Often, foreign corporations will choose to set up as a non-operating entity in the Philippines to gauge the market. However, many multinational corporations find that they are unable to take advantage of local opportunities, bill local clients, and make money, as the structure does not generate income. Converting from a limited structure to a profitable business requires knowledge of complex conversions, changing the business structure, and complying with the regulations of the Philippines. Converting your Representative Office in the Philippines to an operating business will ensure you can remain in the market and gain the right to bill in the Philippines.
Overview of Conversion Options
To convert your foreign entity from an information-only structure to a profitable company, you need to consider the different structures available in the Philippines. To understand which structure would be best, foreign businesses should consider the tax implications, capital requirements, limitations, and complexity.
Branch Office
A branch office is an extension of the foreign parent company and will generate income from the Philippines. The foreign parent will be responsible for any liabilities incurred by the branch. The branch office gives the foreign parent complete control over the branch; however, it is not a separate legal entity. This means the branch will have one set of accounts and be easier to manage. This is a great option for foreign companies looking to leverage their global capital while getting into the local market.
Regional Operating Headquarters (ROHQ)
This structure acts as the administrative and technical hub for the foreign multinational. The Regional Operating Headquarters will generate income through providing services to the parent, affiliates, and subsidiaries. There are tax benefits of using an ROHQ, and there is complete control over the administration as it is centralized. There are some limitations when setting up an ROHQ. This is the perfect option for a company wishing to charge for back office, financial, and technical administrative services, but will not sell any goods or services.
Domestic Corporation
A domestic corporation will be set up as a separate legal entity within the Philippines. This means the parent company will not be liable for any local liabilities. The subsidiary can fully trade in the local market. There are minimum capital requirements set by the law and regulations of the Foreign Investment Act. This creates a complete legal separation between the local operations and foreign assets.
Representative Office vs Branch Office
A representative office vs. a branch office does have differences. The representative office can only be used as a liaison/administration office and cannot generate income from the local market. The branch office will actively generate income by trading. The branch will directly negotiate with local suppliers and bill local clients. The branch will have full agency rights, while the liaison office will always require money to be sent from abroad.
Representative Office vs ROHQ
Unlike the representative office, the ROHQ can generate income by billing related foreign entities for certain administrative, technical, and management services. The ROHQ is completely prohibited from providing any services to local independent third parties. This makes it a great option for a shared services operation.
Tax Implications
Any income-generating structures will incur local tax. Branches will incur company income tax on their local net income. They may also incur branch profit remittance tax when sending profits back to the head office. A domestic subsidiary will incur company tax on its worldwide income and withholding tax on any dividend payments made to foreign shareholders. An ROHQ will receive favorable tax treatment on certain intra-group transactions.
Requirements and Approvals
In order to convert from a non-income-generating to an operating entity, you will need to complete a number of forms. You will also need approval from various government bodies to ensure you can continue to operate.
SEC Registration
The first step to converting your Representative Office in the Philippines is to complete the appropriate forms and submit them to the SEC. You will need to provide audited accounts, board resolutions approving the change in structure, updated articles of incorporation, and documentation from the foreign parent company. After receiving approval from the SEC, you will have the basis for your license.
Capital Requirements
You will need to meet certain capital requirements to convert into an income-generating entity. Standard foreign-owned branches will require a minimum capital investment of US200,000. This can be reduced to US $ 200,000 if the business uses advanced technology or employs at least fifty local employees. Proof will need to be provided that the equity has been sent from abroad, and this can be done through your local bank.
BIR Registration
You will need to register for new tax registrations, update TIN details, register company books, and obtain printing rights for invoices. This will allow you to legally issue receipts, pay local sales tax, and manage company tax. You will need to close any non-income tax profiles by converting to an active entity.
LGU Approval
If you are expanding your operations, you will need to obtain an updated Barangay Clearance, Mayor’s Business Permit, and local sanitation/zoning approvals. These will allow you to operate locally and ensure you comply with local legislation. You will also need to pay local taxes and obtain a new community tax certificate each year.
BSP Registration
Any capital being sent into the country to meet capital requirements must be registered with the BSP or nominated banks. This will allow you to repatriate your capital, dividends and profits back to the foreign parent company in the future. If the foreign capital has not been registered, you will struggle to get access to foreign exchange through the banks.
Social Security and Regulatory Registrations
When converting to an active entity, you need to expand your registrations with various social security bodies. This includes registering with the SSS, PhilHealth, and Pag-IBIG. Having active accounts with these bodies will ensure you meet your legal obligations.
Limitations and Requirements
It is important to comply with the requirements of your company. If you fail to understand what you are allowed to do, you may face fines, lose your license, and face issues.
Representative Office Limitations
Liaison offices are legally restricted to providing information, promotion, quality control, and client liaison services for the head office products. They cannot enter into any contracts, attempt to sell, issue invoices, or make a profit in the Philippines. This means you will have to convert your structure to grow your business. If you breach these rules, you may receive large fines.
