Choosing the appropriate mode for Foreign Corporations

to do business in the Philippines

By: Atty. Enrique V. dela Cruz, Jr.1

Foreign corporations planning to do business in the Philippines can choose to

either establish a representative office, a branch, a subsidiary or an independent
domestic corporation. Which mode should they choose? It depends on the nature of
the operations and the purpose of the investment in the Philippines.

Representative Office

Under Philippine law, a representative office is a foreign corporation allowed to

do business in the Philippines, but without deriving any local income. 2 A representative
office is fully subsidized by its head/foreign office and deals directly with the latter’s
clients by disseminating information, acting as a communication center, conducting
surveys and studies of the Philippine market, or promoting and ensuring the quality of
the company’s products and services. Therefore, a representative office in the
Philippines is actually an extension of a corporation’s foreign/head office. Accordingly,
the foreign/head office is liable for the liabilities of the representative office. The test of
whether an office is a representative office or not, is whether it derives income from its
local operations.

A representative office may be established with only one (1) person who will act
as the resident agent.

A representative office is considered a non-resident foreign corporation not

engaged in income-generating business in the Philippines and is, therefore, not subject
to the corporate income tax3 and value-added tax (“VAT”) directly due upon it. 4 This
substantially reduces the tax upon a representative office compared to a Philippine
corporation, whether a subsidiary or an independent corporation, because the latter is
subject to income taxes and VAT.

1
Senior Partner at DivinaLaw. He holds a Master of Laws degree in International & Comparative
Business Law, from the London Metropolitan University, UK; and a Masters Course in International
Trade Law, University College London, UK, as a Chevening Scholar of the British Council. He earned
his Bachelor Of Laws and AB Legal Management degrees from the University of Santo Tomas, Manila
as a Rector’s Scholar.
2
Section 1(c), Implementing Rules and Regulations of Republic Act 7042, or the Foreign Investments
Act.
3
Sec. 28(B), Republic Act 8424, or the National Internal Revenue Code (“NIRC”).
4
BIR Ruling No. DA (VAT-003) 036-2008, July 15, 2008.
 2

However, if the representative office remits technical service fees to foreign/head

office, said fees shall be considered royalties subject to the thirty percent (30%)
corporate income tax, which should be withheld and remitted to the Bureau of Internal
Revenue (“BIR”) by the representative office.5

If the functions of the proposed entities are generally income-generating, they

cannot be registered as representative companies. However, if it is proven that the
entities that is sought to be established in the Philippines will provide services only to
foreign clientele, such that all contracts and transactions will be solely between the
foreign/head office and its foreign clients outside the Philippines, and said entities will
not derive any income from the Philippines, then such entities may be registered as
representative offices.

Note that an inward remittance of a minimum amount of US Dollars: Thirty

Thousand (US$30,000.00) is required for the registration of a representative office. 6 An
application for registration as a representative office with the SEC requires the following
documents:

1. SEC Form F-104;

2. Name Verification Slip;
3. Authenticated copy of a Resolution by the foreign corporation’s Board of
Directors:
a. Authorizing the establishment of a representative office in the
Philippines;
b. Designating a resident agent; and,
c. Stipulating that in absence of such agent or upon cessation of business in
the Philippines, any summons for the company may be served to SEC as if
the same is made upon the company at its home office.
4. Financial Statements of the foreign corporation for the immediate preceding year
at the time of filing of the application, certified by an independent certified
public accountant in the place of its principal office;
5. Authenticated copies of the foreign corporation’s Articles of Incorporation;
6. Proof of inward remittance of a minimum amount of US Dollars: Thirty
Thousand (US$30,000.00), such as bank certificate;
7. Resident agent’s acceptance of appointment (if not signatory in the application
form); and,
8. Affidavit executed by the foreign corporation’s president or resident agent stating
that the company is solvent and in sound financial condition.
5
Ibid.
6
Sec. 3(a)(2), Implementing Rules and Regulations of the Foreign Investments Act.
 3

Note that all documents executed abroad should be authenticated by the

Philippine Embassy or Consular Office at or nearest the place of execution. The
registration of a representative office will take at least one (1) month from submission of
the complete documentary requirements with the SEC.

