By: Atty. Enrique V. dela Cruz, Jr.[1]
Foreign corporations planning to do business in the Philippines can choose to either establish a representative office, a branch, a subsidiary or an independent domestic corporation. Which mode should they choose? It depends on the nature of the operations and the purpose of the investment in the Philippines.
Representative Office
Under Philippine law, a representative office is a foreign corporation allowed to do business in the Philippines, but without deriving any local income.[2] A representative office is fully subsidized by its head/foreign office and deals directly with the latter’s clients by disseminating information, acting as a communication center, conducting surveys and studies of the Philippine market, or promoting and ensuring the quality of the company’s products and services. Therefore, a representative office in the Philippines is actually an extension of a corporation’s foreign/head office. Accordingly, the foreign/head office is liable for the liabilities of the representative office. The test of whether an office is a representative office or not, is whether it derives income from its local operations.
A representative office may be established with only one (1) person who will act as the resident agent.
A representative office is considered a non-resident foreign corporation not engaged in income-generating business in the Philippines and is, therefore, not subject to the corporate income tax[3] and value-added tax (“VAT”) directly due upon it.[4] This substantially reduces the tax upon a representative office compared to a Philippine corporation, whether a subsidiary or an independent corporation, because the latter is subject to income taxes and VAT.
However, if the representative office remits technical service fees to foreign/head office, said fees shall be considered royalties subject to the thirty percent (30%) corporate income tax, which should be withheld and remitted to the Bureau of Internal Revenue (“BIR”) by the representative office.[5]
If the functions of the proposed entities are generally income-generating, they cannot be registered as representative companies. However, if it is proven that the entities that is sought to be established in the Philippines will provide services only to foreign clientele, such that all contracts and transactions will be solely between the foreign/head office and its foreign clients outside the Philippines, and said entities will not derive any income from the Philippines, then such entities may be registered as representative offices.
Note that an inward remittance of a minimum amount of US Dollars: Thirty Thousand (US$30,000.00) is required for the registration of a representative office.[6] An application for registration as a representative office with the SEC requires the following documents:
- SEC Form F-104;
- Name Verification Slip;
- Authenticated copy of a Resolution by the foreign corporation’s Board of Directors:
- Authorizing the establishment of a representative office in the Philippines;
- Designating a resident agent; and,
- Stipulating that in absence of such agent or upon cessation of business in the Philippines, any summons for the company may be served to SEC as if the same is made upon the company at its home office.
- Financial Statements of the foreign corporation for the immediate preceding year at the time of filing of the application, certified by an independent certified public accountant in the place of its principal office;
- Authenticated copies of the foreign corporation’s Articles of Incorporation;
- Proof of inward remittance of a minimum amount of US Dollars: Thirty Thousand (US$30,000.00), such as bank certificate;
- Resident agent’s acceptance of appointment (if not signatory in the application form); and,
- Affidavit executed by the foreign corporation’s president or resident agent stating that the company is solvent and in sound financial condition.
Note that all documents executed abroad should be authenticated by the Philippine Embassy or Consular Office at or nearest the place of execution. The registration of a representative office will take at least one (1) month from submission of the complete documentary requirements with the SEC.
Branch Office
Like a representative office, a branch office is an extension of the foreign/head office, and does not acquire a separate juridical personality from the latter.[7] Thus, the liabilities of the branch are considered liabilities of the foreign/head office. Also, a branch office may be set up with only one (1) person who will act as the resident agent
From the point of view of taxation, the foreign corporation, upon obtaining a license to do business through a branch office, becomes a resident foreign corporation.[8] A branch office is, thus, subject to income tax at a rate of thirty percent (30%) on income from within the Philippines.[9] However, profits remitted by the branch to its head office are subject to branch profit remittance tax, if they are effectively connected with its business in the Philippines, at the rate of fifteen percent (15%) or ten percent (10%) depending on certain tax treaties; however, if located in a special economic zone, then they are tax exempt.
A branch office is not subject to documentary stamp tax (“DST”) simply because it does not issue shares of stock. A branch is also not liable to pay the ten percent (10%) improperly accumulated earnings tax. Subject to certain conditions, overhead expenses of the foreign/head office may be allocated to the branch office.[10]
As a fully foreign-owned entity, a branch must have a capitalization of at least US Dollars: Two Hundred Thousand (US$200,000)[11], unless the branch will be exporting goods or services or generating revenue from abroad amounting to more than sixty percent (60%) of its gross sales. It can be fully foreign owned, as it is considered an Export Enterprise under the Foreign Investments Act.[12]
Hence, the branch can be registered with as little as Philippine Pesos: Five Thousand (PhP5,000.00) as paid up capital. However, most banks require Philippine Pesos: Twenty-Five to Fifty Thousand (PhP25,000.00 – PhP50,000.00) to open a corporate bank account.
Note that a branch is required initially to deposit with the SEC, for the benefit of present and future creditors, acceptable securities with market value equivalent to at least Philippine Pesos: One Hundred Thousand (PhP100,000.00) plus an annual additional deposit of Two Percent (2%) of the amount by which the branch office’s gross income exceeds Philippine Pesos: Five Million (PhP5,000,000.00).
