Foreign Corporations in the Philippines

With the good business potentials in the Philippines, it is unsurprising that foreign corporations and entities are doing business in the Philippines in a way or another. A foreign corporation in the Philippines could either be a resident foreign corporation (RFC) or a non-resident foreign corporation (NRFC). A non-resident foreign corporation is one which does not have any presence in the Philippines but derives income in the Philippines such as extending foreign loans earning interest income, investing in shares of stocks of domestic corporations earning dividends, or leasing out assets in the country for a fee – aircrafts,sea vessels, cinimatographic films. A resident foreign corporation is one which establishes its physical presence in the Philippines – e.g. through an office,a branch or a sales office.

Foreign corporations or entities could do business in the Philippines as a domestic corporation or as a resident foreign corporation. As a domestic corporation or a local corporation registered with the Securities and Exchange Commission (SEC) and other government agencies in the Philippines, they can own equity of up to 100% depending on the type of industry, target market, and capitalization. A resident foreign corporation is a foreign corporate entity is being brought to the Philippines and secured a licensed to do business in the Philippines with the Securities and Exchange Commission in the Philippines. Hereunder are the common forms of resident foreign corporations qualified for a license to do business:

Philippine branch of foreign corporation

A philippine branch is a foreign corporation in the Philippines that is allowed by the SEC to do business in the Philippines in such activities it normally does in its home country. It is normally required a capitalization of US$200,000, unless its activities involve advance technology or employ at least fifty (50) direct employees where it could be capitalized at US$100,000.  A resident agent in the Philippines is required for formal communications and legal processes, and an initial investment of P100,000.00 actual worth of securities in the Philippines subject to incremental adjustment of 2% of its gross income. It is normally taxable in like manner as a local corporation – 12% value added tax in the Philippines, 30% corporate income tax in the Philippines, and such other applicable internal revenue taxes. Repatriation of its operational income in the Philippines is subject to 15% branch profit remittance tax.

It could be allowed to register with Philippine Economic Zone Authority (PEZA) for certain tax incentives – e.g. Income tax holiday, 5% special tax regime based on gross income. This entity is commonly used by business process outsourcing in the Philippines (BPO), call centers, and other outsourcing companies in the Philippines.

Philippine Regional operating headquarters (ROHQ)

A regional operationg headquarter in the Philippines is a special type of income producing foreign corporation in the Philippines. Income to be generated is limited to specific services rendered to its affiliates, branches, and subsidiaries within the Asia-Pacific region. It is required an inward remittance of capitalization amounting to US$200,000.00 and a resident agent in the Philippines. It is subject to special income tax rate of 10% and a 12% value added tax in the Philippines. Repatriation of its operational income in the Philippines is subject to 15% branch profit remittance tax. Managerial and technical expatriate employees are only taxed at 15% tax on gross compensation instead of the 5% – 32% proportionate rate to normal employees. This previlege also applies to Filipino employees under certain conditions. Read more…Tax Savings on Regional Operating Headquarters in the Philippines.

Philippine regional or area headquarters (RHQ)

A regional area headquarters is a non-income generating foreign corporation in the Philippines. Its main operation in the Philippines is to act as a supervisory, communications, or coordinating center for its subsidiaries, affiliates, and branches in the Asia-Pacific region. It is only a cost center that is not allowed to earn income and required to annually remit at least US$50,000.00 to cover the operational expenses. It is also not allowed to partake in any manner in the management of any subsidiary or branch office, or to solicit or market goods and services whether on behalf of its mother company or its branches, affiliates, subsidiaries or any other company.

Managerial and technical expatriate employees are only taxed at 15% tax on gross compensation instead of the 5% – 32% proportionate rate to normal employees. This previlege also applies to Filipino employees under certain conditions. A resident agent in the Philippines is likewise required.

Philippine representative office (PRO)

The representative in the Philippines is a foreign corporation licensed to do business in the Philippines to deal directly with the clients of its parent company abroad on information dissemination, as communication center, product promotion, and quality control of products for export. It is not allowed to earn income in the Philippines and is fully subsidized by the parent company as a cost center in the Philippines being required to make an annual inward remittance of at least US$30,000 to cover operating expenses.

Summary

The above discussions would illustrate the options available to a foreign investor intending to do business in the Philippines. Proper structure would depend on the nature of intended operations in the Philippines and a good structure would be a good tax savings. Securities and Exchange Commission (SEC) is a friendly government agency for securing a license to do business in the Philippines as a mandatory requirement for a foreign corporation to do business in the Philippines.