Types of business structures for company registration in Philippines

Since 2003, Healy Consultants Group assists multi-national Clients’ with i) Filipino company formation and ii) multi-currency corporate bank account opening and iii) regulatory license approvals and iv) accounting and tax support. This web page will help our client choose the optimum corporate structure.

The Philippines branch office

• A branch office is treated as an extension of its parent foreign corporation, therefore can conclude contracts with local entities in its parent’s name and engage in revenue generating activities in the same manner as its parent. A branch is prohibited from performing activities outside the scope of activities of its head office. Liabilities of the branch are considered liabilities of the head office.
• The branch office must be registered with the Philippines SEC and the overseas head office must invest at least US$200,000 in the country. However, this amount is reduced to US$100,000 if Philippines branch office intends to create at least 50 jobs or engage in a business that involves advanced technology. If the branch plans to be an export-oriented business that exports 60% or more of its total revenue, it is exempt from the US$200,000 minimum paid-up capital requirement and can register with as little as US$100.
• To protect future creditors, a branch office must place a security deposit with the SEC. In year one, it is approximately US$ 9,000. Annually, the deposit is increased to 2% of the branch office’s gross income.
• As well as the standard corporation tax rate of 20%, profits of a Philippine branch suffer an additional profit remittance tax of 15%;
• While Philippines branch registration does not require resident directors and shareholders, the Philippines branch must appoint one country representative that can be either i) a local resident Filipino citizen or ii) a domestic corporation or iv) a foreign national with a valid Filipino Visa.
• To register a Filipino branch, our Client parent company must supply us with i) a legalised or apostilled Board Resolution that authorises the Filipino branch formation and ii) legalised or apostilled Audited Financial Statements and iii) legalised or apostilled Certificate of Incorporation and Articles of Incorporation and By-laws and iv) a certificate of Inward Remittance of the minimum paid-up share capital and v) valid IDs of the shareholders and directors and bank signatory.
• Following receipt of the above, Healy Consultants Group will i) secure a license to do business as a branch office from the SEC and ii) open a local bank account and iii) register the entity with the Bureau of Internal Revenue (BIR) and secure a Tax Identification Number (TIN) and register the books of accounts and official receipts and iv) register the branch office with the labor welfare agencies such as the Social Security System, Department of Labor and Employment, Philippine Health Insurance Corporation and Home Development Mutual Fund.

The Philippines representative office

• Opening a representative office (RO) can be a useful and cost effective first step to explore business opportunities in the Philippines. ROs cannot conduct revenue generating activities such as the execution of contracts, receipt of funds, sale or purchase of goods, or provision of services.
• The RO can provide a wide range of support activities to the overseas head office including i) disseminate foreign market information and ii) act as a communication center and promote company products and iii) quality control of products for export and iv) market research and v) act as a liaison office between its head office and the latter’s Philippine-based clients and vi) promote the export of Philippine products and vii) render, assist, and give technical know-how and training to existing and future customers of its foreign principal’s products and viii) inform potential customers of price quotations of the head office and ix) attend to the needs of end-users of its foreign principal’s products in the Philippines, advise them on the proper care and maintenance of their equipment, and communicate to its head office problems that call for consultations.
• The representative office is also required to deposit to a Filipino corporate bank account in Philippines a security bond of at least US$30,000;
• As a representative office does not derive income from its operations, it is not subject to income tax.