Branch Office

Like a representative office, a branch office is an extension of the foreign/head

office, and does not acquire a separate juridical personality from the latter. 7 Thus, the
liabilities of the branch are considered liabilities of the foreign/head office. Also, a
branch office may be set up with only one (1) person who will act as the resident agent

From the point of view of taxation, the foreign corporation, upon obtaining a
license to do business through a branch office, becomes a resident foreign corporation. 8
A branch office is, thus, subject to income tax at a rate of thirty percent (30%) on income
from within the Philippines.9 However, profits remitted by the branch to its head office
are subject to branch profit remittance tax, if they are effectively connected with its
business in the Philippines, at the rate of fifteen percent (15%) or ten percent (10%)
depending on certain tax treaties; however, if located in a special economic zone, then
they are tax exempt.

A branch office is not subject to documentary stamp tax (“DST”) simply because
it does not issue shares of stock. A branch is also not liable to pay the ten percent (10%)
improperly accumulated earnings tax. Subject to certain conditions, overhead expenses
of the foreign/head office may be allocated to the branch office. 10

As a fully foreign-owned entity, a branch must have a capitalization of at least US

Dollars: Two Hundred Thousand (US$200,000)11, unless the branch will be exporting
goods or services or generating revenue from abroad amounting to more than sixty
percent (60%) of its gross sales. It can be fully foreign owned, as it is considered an
Export Enterprise under the Foreign Investments Act.12
Hence, the branch can be registered with as little as Philippine Pesos: Five
Thousand (PhP5,000.00) as paid up capital. However, most banks require Philippine

7
Sec. 123, Corporation Code.
8
Sec. 22(H), NIRC.
9
Sec. 28(A)(1), NIRC.
10
Sec. 42(B)(1), NIRC.
11
Sec. 8, Foreign Investments Act.
12
Sec. 3(e).
 4

Pesos: Twenty-Five to Fifty Thousand (PhP25,000.00 - PhP50,000.00) to open a

corporate bank account.

Note that a branch is required initially to deposit with the SEC, for the benefit of
present and future creditors, acceptable securities with market value equivalent to at
least Philippine Pesos: One Hundred Thousand (PhP100,000.00) plus an annual
additional deposit of Two Percent (2%) of the amount by which the branch office’s gross
income exceeds Philippine Pesos: Five Million (PhP5,000,000.00).

An application for registration of a branch office with the SEC requires the
following documentary requirements:
1. SEC Form 103 (Application of a Foreign Corporation to Establish a Branch Office
in the Philippines). This application may be signed by any person authorized by
the applicant’s Board of Directors.
2. Proof of inward remittance of a minimum amount of US Dollars: Two Hundred
Thousand (US$200,000.00) such as bank certificate. The initial assigned capital
shall be remitted directly to the Treasurer-in-trust account opened for and on
behalf of the branch office, spate from any remitted filing fees.
3. Latest audited financial statements of the foreign corporation.
4. Authenticated Articles of Incorporation, By-laws or similar documents of the
foreign corporation.

Note that all documents executed abroad should be authenticated by the

Philippine Embassy or Consular Office at or nearest the place of execution. SEC filing
and legal research fees for the above application will amount to at least US Dollars Two
Thousand Twenty (US$2,020.00).

Within sixty (60) days after obtaining the license to operate, the branch office is
required to deposit marketable securities worth at least Philippine Pesos: One Hundred
Thousand (PhP100,000.00) with the SEC, which may be withdrawn upon cessation of
the Philippine branch’s operations.

Subsidiary Corporation

A subsidiary is defined as a corporation more than fifty percent (50%) of the

voting stock of which is owned or controlled directly or indirectly through one or more
intermediaries by another corporation, which thereby becomes its parent corporation. 13

13
A.M. No. 00-8-10-SC, or the Rules of Procedure on Corporate Rehabilitation.
 5

A subsidiary is a juridical entity separate and distinct from its parent company; 14 hence,
its liabilities are generally not regarded as the liabilities of the parent company.

