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Foreign Investments Act (R.A. No. 7042)

1. Policy of the Law

The government recognizes the pivotal role of private sector investments and,
thereby, commits to continuously enhance the business climate. Foreign investments
are encouraged to fill in capital gaps, help provide employment, increase production,
and provide a base for the overall development of the economy.

2. Definition of Terms

a. Foreign Investment

The Foreign Investment Act (R.A. 7042, 1991, amended by R.A. 8179, 1996)
liberalized the entry of foreign investment into the Philippines. Under the FIA, foreign
investors are generally treated like their domestic counterparts and must register
with the Securities and Exchange Commission (SEC) (in the case of a corporation or
partnership) or with the Department of Trade and Industrys Bureau of Trade
Regulation and Consumer Protection (in the case of a sole proprietorship).

The term "investment" shall mean equity participation in any enterprise organized or
existing under the laws of the Philippines.

The term "foreign investment" shall mean as equity investment made by a non-
Philippine national in the form of foreign exchange and/or other assets actually
transferred to the Philippines and duly registered with the Central Bank which shall
assess and appraise the value of such assets other than foreign exchange.

Percentage of foreign equity allowed under the FIA

With the liberalization of the foreign investment law, 100% foreign equity may be
allowed in all areas of investment except those reserved for Filipinos by mandate of
the Philippine Constitution and existing laws.

Within the 1991 Foreign Investment Act (FIA) there are two negative lists, also
known as the Foreign Investment Negative List, which defines the foreign
investments, which are limited or restricted by the Constitution and specific laws.
Negative List A & Negative List B.

List A:
Areas reserved to Filipinos by mandate of the Constitution and special laws such as
but not limited to: a. Mass media except recording, practice of licensed professions,
retailtrade with paid-up capital of less than US$2.5 million, cooperatives, and small
scale mining, etc. where foreign ownership is prohibited; and b. Private radio
communications network, private recruitment, advertising, ownership of land,
operation and management of publicutilities, etc. where only minority foreign
ownership is allowed.

List B:
Areas that are security and defense related; those with adverse effects onpublic
health and morals; and for the protection of small-and medium scale enterprises,
i.e., domestic market enterprises with paid-in capital of less than the equivalent of
US$200,000 and domestic market enterprises which involve advanced technology or
employ at least 50 Filipino directemployees, with paid-in capital of less than the

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equivalent US$100,000.

b. Doing Business in the Philippines

The praise "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 totaling 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: Provided, however, That the phrase "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; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name and
for its own account;

What requirements must be complied with before a foreign

corporation can do business in the Philippines? A foreign corporation
must first secure the necessary licenses or registrations from the appropriate
government bodies. In the case of corporations or partnerships, the
necessary incorporation papers from the SEC must first be obtained. In the
case of single proprietorship, registration from the Bureau of Trade Regulation
& Consumer Protection of the Department of Trade and Industry must be
secured.

What are the requisites for obtaining a license to do business in the

Philippines? A foreign corporation shall be granted a license to transact
business by filing a verified application with the SEC setting forth specifically
required data, including certified copies of its articles of incorporation and by-
laws. The SEC is the government agency responsible for the registration,
licensing, regulation, and supervision of all corporations and partnerships
organized in the Philippines, including foreign corporations licensed to engage
in business or to establish branch offices in the Philippines. Registration with
the SEC grants the entity with the corporate franchise or juridical personality
to operate and transact business in the Philippines.

What is the effect of being issued a license to do business? When a

foreign corporation is issued the license to do business in the Philippines, it
may commence to transact its business in the Philippines and continue to do
so for as long as it retain its authority to act as a corporation under the laws
of the country or state of its incorporation, unless such license is sooner
surrendered, revoked, suspended, or annulled.

What are the consequences of not obtaining a license to do business?

A foreign corporation doing business in the Philippines without first obtaining
the license to do business (a) shall not be permitted to maintain or intervene
in any action, suit or proceeding in any court or administrative agency of the
Philippines; (b) but such foreign corporation may be sued or proceeded

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against before Philippine courts or administrative tribunals on any valid cause

of action recognized under Philippine laws.

Is there a need for the foreign corporation to appoint its local agent
in the Philippines? Yes. Among the things to be stated in the verified
application are the name and address of the foreign corporations resident
agent authorized to accept summons and process in all legal proceedings and,
pending the establishment of a local office, all notices affecting the
corporation.

