Registering Tax Exempt Foreign Corporations in the Philippines

By: Garry S. Pagaspas, CPA

As most would be aware, a foreign corporation outside of the Philippines could have a number of choices on what to register in the Philippines for its intended operations such as the following:

1. Philippine subsidiary where the foreign corporation would own majority of shares of stock of the local domestic company;
2. Domestic corporation where the investor would along with the rest would incorporate a local corporation without the foreign corporation becoming a stockholder;
3. Philippine branch – How to Register Philippine Branch?;
4. Regional Operating headquarters (ROHQ) – How to Register ROHQ in the Philippines? ;
5. Regional or Area headquarters (RAHQ); and,
6. Representative Office in the Philippines – How to Register Representative Office in the Philippines?

A good choice of legal entity to be used in the Philippines would be a challenging one for the foreign investor and would depend on a number of factors like intended operations, capitalization, target market, extent of foreign ownership .

In one instance, a foreign investor set-up a local domestic corporation that engaged in business process outsourcing related to information technology. Upon completion and during operation, they noticed the tax implication hurting the cash flows.  In an attempt to remedy the situation, they ended up trying to know as to whether or not the domestic corporation could be converted to a tax-exempt entity or cost center entity to save on cash flow.

Foreign investors should be fully aware of the applicable alternatives and related tax implications so the type of legal entity to be established should correspond to the targeted tax implications. Below are two (2) choices of tax-exempt foreign corporations in the Philippines:

Philippines Representative Office of foreign corporations

A Philippine representative office is a cost center entity that is allowed to interact with clients of foreign corporation’s parent to facilitate orders, information dissemination, undertake quality control and undertake other administrative matters. To fund the operations, the foreign corporation will be required to inwardly remit US$30,000.00 initial capitalization. It is required to secure License to Do Business in the Philippines and appoint a resident agent in the Philippines for the service of notices, summons, and other communications.

For tax purposes, a representative office in the Philippines Philippine branch office is not subject to 30% corporate income tax, and 12% value added tax being a cost center in the Philippines. However, it is subject to withholding taxes on its income payments covered by expanded withholding tax, withholding tax on compensation, and could be passed on 12% value added tax on its purchases from VAT-registered suppliers.

Click here on How To register Philippine Representative Office…

Philippine or Regional Area Headquarters (RAHQ)

A regional or area headquarters in the Philippines (RAHQ) is a Philippine administrative office of foreign corporation that will serve as a communication, supervision, and coordination center for the subsidiaries, branches, affiliates within the Asia-Pacific Region and abroad. To fund the operations, it is required to inwardly remit  US50,000.00 initial capitalization. It is required to secure License to Do Business in the Philippines and appoint a resident agent in the Philippines for the service of notices, summons, and other communications.

For tax purposes, a representative office in the Philippines Philippine branch office is likewise not subject to 30% corporate income tax, and 12% value added tax being a cost center in the Philippines. However, it is subject to withholding taxes on its income payments covered by expanded withholding tax, withholding tax on compensation other than those managerial and technical employees covered by the 15% final withholding tax, and could be passed on 12% value added tax on its purchases from VAT-registered suppliers.

Requirements for License to Do Business in Philippines

To secure Securities and Exchange Commission (SEC) approval of the License to do Business in the Philippines of a Representative Office or Regional or Area Headquarters, you need to have the following basic documentary requirements:

Basic SEC Requirements

• SEC Application Form
• Name verification slip of the company name to be used. This should be reserved manually with the Securities & Exchange Commission (SEC) for minimal fees – P40.00 for every 30 days up to a maximum of 90 days subject to renewal or online through the SEC -Register;
• Certified copy of the Board Resolution of the Parent company authorizing the establishment of an office in the Philippines and designating a Resident Agent who may be an Philippine resident individual or a domestic corporation;
• Latest audited financial statements of the parent company certified by an independent certified public accountant and authenticated by the Philippine consulate/embassy;
• Certified copies of the Articles of Incorporation of the parent company with an English translation, if in a foreign language;
• Certificate of Inward remittance and Certificate of Bank Deposit of the initial capitalization; and,
• Resident Agent acceptance of appointment, unless, the agent is the signatory in the application form;

SEC in the Philippines has a set of prescribed forms for some of the above documentary requirements that you may either do it yourself or secure the assistance of experienced professionals. Initial registration papers carefully prepared for the purpose will undergo initial evaluation of the SEC, and finding the same in order will be assessed filing and other fees based on the proposed capitalization. Payment of the filing and other fees marks the formal filing of the application and normal approval procedures would immediately follow. Approval normally comes in a couple of days to about ten (10) days.

Processing fees for securing license to do business

Should intend to engage the services of a professional for the assistance in securing License to Do Business in the Philippines, professional fees could vary and the range could start from US$1,000.00.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.