An application for registration of a branch office with the SEC requires the following documentary requirements:
- SEC Form 103 (Application of a Foreign Corporation to Establish a Branch Office in the Philippines). This application may be signed by any person authorized by the applicant’s Board of Directors.
- Proof of inward remittance of a minimum amount of US Dollars: Two Hundred Thousand (US$200,000.00) such as bank certificate. The initial assigned capital shall be remitted directly to the Treasurer-in-trust account opened for and on behalf of the branch office, spate from any remitted filing fees.
- Latest audited financial statements of the foreign corporation.
- Authenticated Articles of Incorporation, By-laws or similar documents of the foreign corporation.
Note that all documents executed abroad should be authenticated by the Philippine Embassy or Consular Office at or nearest the place of execution. SEC filing and legal research fees for the above application will amount to at least US Dollars Two Thousand Twenty (US$2,020.00).
Within sixty (60) days after obtaining the license to operate, the branch office is required to deposit marketable securities worth at least Philippine Pesos: One Hundred Thousand (PhP100,000.00) with the SEC, which may be withdrawn upon cessation of the Philippine branch’s operations.
Subsidiary Corporation
A subsidiary is defined as a corporation more than fifty percent (50%) of the voting stock of which is owned or controlled directly or indirectly through one or more intermediaries by another corporation, which thereby becomes its parent corporation.[13] A subsidiary is a juridical entity separate and distinct from its parent company;[14] hence, its liabilities are generally not regarded as the liabilities of the parent company.
If the parent corporation is a foreign one, the subsidiary automatically comes under the provisions of the Foreign Investments Act, thereby necessitating a minimum paid-up capital of at least US Dollars: Two Hundred Thousand (US$200,000.00).[15] However, if the subsidiary involves advanced technology as determined by the Department of Science and Technology or employs at least fifty (50) direct employees, then the minimum paid-in capital may be reduced to at least US Dollars: One Hundred Thousand (US$100,000.00).[16]
In addition, like a branch office, if the subsidiary will be exporting goods or services or generating revenue from abroad amounting to more than sixty percent (60%) of its gross sales, it can be fully foreign owned, as it is considered an Export Enterprise under the Foreign Investments Act.[17] Thus, the subsidiary may also be registered with as little as Philippine Pesos: Five Thousand (PhP5,000.00) as paid up capital. However, most banks require Philippine Pesos: Twenty-Five to Fifty Thousand (PhP25,000.00 – PhP50,000.00) to open a corporate bank account.
A subsidiary is a domestic corporation[18] and is, thus, liable for income tax at the rate of thirty percent (30%) of its net income from all sources within and without the Philippines.[19] Its parent corporation remains a non-resident foreign corporation[20] and is subject to income tax, at the same tax rate, based on its gross income from sources within the Philippines.[21] A subsidiary is liable to pay DST on the original issuance of shares of stock at the rate of Philippine Pesos: Two (PhP2.00) for every Philippine Pesos: Two Hundred (PhP200.00) or fractional part of the par value of the shares of the outstanding shares of stock.[22] It is also liable to pay the ten percent (10%) improperly accumulated earnings tax.[23]
The remittance of dividends by a subsidiary to its parent corporation is, generally, taxed at thirty percent (30%) pursuant to the foregoing.
However, this may be reduced to fifteen percent (15%) if the country wherein the parent corporation is domiciled either: (a) grants a tax-sparing credit[24]; or (b) does not at all impose any tax on such dividends received.[25]
Like any Philippine corporation, a subsidiary requires at least five (5), but not more than fifteen (15), incorporators and/or directors, all of whom must be natural persons and majority of whom must be residents of the Philippines.[26]
Registration is effected by filing an application with the SEC, accompanied by the following documents:
- Name Verification Slip. Note that we have already reserved the corporate names in your behalf.
- Articles of Incorporation, which must indicate the following:
- The name of the corporation;
- The specific purpose or purposes for which the corporation is being incorporated;
- The place where the principal office of the corporation is to be located, which must be within the Philippines;
- The term for which the corporation is to exist, not exceeding fifty years;
- The names, nationalities and residences of the incorporators, which must be natural persons;
- The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15), majority of whom must be residents of the Philippines;
- The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified;
- The name of the Treasurer of the corporation who shall act as such until the first regular Treasurer is duly elected and qualified (“Treasurer-in-trust”);
- The date of the annual meeting of the stockholders;
- The amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each;
- The names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated;
- Note that the Corporation code requires at least twenty-five percent of the corporation’s authorized capital stock must be subscribed, and at least twenty-five percent (25%) of the total subscribed stock must be paid.