How will the foreign corporation appoint its Philippine local agent? A
written power of attorney must be filed by the foreign corporation with the
SEC designating some person who must be a resident of the Philippines, on
whom service of summons and other legal processes may be served in all
actions or other legal proceedings against such corporation, and consenting
that service upon such resident agent shall be admitted and held as valid as if
served upon the duly authorized officers of the foreign corporation at its home
office.

Is there a need for the foreign corporation to execute an agreement

with the SEC regarding service of summons? Yes. In consideration of its
being granted a license to do business in the Philippines, the foreign
corporation shall execute and file with the SEC an agreement or stipulation
agreeing that if at any time said corporation shall cease to transact business
in the Philippines or shall be without any resident agent in the Philippines on
whom any summons or other legal processes may be served, then in any
action or proceeding arising out of any transaction or business which occurred
in the Philippines, service of any summons or other legal processes may be
made upon the SEC and that such service shall have the same force and
effect as if it is made upon the duly authorized officers of the foreign
corporation at its home office.

What is the effect of failure to appoint or maintain a local agent? The

failure to appoint or maintain a resident agent in the Philippines or failure,
after change of its resident agent or his address, to submit to the SEC a
statement of such change, are grounds for revocation of a license granted to
a foreign corporation to do business.

Is there any Reciprocity Compliance? Yes. Attached to the application

shall also be a duly executed certificate under oath by the authorized official
or officials of the jurisdiction of incorporation of the foreign corporation,
attesting to the fact that the laws of the country or state of the applicant
allow Filipino citizens and corporation to do business therein.

Is there a need to deposit Securities? Yes. Within sixty (60) days from
issuance of the license to do business, such foreign corporation shall deposit
with the SEC, for the benefit of its present and future creditors, Philippine
securities in the actual market value of at least Php100,000, subject to
further deposit of additional securities every six months after each fiscal year
equivalent in actual market value to two percent (2%) of the amount by
which the foreign corporations gross income for that fiscal year exceeds
Php5,000,000.00.

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Are there any tax incentives for foreign corporations investing in the
Philippines? Yes. A corporation investing in the Philippines may avail of tax
breaks and incentives by registering with the BOI Board of Investments.
The company must operate a business, which has been recognized as a
preferred area of investment in the Philippines Investment Priority Plan (IPP).

Can business activities not covered by the IPP avail of tax incentives?
Yes, provided the following requirements are met: at least 50% of
production / service is for export, if Filipino-owned enterprise; and at least
70% of production / service is for export, if majority foreign-owned enterprise
(more than 40% foreign equity).

What are the available fiscal incentives for foreign corporations

operating businesses covered by the IPP?
o Income Tax Holiday
o Exemption from Taxes and Duties on Imported Spare Parts
o Exemption from Wharfage Dues and Export Tax, Duty, Impost and
Fees
o Tax Exemption on BreedingStocks and Genetic Materials
o Tax Credits
o Additional Deductions from Taxable Income.

What are the advantages of an Income Tax Holiday?

o Companies registered with the BOI are eligible for income tax holidays,
which range form 3 8 years. 4 years for new projects without
pioneer status and 6 years for projects with pioneer status.
o A 100% foreign owned corporation may be entitled to incentives if
their business has been categorized as a pioneer project and at least
70% of production / service is exported or the project is in one of the
less-developed areas mentioned in the IPP. Companies not exporting
100% of their production / services are obliged to have 60% Filipino
ownership within a period of 30 years from time of registration with
the BOI. Foreign ownership of corporations in non-pioneer projects is
limited to 40% except if the company exports more than 70% of its
production / service.

How does a foreign corporation apply for BOI incentives? Submission

of a notarized application specifying the nature of the projects, its inclusion in
the IPP or not, percentage of production for export, the investors details and
a 5-year feasibility study.

What are other tax incentive schemes available for foreign

corporations? Companies that register and locate within an area that is
under the Philippine Economic Zone Authority (PEZA) are entitled to various
tax incentives and other advantages.NOTE: Usually, enterprises located in a
PEZA approved ecozone are required to export 100% of their production.

