Property Ownership and Foreign Investment:
Conventus Law (CL): How are the current regulations governing foreign ownership of real estate in the Philippines, and have they been changed or developed recently?
SyCipLaw: The 1987 Constitution of the Philippines (“Philippine Constitution”) provides that the exploration, development, and utilization of natural resources, including lands of the public domain, may only be undertaken by Filipino citizens or by corporations whose capital is at least 60% owned by Filipino citizens. Likewise, the Philippine Constitution limits the ownership of private lands only to those who are qualified to acquire and hold lands of the public domain and, thus, is subject to the same 60% nationality restriction.
The Philippines has an Anti-Dummy Law which gives teeth to the nationality restrictions imposed under the Philippine Constitution and statutes by penalizing the following: (a) the use of a Filipino’s name or citizenship for the purpose of evading such constitutional or legal provision requiring Philippine citizenship as a requisite for the enjoyment of a right, franchise or privilege, (b) the false simulation of the existence of the minimum capital as owned by Filipino citizens for the purpose of evading a constitutional or legal provision requiring a minimum nationality requirement for the exercise or enjoyment of a right, franchise or privilege, and (c) foreign intervention in the management, operation, administration or control of a corporation engaged in a partially nationalized activity, whether as an officer, employee or laborer therein with or without remuneration, except that: (i) technical personnel may be employed when specifically authorized by the Secretary of the Department of Justice, and (ii) aliens may be elected as directors in proportion to their allowable participation in the capital of the corporation.
The Foreign Investments Act of 1991, as amended, (“FIA”) defines “Philippine national” for the purpose of compliance with the nationality requirement. Section 3(a) of the FIA provides that
The term “Philippine national” shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty (60%) of the fund will accrue to the benefit of the Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines, in order that the corporations shall be considered a Philippine national. (Emphasis supplied.)
The above definition sets out the Control Test for determining compliance with applicable nationality requirements or restrictions. Under the Control Test, if at least 60% of the capital stock outstanding and entitled to vote of a corporation organized under the laws of the Philippines is owned and held by citizens of the Philippines, such corporation shall be considered a Philippine national. The Control Test has been used in the past for determining compliance with the nationality restriction.
“(…) the SEC has since issued SEC Memorandum Circular No. 8, series of 2013 (“SEC MC 8-2013”) which provides that, for purposes of determining compliance with nationality restrictions, such as land ownership, the required percentage of Filipino ownership shall be applied 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.”
Benedicto P. Panigbatan – Partner, SyCipLaw
However, the SEC has since issued SEC Memorandum Circular No. 8, series of 2013 (“SEC MC 8-2013”) which provides that, for purposes of determining compliance with nationality restrictions, such as land ownership, the required percentage of Filipino ownership shall be applied 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. This is the most recent and is currently the controlling rule in determining compliance with the required percentage of Filipino ownership. In the case of Roy v. Herbosa (G.R. No. 207246, November 22, 2016), the Supreme Court upheld the validity of SEC MC 8-2013 and stated that “Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling interest requirement. xx xx The SEC formulated SEC-MC No. 8 to adhere to the Court’s unambiguous pronouncement that ‘full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights is required.’”
The percentage of ownership is computed based on the total number of outstanding shares of stock, and not on the par values of the shares. Thus, theoretically, a foreign company may maximize its economic interest in the 60-40 joint venture company through the issuance of different classes of shares (i.e., common shares and redeemable preferred shares) with different par values or issue prices.
There is no similar prohibition with respect to other forms of real estate (other than land). Foreign nationals are allowed to own buildings, machineries, and other forms of real property. While the general rule under Philippine law is that the ownership of real property adhered to land follows the ownership of the land, there may be separate legal title over other forms of real property adhered to the land (e.g., buildings). More specifically, the Philippine Condominium Act allows foreign nationals to own condominium units provided that at least 60% of the condominium building is owned by Philippine nationals.
The laws and regulations mentioned above have not been changed recently.
