Starting a Philippine business as a foreigner is complicated, and it is difficult to find accurate information or advice. Equally, most documents governing business activities (i.e. the Constitution, SEC rulings, Supreme Court rulings, etc.) are not well indexed on the internet, so self-educating yourself is inherently flawed.
Generally speaking, the Philippines has restrictions on the percentage of equity foreigners can own of a domestic/Philippine corporation. This fact is widely known, but the details are not easily understood. It is not easy to fully explain in a blog post either.
I highly recommend you speak to a lawyer about the implications of the law on your business. The law is very prescriptive, so it likely has some impact of you. The rest of this post will help inform you for that conversation.
Brief Summary of Foreign-Owned Equity Restrictions:
Some industries do not allow for any foreign owned equity. Others have defined caps which are outlined in the Philippine Foreign Investment Negative List (there have been numerous revisions to this over the years).
If the business is on the negative list, the cap is the cap. There is no getting around it. If it is not, there is a 40% restriction on foreign-owned equity. The cap can be lifted if the initial capitalization is 200,000 USD or more. It can be further reduced to 100K USD if the business employs 50 or more employees, or if it will be employing advanced technology (“Advanced Technology,” is defined by the Department of Science and Technology).
Companies that export 60% or more of their products/services do not have to comply with the capitalization requirement in order to be more than 40% foreign-owned.
For more on this, check out the Doing Business in the Philippines by Baker McKenzie. It is one of the few resources that outlines all of this with great clarity (though it is a few years old, and aspects of it are dated).
What this Means for Lean Software Startups in the Philippines:
The Philippines is more business friendly if you are exporting your product or services from the Philippines. Otherwise, as a foreigner, the legal restrictions make owning a Philippine business a giant hassle and very risky as it strips you of many protections.
- If the industry is on the negative list , you are bound by the equity cap. This relegates you to minority shareholder with no option for greater ownership.
- If the industry is not on the negative list, the capitalization requirements make owning more than 40% equity during the initial incorporation an absurd undertaking if you are operating a lean startup.
- You cannot be President, nor have a C-level position.
What about Nominee Shareholders?
It is important to preface this section with a quick disclaimer – Doing something illegal in the Philippines is a completely different discussion than doing something illegal and getting caught in the Philippines. I am going to address what is and is not legal with regards to Nominee Shareholders and foreign-owned equity.
In order to get around the restrictions, it is not uncommon for a foreigner to own more than the restricted cap allowed by using a nominee shareholder. However, the law is quite clear, and foreign ownership greater than the allowed amount is prohibited, including shares owned by a nominee shareholder. It is hard to get caught though. The nominee shareholder is often a spouse, and since the legal documents for nominee shareholders can be drafted and litigated anywhere, the Philippine authorities would be pressed to get a hold of incriminating evidence. This does not mean that it is legal though, but it does seem to be common practice.
Foreign ownership applies to all shares, including non-voting shares. This was made clear in the 2012 Supreme Court ruling that PLDT, the Philippine telecom provider, was greater than 40% foreign-owned when preferred stock was calculated along with common stock. PLDT chose to dilute its voting shares to comply with the ruling.
So what do you do?
I and other foreign-owned software companies that sell in the Philippines have done the following:
- Incorporate outside the Philippines in a place that does not have foreign equity restrictions.
- Regionally, Singapore is a great option. Hong Kong is less attractive because they do not have a tax treatise with the Philippines. Singapore does. I made the mistake of incorporating in Hong Kong which was disadvantageous from a tax perspective.. For a list of all Philippine tax treaties and tax rates, see the Deloitte International Tax Source.
- Sell into the Philippines – Taxes really matter here.
- Directly to customers. – This will burden the customers with a 30% withholding tax which the Philippine government requires that they pay on your behalf. The 30% tax can be reduced if your company is located in a country that has a tax treatise with the Philippines (hence why Singapore is a good option). To receive tax relief, each of your customers must file for it separately with the Philippine Bureau of Internal Revenue (BIR). Otherwise they are burdened with a 30% tax. As a foreign entity, you cannot file on their behalf.
- Via a Philippine-based Partner – The Philippine-based company will be subjected to restrictions on the Negative List and the partner will have to pay withholding taxes on your behalf. However the partner’s customers will not have to pay withholding taxes, and the partner can file for tax relief with the BIR. There are not a lot of advantages to this option other than more easily reducing the withholding tax burden.
- Via a Domestic Subsidiary or Branch Office – Both entities are subject to the Negative List and capitalization requirements. This is the option we chose for our startup. It allowed me, as the foreigner, to have a greater stake in our Hong Kong entity, and still have a stake in the local Philippine entity as well.
Startup Lawyers in the Philippines:
There are lots of firms in the Philippines that can help you setup a business. Most use a standard template for Articles of Incorporation and By-Laws.
If however you are not just starting a business, but starting a startup, you will struggle to find a local firm that knows the difference. Most of their templates do not include provisions that startups need to consider. Most assume that a startup is just another name for a small business. The real service they sell is filing paperwork, which should not be underestimated. There is a lot of bureaucracy in setting up a corporation in the Philippines.
If you are looking for Philippine startup advice and assistance beyond someone to push through your paperwork, there are a couple very good firms that can help: Dayana Consulting and Triple i Consulting. I have worked with both closely and highly recommend them.
This is a nuanced subject, so let me know if you have any questions. I am happy to help, or point you in the right direction.