What is the percentage of foreign ownership allowed in enterprises

located in a PEZA approved ecozone? 100% foreign ownership is allowed
except in activities, which are limited by the Foreign Investment Negative
List.

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What are the incentives provided by PEZA?

o Income Tax Holiday (ITH) or exemption from corporate income tax for
4 years, extendable to a maximum of 8 years; after which a special
5% tax on gross income (sales less direct costs) shall be paid in lieu of
all national and local taxes. The income tax holiday is not available for
locators in the Subic Bay Metropolitan Authority (SBMA) and Clark
Freeport Zone; they are entitled to the special 5% tax on gross income
as described above.
o Exemption from duties and taxes on imported capital equipment, spare
parts, supplies, and raw materials. Tax credits will be issued on
breeding stocks or genetic materials when they are sourced locally.

What are the other available incentives?

o PEZA may grant the right to the locator on a case-to-case basis the
sale of up to 30% of production to the domestic market.
o Exemption from wharfage dues and export taxes, imposts and fees.
o Permanent resident status for foreign investors and immediate family
members.
o Employment of foreign nationals.
o Simplified import and export procedures.

Can foreign corporations acquire or own land in the Philippines? Yes,

provided the following requirements are met: (a) it must be a private land,
which means any land of private ownership; and (b) the foreign equity in the
corporation must not exceed forty percent (40%).

What will happen if foreign ownership exceeds forty percent (40%)?

The effect would be that the foreign corporation would lose its capacity to
hold the private land. They may, however, be granted temporary rights such
as a lease contract which is not prohibited by the Constitution.

What are the other exceptions to the ownership of land by foreign

investors and corporations?
o Acquisition through hereditary succession;
o Purchase by a former natural-born Filipino citizen pursuant to the Dual
Citizenship Law which states that a former Filipino re-acquiring his
Filipino Citizenship shall be deemed not to have lost his Philippine
citizenship, thus enabling them to enjoy all the rights and privileges of
a Filipino;
o If a former natural-born Filipino who has become a naturalized citizen
of another state opts not to re-acquire Filipino citizenship according to
the Dual Citizenship Act, he may nonetheless own land but limited to
the following according to BP 185 and RA 8179):
For residential use:
Up to 1,000 square meters of residential land
Up to 1 hectare of agricultural land
For business or commercial use
Up to 5,000 square meters of urban land
Up to 3 hectares of rural land
o Purchase of not more than 40% interest in a condominium project;
and
o Ownership through Filipinos who are married to aliens who retain their

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Filipino citizenship

Can foreign corporations own real properties in the Philippines other

than land? Yes. Foreign corporations can acquire other immovable or real
properties such as buildings and other improvements on the land.

Are foreigners and foreign corporations allowed to lease lands in the

Philippines? Yes. Foreign investors investing in the Philippines can now lease
private lands up to 75 years. Based on R.A. No. 7652, entitled Investors
Lease Act, lease agreements may be entered into with Filipino landowners.
Lease period is 50 years, renewable once for another 25 years. For tourism
projects, the lease shall be limited to projects with an investment of not less
than US$5M, 70% of which shall be infused in said project within 3 years
from signing of the lease contract.

Are arbitration clauses accepted in the Philippines? Yes. Consistent with

UNCITRAL Model Law, the Alternative Dispute Resolution (ADR) Act of 2004
was recently enacted. The Law promotes the use of different modes of ADR
for the speedy and impartial dispensation of justice. The ADR Act expressly
adopted under Section 19 thereof the UNCITRAL Model Law as the law
governing international commercial arbitration in the Philippines. /in short,
the ADR Act has now opened the window for the Philippines to be a venue for
international commercial arbitration and mediation.

Can foreign corporations participate in bidding for projects by the

Philippine Government? Yes. Under the Government Procurement Reform
Act of 2003, all procurement shall be done through competitive bidding, a
method of procurement which is open to participation by any interested party.

c. Export Enterprise
The term "export enterprise" shall mean an enterprise, which produces goods for
sale, or renders services to the domestic market entirely or if exporting a portion of
its output fails to consistently export at least sixty percent (60%) thereof.

d. Domestic Market Enterprise

Section 7. Foreign Investments in Domestic Market Enterprises. - Non-
Philippine nationals may own up to one hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is prohibited or limited by existing law
or the Foreign Investment Negative List under Section 8 hereof.

