What is the 60 40 Ownership Rule in the Philippines?

November 6, 2024

Businessmen dealing with 100% Foreign Ownership

The Philippines’ 60-40 foreign ownership rule shapes the landscape for international investors seeking opportunities in the country’s dynamic economy. Rooted in the 1987 Constitution and the Foreign Investments Act, this regulation limits foreign ownership to 40% in specific sectors, reserving at least 60% for Filipino citizens or entities. Recent legislative reforms, including amendments to the Public Service Act and Retail Trade Liberalization Act, have introduced exceptions, making it essential for investors to understand the current framework. This article provides a detailed guide to the rule, its applications, exceptions, and compliance requirements, offering clarity for businesses aiming to register and operate in the Philippines.

Overview of the 60-40 Foreign Ownership Rule in the Philippines

The 60-40 rule is a cornerstone of the Philippines’ economic policy, balancing foreign investment with national interests. Below is a detailed look at its core components:

Constitutional Basis: The 1987 Philippine Constitution mandates that specific industries, particularly those involving natural resources or public utilities, maintain at least 60% Filipino ownership, limiting foreign investors to a 40% stake.
Foreign Investments Act (FIA): Republic Act No. 7042, amended by R.A. 8179, formalizes the 60-40 rule for “partially nationalized” businesses, ensuring Filipino control in designated sectors.
Foreign Investment Negative List (FINL): The FINL, updated regularly by the government, categorizes restricted sectors into List A (constitutionally or legally restricted, e.g., mass media) and List B (restricted for security, health, or safety reasons, e.g., firearms manufacturing).
Purpose and Scope: The rule protects strategic industries and allows foreign capital to drive economic growth. It applies to corporations, partnerships, and sole proprietorships in restricted sectors.
Penalties for Non-Compliance: Violating the 60-40 rule can lead to fines, business closure, or legal action, as enforced by the Securities and Exchange Commission (SEC) and other regulatory bodies.

Sectors Subject to the 60-40 Foreign Ownership Philippines Rule

The 60-40 rule applies to specific industries outlined in the FINL. Below are key sectors affected, along with their ownership restrictions:

Mass Media: Foreign ownership (0%) is not allowed in newspapers, television, radio, or other media platforms, except for internet-based media that are not explicitly restricted.
Public Utilities: Sectors like electricity distribution, water supply, and sewerage systems require 60% Filipino ownership, as clarified by the amended Public Service Act (R.A. 11659, 2022).
Natural Resources: Per Article XII of the Constitution, the exploration, development, and utilization of natural resources, such as mining and forestry, are limited to 40% foreign ownership.
Private Security Agencies: Foreign ownership is capped at 25%, reflecting the sector’s sensitive nature.
Retail Trade (Pre-2022): Before amendments to the Retail Trade Liberalization Act, retail businesses required 60% Filipino ownership unless meeting specific capital thresholds.

Exceptions to the 60-40 Foreign Ownership Philippines Rule

Recent legislative changes have relaxed restrictions in specific sectors, creating opportunities for foreign investors. Below are the primary exceptions:

Export-Oriented Enterprises: As outlined in the FIA, businesses exporting at least 60% of their output can have 100% foreign ownership.
Domestic Market Enterprises: Firms with a minimum paid-up capital of USD 200,000 (or USD 100,000 for those introducing advanced technology or employing 50+ Filipinos) may qualify for 100% foreign ownership.
Public Service Act Amendments (2022): Sectors like telecommunications, railways, airports, and expressways now allow 100% foreign ownership, as they are no longer classified as public utilities.
Retail Trade Liberalization Act (2022): Retail businesses with a minimum paid-up capital of PHP 25 million (approximately USD 500,000) per brand and PHP 10 million per additional store can have 100% foreign ownership, provided the investor’s home country reciprocates for Filipino retailers.
Renewable Energy Sector: The Renewable Energy Act (R.A. 9513) and its 2023 amendments permit 100% foreign ownership in solar, wind, and other renewable energy projects.