ROHQ Requirements
To set up an ROHQ, you must prove you have an existing presence in the region and that you will only provide services to existing corporate affiliates. The ROHQ cannot attempt to sell to third-party companies. The ROHQ can provide administrative services, planning, technical support, sourcing, and research.
You must maintain the capital investment. You must keep detailed transfer pricing documentation and regularly submit compliance reports. You must ensure your accounts clearly show any income generated from services provided within the network. All accounts must be audited by independent accountants each year.
Branch Office Requirements
A branch office must have a local agent who is legally authorized to receive any legal notices/serve process. A foreign branch must also provide acceptable security deposits with the SEC. This is based on your gross income. If you do not have these in place, you may lose your right to trade.
Transfer Pricing and Tax
Converting from a zero entity to an entity that will bill will mean you will face strict tax audits, value-added tax, and company tax. You must ensure you have strong transfer pricing policies in place to ensure you do not face any tax adjustments or non-compliance. You must have detailed intercompany contracts to show all financial transactions between the local branch and international head office.
Annual Requirements
Operating foreign entities must submit annual reports. This will include audited annual accounts, General Information Sheets (GIS) showing who is currently leading the company, and updated compliance. This will ensure you don’t face any penalties and you have an active entity.
Conversion Process
To ensure you have a clean transition, you must ensure everything is done in the correct order. This will minimize any disruptions and maintain confidence from your vendors, suppliers, and clients.
Corporate Resolutions
The board of directors will need to approve resolutions to convert. This will include investing funds, giving corporate officers power of attorney to sign legal documents in the Philippines. These documents must be legalized, notarised, and consularised/apostilled in the country of origin.
Company Name Reservation
Ensure you reserve the name of your company/branch with the online SEC portal. Ensure your legal documents show the new purpose of the company, who has management powers, and what the company does. This will ensure you don’t face any issues when submitting your main registration documents.
Bank Accounts
Open the required bank accounts with recognized local banks. This will ensure the regulatory bodies can confirm that the required equity has been invested. You must ensure your foreign exchange documents clearly show that the money being sent into the country is for equity purposes.
Asset Transfers
All leases, equipment, contracts and vendor agreements must be legally transferred or rewritten to the new operating company. This will ensure you are accountable for the costs incurred and they will be correctly shown on your company income tax. Novation agreements will protect any previous claims.
Cancellation of Liaison License
Once you have obtained your licenses for your new branch/domestic company, you must cancel your liaison license with the SEC. Ensure all liabilities have been paid, taxes cleared, and old company files closed. This will ensure you don’t face any duplicate submissions.
Trading and Billing
Once you have all your clearances, you can start to sign contracts, issue invoices, and receive income from the Philippines. You can also open credit facilities, merchant accounts and participate in local public and private procurement.
Expert Help
Converting your company can be a complex process. You need to ensure you comply with the law to avoid any delays. Having legal, corporate, and financial advice will ensure your company complies with the laws of the Philippines.
Complex Process
Converting your company requires expert knowledge of the SEC, BIR, local council, and Central Bank. It is extremely important to get help from Triple i Consulting, as this is a complex process that involves multiple government approvals, verifying capital requirements, and ensuring you comply with strict company requirements. We can ensure your application is processed quickly by expert corporate consultants. We can also prepare the correct board documents.
Avoid Delays and Penalties
Failing to complete your registration documents, consularise your documents, or provide incorrect capital documents can cause delays of months and incur large penalties. Having professional legal help will ensure your conversion is completed on time. Getting your documents reviewed by qualified professionals will ensure they are approved by multiple agencies.
Tax and Company Structure
Choosing between a foreign branch, ROHQ, or subsidiary can be complex. We can help multinational companies choose the best strategy to enter the market. This will ensure you have maximum flexibility and make your company more profitable. Structuring your company correctly will ensure you don’t face any tax issues internationally while still complying with local laws.
Fast Approvals
We have expert local representation who can communicate directly with the relevant people. This will ensure we can answer any questions quickly. Our dedicated management will ensure you get fast approvals from all municipal and national agencies. We can ensure foreign companies don’t face any duplicate documentation.
Compliance During Conversion
We can ensure you have two sets of responsibilities handled by experts. This includes closing down your non-income-generating liaison and setting up your operating company. We can ensure your leases are transferred, tax cleared, and assets transferred without impacting your company. We can ensure your project is managed professionally to ensure you don’t lose any momentum.
Conclusion
Converting your liaison to an active licensed entity is a major milestone for foreign companies looking to expand in the Philippines. Converting your Representative Office in the Philippines to an operating entity will give you access to local income, increase your long-term potential, and improve your local company governance. By considering your options, complying with capital requirements, managing multiple agency approvals, and abiding by strict legal requirements, you can be successful. Using specialized legal and corporate management will ensure you have a smooth conversion. This will protect your assets and ensure your company can grow financially.
Is Assistance Available?
Yes! We can help you convert your Representative Office in the Philippines to an operating entity by providing expert legal, corporate, and regulatory advice. Our experienced specialists will manage all aspects of your registration to ensure you are fully compliant. Contact us today to book an initial consultation with one of our experts:
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