Business entities in Philippines
Entrepreneurs willing to setup a business in Philippines are unable to do so through the establishment of a limited liability company, because such business entity is not provided by local regulations. Consequently, the easiest way to start doing business locally is to register a branch of a foreign company. Formation of a regional headquarters is also an attractive way for multinationals to manage the Asian subsidiaries while benefiting from an exemption from Philippines corporate income tax on distributed dividends.
Trading in the Philippines with a foreign entity
The Philippines branch office
- In accordance with Philippines regulations, foreign companies can open a branch office in the Philippines, provided they does not engage in industries restricted to foreigners. While Philippines branch registration is the best strategy to avoid the appointment of resident directors and shareholders, this business entity still requires the appointment of one country representative: the person assuming this function must be ordinarily resident in the Philippines and (if foreign national) allowed to work in the country;
- The branch office must be registered with the Philippines Securities and Exchange Commission (SEC) (SEC) and its foreign head office will be required to invest US$200,000 in the Archipelago, although such amount may be reduced to US$100,000 if the branch office setup leads to the creation of at least 50 jobs. If the branch is planning to trade with retail customers, the minimum investment is however increased to US$3 million, in accordance with the Retail Trade Liberalization Act of 2000.
- Best uses for a Philippines branch: the registration of a branch allows our Clients to minimize the requirement to appoint resident directors. It is hence the perfect choice for most types of trading and manufacturing businesses having no long term plans to hire a local management team.
The Philippines representative office
- While Philippines regulations allow foreign companies to open representative offices, such business entities are not allowed to pursue production-related or commercial activities in the country. Consequently, this entity can only engage in i) market research and ii) promoting the business of the parent company. The representative office is also required to deposit on a corporate bank account in Philippines a security bond of at least US$30,000;
- Best uses for a Philippines representative office: A representative office is a good option for Clients willing to establish a local presence in the Philippines to venture the local market, without conducting commercial or productive operations.
Trading in the Philippines with a local entity
The Philippines joint-stock corporation
- Foreign entrepreneurs reluctant to register a branch in the Philippines can alternatively form a joint stock corporation. To do so, they will first need to appoint a Board of Directors comprising at least 5 members, each of them possessing at least 1 share of the company. Except in industries restricted to foreign investment, these owners can be of any nationality, although foreigners living outside of the Philippines will not be able to own 100% of the company due to the requirement to appoint three resident directors holding each one share;
- While a Philippines joint-stock corporation can be setup by locals with only US$150 of share capital, such requirement is increased for foreigners to i) US$100,000 if the company has more than 50 employees or ii) a minimum US$200,000 if otherwise. For foreign owned companies planning to trade with retail customers in the Philippines, the minimum capital requirement is increased to US$3 million;
- For our Clients willing to sign as soon as possible contracts and invoice their customers, we offer fast setup solutions, that is to say companies registered with Philippine nominees acting as temporary professional passive shareholders & directors. Immediately after business setup, we transfer the shares to our Client and secure the permits and licenses required by the business.
Post registration requirements
- A Philippines joint stock corporation is allowed to start operations only after its registration certificate has been issued and the company has been registered with i) the Bureau of Internal Revenue ii) the Philippines Department of Trade of Industry iii) the Social Security Authority iv) The Home Development Mutual Fund and v) the municipality where the JSC has its headquarters;
- After incorporation, this type of Philippines business entity will be required to submit i) audited annual financial statements and ii) an annual return, including i) the names and addresses of all owners, directors and managers ii) the company’s capital composition iii) investments made by the company and iv) retained earnings and dividends granted to shareholders.
- Best uses for a Philippines joint stock corporation: We usually recommend our Client to consider registering a joint stock company only if they have long term plans to recruit (or relocate) the management team of the business to the Philippines.
The Philippines free zone company
- Foreigners willing to register export-oriented businesses can register a subsidiary in a special economic zone (SEZ). After joint stock company setup (see above section for further details re requirements) the company will be required to submit a business plan to the SEZ authority;
- Healy Consultants will advise our Client re the amount of investment we expect the SEZ authority to require, as well as other relevant criteria for eligibility (job creations, annual turnover and technology transfers). See also this page for further details on tax benefits available in the Philippines free zones;
- Best uses for a Philippines free zone company: we usually recommend our Clients to seek free zone registration in the Philippines when they expect to make a significant investment and to export a significant percentage (over 75%) of their products overseas. See also this page for a comparison of Asian manufacturing companies.
