How to Register a Non-stock Non-profit in the Philippines?

By: Tax and Accounting Center Philippines

You may have a charitable mind and a big heart having in mind the general welfare of the less privileged and the needy, or you may simply want to operate a non-stock, non-profit entity for a reason or another, this article could be of help.

Non-stock and non-profit corporation in the Philippines is one who operates for a not-for-profit undertaking such as charitable institutions, associations, foundations, health organizations, environmental activities, and others in line. It does not issue shares of stocks to stockholders but rather admit members based on established rules in its By-laws. Its operational funds could come from donations, members contributions, and some proceeds from fund raising activities. For tax purposes, it could be exempted from income tax and value added tax on sales  based on BIR Ruling issued. It is however subject to withholding taxes on its income payments and compensation, and could be passed on 12% value added tax on its purchases from VAT-registered suppliers.

Details of incorporators 

To register a non-stock, non-profit corporation, you need to have the following to start with:

1. At least five (5) incorporators, majority of them must be residents in the Philippines;
2. Complete address of each incorporator;
3. BIR Tax identification number (TIN) of each incorporator;
4. Contribution of incorporators and members;

Based on the above details, you may now proceed with the documentation. Securities and Exchange Commission (SEC) in the Philippines would require the following documentary requirements:

Basic SEC Requirements

• 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;
• Articles of Incorporation and By-laws;
• Joint affidavit of two (2) incorporators undertaking to change name;
• List of members, as certified by the corporate secretary, unless already stated in the Articles of Incorporation; and,
• List of names of contributors or donors and the amounts contributed or donated, as certified by the treasurer.

Additional SEC Requirements

• For Foundation – Notarized certificate of bank deposit of the contribution of not less than P1M along with statement of willingness to allow SEC to conduct an audit;
• For Religious Corporation – Refer to Setions 109-116 of the Corporation Code of the Philippines, and an affidavit of affirmation or verification by the chief priest, rabbi, minister or presiding elder;
• For Federations – Certified list of member-associations by Corporate Secretary or President;
• For Condominium corporations or associations -Master Deed with primary entry of the Register of Deeds and certification that there is no other existing similar condominium association within the condominium project.

SEC in the Philippines has a set of express forms for some ready to fill-out SEC registration forms.  Alternatively, you may have your own customized forms and documents that is in accordance with the format of SEC in relation to the provisions of the Corporation Code of the Philippines applicable to non-stock, non-profit corporations in the Philippines. You may need an assistance of a lawyer or  somebody with better appreciation of the requirements for registering a non-stock, non-profit corporation in the Philippines.

SEC application and approval

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 not more than ten (10) days.

Tax Authority Registration

SEC will assign a tax identification number (TIN) upon release of the Certificate of Incorporation  in the Philippines and such TIN shall be formally registered with the Bureau of Internal Revenue (BIR). Certain registration fees and taxes will be paid and other registrations for books of accounts, and official receipts or invoices will follow. For tax exemptions of non-stock non-profit corporation in the Philippines, you need to secure BIR ruling with the tax authority with the Revenue District Office (RDO) of registration.

Business Permits & Licenses

For the legality of its local operations, business permit has to be secured with the local government unit of business location. Certain fees and other registrations are likewise required such as community tax certificate, barangay clearance, fire permit, occupancy permit, and the likes.

Employee safeguards registrations

Employer registration with the Social Security System (SSS), Philippine health Insurance Corporation (Philhealth), and Home Development Mutual Fund (HDMF) is likewise mandatory and will proceed independent of the above.

Complete Processing Timetable

With the improved processing system of the government agencies, complete processing of the above will take three (3) to four (4) weeks from filing with the Securities and Exchange Commission. We suggest you secure the services of professionals to assist you in the complete registration of your Philippine Company that you may be able to simply concentrate on operational matters.

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. For comments, you may please send mail at in**@************er.org.)

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For a foreign investor in the Philippines intending to do business in the Philippines, one common question is:

Is a foreign investment required to be registered with the Bangko Sentral ng Pilipinas ( BSP or Central Bank of the Philippines)?