A domestic market enterprise may change its status to export enterprise if over a
three (3) year period it consistently exports in each year thereof sixty per cent
(60%) or more of its output.

3. Registration of Investments on Non-Philippine Nationals

The term "Philippine national" shall mean a citizen of the Philippines or a domestic
partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a

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Philippine national and at least sixty (60%) of the fund will accrue to the
benefit of the Philippine nationals: Provided, That where a corporation and
its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the
capital stocks outstanding and entitled to vote of both corporations must be
owned and held by citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors of both corporations must
be citizens of the Philippines, in order that the corporations shall be
considered a Philippine national.

Section 5. Registration of Investments of Non-Philippine Nationals. - Without

need of prior approval, a non-Philippine national, as that term is defined in Section 3
a), and not otherwise disqualified by law may upon registration with the Securities
and Exchange Commission (SEC), or with the Bureau of Trade Regulation and
Consumer Protection (BTRCP) of the Department of Trade and Industry in the case of
single proprietorships, do business as defined in Section 3 (d) of this Act or invest in
a domestic enterprise up to one hundred percent (100%) of its capital, unless
participation of non-Philippine nationals in the enterprise is prohibited or limited to a
smaller percentage by existing law and/or limited to a smaller percentage by existing
law and/or under the provisions of this Act.

The SEC or BTRCP, as the case may be, shall not impose any limitations on the
extent of foreign ownership in an enterprise additional to those provided in this Act:
Provided, however, That any enterprise seeking to avail of incentives under the
Omnibus Investment Code of 1987 must apply for registration with the Board of
Investments (BOI), which shall process such application for registration in
accordance with the criteria for evaluation prescribed in said Code,

Provided, finally, That a non-Philippine national intending to engage in the same line
of business as an existing joint venture in his application for registration with SEC.
During the transitory period as provided in Section 15 hereof, SEC shall disallow
registration of the applying non-Philippine national if the existing joint venture
enterprise, particularly the Filipino partners therein, can reasonably prove they are
capable to make the investment needed for they are competing applicant. Upon
effectivity of this Act, SEC shall effect registration of any enterprise applying under
this Act within fifteen (15) days upon submission of completed requirements.

Specific Areas of Equal Investment Rights for Former Filipino nationals

While most areas of businesses have limits for foreign investors, Section 9 of the
amended Foreign Investments Act of 1991 lists the following types of businesses
where former natural-born Filipinos can enjoy the same investment rights as a
Philippine citizen: 1) Cooperatives; 2) Rural banks; 3) Thrift banks and private
development banks; 4) Financing companies

Former natural born Filipinos can also engage in activities under List B of the
FINL.This means that their investments shall be treated as Filipino or will be
considered as forming part of Filipino investments in activities closed or limited to
foreign participation.

The equal investment rights of former Filipino nationals do not extend to activities
under List A of FINL, which are reserved for Filipino citizens under the Constitution.

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Former natural born Filipinos have also been given the right to be transferees of
private land up to a maximum of 5,000 square meters in the case of urban land or
three (3) hectares in the case of rural land to be used for business or other
purposes.

4. Foreign Investments in Export Enterprise

Section 6. Foreign Investments in Export Enterprises. - Foreign investment in

export enterprises whose products and services do not fall within Lists A and B of the
Foreign Investment Negative List provided under Section 8 hereof is allowed up to
one hundred percent (100%) ownership.

Export enterprises which are non-Philippine nationals shall register with BOI and
submit the reports that may be required to ensure continuing compliance of the
export enterprise with its export requirement. BOI shall advise SEC or BTRCP, as the
case may be, of any export enterprise that fails to meet the export ratio
requirement. The SEC or BTRCP shall thereupon order the non-complying export
enterprise to reduce its sales to the domestic market to not more than forty percent
(40%) of its total production; failure to comply with such SEC or BTRCP order,
without justifiable reason, shall subject the enterprise to cancellation of SEC or
BTRCP registration, and/or the penalties provided in Section 14 hereof.

5. Foreign Investments in Domestic Market Enterprise

Section 7. Foreign Investments in Domestic Market Enterprises. - Non-

Philippine nationals may own up to one hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is prohibited or limited by existing law
or the Foreign Investment Negative List under Section 8 hereof.