Real Estate Transactions and Contracts:
CL: Are there any significant changes to the laws governing property transactions in the Philippines, and what are the legal requirements and best practices for drafting real estate contracts?
SyCipLaw: There are no recent significant changes to the laws governing property transactions in the Philippines.
Under Philippine law, contracts that have for their object the creation, transmission, modification, or extinguishment of real rights over real property must be appear in the public document. Contracts for sale of real property or an interest therein and any contract for lease longer than one year must appear in writing. Otherwise, the contract is considered unenforceable. Further, both the Civil Code of the Philippines (“Civil Code”) and Presidential Decree No. 1529 or the Property Registration Decree, as amended (“Property Registration Decree”) provide that contracts affecting land must be registered with the local Register of Deeds in order to bind third parties.
In our experience, it is best practice in drafting real estate contracts to include representations or warranties that (i) the transferor/seller/lessor (as applicable) is the absolute legal and beneficial owner of the real property being sold or transferred, (ii) the property (if land) is duly registered with the Register of Deeds, (iii) the property (if land) is capable of being the object of a contract, i.e., it has been previously declared alienable and disposable, and (iv) there are no liens or encumbrances (e.g., mortgages) on the real property unless otherwise disclosed to the transferee/buyer/lessee (as applicable), and (iv) other similar representations or warranties. Parties would also usually stipulate the conditions precedent for title over the property to be transferred, as well as who would bear the economic cost of applicable taxes due on the transfer. Further, the transferee/buyer/lessee (as applicable) is also advised to conduct due diligence on the property subject of the transaction. Due diligence findings affecting the subject real property may need to be resolved before closing the transaction, or dealt with on a post-closing basis, and provisions relating to these would typically be included in the transaction documents.
Land Use and Zoning Regulations:
CL: What is the current structure of land use and zoning regulations in the Philippines, and have they been updated recently to affect property development and construction?
SyCipLaw: In general, zoning and classification of lands is done by the local government unit (e.g., city or municipality) where the land is located. The zoning and classification of the land will determine the permissible uses to which it may be devoted. The common types of uses that are found in local zoning ordinances are (i) commercial; (ii) residential or (iii) industrial. The local government unit may also choose to adopt different zoning classifications such as “High Growth commercial,” “Institutional/Recreational District,” “Planned Unit Development,” and others. Also, certain zoning ordinances may prescribe the number of floors or parking spaces when constructing a building.
There may also be restrictions on the land imposed voluntarily by the owner or developer of the property (such as in residential subdivisions, commercial developments, or industrial zones). This usually comes in the form of a master deed of restrictions which is annotated on the certificate of title to the land. A master deed of restrictions is a restrictive covenant that governs how and to what extent third-party purchasers may use or enjoy the land or other real property (such as condominium units) that they acquire. The provisions of a master deed of restrictions, being a contract, cannot be contrary to laws, morals, good customs, public order or public policy.
We are not aware of recent updates regarding the foregoing. However, it is possible that certain local government units may issue ordinances to amend current zoning regulations within their respective territories.
“Owners and operators of facilities that discharge regulated effluents are required to secure a discharge permit, specifying the quantity and quality of effluent that said facilities are allowed to discharge into a particular water body, compliance schedule and monitoring requirement. The discharge permit serves as the legal authorization to discharge wastewater.”
Benedicto P. Panigbatan – Partner, SyCipLaw
Environmental Compliance and Property Development:
CL: How are environmental regulations affecting real estate projects in the Philippines? Have there been any recent developments in these laws?
SyCipLaw: The applicable environmental regulations will depend on the nature of the real estate project being contemplated. Certain environmental regulations will be applicable only when various circumstances are present.
Presidential Decree No. 1586 (“PD No. 1586”) created the Philippine Environmental Impact Statement System which requires project proponents to conduct environmental impact assessments for certain projects considered as environmentally critical. Project proponents would need to secure an environmental compliance certificate (“ECC”) prior to commencement of the project. The ECC is issued by the Department of Environment and Natural Resources (“DENR”) upon a showing that the project will not cause significant negative environmental impact and that the project proponent has an approved Environmental Management Plan.
