Overview of the Philippine Legal System

Overview of the Philippine Legal System

Presentation for Nishimura & Asahi Singapore Office

May 27, 2014

Outline of the PresentationI. General BackgroundII. Philippine Legal SystemIII. Foreign Investments in the PhilippinesIV. Investment IncentivesV. Business Vehicles in the PhilippinesVI. Regulatory RegimeVII. TaxationVIII.Special Focus: Real Estate Investment

s in the Philippines

General Background The Philippines is an archipelago of 7,107

islands. There are three principal regions of the

archipelago: Luzon, Mindanao and Visayas group of islands.

The Philippines is a democratic republican state with a presidential form of government.

The Philippine government consists of the executive, legislative, and judicial branches.

General Background National population of 103.8 million (as

of July 2012) The official national language is Filipino.

Most Filipinos are bilingual, speaking English fluently as their second language. It is also the main language used in business, government, and schools, and is also common in everyday communication. Local laws are also written in English.

General Background The Philippines is the only

predominantly Christian country in Asia with approximately 83% of the population belonging to the Roman Catholic Church.

Philippine Legal System The Philippine legal system is aptly described as a

blend of customary usage, and Roman (civil law) as well as Anglo-American (common laws) system.

The civil law operates in areas such as family relations, property, succession, contract and criminal law.

Statutes and principles of common law origin are evident in such areas as constitutional law, procedure, corporation law, negotiable instruments, taxation, insurance, labour relations, banking and currency.

In some Southern parts of the islands, Islamic law is observed.

Philippine Legal System The main sources of Philippine law are the

Constitution, statutes, treaties and conventions, and judicial decisions.

The Constitution is the fundamental law of the land and as such, it is authority of the highest order against which no other authority can prevail.

Statutes are intended to supply the details which the Constitution does not provide for.

Philippine Legal System Philippine law is also derived from cases.

› The Civil Code provides that ‘judicial decisions applying to or interpreting the laws or the Constitution shall form a part of the legal system of the Philippines’.

Only decisions of its Supreme Court establish jurisprudence and are binding on all other courts. They are also binding to everyone, much like the laws are made binding.

These decisions assume the same authority as the statutes to which they apply or interpret until authoritatively abandoned by the Supreme Court.

Philippine Legal System First-level courts Regional Trial Courts Court of Appeals Supreme Court Other special courts:

› Sandiganbayan› Court of Tax Appeals› Shari’a Courts› “Quasi-courts” (administrative agencies)

Foreign Investments in the Philippines

The law that governs the participation of foreign entities in economic and commercial activities in the Philippines is Republic Act No. 7042, as amended, otherwise known as the Foreign Investments Act of 1991 (“FIA”).

Negative list system – only the investment areas and/or activities listed in the foreign investment negative list shall be reserved to Philippine nationals. The extent of foreign equity allowed in such areas varies.


List A – foreign ownership is limited by mandate of the Constitution and specific laws

List B – foreign ownership is limited for reasons of security, defense, risk to health and morals and protection of small-and medium-scale enterprises


A non-Philippine national is a person, corporation, partnership, or association that is not considered a “Philippine national” under the FIA.

A “Philippine national,” as defined under the FIA, is any of the following: › a. A citizen of the Philippines; › b. A domestic partnership or association wholly owned by citizens of the

Philippines; › c. A corporation organized under the laws of the Philippines, of which at

least 60 percent of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines;

› d. A corporation organized abroad and registered as doing business in the Philippines under the Corporation Code, of which 100 percent of the capital stock outstanding and entitled to vote is wholly owned by Filipinos;

› e. A trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60 percent of the fund will accrue to the benefit of Philippine nationals.


However, in a SEC Memorandum circular, companies which are subject to a foreign investment regulation were required to observe at all times the required percentage of Filipino ownership with respect to both:› The total number of outstanding shares of stock entitled

to vote in the election of directors; and› The total number of outstanding shares of stock, whether

or not entitled to vote in the election of directors. Additionally, at least 60 percent of the members of

the board of directors must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national.


The Philippines has an Anti-Dummy Law that imposes criminal and civil penalties on persons violating foreign equity limitations.

