PH12 Legal Framework:Layout 1 - syciplaw.com

1 THE REPORTThe Philippines 2012 POLITICSENERGYINDUSTRYECONOMYTOURISMCAPI TAL MARKETSBANKINGREAL ESTATECONSTRUCTIONBPOTELECOMS & ITMINING9781907065569223 Legal FrameworkDifferent ways of setting up shop locallyLicensing requirements for foreign companiesComparison of subsidiary and branch operationsTransferability of shares, liability and continuityLEGAL FRAMEWORK OVERVIEWA subsidiary or a branch may qualify for tax and other incentivesThe subject of foreign corporations doing business inthe Philippines is perhaps better understood in thecontext of their involvement in the flow of capital,goods and services into the country. In this context, abusiness is a vehicle through which such a flow is car-ried out by the foreign corporation concerned. In the Philippines, a common business vehicle iseither a domestic subsidiary in the form of a stock cor-poration, or a local branch of a foreign corporation.

2 Inthe case of a branch, it is the foreign corporation itselfthat conducts business, considering that the localbranch is merely an extension of the juridical person-ality of the head office abroad since the branch andthe head office are one and the same juridical entity. Under the National Internal Revenue Code (NIRC),such juridical entity is categorised as a resident for-eign corporation (a foreign corporation engaged intrade or business within the Philippines). In contrast, adomestic subsidiary acquires a separate juridical per-sonality distinct from its foreign parent corporation. Theforeign corporation has been domesticated or natu-ralised through its local subsidiary. However, since thesubsidiary has a juridical personality of its own, sepa-rate from the parent foreign corporation, the latter iscategorised as a non-resident foreign corporation (aforeign corporation not engaged in trade or businessin the Philippines), while the former is classified as a domestic corporation.

3 In instances where a foreign corporation s econom-ic contact with the Philippines is only occasional orepisodic, the establishment of a business vehicle maynot be warranted. A business presence seems appro-priate only when the entry by a foreign corporation intothe economic processes of the country is relativelycontinuous and permanent in nature. In fact, the taxtreaties of the Philippines would call a business pres-ence here through a branch a permanent establish-ment . Whether or not a foreign corporation has toestablish locally a business presence depends onwhether or not it is intent on doing business in thePhilippines as that term is defined in the Foreign Invest-ments Act of FOREIGN CORPORATION: Under Section 123 of theCorporation Code, a foreign corporation is one formed,organised or existing under any laws other than thoseof the Philippines and whose laws allow Filipino citi-zens and corporations to do business in its country orstate.

4 The concept of reciprocity is folded into the def-inition of a foreign corporation. However, this onlymeans that a company incorporated outside the Philip-pines will not be allowed to do business in this coun-try if its jurisdiction of incorporation does not grant areciprocal right to a Philippine corporation. In otherwords, the concept of reciprocity in Section 123 ismeant to be a condition for the issuance of a licenceto do business in the Philippines. It does not affect thestatus of the foreign corporation as a juridical there is absence of reciprocity, the foreign corpora-tion will simply not be allowed to come in. Reciprocityis also not a condition for the right of a foreign corpo-ration not doing business in the Philippines to file a suitin the BUSINESS: The Supreme Court has applied thecontinuity test in determining whether or not a foreigncorporation is doing business in the Philippines.

5 As ear-ly as the case of the Mentholatum Co., Inc., et al. , et al., (1941), it was ruled that the term doing business implies a continuity of commercialdealings, and contemplates, to that extent, the perform-ance [by the foreign corporation] of acts or works orthe exercise of some of the functions normally incidentto, and in progressive prosecution of, the purpose andobject of its organisation . This broad concept has found its way into Section3(d) of the Foreign Investments Act of 1991, which spec-ifies continuous commercial dealings, along with cer-tain other acts or activities, as constituting doing busi-ness in the Philippines. Thus:a)Soliciting orders, [or] service contracts;b)Opening of offices or branches;224 Clear and simpleA look at the Legal aspects of doing business FRAMEWORK OVERVIEWc)Appointing representatives or distributors domi-ciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling 180 days or more;d)Participating in the management, supervision or control of any domestic business, firm, entity or cor-poration in the Philippines.