Other laws that may be applicable include:
- Republic Act No. 9275 or The Philippine Clean Water Act of 2004
Owners and operators of facilities that discharge regulated effluents are required to secure a discharge permit, specifying the quantity and quality of effluent that said facilities are allowed to discharge into a particular water body, compliance schedule and monitoring requirement. The discharge permit serves as the legal authorization to discharge wastewater.
- Republic Act No. 8749 or Philippine Clear Air of 1999
Owners and operators of facilities are required to obtain an authority to construct air pollution source installations and a permit to operate for all sources of air pollution from stationary sources.
- Republic Act No. 6969 or the Toxic Substances and Hazardous and Nuclear Wastes Control Act of 1990
A permit from the DENR is required for the storage, treatment, transport, export, processing, reprocessing, recycling and disposal of hazardous waste, excluding waste generation. An entity that is purely a waste generator (i.e., a person who generates or produces, through any commercial, industrial or trade activities, hazardous wastes) is not required to secure any permit from the DENR for the generation of hazardous waste. It must, however, register as a waste generator.
We are not aware of recent updates regarding the foregoing.
Taxation and Real Estate:
CL: Are there any recent changes to the property taxation laws in the Philippines, and what are the tax laws relating to real estate transactions?
SyCipLaw: A recent significant change to property taxation law in the Philippines is the enactment of Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (“CREATE”) in 2021. CREATE amended the National Internal Revenue Code (“Tax Code”), the main piece of legislation governing taxation in the Philippines.
The applicable taxes to a real estate transaction would depend on (i) whether the property subject of the transaction is classified as a capital asset or an ordinary asset, (ii) the particular type of transaction contemplated (e.g., sale or donation), and (iii) the status of the seller.
The sale of real property classified as a capital asset by a Philippine resident is subject to (i) capital gains tax (“CGT”) of 6% of the gross selling price or fair market value, whichever is higher; (ii) documentary stamp tax (“DST”) of approximately 1.5% of the actual consideration of the sale, and (iii) a local government transfer tax with a maximum rate of 0.75% of the gross selling price or the fair market value, whichever is higher, depending on the local government unit where the property is located.
On the other hand, the sale of real property classified as an ordinary asset by a Philippine resident is subject to (i) creditable withholding tax of 1.5% to 15% depending on the status of the seller, which will be applied against the seller’s income tax due at the end of the taxable year; (ii) value added tax of 12% of the gross selling price; (iii) DST as described above; and (iv) local government transfer tax as described above.
The donation of real property is subject to (i) donor’s tax of 6% computed on the basis of the donor’s total gifts in excess of PhP 250,000 made during the calendar year; (ii) DST as described above; and (iii) local government transfer tax as described above.
Consumer Protection in Real Estate Transactions:
CL: Is there a consumer protection law in place to protect property buyers in the Philippines, and has it changed recently?
SyCipLaw: Yes, there is a consumer protection law in place to protect buyers of real estate.
Republic Act No. 6552 or the Realty Installment Buyer Protection Act (more commonly known as the “Maceda Law”) protects buyers of real estate on installment payments. The Maceda Law covers buyers of real estate who have paid at least two (2) years of installments, except where (i) the property is a commercial or industrial lot, or (ii) the buyer is the current tenant of the property. Under the Maceda Law, the buyer, in case of default in the payment of an installment, shall have the following rights:
- To pay, without additional interest, the unpaid installments due within the total grace period earned by the buyer, which is fixed at the rate of one month grace period for every one year of installment payments made. This right shall be exercised by the buyer only once in every five (5) years of the life of the contract.
- If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to 50% of the total payments made and, after five years of installments, an additional 5% every year but not to exceed 90% of the total payments made. The actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract and upon full payment of the cash surrender value to the buyer.
If the buyer has paid less than two years of installments, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract.
The Maceda Law has not been changed recently.
“(…) a corporation may only be engaged in the business of real estate service if the persons authorized to act for the corporation are duly registered and licensed real estate service practitioners.”
