
Anti-Dummy Law 2 years ago
The allowable amount of foreign equity in businesses engaging in fully or partially nationalized economic activities in the Philippines is limited by several laws and regulations, such as the Foreign Investments Act of 1991, the Foreign Investment Negative Lists, and the Constitution of 1987.
Meanwhile, the Anti-Dummy Law was passed to prohibit the violation of the Philippines' foreign equity restrictions and nationalization regulations, which has inevitably changed due to the most recent changes to the country's regulations on foreign equity.
What is Anti-Dummy Law?
As amended, the Anti-Dummy Law or Commonwealth Act No. 108 aims to penalize individuals and businesses who violate regulations on foreign equity–prohibiting foreigners from participating in any nationalized activity.
The offender can be:
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Any citizen of the Philippines
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Any citizen of any other specific country. The proscribed offense includes using the "name" or "citizenship" of a Filipino citizen to evade foreign ownership laws.
For instance, if a company that engages in nationalized or partially nationalized economic activity names a foreigner as the legal owner or actual owner who conceals themselves behind the name of the Filipino Citizen, wherein they takes on the role of a shareholder or as beneficial owner.
What are the Penalties?
The Anti-Dummy Law imposes the following penalties for violations:
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Imprisonment for not less than five (5) nor more than fifteen (15) years
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A fine of not less than PHP 5,000 but not less than the value of the right, franchise, or privilege that was acquired or exercised in contempt of the Law's requirements.
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Public employees who take part in the violation must be fired.
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Companies that participated in the crime must be dissolved.
Note if the Filipino dummy voluntarily informs the authorities, he/she will be exempted from criminal liability. It is the foreigner who will be liable.
What is the 60/40 ownership rule?
The Supreme Court ruled that all classes of stock regardless of category that make up a corporation's capital stock must comply with the 60% Filipino ownership requirement, while the foreign investor can own the rest. There are two ways to test used in determining the nationality of the corporation
Control Test or Liberal Rule
Shares of corporations or partnerships with at least 60% of their capital owned by Filipino citizens are deemed to be of Philippine nationality.
Grandfather Rule
Only the number of shares corresponding to the percentage of Filipino ownership in the corporation that is less than 60% shall be declared Filipino. To determine the overall percentage of Filipino ownership, the aggregate total in the investing and investee firms must be traced, or "grandfathered."
It is important to remember that the Anti-Dummy Law solely refers to the limit imposed in the pertinent "constitutional or legal provisions."
Common industries where there are special rules and restrictions:
1) Retail Trade (Restaurants, Shops)
2) Mass media
3) Land
4) Practice of Profession
Meanwhile, the implementation and enforceability of the Anti-Dummy Law are greatly influenced by any changes made to nationalization laws.
A copy of the latest Foreign Investment Negative List as of 2022 is here.
To better understand this, consult with a legal expert or head on to Digest.ph for more startup resources.
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