Startup Guide: Foreign Investment 2 years ago

Foreign investments in the Philippines are regulated under Republic Act 7042, also known as the "Foreign Investments Act of 1991." 

This law aims to encourage foreign investors to improve the value of exports, create new jobs, develop resources, and contribute to the country's overall economic growth.

The standard ownership split is that Filipinos hold the more significant portion, which is sixty percent (60%), and foreign shareholders of forty percent (40%).

Who can invest in the Philippines?

Everyone is welcome to operate a business and make investments in the country, regardless of nationality, as long as those activities are not included on the Foreign Investments Negative List (FINL) of the Foreign Investments Act of 1991.

What is Foreign Investments Negative List (FINL)?

The FINL is a concise list of potential investment opportunities or pursuits that could be made available to foreign investors or maintained exclusively for Filipino citizens. 

It is a list of economic activities where foreign ownership is prohibited from exceeding forty percent (40%) of the equity capital. With certain limitations, foreign investors doing activities not in the FINL are allowed to invest 100% equity in the domestic market.

What types of investments fall within the Foreign Investments Act (FIA)?

The FINL provides two (2) lists: List A and B. They are classified as follows:

List A - This consists of activities reserved for Filipino citizens. While foreign ownership in any domestic or export businesses is restricted to a maximum of forty percent (40%) as defined by the Constitution and other related laws.

Activities that restrict foreign ownership:

• Mass Media

• Cooperatives

• Private Security Agencies

• The practice of all professions (Engineering, Medicine & Allied professions, etc.)

• Retail Trade Enterprises

• Private Security Agencies

• Small-scale mining

Activities allowing up to twenty percent (20%) of foreign equity

• Private radio communications network

Activities allowing up to twenty-five percent (25%) foreign equity

• Private Recruitment (local or overseas employment)

• Contract for construction of locally-funded public works, except:

1. Infrastructure/development projects covered in RA 7718

2. Foreign-funded projects that require to undergo international bidding

• Construction of defense-related structure contracts

Activities allowing up to thirty percent (30%) foreign equity:

• Advertising

• Ownership of Private lands

• Ownership of educational institutions

Activities allowing up to forty percent (40%) foreign equity:

• Exploration & development of natural resources

• Ownership of private lands

• Ownership of condominiums

List B - This consists of activities where foreign ownership is restricted by law due to the following reasons:

• Defense or law enforcement-related activities, such as manufacturing firearms, gunpowder, etc., that call for Philippine National Police (PNP) authorization

• Implications on public health and morals

• Small and medium-sized businesses.

For the complete list, you may check Foreign Investment Negative List.

Can foreign nationals still invest 100% capital in the domestic market?

Suppose foreign ownership of domestic market businesses is not prohibited or restricted by the Constitution, current law, or the Foreign Investment Negative List under Section 8 of FIA. In that case, foreign investors may own up to one hundred percent (100%) of domestic market enterprises with the following conditions:

1. If Small and medium-sized domestic market enterprises have paid-up capital of at least $200,000, which may be reduced to $100,000 if specific requirements are met:

   1. The activity is involved advancing technology as determined by the Department of Science and Technology (DOST)

   2. Provide jobs to at least fifty (50) direct employees.

2. The goods or services offered are intended for export.

As amended, the Retail Trade Liberalization Act of 2000 makes it easier for foreign retailers to invest in or operate a retail business in the Philippines to boost economic growth by lowering prices for Filipino consumers, increasing employment opportunities, promoting tourism, supporting small manufacturers, and enabling Philippine goods and services to compete globally through the liberalization of the retail trade sector.

Qualification of foreign retailers 

No foreign retailer may conduct retail business in the Philippines unless they meet all of the requirements listed below:

• The minimum investment per store for foreign retailers who conduct retail business for more than one (1) physical store must be at least PhP 10 million.

• Filipino retailers are allowed to do business in the country of origin of the foreign retailer.

• The foreign retailer must have a minimum of PhP 25 million in paid-up capital.

• Five (5)-year track record in retailing

Implementing Agency 

Instead of the DTI, the SEC now oversees and regulates foreign retailers who have created or plan to establish corporations, groups, or partnerships involved in retail trade. Foreign retailers that already have or will open sole proprietorships in the Philippines are subject to regulation by the DTI.

Penalty 

The penalty for breaching the RTLA is a fine of not less than one million pesos (P1,000,000.00) but not more than twenty million pesos (P20,000,000.00), and an imprisonment term of not less than six (6) years and one (1) day but not more than eight (8) years. 

• Anti Dummy Law – Prohibits using a proxy arrangement, sometimes known as a ‘dummy,’ to carry out an illegal transaction under Philippine law and foreign equity restrictions. Penalties are five (5) to fifteen (15) years in prison or a hefty fine which applies to both foreigners and the Filipino dummies they employ.

There are a ton of laws regulating foreign investment, and there are legal processes that must be followed. If you are considering investing in the Philippines, you may contact a legal expert to help you with the procedures you must take. 

For more startup business and law resources, head on to Digest.ph.