6 Ande)Any other act or acts which imply a continuity ofcommercial dealings or arrangements, and contem-plate to that extent the performance of acts or works,or the exercise of functions normally incident to, andin progressive prosecution of, commercial gain orthe purpose or object of the business , the following acts do not constitute doing busi-ness in the Philippines under the implementing rulesof the Foreign Investments Act of 1991:1)Mere investment as a shareholder by a foreign enti-ty in domestic corporations duly registered to dobusiness, and/or the exercise of rights as suchinvestor;2)Having a nominee director or officer to represent its interest in such corporation;3)Appointing a representative or distributor domiciledin the Philippines which transacts business in therepresentative s or distributor s own name andaccount;4)The publication of a general advertisement throughany print or broadcast media;5)Maintaining a stock of goods in the Philippines sole-ly for the purpose of having the same processed by another entity in the Philippines;6)Consignment by a foreign entity of equipment witha local company to be used in the processing of prod-ucts for export;7)Collecting information in the Philippines.

7 And8)Performing services auxiliary to an existing isolatedcontract of sale which are not on a continuing basis,such as installing in the Philippines machinery it hasmanufactured or exported to the Philippines, serv-icing the same, training domestic workers to oper-ate it, and similar incidental 1 above considers mere investment as a share-holder by a foreign entity in domestic corporationsduly registered to do business as not doing businessin the Philippines by such foreign entity. Thus, a foreigncorporation that establishes a local subsidiary is itselfnot doing business in the Philippines. Similarly, equity investment by a foreign corporationin a local affiliate company will not constitute doing busi-ness. In either case, it is the subsidiary or affiliate (eacha juridical entity in its own right) that will be doing busi-ness locally.

8 On the other hand, item 2 clarifies that hav-ing nominee directors or officers in the subsidiary oraffiliate will not be deemed doing business. It would bea different matter, however, if the investing companyitself were to become the management company ofthe subsidiary or affiliate. That would be directly par-ticipating in the management, supervision or control of a domestic corporation which is an act of doingbusiness under Section 3(d) of the Foreign InvestmentsAct of 1991. The continuity test was defined in aSupreme Court ruling B. Van Zuiden Bros., Ltd. v. GTVLM anufacturing Industries, Inc. (2007). There, theSupreme Court ruled that: Actual transaction of busi-ness within the Philippine territory is an essential req-uisite for the Philippines to acquire jurisdiction over aforeign corporation and then require the foreign cor-poration to secure a Philippine business licence.

9 Accord-ingly, even if there is a series of transactions implyinga continuity of commercial dealings , the foreign cor-poration will not be doing business in the Philippines,if the perfection and consummation of these trans-actions were done outside the Philippines . This rulingwas reiterated by the Supreme Court in Cargill, Inc. Strata Assurance Corporation (2010).DIMENSIONS:The concept of doing business in thePhilippines arises in three contexts or dimensions. Thefirst relates to the qualifications of the foreign enter-prise for its formal entry into the Philippine touches on the licensing requirement. The secondaspect concerns the amenability to suit of a foreign cor-poration. The third dimension has to do with the taxtreatment of the foreign enterprise as a resident or anon-resident foreign REQUIREMENT:A foreign corporation willhave the right to transact business in the Philippinesafter it has obtained a licence for that purpose fromthe Securities and Exchange Commission (SEC).

10 Thislicence is necessary because a foreign corporation hasno Legal existence in the Philippines unless it is recog-nised in the country as a Legal entity. Recognition is evi-denced by the licence issued by the SEC. In certain cases, the SEC will not issue the licencewithout a favourable endorsement from the govern-ment agency that has supervision over the contemplat-ed business activity of the applicant. The endorsementwill be in the form of a certificate of authority from, forinstance, the Bangko Sentral ng Pilipinas (BSP) forbanks, or the Insurance Commission for insurance com-panies. The primary franchise of the foreign corpora-tion s business vehicle in the Philippines is its SEC licence,while its secondary franchise is its certificate of author-ity from any other relevant government agency (suchas the BSP or the Insurance Commission).