As an example, the following arrangements will not be allowed under the Anti-Dummy Law:› In a corporation engaged in a nationalized activity with 10 members in the

board of directors, a maximum of 4 foreign members of the Board is allowed. Thus, the election of 5 or more non-Filipinos as members of the Board is not allowed.

› A corporation whose outstanding shares of stock entitled to vote in the election of directors which are owned by non-Filipinos is 40% but the total outstanding shares of stock whether or not entitled to vote in the election of directors which are owned by non-Filipinos is 55% is not allowed.

› A clause in the shareholders’ agreement which provides that if shareholders do not agree, the non-Filipino shareholder’s view is controlling whether in general or with respect to certain items.

› A clause in the shareholders’ voting agreement which ignores the actual voting weight according to the percentage of shares held and replaced by an equalization of the voting power of the each of the shareholders, whether Filipino or non-Filipino.


Ownership of private lands is restricted to Filipino citizens and to companies that are at least 60% owned by Philippine nationals. However, foreign investors may obtain 50-year leases, renewable for another 25 years, on private land.

Investment Incentives Incentives are offered by various

government agencies, depending on the type of industry or the place where the business wishes to operate.

Generally, the Philippines grants various incentives such as tax, non-tax, and industry incentives.

Investment Incentives Tax incentives include income tax holidays for three to eight

years, special tax deductions and duty-free importation of some items through customs bonded warehouses. After the income tax holiday, companies are also entitled to a special tax rate of 5% on gross income (measured as sales less direct costs) in lieu of all Philippine national and local taxes.

Non-tax incentives include simplified customs procedures for imports and exports, the generally unrestricted use of consigned equipment, and employment in general of foreign nationals in supervisory, technical, or advisory positions for five years from registration.

Industry-specific incentives also available in the mining industry, mini-hydroelectric power developers, and tourism.

Business Vehicles in the Philippines

There are three general forms of business organizations in the Philippines: sole proprietorship, partnership, and corporation (domestic or foreign).› A sole proprietorship is a business owned and operated by a single

natural person. The liability of the sole proprietor is unlimited, and the personality of the business enterprise is not distinct and separate from that of the owner.

› A partnership is created by virtue of a contract whereby two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

› Subject to nationality requirements pertaining to the intended activity, Philippine law allows foreign investors to establish and incorporate a domestic corporation, and foreign corporations to transact business in the Philippines as a branch or a representative office.


A domestic corporation may be a joint venture or a wholly owned subsidiary.

A branch and a representative office of a foreign corporation are mere extensions of their head offices.

A foreign investor may also invest as a limited or general partner in a partnership.


Foreign corporations are required to obtain a license from the Securities and Exchange Commission (SEC) before they may do business in the Philippines, which typically involves remitting capital of at least $200,000 to the Philippines. Failure to obtain a license will result in the corporation losing its ability to sue in local courts.


“Doing business” shall include:› Soliciting orders;› Service contracts;› Opening offices, whether called “liaison” offices or branches; › Appointing representatives or distributors domiciled in the

Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more;

› Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and

› Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization.


“Doing business” shall not be deemed to include:

Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;

Having a nominee director or officer to represent its interests in such corporation;

Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.


The most common form of corporate vehicle used by foreign investors is the corporation.

A corporation readily accommodates the requisite Filipino ownership. They are also the only vehicle that can be used if an investor wants to establish a regional headquarters in the Philippines.

Finally, the absence of tax profit remittances should make the branch the vehicle of choice for investors locating in a special economic zone.


Joint ventures tend to be feasible investment vehicles only for construction projects and certain energy operations. Joint ventures in other activities are subject to unfavourable tax treatment as partnerships.

Regulatory Regime The two main agencies for business registrations are the

Department of Trade and Industry (DTI) and the Securities and Exchange Commission (SEC).

Businesses owned by individuals must register with the DTI, while businesses operated through corporations or partnerships must register with the SEC.

At a minimum, a business must also register with the Bureau of Internal Revenue (BIR), the Home Development Mutual Fund (HDMF), the Social Security System (SSS), and the Philippine Health Insurance Corporation.

The enterprise must also register with the local government unit of the place where its business will be conducted, unless it is registered with one of the agencies responsible for administering Philippine incentive laws (other than the Board of Investments).