The Philippines corporation or domestic subsidiary

• A Filipino subsidiary is known as a foreign corporation which is either wholly owned or at least majority-owned by a foreign “parent” company. The subsidiary is also known as a domestic Filipino corporation because it is incorporated under the laws of the Philippines.
• Compared to a Branch Office, a domestic subsidiary has the advantage of having a separate and distinct legal personality from its parent foreign corporation. Consequently, the parent company is shielded from the subsidiary’s creditors.
• The powers of a Domestic Subsidiary are exercised by its Board of Directors, which shall consist of a minimum of two directors but not more than 15 Directors. Only an individual who owns at least one share of stock of the corporation is qualified to be elected as director. Foreign nationals can be elected as directors in proportion to their equity participation.
• The mandatory corporate officers of a corporation are i) the president, who must also be a director and ii) the treasurer, who must be a resident of the Philippines and iii) company secretary, who must be a resident and citizen of the Philippines. The president may not concurrently sit as secretary or treasurer of the corporation.
• The Filipino subsidiary must have a minimum paid-in capital of US$200,000 if i) it is primarily serving the domestic market ii) more than 40% foreign-owned equity owned. This capitalization requirement may be reduced to US$100,000 if the activity involves advanced technology as determined and certified by the Department of Science and Technology or the entity employs at least 50 direct employees as certified by the appropriate regional office of the Department of Labor and Employment. Depending on the industry sector and business activity, corporations may require a higher paid-in capital and/or a higher Filipino ownership percentage. As with other Filipino entities, the US$200,000 minimum capital requirement does not apply to a Domestic Subsidiary that qualifies as an Export Enterprise (i.e. an enterprise that exports 60% or more of its output).
• A Philippines corporation is allowed to issue invoices after its registration certificate has been issued by SEC and the company has completed the post incorporation registrations including i) securing the Major’s permits, Fire safety and sanitary certificates ii) completing the tax registration with the BIR and iii) secured Government printed receipts/invoices. A company can only hire employees after registering for social security with the Philippes Health Insurance and Home Development Mutual Fund.
• Immediately after the company is operational, the company has monthly and quarterly statutory reporting obligations including i) quarterly advance corporation tax payments and ii) monthly and quarterly VAT returns and iii) monthly and quarterly withholding tax returns and iv) monthly payroll for staffed companies.

Philippines One Person Corporation (OPC)

• An OPC is the ideal corporate entity for foreign entrepreneurs looking to do business in the Philippines. An OPC has a single shareholder, who is also the company director and president. The shareholder can be resident overseas. The shareholder can only be a natural person or trust. Unfortunately, the OPC cannot have a corporate shareholder.
• The OPC has a separate legal identity from the single stockholder, which allows our client to limit his liability and to gain complete control and authority to manage his business affairs; without the need to seek consensus and approval from a board of directors or stockholders
• A foreign owned OPC must deposit a paid-up share capital of US$200,000 before OPC incorporation is complete. Refer to the OPC registration page for more details.
• An OPC must appoint a company secretary (who must be a Philippines citizen), a treasurer (any nationality but must be resident in the Philippines). Officers must be appointed within 15 days establishing the OPC, and the Securities and Exchange Commission (SEC) must also be notified within five days of their appointment.

The Philippines free zone company

• Foreigners willing to register an export-oriented businesses can register a subsidiary in a special economic zone (SEZ). See also this page for further details on tax benefits available in the Philippines free zones.
• Special economic zones (SEZ) are governed by the Philippine Economic Zone Authority (PEZA). These zones are export-focused, using local raw material inputs. There are over 400 SEZs operating in the Philippines, classified into five categories: manufacturing, information technology, agro-industrial, tourism and medical tourism.
• Businesses looking to leverage the advantages of an SEZ can register through PEZA’s Electronic Application for Registration System (EARS). To secure free zone approval, PEZA will need to review i) a formal application and ii) the SEC Certificate of Registration and iii) the Articles of Incorporation and By-Laws and iv) the Secretary’s Certificate Authorizing Registration with PEZA and v) a Project Brief and vi) an anti-Graft Certificate and vii) a Project Feasibility Study.
• Setting up operations within PEZA’s special economic zones offers numerous tax incentives including i) zero corporation tax for four to seven years and ii) tax and duty-free importation of capital equipment, spare parts, and accessories and iii) a double Profit & Loss statement deduction for labor expenses and iv) unrestricted employment of foreign nationals in supervisory, technical, or advisory positions.
• Businesses located in ecozones are considered outside customs territory and are allowed to import capital equipment and raw material free of customs duties, taxes, and other import restrictions. Goods imported into ecozones may be stored, repacked, mixed, or otherwise manipulated without being subject to import duties and are exempt from the Bureau of Customs’ Selective Pre-shipment Advance Classification Scheme.