A domestic market enterprise may change its status to export enterprise if over a
three (3) year period it consistently exports in each year thereof sixty per cent
(60%) or more of its output.

6. Foreign Investment Negative List

The term "Foreign Investments Negative List" (FINL) or "Negative List" shall
mean a list of areas of economic activity whose foreign ownership is limited to a
maximum of forty percent (40%) of the equity capital of the enterprise engaged
therein.

The FINL is a shortlist of investment areas or activities, which may be opened to

foreign investors and/or reserved to Filipino nationals. The Foreign Investments
Negative Lists (FINL) are classified as follows:

In Negative List A, foreign ownership in certain businesses is limited by mandate of

the Constitution and specific laws. These are:

No Foreign Equity
1. Mass Media except recording

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2. Practice of professions
3. Retail trade enterprises with paid-up capital of not less than US$2,500,000.00
4. Cooperatives
5. Private Security Agencies
6. Small-scale Mining
7. Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive
economic zone
8. Ownership, operation and management of cockpits
9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and
radiological weapons and anti-personal mines
11. Manufacture of firecrackers and other pyrotechnic devices Up to Twenty Percent
(20%) Foreign Equity
12. Private radio communication network Up to Twenty-Five Percent (25%) Foreign
Equity
13. Private recruitment, whether for local or overseas employment
14. Contracts for the construction and repair of locally-funded public works, except:
a. Infrastructure/development projects covered in RA 7718; andb. Projects which are
foreign funded or assisted and required to undergo international= competitive
bidding (Sec. 2(a) of RA 7718)
15. Contracts for construction of defense related structure Up to Thirty Percent
(30%) Foreign Equity
16. Advertising Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of natural resources
18. Ownership of Private Lands
19. Operation and management of public utilities
20. Ownership/establishment and administration of educational institutions
21. Culture, production, milling, processing, trading excepting retailing, of rice and
corn and acquiring, by barter, purchase or otherwise, rice and corn and the
byproducts thereof
22. Contracts for the supply of materials, goods and commodities to government-
owned or controlled corporation, company, agency or Municipal Corporation
23. Project Proponent and facility Operator of a BOT project requiring a public
utilities franchise
24. Operation of deep-sea commercial fishing vessels
25. Adjustment Companies
26. Ownership of condominium units where the common areas in the condominium
projects are co-owned by the owners of the separate units or owned by a corporation

Up to Sixty Percent (60%) Foreign Equity

27. Financing companies regulated by the Securities and Exchange Commission
28. Investment houses regulated by the SEC

In Negative List B, foreign ownership is limited for reason of security, defense, risk
to health and morals and protection of small-and-medium-scale enterprises. These
are:

Up to Forty Percent (40 %) Foreign Equity

1) Manufacture, repair, storage and/or distribution of products and/or ingredients
requiring Philippine National Police (PNP) clearance:

1. Firearms (handguns to shotguns), parts of firearms and ammunition

therefore, instruments or implements used or intended to be used in the

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manufacture of firearms
2. Gunpowder
3. Dynamite
4. Blasting supplies
5. Ingredients used in making explosives:
6. Telescopic sight, sniper scope and other similar devices

2) Manufacture, repair, storage and/or distribution of products requiring Department

of National Defense (DND) clearance:

1. Guns and ammunition for warfare

2. Military ordnance and parts thereof (e.g., torpedoes, depth charges, bombs,
grenades, missiles)
3. Gunnery, bombing and fire control systems and components
4. Guided missiles/missile systems and components
5. Tactical aircraft (fixed and rotary -winged), parts and components thereof
6. Space vehicles and component systems
7. Combat vessels (air. land and naval) and auxiliaries
8. Weapons repair and maintenance equipment
9. Military communications equipment
10. Night vision equipment
11. Stimulated coherent radiation devices, components and accessories
12. Armament training devices
13. Others as may be determined by the Secretary of the DND

3) Manufacture and distribution of dangerous drugs.

4) Sauna and steam bathhouses, massage clinics and other like activities regulated
by law because of risks posed to public health and morals
5) All forms of gambling, e.g. race track operation.
6) Domestic market enterprises with paid-in equity capital of less than the equivalent
of US$200,000.

Domestic market enterprises, which involve advanced technology or employ at least

fifty (50) direct employees with paid-in-equity capital of less than the equivalent of
US$100,000.

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