- By-laws;
- Treasurer’s Affidavit;
- Certificate of Inward remittance issued by a Philippine bank on the remittance of at least US Dollars: Two Hundred Thousand (US$200,000.00), net of bank charges, to the subsidiary’s or its Treasurer-in-trust’s local bank account, unless the corporation is export-oriented. It takes around three (3) days from submission of bank documents for purposes of opening an account; and,
- SEC Form F-100 (Application to Do Business Under the Foreign Investments Act)
If the incorporators, directors, and/or officers designated in the Articles of Incorporation and By-laws are Filipinos, their Tax Identification Numbers (“TIN”) must be stated. If said individuals are non-Filipinos, their passport numbers must be indicated instead.
If any of the above documents are signed or executed outside the Philippines, such documents should be authenticated by the Philippine Embassy or Consular Office at or nearest the place of execution.
The application requires filings fee equivalent to one fifth of one percent (0.2%) of the corporation’s authorized capital stock, plus one percent (1%) of such fee as legal research fee and Philippine Pesos: Five Hundred Ten (PhP510.00) for registration of by-laws.
The incorporation of a subsidiary will take at least one (1) month from submission of the complete documentary requirements with the SEC. The subsidiary is deemed incorporated upon the issuance of a certificate of incorporation in its favor.
Within thirty (30) days from receipt of the certificate of incorporation, the corporation’s stock certificates and stock transfer book must be registered with the SEC. Within the first five (5) days of the following month from receipt of the certificate of incorporation, the Documentary Stamp Tax on the subscribed shares must be paid to the BIR amounting to Philippine Pesos: Two (PhP2.00) for every Philippine Pesos: Two Hundred (PhP200.00) worth of subscription.
In addition, the subsidiary must register with the BIR by filing BIR Form 1903, with its attachments. The registration will take around one (1) week upon submission of all necessary documents.
The subsidiary must also secure business permits, such as a Mayor’s Permit, Locational Clearance, etc., from the local government of the city or municipality where its principal office is based. The permits will be issued in around two (2) weeks.
Independent Domestic Corporation
Considering the tedious requirements for the incorporation of a subsidiary, and noting the need to promptly establish the foreign company’s presence in the Philippines, it is possible to incorporate a corporation that does not fall within the restrictions of the Foreign Investments Act. In this case, such corporation will be independent from the foreign corporation but will be partly owned by foreign entities. This requires that the independent corporation have foreign ownership not exceeding forty percent (40%) of its authorized capital stock. Thus, at least sixty percent (60%) of the independent corporation’s owners should be Filipino entities. Accordingly, the minimum capitalization for the independent corporation will amount to Philippine Pesos: Twenty-Five Thousand (PhP25,000.00).
The process will be the same as the incorporation of a subsidiary, except that SEC Form F-100 will not be required and a certificate of bank deposit, in lieu of inward remittance, will instead be filed. The certificate of bank deposit will require the opening of a bank account with a minimum deposit of Philippine Pesos: Twenty-Five to Fifty Thousand (PhP25,000.00 – PhP50,000.00).
In this case, once the foreign corporation has the ability to remit at least US Dollars: Two Hundred Thousand (US$200,000.00) for the purposes of the independent Philippine corporation, then such amount may be remitted and be considered a capital investment into the independent corporation. The ownership of the independent corporation will be changed to include said amount as capital and the ownership structure will also change as a result. Only upon the foregoing will the provisions of the Foreign Investments Act apply to the independent corporation.
[1] Senior Partner at DivinaLaw. He holds a Master of Laws degree in International & Comparative Business Law, from the London Metropolitan University, UK; and a Masters Course in International Trade Law, University College London, UK, as a Chevening Scholar of the British Council. He earned his Bachelor Of Laws and AB Legal Management degrees from the University of Santo Tomas, Manila as a Rector’s Scholar.
[2] Section 1(c), Implementing Rules and Regulations of Republic Act 7042, or the Foreign Investments Act.
[3] Sec. 28(B), Republic Act 8424, or the National Internal Revenue Code (“NIRC”).
[4] BIR Ruling No. DA (VAT-003) 036-2008, July 15, 2008.
[5] Ibid.
[6] Sec. 3(a)(2), Implementing Rules and Regulations of the Foreign Investments Act.
[7] Sec. 123, Corporation Code.
[8] Sec. 22(H), NIRC.
[9] Sec. 28(A)(1), NIRC.
[10] Sec. 42(B)(1), NIRC.
[11] Sec. 8, Foreign Investments Act.
[12] Sec. 3(e).
[13] A.M. No. 00-8-10-SC, or the Rules of Procedure on Corporate Rehabilitation.
[14] Sec. 2, Batas Pambansa Blg. 68, or the Corporation Code of the Philippines.
[15] Sec. 8, Foreign Investments Act.
[16] Ibid.
[17] Sec. 3(e).
[18] Sec. 22(C), NIRC.
[19] Sec. 27(A), NIRC.
[20] Sec. 22 (I), NIRC.
[21] Sec. 28 (B)(1), NIRC.
[22] Section 174, NIRC, as amended.
[23] Sec. 29(A), NIRC.
[24] Sec. 28 (b)(5)(b), NIRC.
[25] Commissioner of Internal Revenue vs. Wander Philippines, Inc., G.R. No. L-68375, 15 April 1988.
[26] Sec. 14, Corporation Code.