By foreign investments, it shall mean an equity investment made by non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess and appraise the value of such assets other than foreign exchange (Section 3(c), RA No. 7042 – Foreign Investments Act or FIA). Under the Manual of Regulations for Foreign Transactions of the BSP, inward foreign investments may be in any of the following forms:

• foreign direct investments in Philippine firms or enterprises either in cash or in kind  (e.g. machinery and equipment; raw materials, supplies, spare parts, and other items including intangible assets necessary for the operations of the investee firm);
• investments in peso-denominated government securities;
• investments in securities listed in Philippine Stock Exchange (PSE);
• investment in peso-denominated money market instruments;
• investments in peso time deposits with authorized agent banks (AAB) with minimum maturity of ninety (90) days

As a rule under FIA (Section 5), a qualified non-Filipino national  may do business in the Philippines upon registration with the Securities and Exchange Commission (SEC) or invest in a domestic enterprise to the extent allowed by law, without need of prior approval. This would mean that inward foreign investment need not be registered with the BSP unless the foreign exchange needed to service the repatriation of capital and remittance of dividends, profits and earnings which accrue thereon shall be purchased from AABs or AAB-forex corporations.

Registration of inward foreign investments are made directly with the BSP, who will issue a Bangko Sentral Registration Document (BSRD) to evidence such registration. Inward foreign investment in peso-denominated government securities, PSE-listed securities, and peso time deposits shall be registered with an investor’s designated custodian bank in behalf of the BSP. Registering such foreign investments would entail the following repatriation and remittance privileges:

• Full and immediate repatriation of capital and remittance of dividends, profits and earnings using foreign exchange to be purchased from AABs and AAB-forex corps;
• Foreign exchange may be purchased from AAB and AAB-forex corps for outward remittance in an amount equivalent to the peso sales/divestments proceeds of registered foreign investments;
• Registering banks for for foreign investments may sell for outward remittance the equivalent foreign exchange of excess pesos funded with inward remittance for foreign exchange under certain conditions

In registering a legal business entity in the Philippines, hereunder are the normal procedures you may consider:

Company name reservation

A company name to be used should be reserved 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. For domestic companies, a company named should not be confusingly similar or identical to a registered and protected name, while a similar name of a foreign entity with added suffix is required for those securing a license to do business in the Philippines.

Treasurer-in-trust account

Using the initial registration papers executed, a treasurer-in-trust (TITF) account with the required paid-up capitalization shall be maintained with the bank as proof of such capitalization evidenced by the bank certificate and inward remittance, if applicable. TITF account is for deposit only and restricted for withdrawal except upon approval of the SEC of the registration papers.

SEC application and approval

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 not more than ten days.

Tax Authority Registration

SEC will assign a tax identification number (TIN) upon release of the Certificate of Incorporation or License to Do Business in the Philippines and such TIN shall be formally registered with the Bureau of Internal Revenue (BIR). Certain registration fees and taxes will be paid and other registrations for books of accounts, and official receipts or invoices will follow.

Business Permits & Licenses

For the legality of its local operations, business permit has to be secured with the local government unit of business location. Certain fees and other registrations are likewise required such as community tax certificate, barangay clearance, fire permit, occupancy permit, and the likes.

Employee safeguards registrations

Employer registration with the Social Security System (SSS), Philippine health Insurance Corporation (Philhealth), and Home Development Mutual Fund (HDMF) is likewise mandatory and will proceed independent of the above.

Complete Processing Timetable

With the improved processing system of the government agencies, complete processing of the above will take three (3) to four (4) weeks from filing with the Securities and Exchange Commission. We suggest you secure the services of professionals to assist you in the complete registration of your Philippine Company that you may be able to simply concentrate on operational matters.

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. For comments, you may please send mail at in**@************er.org.)

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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.

By: Garry S. Pagaspas

Improperly accumulated earnings tax (IAET) in the Philippines is imposed upon every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and earnings and profits to accumulate instead of being divided or distributed. I pity those who are being paid this tax because with proper education and awareness, these could be avoided. You would not want to waste your hard earned business profits from the effects of simple lapses, or worst, ignorance.  Hereunder are its simple features to picture out how it works:

Imposed as a penalty tax to recover lost revenue

In simple and plain language, improperly accumulated earnings tax is a penalty tax upon a corporate taxpayer for accumulating so much net income after tax  beyond the reasonable needs of the business. Section 43 of the Corporation Code of the Philippines in effect prohibits a stock corporation to maintain a retained earnings more than 100% of its paid-up capitalization.