Benedicto P. Panigbatan – Partner, SyCipLaw
Real Estate Regulation and Professional Standards:
CL: How are real estate agents and brokers regulated in the Philippines, and have there been any recent developments in professional standards or licensing requirements for individuals involved in real estate transactions?
SyCipLaw: Real estate agents and brokers are regulated by the Professional Regulatory Board of Real Estate Service (“Professional Regulatory Board”) established by Republic Act No. 9646 otherwise known as the Real Estate Service Act of the Philippines. Real estate service practitioners (including real estate brokers, consultants, appraisers, and assessors) must be duly registered and licensed by the Professional Regulatory Board. Applicants must take and pass an examination given by the Professional Regulatory Board at least once every year. The law limits the practice of real estate service to Filipino citizens and citizens of countries giving reciprocal rights to Filipino real estate service practitioners. Real estate service practitioners shall also be bound by a Code of Ethics and Responsibilities provided by the Professional Regulatory Board, and they shall be mandated to undergo a continuing professional education program.
Similarly, a corporation may only be engaged in the business of real estate service if the persons authorized to act for the corporation are duly registered and licensed real estate service practitioners.
Republic Act No. 11521, which amended the Anti-Money Laundering Act (“AMLA”) makes real estate developers and brokers covered persons under the AMLA. The AMLA defines a “covered transaction” for real estate brokers as a single cash transaction involving an amount in excess of PHP 7,500,000.00 or its equivalent in any other currency. Covered institutions such as banks or other financial institutions are required to report such covered transactions to the Anti-Money Laundering Council.
Smart Cities and Technological Integration:
CL: In the Philippines, how are technology, such as blockchains and digital platforms, being integrated into real estate transactions, and what legal considerations and developments are associated with these technological advances?
SyCipLaw: We are not aware of any laws or regulations that specifically integrate technology advances such as blockchains or digital platforms in real estate transactions.
However, the use of technology may aid in the due diligence process undertaken by the parties. For example, the Land Registration Authority recently launched an online portal where certified true copies of certificate of titles may be obtained from any Register of Deeds. There is also a rise in the use of cloud services as virtual data rooms for the due diligence process.
Czar Matthew Gerard T. Dayday, an Associate of the Firm, assisted in the preparation of the foregoing.
- Philippine Constitution, Article XII, Section 7.
- Philippine Constitution, Article XII, Section 7.
- Commonwealth Act No. 108, as amended.
- Anti-Dummy Law, Section 1.
- Anti-Dummy Law, Section 2.
- Anti-Dummy Law, Section 2-A.
- Following the cases of Gamboa v. Teves (G.R. No. 176579, June 28, 2011), Narra Nickel Mining and Development Corporation v. Redmont Consolidated Mines, Corp., et al. (G.R. No. 195580 (Resolution), January 28, 2015) and Roy v. Herbosa (G.R. No. 207246, November 22, 2016), in the Philippines, there are two acknowledged tests for determining the nationality of a corporation which has corporate stockholders: (i) the Control Test and (ii) the Grandfather Rule.
- The Control Test is that stated above. Under this test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of an investing corporation since a corporation which is at least 60% Filipino-owned is already considered as Filipino or a Philippine nationa.
- On the other hand, the Grandfather Rule is “the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Philippine Constitution and other nationalization laws, such as land ownership, is computed, in cases where corporate shareholders are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder.” Under this Rule, the Filipino ownership of the investing corporation and the investee corporation are combined to determine the percentage of Filipino ownership.
The Grandfather Rule is only applicable when the 60-40 Filipino-foreign equity ownership is in “doubt.” For instance when the investing corporation has less than 60% Filipino stockholdings and the investee corporation has either 60-40% Filipino-foreign ownership ratio or has 59% or less Filipino shareholdings. “Doubt”, however, is not limited to these circumstances.
Even if the 60-40 Filipino to Foreign equity ratio is apparently met by the investing or investee corporation, a resort to the Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial ownership” and “control.” The “doubt” refers to, “various indicia that the ‘beneficial ownership’ and ‘control’ of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.”