Maximing Returns on Foreign Investments in the Philippines

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Maximizing Returns on Foreign Investments in the Philippines

Submitted by:

Anne Jamaica Eya-Bagaloyos

Submitted to:

Atty. Ricardo Puno, Jr., LL.M.

San Beda College
Graduate School of Law

I. Introduction

The Philippine government is encouraging foreign investors to invest in the country with businesses that will provide opportunities in employment, develop the productivity of resources, heighten the volume as well as the value of exports and provide the future development of the economy’s foundation.

The Foreign Investments Act (“FIA”) of 1991[1] liberalized the entry of foreign investments into the Philippines. Section 2 of the FIA provides:

“It is the policy of the State to attract, promote and welcome productive investments from foreign individuals, partnerships, corporations, and governments, including their political subdivisions, in activities which significantly contribute to national industrialization and socio-economic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws. xxxxxx”

Under the FIA, foreign investors are generally treated like their domestic counterparts and must register with the Securities and Exchange Commission (“SEC”) (in the case of a corporation or partnership) or with the Department of Trade and Industry‘s Bureau of Trade Regulation and Consumer Protection (in the case of a sole proprietorship).

In line with the Government’s thrust of making Philippines a competitive country in the global environment through various investments, investors, both existing and prospective should be well informed of the economic environment and regulations. Information about the economic environment of the country and industry is essential because it will help investors assess possible opportunities and avoid possible threats at the same time. Regulations, on the other hand, provide the guidelines with which investments must be done. It is therefore important to provide the investors with options that will assure them of an acceptable rate of return.

II. Legal Forms Available and the Tax Effects

There are several types of forms that a foreign investor may choose from in establishing operations in the Philippines.

A. Organized under Philippine Laws

1. Sole Proprietorship – a business structure owned by an individual who has full control/authority of its own.

Tax Effects:
An alien individual, whether resident or not of the Philippines, is taxable only on income derived from sources within the Philippines.[2]

2. Partnership - By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.[3] A partnership is treated as a juridical person, having a personality separate and distinct from that of its members.

Tax Effects:
A partnership is taxed like a corporation.[4]

3. Corporation – A corporation is a juridical person with personality separate and distinct from its stockholders.[5] Tax Effects:
A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.[6]

B. Organized under Foreign Laws

1. Branch Office – a branch office carries out the business of the head office and derives income from the host country.[7] A foreign inward remittance of at least US$200,000 or its peso equivalent is required for branch office of a foreign corporation.[8]

2. Representative Office - deals directly with the clients of the parent company, but does not derive...
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