If the parent corporation is a foreign one, the subsidiary automatically comes

under the provisions of the Foreign Investments Act, thereby necessitating a minimum
paid-up capital of at least US Dollars: Two Hundred Thousand (US$200,000.00). 15
However, if the subsidiary involves advanced technology as determined by the
Department of Science and Technology or employs at least fifty (50) direct employees,
then the minimum paid-in capital may be reduced to at least US Dollars: One Hundred
Thousand (US$100,000.00).16

In addition, like a branch office, if the subsidiary will be exporting goods or

services or generating revenue from abroad amounting to more than sixty percent (60%)
of its gross sales, it can be fully foreign owned, as it is considered an Export Enterprise
under the Foreign Investments Act.17 Thus, the subsidiary may also be registered with as
little as Philippine Pesos: Five Thousand (PhP5,000.00) as paid up capital. However,
most banks require Philippine Pesos: Twenty-Five to Fifty Thousand (PhP25,000.00 -
PhP50,000.00) to open a corporate bank account.

A subsidiary is a domestic corporation 18 and is, thus, liable for income tax at the
rate of thirty percent (30%) of its net income from all sources within and without the
Philippines.19 Its parent corporation remains a non-resident foreign corporation 20 and is
subject to income tax, at the same tax rate, based on its gross income from sources
within the Philippines.21 A subsidiary is liable to pay DST on the original issuance of
shares of stock at the rate of Philippine Pesos: Two (PhP2.00) for every Philippine Pesos:
Two Hundred (PhP200.00) or fractional part of the par value of the shares of the
outstanding shares of stock.22 It is also liable to pay the ten percent (10%) improperly
accumulated earnings tax.23

The remittance of dividends by a subsidiary to its parent corporation is, generally,

taxed at thirty percent (30%) pursuant to the foregoing.

14
Sec. 2, Batas Pambansa Blg. 68, or the Corporation Code of the Philippines.
15
Sec. 8, Foreign Investments Act.
16
Ibid.
17
Sec. 3(e).
18
Sec. 22(C), NIRC.
19
Sec. 27(A), NIRC.
20
Sec. 22 (I), NIRC.
21
Sec. 28 (B)(1), NIRC.
22
Section 174, NIRC, as amended.
23
Sec. 29(A), NIRC.
 6

However, this may be reduced to fifteen percent (15%) if the country wherein the
parent corporation is domiciled either: (a) grants a tax-sparing credit 24; or (b) does not
at all impose any tax on such dividends received.25

Like any Philippine corporation, a subsidiary requires at least five (5), but not
more than fifteen (15), incorporators and/or directors, all of whom must be natural
persons and majority of whom must be residents of the Philippines.26

Registration is effected by filing an application with the SEC, accompanied by the

following documents:
1. Name Verification Slip. Note that we have already reserved the corporate names
in your behalf.
2. Articles of Incorporation, which must indicate the following:
a. The name of the corporation;
b. The specific purpose or purposes for which the corporation is being
incorporated;
c. The place where the principal office of the corporation is to be located, which
must be within the Philippines;
d. The term for which the corporation is to exist, not exceeding fifty years;
e. The names, nationalities and residences of the incorporators, which must be
natural persons;
f. The number of directors or trustees, which shall not be less than five (5) nor
more than fifteen (15), majority of whom must be residents of the Philippines;
g. The names, nationalities and residences of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and
qualified;
h. The name of the Treasurer of the corporation who shall act as such until the
first regular Treasurer is duly elected and qualified (“Treasurer-in-trust”);
i. The date of the annual meeting of the stockholders;
j. The amount of its authorized capital stock in lawful money of the
Philippines, the number of shares into which it is divided, and in case the
share are par value shares, the par value of each;
k. The names, nationalities and residences of the original subscribers, and the
amount subscribed and paid by each on his subscription, and if some or all of
the shares are without par value, such fact must be stated;
l. Note that the Corporation code requires at least twenty-five percent of the
corporation’s authorized capital stock must be subscribed, and at least
twenty-five percent (25%) of the total subscribed stock must be paid.

24
Sec. 28 (b)(5)(b), NIRC.
25
Commissioner of Internal Revenue vs. Wander Philippines, Inc., G.R. No. L-68375, 15 April 1988.
26
Sec. 14, Corporation Code.
 7

3. By-laws;
4. Treasurer’s Affidavit;
5. Certificate of Inward remittance issued by a Philippine bank on the remittance of
at least US Dollars: Two Hundred Thousand (US$200,000.00), net of bank
charges, to the subsidiary’s or its Treasurer-in-trust’s local bank account, unless
the corporation is export-oriented. It takes around three (3) days from
submission of bank documents for purposes of opening an account; and,
6. SEC Form F-100 (Application to Do Business Under the Foreign Investments
Act).

If the incorporators, directors and/or officers designated in the Articles of

Incorporation and By-laws are Filipinos, their Tax Identification Numbers (“TIN”) must
be stated. If said individuals are non-Filipinos, their passport numbers must be
indicated instead.

If any of the above documents are signed or executed outside the Philippines,
such documents should be authenticated by the Philippine Embassy or Consular Office
at or nearest the place of execution.

The application requires filings fee equivalent to one fifth of one percent (0.2%)
of the corporation’s authorized capital stock, plus one percent (1%) of such fee as legal
research fee and Philippine Pesos: Five Hundred Ten (PhP510.00) for registration of by-
laws.

The incorporation of a subsidiary will take at least one (1) month from
submission of the complete documentary requirements with the SEC. The subsidiary is
deemed incorporated upon the issuance of a certificate of incorporation in its favor.

Within thirty (30) days from receipt of the certificate of incorporation, the
corporation’s stock certificates and stock transfer book must be registered with the SEC.
Within the first five (5) days of the following month from receipt of the certificate of
incorporation, the Documentary Stamp Tax on the subscribed shares must be paid to
the BIR amounting to Philippine Pesos: Two (PhP2.00) for every Philippine Pesos: Two
Hundred (PhP200.00) worth of subscription.

In addition, the subsidiary must register with the BIR by filing BIR Form 1903,
with its attachments. The registration will take around one (1) week upon submission of
all necessary documents.
 8

The subsidiary must also secure business permits, such as a Mayor’s Permit,
Locational Clearance, etc., from the local government of the city or municipality where
its principal office is based. The permits will be issued in around two (2) weeks.

Independent Domestic Corporation

Considering the tedious requirements for the incorporation of a subsidiary, and

noting the need to promptly establish the foreign company’s presence in the
Philippines, it is possible to incorporate a corporation that does not fall within the
restrictions of the Foreign Investments Act. In this case, such corporation will be
independent from the foreign corporation but will be partly owned by foreign entities.
This requires that the independent corporation have foreign ownership not exceeding
forty percent (40%) of its authorized capital stock. Thus, at least sixty percent (60%) of
the independent corporation’s owners should be Filipino entities. Accordingly, the
minimum capitalization for the independent corporation will amount to Philippine
Pesos: Twenty-Five Thousand (PhP25,000.00).

The process will be the same as the incorporation of a subsidiary, except that SEC
Form F-100 will not be required and a certificate of bank deposit, in lieu of inward
remittance, will instead be filed. The certificate of bank deposit will require the opening
of a bank account with a minimum deposit of Philippine Pesos: Twenty-Five to Fifty
Thousand (PhP25,000.00 - PhP50,000.00).

In this case, once the foreign corporation has the ability to remit at least US
Dollars: Two Hundred Thousand (US$200,000.00) for the purposes of the independent
Philippine corporation, then such amount may be remitted and be considered a capital
investment into the independent corporation. The ownership of the independent
corporation will be changed to include said amount as capital and the ownership
structure will also change as a result. Only upon the foregoing will the provisions of the
Foreign Investments Act apply to the independent corporation.