Regulatory Regime The Philippines has no formal Anti-Trust Law. However, there are legal provisions which

prohibit any combination of businesses that would result in unfair competition or restrain trade to artificially prevent free competition in the market.

They also give a right of action to persons who suffer damage from acts constituting unfair competition in agricultural, commercial or industrial enterprises, or in labor.

Taxation Philippine taxes are imposed by both the national

government and the local government units. Corporate income tax:

› A domestic corporation is taxed on its net income (gross income less allowable deductions) from all sources at the rate of 30 percent.

› A resident foreign corporation, such as a branch, is taxed only on its net income from Philippine sources at the same rate as a domestic corporation.

› A non-resident foreign corporation is subject to final withholding tax on its gross income (without the benefit of deductions) from Philippine sources at the rate of 30 percent.

› A foreign corporation is considered a resident when it is engaged in trade or business in the Philippines and is licensed by the SEC to engage in trade or business in the Philippines.

Taxation Value-Added Tax (VAT)

› VAT is a tax on consumption levied on the sale, barter, exchange, or lease of goods or properties and services in the Philippines, and on the importation of goods into the Philippines.

Documentary Stamp Taxes (DST)› Documentary stamp taxes must be affixed

to certain documents, instruments, and papers evidencing business transactions.

Real Estate Investments in the Philippines

Foreign Ownership of Private Lands

Ownership of private lands in the Philippines is reserved to Philippine citizens and corporations that are considered Philippine nationals.

Foreign nationals and companies therefore may not own private lands in the Philippines. However, they may indirectly own private lands by taking a minority interest (up to 40%) in domestic corporations.

Foreign Ownership of Real Property other than Land

Since the prohibition only applies to private lands, foreign nationals and foreign corporations may own or take 100% interest in buildings, machineries, and other forms of real property other than lands.

A leasehold right over the land where the building or other real property is built is also acquired.

The execution of a lease agreement between the land owner and the building owner is also required.


As a general rule, the foreign owner can generally lease private lands for 25 years and may be renewed for another 25 years.

It can be extended to another 25 years (for a total of 75 years) under the Investor's Lease Act, depending on the purpose to which the building will be used.

If the lease is made under the Investor’s Lease Act, it is required to be registered with the Department of Trade and Industry (“DTI”).

To be granted an extension, the foreign lessee must also show to the DTI that it has made social and economic contributions to the country.


Foreign companies that locate in government-designated economic and industrial zones may also enter into lease agreements with a maximum lease term of 50 years and is also renewable for 25 years.

In case of extension, the foreign company must also present proof before the administrative agency managing the economic and industrial zone that it has made social and economic contributions to the country.

Additionally, foreign companies which acquire real properties in the Philippines for the purpose of establishing business or commercial operations in the Philippines are required to obtain a license to do business from the Securities and Exchange Commission.

Foreign ownership interests in a condominium

As an alternative to owning land, foreign nationals and companies may also own condominium units in condominium projects.

If the condominium project is set up on leased land, the corresponding condominium corporation may be established by a foreign corporation. The land ownership restriction does not apply in this case.

Foreign ownership interests in a condominium

Where the condominium corporation is a Filipino corporation which owns the land on which the condominium project is situated, no interest in the condominium may be transferred to non-Filipinos or to corporations more than 40% of the capital stock of which is owned by non-Filipinos.

When the common areas are held by a condominium corporation, the transfer to non-Filipinos of units in the project may be made only up to the point where the accompanying transfer of stockholdings in the condominium corporation would not cause the non-Filipino interest in such corporation to exceed 40% of its entire capital stock.

Lease by Foreign Corporations

Apart from the maximum allowable period of a lease by foreign corporations, there are no other rules or regulations only applicable to foreign nationals or corporations.

Generally, the lessee cannot assign the lease without the consent of the lessor unless there is a stipulation to the contrary. However, the lessee may sublease the property in the absence of express prohibition.

Lease by Foreign Corporations

There are also no special or formal requirements for the execution or perfection of the lease. However, if the lease is longer than one year, it must be in writing in order to be enforceable. Also, the lease must be recorded in the Registry of Property to be binding upon third persons.

The leasehold right that is acquired under long-term lease contracts may be sold, transferred or assigned to another foreign company or a Filipino national. It may also be used as a security for a loan agreement.

Date post:	23-Aug-2014
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