Land Ownership and Lease Regulations for Foreign Investors

Foreign investors face unique restrictions on land ownership, a key consideration in the 60-40 framework. Below are the regulations governing land and property:

Land Ownership Prohibition: The Constitution stipulates that foreigners cannot own land in the Philippines to preserve national patrimony.
Condominium Ownership: Foreign investors may own up to 40% of units in a condominium project, provided the remaining 60% is Filipino-owned.
Long-Term Leases: The Investors’ Lease Act (R.A. 7652) allows foreigners to lease land suitable for commercial or industrial projects for 50 years, renewable for 25 years.
Special Arrangements: Renewable energy and tourism projects may access flexible land-use agreements, such as joint ventures with Filipino entities under recent reforms.
Compliance Requirements: To ensure legal validity, lease agreements must be registered with the Department of Environment and Natural Resources (DENR) or local government units.

Navigating Compliance with the 60-40 Foreign Ownership Philippines Rule

Compliance with the 60-40 rule is complex, requiring careful structuring of business entities. Triple i Consulting, a trusted provider of business registration and compliance services, emphasizes the importance of expert guidance due to the intricate regulatory landscape. Below are key compliance considerations:

Grandfather Rule: The SEC applies the Grandfather Rule to scrutinize ownership structures, ensuring the 60-40 ratio is met by calculating the effective Filipino ownership in layered corporate setups (e.g., a Filipino partnership owning 60% of a company may be partially foreign-owned).
Corporate Structuring: Foreign investors often use holding companies or joint ventures with Filipino partners to comply with ownership limits, but these must be transparent to avoid penalties.
Visa Requirements: Investors and employees may need visas like the 9g (working visa), 9d (Treaty Traders Visa for US, Japan, or Germany nationals), or Special Investor’s Resident Visa (SIRV), requiring a minimum investment of USD 75,000 in designated sectors.
Regulatory Oversight: The SEC, Board of Investments (BOI), and Philippine Economic Zone Authority (PEZA) monitor compliance, requiring regular reporting and audits.
Expert Assistance: The complexity of compliance, including navigating the FINL and Grandfather Rule, makes professional support from firms like Triple i Consulting essential to avoid costly errors and ensure smooth operations.

Economic Impact and Ongoing Relevance of the 60-40 Rule

The 60-40 rule remains a pivotal topic in the Philippines’ economic policy, influencing foreign direct investment (FDI) and national development. Below are its key impacts and why it merits continued discussion:

FDI Dynamics: The rule has historically limited FDI, with the Philippines attracting USD 9.4 billion in 2024, compared to Vietnam’s USD 28 billion, due to restrictive ownership policies.
Protection vs. Growth: Proponents argue that the rule safeguards Filipino interests in strategic sectors like land and utilities, while critics, including business groups, contend it deters investment and stifles growth.
Legislative Reforms: The 2022 amendments to the Public Service Act, Foreign Investments Act, and Retail Trade Liberalization Act reflect efforts to liberalize the economy, yet constitutional restrictions persist, fueling debates about further reform.
Compliance Challenges: High-profile cases, such as the NAIA Terminal 3 scandal, highlight the risks of using “dummy” partners to bypass the 60-40 rule, underscoring the need for transparent compliance.
Global Competitiveness: As ASEAN neighbors liberalize their economies, the Philippines faces pressure to relax the 60-40 rule to compete, with ongoing proposals to amend the 1987 Constitution.

Final Insights

The 60-40 foreign ownership Philippines rule remains a defining feature of the country’s investment landscape, balancing national interests with global economic integration. While recent reforms have opened sectors like telecommunications and retail to full foreign ownership, restrictions in public utilities, natural resources, and land ownership persist, requiring careful navigation. Compliance, particularly with the Grandfather Rule and visa regulations, demands precision to avoid legal pitfalls. The rule’s impact on FDI and ongoing debates about constitutional reform ensure its relevance for investors and policymakers. Expert guidance is invaluable for businesses seeking to thrive in this complex environment.

Is Assistance Available?

Navigating the 60-40 foreign ownership Philippines rule can be daunting due to its intricate regulations and evolving legal framework. Triple i Consulting, a trusted provider at tripleiconsulting.com, offers expert support to ensure compliance and streamline your business setup in the Philippines. Contact us today to schedule an initial consultation with one of our experts: