third parties for their own purposes. Controllers sharing data with each other should have lawful basis for sharing the data and must inform the data subject of certain required information. Where consent is relied upon as basis, the data subject must specifically consent to the sharing of his or her data.

(CL) What are the main tax obligations for foreign businesses operating in the Philippines, and are there any available incentives or exemptions?

Income Tax

Under the Tax Code, foreign corporations doing business in the Philippines are subject to income tax. A subsidiary, being a domestic corporation, is subject to income tax on its worldwide income. On the other hand, for tax purposes, a Philippine branch of a foreign corporation is treated as a resident foreign corporation subject to income tax only on its Philippine-sourced income.

Tax on Intercorporate Dividends

There is a 15% tax on intercorporate dividends received by a non-resident foreign corporation from a domestic corporation, provided, that the domicile country of the non-resident foreign corporation allows a tax credit due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to the difference between the RCIT and the 15% tax on dividends (the “Tax Sparing Rule”). If the non-resident recipient of the dividends is a resident of a country with whom the Philippines has a treaty, a tax treaty relief application may be applied for in order to avail of the preferential tax rate under the double tax treaty.

Tax on Branch Profit Remittances

For branch office, there is 15% tax on any profit remitted abroad by a branch to its head office. If the recipient of the profits is a resident of a country with whom the Philippines has a treaty, a tax treaty relief application may be applied for in order to avail of the preferential tax rate under the double tax treaty.

Tax Incentives

Under the law, The Fiscal Incentives Review Board (“FIRB”), or the Investment Promotion Agencies (“IPAs”) such as the PEZA and BOI, under a delegated authority from the FIRB, have the authority to grant the appropriate tax incentives to registered business enterprises only to the extent of their approved registered project or activity under the Strategic Investment Priority Plan.

The following types of tax incentives may be granted to registered projects or activities:

Income Tax Holiday (ITH);
Special Corporate Income Tax (SCIT) Rate;
Enhanced Deductions;
Duty exemption on importation of capital equipment, raw materials, spare parts, or accessories; and
Value-Added Tax (VAT) exemption on importation and VAT zero-rating on local purchases.

(CL) What protections do The Philippines’ intellectual property laws offer to foreign businesses?

Processes for registering patents, trademarks, and copyrights

Intellectual property rights in the Philippines are principally governed by the Intellectual Property Code of the Philippines (“IP Code”). The main government agency implementing and enforcing intellectual property rights is the Intellectual Property Office of the Philippines (“IPOPHL”).

Patents

Under the IP Code, any field of human activity which is new, involves an inventive step and is industrially applicable is patentable. The patent application must be in Filipino or English and must contain, among others, a description of the invention and drawings necessary for the understanding of the invention.

An application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application, provided that: (a) the local application expressly claims priority; (b) it is filed within twelve months from the date the earliest foreign application was filed; and (c) a certified copy of the foreign application together with an English translation is filed within six months from the date of filing int he Philippines.

Trademarks

The application for the registration of the mark must be in Filipino or in English and must contain certain information regarding the applicant and the mark. The applicant or the registrant must also file a declaration of actual use of the mark with evidence to that effect within three years from the filing date of the application.

An application for registration of a mark filed in the Philippines by a person who is a national or who is domiciled or has a real and effective industrial establishment in a country which is a party to any convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party, or extends reciprocal rights to nationals of the Philippines by law, and who previously duly filed an application for registration of the same mark in one of those countries, shall be considered as filed as of the day the application was first filed in the foreign country. No registration of a mark in the Philippines by such a person shall be granted until such mark has been registered in the country of origin of the applicant.

Copyright

Under the IP Code, literary and artistic works, or “works”, are original intellectual creations in the literary and artistic domain protected from the moment of their creation. In the case of original literary and artistic works, copyright belongs to the author of the work, or the natural person who has created the work. Derivative works are also protected by copyright and protected as new works.

Enforcement mechanisms and litigation options

The IPOPHL’s Rules and Regulations on Inter Partes Proceedings provide for procedures in respect of: (i) oppositions to applications for the registration of trademark or service mark; (ii) petitions to cancel the registrations of trademarks or service marks; (iii) petitions to cancel invention patents, utility model registrations, industrial design registrations, or any claim or parts of a claim, and registrations of topography or layout design of integrated circuits; and (iv) petitions for Compulsory Licensing.

Infringement cases and administrative or civil cases for unfair competition may be filed in the proper courts or the Bureau of Legal Affairs of the IPOPHL.

(CL) What environmental regulations must businesses in the Philippines follow, especially those in industries with substantial environmental impact?

Philippine companies must comply with a number of laws relating to environmental protection, which are primarily administered by the Department of Environment and Natural Resources (“DENR”).

Philippine Clean Water Act of 2004

R.A. No. 9275 (Philippine Clean Water Act of 2004) provides that all establishments are required to secure a Discharge Permit from the DENR. The Discharge Permit will be issued upon confirmation that the establishment’s waste-water effluent sufficiently passes the standard set by law.

Philippine Clean Air Act of 1999

DENR Administrative Order No. 81 s. 2000 or the implementing rules and regulations of the Philippine Clean Air Act of 1999 requires all sources of air pollution to be covered by a valid Permit to Operate issued by the DENR.

Ecological Solid Waste Management Act of 2000

R.A. No. 9003 (Ecological Solid Waste Management Act of 2000) provides for the proper management of solid waste which includes discarded commercial waste and non-hazardous institutional and industrial waste. The said law prohibits, among others, the transporting and dumping of collected solid wastes in areas other than prescribed centers and facilities.

Environmental Compliance Certificate

Any business or undertaking in the Philippines that poses a potential environmental risk or a significant impact to the environment is required to secure an Environmental Compliance Certificate (“ECC”) from the DENR. An ECC is a certificate issued by DENR after a positive finding that, based on the application, the proposed undertaking will not cause a negative impact on the environment. The ECC contains conditions and measures meant to be observed by the business owner during the implementation of the project.

(CL) What are the procedures and legal requirements for mergers and acquisitions in the Philippines, and how do they compare with those in other Southeast Asian countries?

Apart from the required corporate approvals and any change of control requirements imposed by the relevant government agencies, mergers and acquisitions in the Philippines are subject to merger control requirements under Philippine antitrust laws provided that they meet certain thresholds. Asset sales may also have to comply with the provisions of the Bulk Sales Law.

Merger Control

Section 17 of the Philippine Competition Act (Republic Act No. 10667, the “PCA”) provides for a compulsory notification regime in respect of transactions that breach certain thresholds. As of 1 March 2024, these thresholds, as promulgated by the Philippine Competition Commission (“PCC”), are PhP7.8 billion for the Size of Party Test and PhP3.2 billion for the Size of Transaction Test. Both thresholds must be satisfied to trigger compulsory notification to the PCC of an acquisition.

Further, for a voting share acquisition to be compulsorily notifiable, the Control Test must also be met. That is, the acquiring entity should either (i) acquire more than 35% of outstanding voting shares or interests in the acquired entity, or (ii) if the acquisition is less than 35% of the outstanding voting interests, the rights granted to the acquiring entity are of such nature as to amount to “joint control”, following the PCC’s Guidelines on Notification of Joint Ventures.

Consummating a notifiable transaction without clearance (or deemed approval) from the PCC will render the transaction void and subject the parties involved to fines equivalent to 1% to 5% of the value of the transaction.

Bulk Sales Law

A sale of assets that is considered a “sale and transfer in bulk,” i.e. a sale of a stock of goods otherwise than in the ordinary course of trade and the regular prosecution of the business of the seller, would require compliance with the Bulk Sales Law (“BSL”).

Under the BSL: (i) the seller must deliver to the buyer the sworn statement of creditors before receiving any part of the purchase price; (ii) the seller must make an inventory of the assets at least ten days before the sale or transfer; (iii) the seller must notify its creditors of the sale at least ten days before transferring possession of the goods; and (iv) the seller must register the bulk sale with the Department of Trade and Industry (“DTI”).

Non-compliance with the BSL will render the sale void.

(CL) What are the primary tax obligations for businesses in the Philippines?

Corporate tax rates, indirect taxes

For domestic subsidiaries, the regular corporate income tax (“RCIT”) is 25% of net taxable income from all sources within and without the Philippines (except for corporations with net taxable income not exceeding PhP5,000,000 and with total assets not exceeding PhP100,000,000, excluding land on which the particular business entity’s office, plant, and equipment are situated, in which case the RCIT is 20% of net taxable income).

On the other hand, for branch offices, the RCIT is 25% of net taxable income from all sources within the Philippines.

Moreover, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (“VAT”). The current VAT rate is 12%.

The local government of the city or municipality in which the corporation is operating imposes tax on businesses and on the real property owned by the corporation in such city or municipality.

Tax incentives and relief measures

As mentioned in our response to Question 8, certain tax incentives may be granted by the FIRB and various IPAs to registered business enterprises only to the extent of their approved registered project or activity under the Strategic Investment Priority Plan.

(CL) What are the essential factors to consider when entering into commercial contracts with entities in the Philippines?

Common contractual terms, dispute resolution, and arbitration

Choice of Law

Philippine jurisprudence recognizes that parties to a contract may select the law applicable to their contract, subject to the limitation that it is not against the law, morals, or public policy of the forum and that the chosen law must bear a substantive relationship to the transaction.

While Philippine courts “will generally defer to the parties’ articulated choice,” since Philippine choice of law rules require that “the chosen law must bear a substantive relationship to the transaction,” there is a risk that a Philippine court may disregard this choice of law provision if it finds that the transaction’s “points of contact” with the choice of governing law are too few or insignificant.

Jurisdiction

Jurisdiction is determined by law and cannot be acquired by the court by consent or submission of the parties, and neither may it be waived by agreement of the parties. Therefore, the stipulation on the exclusive jurisdiction of the courts of other countries will not operate to oust a Philippine court of jurisdiction otherwise vested in it by law. Thus, while Philippine courts would generally respect exclusive jurisdiction clauses, it may also apply the doctrine of forum non conveniens in determining whether to take cognizance of the case.

ADR Institutions

Dispute resolution or arbitration clauses typically refer to ADR and arbitral proceedings administered by such ADR institutions as the Philippine Dispute Resolution Center, the Singapore International Arbitration Centre, the Hong Kong International Arbitration Centre, and the International Chamber of Commerce – International Court of Arbitration.

Jurisdictional challenges and enforceability

Foreign judgments may be enforced in the Philippines through the filing of a petition for recognition of foreign judgment. However, the judgment or final order may be repelled by evidence of a want of jurisdiction, want of notice to the party, collusion, fraud, or clear mistake of law or fact.

The Philippines is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Consequently, the provisions on recognition and enforcement of an award under the ADR Act and Special ADR Rules are consistent with the New York Convention.