In a corporate set-up, stockholder-owners gets their share in the earnings of the corporation through the dividends from the retained earnings. Dividend declaration is dependent upon the will of the Board of Directors and upon declaration cash and/or property dividend to resident individual stockholder is subject to 10% final tax on dividends. No dividend declaration by the Board of Directors means that the government will lose the revenue from the dividend tax. As such, improperly accumulated earnings tax in the Philippines is imposed to recover the revenue it should have earned. Aside from the 10% IAET, Securities and Exchange Commission (SEC) likewise provides a penalty for such an excess.

Tax rate is 10% based on improperly accumulated earnings

As a mechanism to recover lost revenue, the tax rate is patterned after the rate that the government should have earned.  Since tax on dividends to resident individuals is 10%, then, the tax rate imposed is the same. Thus, Section 29 of the National Internal Revenue Code of the Philippines imposes a 10% improperly accumulated earnings tax.

Imposition is not outright upon the mere improper accumulation

The mere fact that the retained earnings exceed 100% of the paid up capitalization at the end of a taxable year does not mean an outright tax liability for IAET. What is being taxed is the improper accumulation and not the mere accumulation. Improper means the unjustifiable accumulation beyond the reasonable needs of the business. In determining the reasonable needs, the amount of paid up capitalization is considered, but does not include additional paid-up capital under Revenue memorandum Circular no. 35-2011.

As a rule, the corporate taxpayer has within one (1) year or twelve months from the end of the taxable year within which to dispose of or remedy the excess retained earnings. Under the rules of the Securities and Exchange Commission (SEC), such corporate taxpayer must come up with a concrete plan as to the disposition of such excess. It is the failure to dispose of such excess upon the the lapse of one (1) year that is being penalized and subjected to improperly accumulated earnings tax in the Philippines.

One simple approach is to appropriate part of retained earnings for some future use through a Board Resolution – e.g. appropriations for business expansion, redemption of a long term obligation, and more. But mere appropriation of retained earnings without an implementation may not be safe. Another approach is a cash or property or stock dividend declaration securing a notation with the SEC. Another is increasing authorized capitalization with the Securities and Exchange Commission (SEC) either by cash infusion, stock dividend declaration, tax-free transfer, and more.

Imposed upon improperly accumulated earnings on holistic view

Taxable net income is subjected to 30% income tax. Net income after income tax that is allowed to accumulate beyond 100% of the paid-up capitalization is the tax base of improperly accumulated earnings tax in the Philippines. Improperly accumulated taxable income as a tax base of the 10% improperly accumulated earnings tax is further adjusted by the following:

• Income exempt from tax;
• Income excluded from gross income;
• Income subject to final tax;
• The amount of net operating loss carry-over deducted

No duplication of the tax

Normally, this tax type is being paid during tax assessments in the Philippines. Once the 10% improperly accumulated earnings tax has been paid, such amount could no longer be subjected to IAET in the subsequent year. To do so would be a direct duplicate taxation tantamount to a violation of equal protection clause. Nevertheless, is is still suggested to dispose of the excess free retained earnings. Remember, it is always better to prevent an issued with the tax authority (BIR), than to defend one.

Does not apply to the following

Suffice it to say, not all corporate taxpayers are subject to the 10% improperly accumulated earnings tax in the Philippines. The following are exempted, to wit:

• Publicly held corporations;
• Banks and other non-bank financial intermediaries;
• Insurance companies;
• Taxable partnerships;
• General professional partnerships;
• Tax-exempt joint ventures;
• Economic Zone (Ecozones) under special tax rate; and,
• Philippine branch of a multinational company

I hope the above would give you a bigger picture of how the 10% improperly accumulated earnings tax in the Philippines would apply. As mentioned above, this could be avoided legally and I suggest you do not waste you hard earned business profits on this tax type.

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. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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