The Regional Headquarters RHQ)

• An RHQ is an administrative branch of a foreign company and can only operate as a local cost center. All its expenses are financed by its overseas parent company. The. Liabilities of the Filipino branch are considered liabilities of the overseas head office.
• The RHQ is not allowed to earn income in the Philippines. It is prohibited from engaging in income-generating activities. Unlike a domestic subsidiary and a branch office, an RHQ is not allowed to solicit or do business or earn income in the Philippines. Unlike a Representative Office, an RHQ is not allowed to deal with the clients of its principal, even for purposes of products and/or services promotion.
• The primary function of the RHQ is to support other Group entities in the Asia-Pacific Region providing i) supervision and ii) communications and iii) coordination.
• To comply with SEC requirements, the RHQ must remit annually at least USD50,000 into the Philippines to cover its operations costs. This remittance must be completed within 30 days from the anniversary date of branch registration. RHQ funds are utilized for salaries, rental of offices, transportation and communication expenses, and other costs necessary for the operation and maintenance of the RHQ office.
• An RHQ does not suffer corporation tax because the entity does not earn or derive income from the Philippines and merely act as an administrative cost center. An RHQ is exempted from VAT re purchase and lease of goods and services. An RHQ is exempt from local taxes, fees and charges.

The Philippines regional operating headquarters (ROHQ)

• An ROHQ is also a branch of a foreign company, but can receive income from other Group entities in Asia-Pacific Region. All branch expenses are financed by its overseas parent company. The liabilities of the Filipino branch are considered liabilities of the overseas head office.
• The ROHQ can only receive income from other Group entities in Asia-Pacific Region. The ROHQ can only provide the following professional services to other Group entities in Asia-Pacific Region:
  • General administration and planning
  • Marketing control and sales promotion
  • Business planning and coordination
  • Training and personnel management
  • Sourcing of raw materials and components
  • Logistics services
  • Corporate finance advisory services
  • Technical support and maintenance
  • Data processing and communication
  • Business development
  • R&D services and product development
• The ROHQ is prohibited from selling and distributing goods and services. An ROHQ is not allowed to directly or indirectly solicit, market or engage in the sale and distribution of goods and services of or on behalf of any other entity.
• For the first three years after branch formation, the ROHQ suffers corporation tax of 20% on annual net profits. Thereafter, the entity will pay the higher of i) 20% of annual net profits or ii) a minimum corporate income tax (MCIT) of 2% of annual gross income. In addition to the above, an ROHQ suffers the 15% Tax on Branch Profit Remittances. To legally minimise taxes, we assist our clients apply for tax incentives from the Investment Promotion Agency and avail of the tax holidays under the CREATE Act.
• Compared to other Filipino entities, the ROHQ enjoys the following benefits:
  • Exemption from all kinds of local taxes, fees, or charges, except real property tax on land improvements and equipment
  • Tax and duty-free importation of equipment and materials for training and conferences, provided they are not locally available
  • Multiple entry visa for expatriates, including their spouse and unmarried children below 21 years old
  • Exemption from securing an Alien Certificate of Registration
  • Preferential tax rate of 15% on salaries, annuities, and other compensation applicable to expatriates
  • Tax and duty-free importation of used household goods and personal effects
• ROHQs do not require a specific minimum paid-up capital, although proof of inward remittance (US$200,000) is required during branch formation. Annually thereafter, the parent company must remit into the country such amount as may be necessary to cover its operations in the Philippines but not be less than US$200,000.

Doing business in the Philippines through an agent

• As significant amount of paid-up capital is 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. 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.
• Agents act as representatives of suppliers and do not take ownership of the products they are trying to sell. They are usually paid on a commission basis, which provides an incentive for them to drive sales. Standard agent commissions range from between 5 and 10 per cent in the Philippines but can vary by sector. Being based in-market they will often represent several complementary products or services. They can be retained exclusively as the sole agent for a company’s goods or services or as one of several for the exporter.
• Unlike agents, importers and distributors buy the goods from exporters and then resell them to local retailers or direct to consumers. In some cases, an importer/distributor may sell to other wholesalers who then on-sell to retailers or consumers. Importers and distributors may carry complementary and competing lines and usually offer after-sales service. They earn money by adding margins to product prices. Margins are generally higher than agent fees because importers and distributors have higher costs, such as for carrying inventory, marketing and extending credit for customers. There are two types of importers/distributors in the Philippines: stocking distributors and indenters. Stocking distributors are bound by a contract to buy and sell a set number of items stated in their agreement with a foreign supplier. Indenters act as brokers between foreign suppliers and the end user. They help foreign suppliers save costs by avoiding the need to stock high-end products and capital outlays for expensive equipment.