The Philippines foundation (non stock non profit corporation)
- Foreigners willing to create a charitable foundation in the Philippines usually register a non-stock non-profit corporation. The main difference with a joint stock corporation consists in the impossibility to distribute dividends to the owners: the business must be run as a non profit;
- The Philippines Bureau of Internal Revenue will legally exempt the foundation from corporate income tax and allow the business to include foundation in its name, provided that sufficient evidence is provided that the entity’s sole purpose is to finance and run religious, charitable, scientific, athletic, or cultural activities;
- Best uses for a Philippines foundation: a Philippines foundation can be used to finance charitable activities in the Philippines and abroad.
The Philippines sole proprietorship
- Locals willing to start a business in the Philippines usually setup a sole partnership, the simplest structure available in the country. Such business entity can be established i) without share capital requirement and ii) by a single individual, who will be both the owner and director of the partnership. Except in sectors restricted to foreign investment, the company’s owner may be of any nationality but will be required to provide evidence of residency in Philippines during the registration process;
- Unlike a limited liability company, a sole proprietor will be completely liable for losses made by his business. Such risk may be limited for our Clients running a small business in Philippines such as i) a restaurant ii) a guesthouse or iii) a small shop. To protect our Clients’ personal assets, Healy Consultants recommends the setup of a Philippines joint stock corporation, especially for Clients expecting their business to i) have important annual sales ii) to involve complex operations and/or iii) to be run from abroad;
- While the setup process of a sole proprietorship is simpler than a corporation’s, our Client will still be required to register his business with i) the Philippines Department of Trade and Industry ii) the nearest municipality iii) the Bureau of Internal Revenue (for tax and VAT) and iv) the Social Security Authority.
- Best uses for a Philippines sole proprietorship: registration of a sole proprietorship is an option only available to our Clients already living in the Philippines. It is also recommended only for smaller businesses, due to the liability risk for the business owner.
Holding global investments with a Philippines holding company
The Philippines holding company (regional headquarters)
- A Philippines holding company, also known locally as a regional headquarters, can only be setup by multinationals running operations in at least one Asia-Pacific country. While the holding company may conduct some operations in Philippines, such business entity should be mostly used for the management and supervision of its Philippines and other Asian countries’ subsidiaries. A holding company requires i) a minimum initial investment of US$200,000 upon Philippines business setup and ii) remittances from its foreign subsidiaries of at least US$50,000 per year;
- The Philippines holding company will benefit from attractive tax advantages, including i) 100% exemption of corporate tax on all earnings received from abroad, if the holding company conducts no operations in Philippines or ii) a reduced corporate tax rate of 10% if otherwise. Philippines holding companies will also not suffer i) taxation from local authorities ii) custom duties on imported equipment and cars and iii) easier visa requirements for their employees;
- Best uses for a Philippines regional headquarters: a Philippines regional headquarters is a great holding vehicle for the Asian subsidiaries of a Group.
The Philippines regional operating headquarters (ROH)
- The regional operating headquarters (ROH) differs from the Philippines regional headquarters in the sense that it also render management services to its subsidiaries and sister companies from the Philippines (services to companies which are not part of the Group are disallowed by Philippines Laws);
- The ROH will benefit from a reduced corporate income tax rate of 10% on its locally sourced income earnt through provision of the above services;
- Best uses for a Philippines regional operating headquarters: The ROH is a good vehicle to setup a holding company having local staff in the Philippines in charge of management and oversight of the Asian trading, financing and manufacturing activities of a multinational.
Doing business in the Philippines through an agent
- Because of the significant amount of paid-up capital required to register a branch or a foreign-owned company in the Philippines, our Clients often decide to start business with a local distributor/agent instead. Distribution contracts often include a commission of 10% on all local sales made by the distributor, and a 30 days’ notice period to terminate the contract;
- Most distributors either act as i) stocking distributors, in which case they are required to keep an inventory of the products to be sold in the Philippines or ii) indenters, in which case they only act as a broker between our Client and the end-customer, without a need to keep an inventory. In both cases, distributors are however required to seek registration with the Philippines Securities and Exchange Commission.