Legal Requirements for Business in the Philippines

August 27, 2024

The Philippines has become an attractive destination for foreign entrepreneurs due to its growing economy and strategic location in Southeast Asia. However, starting a business as a foreigner involves navigating a complex legal framework, including specific regulations, documentation, and compliance processes.

This comprehensive guide explores the essential legal requirements, business structures, and necessary steps for foreign nationals or expatriates looking to register a business in the Philippines.

Understanding Foreign Ownership Rules and Restrictions

Foreigners are allowed to own businesses in the Philippines, but there are restrictions depending on the type of business and the industry in which the company operates. The Philippines follows the Foreign Investments Act of 1991 (Republic Act No. 7042) and the Foreign Investment Negative List, which outline sectors where foreign ownership is restricted or prohibited.

Foreign Equity Cap: Generally, foreign equity is capped at 40% for businesses serving the local market (domestic market enterprises). However, there are exceptions:
- If the business has a paid-in capital of at least USD 200,000, 100% foreign ownership is allowed. There are exceptions to this requirement.
- For export-oriented enterprises (at least 60% of the revenue comes from exports), the capital requirement may be lowered to USD 100,000. There are also exceptions to this requirement.

Foreigners looking to set up businesses in sectors that fall within the Foreign Investment Negative List, such as mass media, land ownership, or public utilities, must adhere strictly to the foreign equity limitations. Violating these rules can result in penalties under the Anti-Dummy Law, which prohibits locals from holding business ownership on behalf of foreigners.

Choosing the Right Business Structure

The choice of business structure is critical, as it affects the extent of liability, tax obligations, and legal requirements. Foreign entrepreneurs in the Philippines can choose from the following business structures:

Sole Proprietorship: Foreigners are generally not allowed to establish sole proprietorships unless married to a Filipino citizen. This structure involves full liability for debts and obligations and is registered with the Department of Trade and Industry (DTI)
Partnership: A partnership can be a General Partnership (unlimited liability) or a Limited Partnership (limited liability based on capital contributions). Foreigners can be partners but must comply with the 40% foreign equity cap for domestic market enterprises.
Corporation:
- One Person Corporation (OPC): Suitable for individuals who want complete control, but this is generally restricted to Filipino citizens or foreign nationals in specific industries
- Domestic Corporation: A foreigner can own up to 40% equity unless the paid-in capital exceeds USD 200,000, which allows for 100% foreign ownership. A minimum of five incorporators (who may be foreigners) is required for registration
- Branch Office: A branch of a foreign company that conducts revenue-generating activities in the Philippines. It requires a minimum inward remittance of USD 200,000 to be registered with the Securities and Exchange Commission (SEC)
- Representative Office: Non-revenue-generating office that promotes the parent company’s products, services, or business development in the Philippines. It requires a minimum inward remittance of USD 30,000

Registering the Business

After selecting the appropriate business structure, the following steps outline the process of registering a foreign business:

Registering with the Securities and Exchange Commission (SEC)

For corporations and partnerships, you must register with the SEC. The following documents are required:

Articles of Incorporation and By-Laws
Proof of foreign capital investment
Board Resolution authorizing the establishment of the business (for foreign entities)
Alien Employment Permit (AEP) from the Department of Labor and Employment (DOLE) if the foreigner plans to work in the Philippines

Registering the Business Name
1. The business name must be registered with the Department of Trade and Industry (DTI) for sole proprietorships. Corporations and partnerships must register their corporate name with the SEC.
Obtaining Local Government Permits

The next step is registering where the business will operate with the local government. This involves:

Barangay Clearance: Issued by the local Barangay where the business is located.
Mayor’s Permit: A business license the Local Government Unit (LGU) issued. Additional documents, such as zoning clearance, occupancy permit, and fire safety certificate, may be required depending on the business type.
Complying with Tax and Regulatory Requirements
Registering with the Bureau of Internal Revenue (BIR)

Once registered with the SEC or DTI, you must apply for a Tax Identification Number (TIN) from the BIR. This is essential for filing taxes, and the business must also register its Books of Accounts and Official Receipts with the BIR.

Employee Registration

If the business hires employees, it is mandatory to register them with the following government agencies:

Social Security System (SSS)
PhilHealth
Home Development Mutual Fund (Pag-IBIG)

These agencies ensure that employees receive social security benefits, health insurance, and housing assistance.

Opening a Corporate Bank Account

A critical step in operating a business is opening a corporate bank account. Most banks in the Philippines require the following documents:

SEC Certificate of Registration
Articles of Incorporation and By-Laws
Board Resolution naming the authorized signatories for the account

Securing Office Space and Other Essential Permits

Foreign businesses typically rent office space or business premises. If renting, a Contract of Lease must be secured. Additionally, depending on the nature of the business, further permits may be required, such as:

Fire Safety Inspection Certificate
Sanitary Permit
Environmental Compliance Certificate for businesses affecting the environment

Visa and Employment Requirements for Foreigners

Foreigners who intend to work in their own businesses must obtain the appropriate visa, such as the 9(G) Pre-arranged Employment Visa, and secure an Alien Employment Permit (AEP) from DOLE.

Is Assistance Available?

Starting a business in the Philippines as a foreign national is a multi-step process involving strict compliance with legal, tax, and regulatory requirements. Choosing the right business structure, registering with the appropriate government agencies, and ensuring compliance with foreign ownership restrictions are essential to success. For foreign entrepreneurs, understanding the local business landscape and seeking legal assistance are often beneficial in navigating the complexities of business registration smoothly.

Efficiency in managing time, effort, and costs is crucial when navigating application processes, business registrations, and compliance requirements. Our expertise ensures that these processes are streamlined, allowing our clients to meet their business needs efficiently while focusing on the key areas of operation and growth.

Triple i Consulting is proud to be the first ISO 9001:2008-certified firm in the Philippines specializing in company and business registration services. Whether you need assistance with company incorporation or business registration, we are here to provide tailored support.

To schedule a free initial consultation with one of our registration experts, please contact us through the following channels: