Company Incorporation in the Philippines

Entity structure of a foreign shareholding company in the Philippines

From a foreign investor's perspective, incorporating a Domestic Corporation in the Philippines involves understanding the nuances around foreign shareholding, capital requirements, and other legal prerequisites that impact foreign ownership. Here’s a focused breakdown:

Foreign Shareholding in Domestic Corporations

Ownership Structures:

1. Up to 40% Foreign-Owned: Common for most industries, allowing significant but not controlling foreign investment.
2. 40.01% to 100% Foreign-Owned: Possible in many sectors, though heavily regulated and restricted in industries critical to national interest as outlined in the Foreign Investments Negative List, such as public utilities and defense.

Foreign Investment Negative List:

Foreigners are prohibited from investing or owning in certain sectors specified in this list, which includes areas like mass media, small-scale mining, and private security agencies. This list is crucial for foreigners to consult before planning their investment strategy in the Philippines.

Capital Requirements

General Requirements:

A minimum of USD 100 for corporations with up to 40% foreign ownership or those exporting at least 60% of their products.

A higher requirement of USD 200,000 for corporations with more than 40% foreign ownership, unless they are considered pioneers in the Filipino industry using advanced technology or employing at least 50 local staff, where the requirement is USD 100,000.

Initial Investment:

The required initial investment can vary based on the percentage of foreign ownership and the type of industry. Foreign investors need to ensure sufficient capitalization as per the thresholds to meet regulatory approvals and to facilitate smoother business operations.

Organizational Structure and Compliance

Directors and Incorporators:

A Domestic Corporation must have between 2 to 15 directors or incorporators, each holding at least one share of capital stock. While the majority of incorporators must be residents of the Philippines, they do not necessarily need to be Filipino citizens.

Officers:

1. President: Can be a non-resident but must be a director owning shares.
2. Treasurer: Must be a resident of the Philippines.
3. Corporate Secretary: Must be a Filipino citizen.
4. Compliance Officer: Must be a resident of the Philippines.
5. Resident Agent

A foreign corporation must appoint a resident agent in the Philippines who will handle all legal processes, including summons and other legal matters arising from business activities in the country. This is crucial for ensuring that the corporation remains compliant with local laws and can respond effectively to legal issues.

Documents required for a company formation in the Philippines

To incorporate a company in the Philippines, you need to prepare and submit various documents. These documents are essential to comply with Philippine regulations and ensure your business operates legally. The documents will be used in KYC due diligence procedures, application preparation, and document submission to the authorities.

Proposed Company Details:

1. Proposed company names.
2. Business Activities: Detailed description of the company’s purposes and objectives.
3. Share Details: Number of shares, share classes (if any), rights attached, and nominal value.
4. Power of Attorney: Signed by each shareholder for submission.
5. Proof of a registered address in the Philippines

Personal Documents for Directors, Shareholders, and Promoters:

1. Copy of colored passport with at least 18 months of validity.
2. Tax Identification Number (TIN) (for Philipinos)
3. Valid IDs (for Philipinos) (equivalent for foreigners)
4. Proof of a foreign residential address.
5. Resume and contact information.
6. National identity card, if available.
7. Recent passport-sized photo with a red background.

Corporate Documents for Corporate Shareholders:

1. Certificate of Incorporation.
2. Memorandum & Articles of Association/Constitution and Amendments.
3. Certificate of Incumbency.
4. Proof of the registered address.
5. Board of Directors structure and corporate chart.
6. Corporate representative details and board resolution.

Additional Requirements:

1. Written confirmation that directors, shareholders, and other key individuals are not Politically Exposed Persons (PEPs).
2. Principal place of business address.
3. Source and origin of funds used in the business.
4. Expected location of the company’s customers and suppliers.
5. Information on the beneficial owner, if different from the named shareholder.

How do I incorporate a company in the Philippines?

Incorporating a company in the Philippines is a structured process that involves several important steps, from name registration to obtaining necessary permits. Each step is crucial to ensuring legal compliance and smooth operation of your business. Here’s a detailed guide on how to incorporate a company in the Philippines.

Step 1 - Name Registration with the SEC

The first step in incorporating your company in the Philippines is to register your business name with the Securities and Exchange Commission (SEC). Start by visiting the SEC’s Company Registration System online or their Name Verification Unit in Mandaluyong to check the availability of your desired company name and reserve it. Once your company name is reserved, prepare the required documents, including the Articles of Incorporation, By-laws, Joint Affidavit of two incorporators, and Treasurer’s Affidavit. Submit these documents to the SEC either online or in person. Upon approval, the SEC will issue a Certificate of Registration, officially legitimizing your company's existence and allowing you to proceed with business activities.

Step 2 - Obtain Barangay Clearance

After securing your SEC Certificate of Registration, the next step is to obtain a Barangay Clearance from the local barangay where your business will be located. This involves visiting the barangay office and submitting your SEC Certificate of Registration, two valid forms of identification, and proof of your company’s address, such as a Certificate of Land Title or Lease Contract. The Barangay Clearance is essential for ensuring compliance with local government regulations and is a prerequisite for obtaining further permits.

Step 3 - Acquire Business Permit from the Local Mayor’s Office

With your Barangay Clearance in hand, proceed to the Mayor’s Office of your municipality to apply for a business permit. This step involves submitting your SEC Certificate of Registration, Barangay Clearance, two valid IDs, and proof of address for your local office. The business permit, which you will receive after fulfilling these requirements, is crucial as it legally authorizes your company to operate within the municipality. This permit must be displayed at your business premises and is subject to annual renewal.

Step 4 - Register with the Bureau of Internal Revenue (BIR)

Registering your company with the Bureau of Internal Revenue (BIR) is a critical step to ensure compliance with Philippine tax laws. Visit the BIR’s Regional District Office (RDO) that corresponds to your business location and complete BIR Form 1903 (Application for Registration). Submit this form along with your SEC Certificate of Registration, Barangay Clearance, Business Permit, proof of address, and valid IDs. You may also need to pay the Registration Fee (BIR Form 0605) and Documentary Stamp Tax (BIR Form 2000). Once registered, you will receive a BIR Certificate of Registration (BIR Form 2303), which confirms your company’s tax obligations and allows you to operate legally. Additionally, ensure that you register your account books and receipts with the BIR.

Step 5 - Register as an Employer

If your company plans to hire employees, it’s necessary to register with several government agencies to comply with labor laws and provide benefits to your workforce. Register with the Social Security System (SSS) to offer social security benefits, with the Philippine Health Insurance Corporation (PhilHealth) for health insurance, and with the Home Development Mutual Fund (HDMF or Pag-IBIG Fund) for housing loan benefits. This step ensures that your company meets its obligations as an employer and provides essential benefits to your employees, fostering a compliant and supportive work environment.

Compliance requirements post-incorporation

SEC Compliance

1. General Information Sheet (GIS): Annually updated details about directors, officers, and major stockholders must be submitted.
2. Annual Financial Statements: Audited financial statements complying with Philippine Financial Reporting Standards (PFRS) need to be submitted to the SEC after BIR approval.
3. Stock and Transfer Book (STB): Must be stamped by the SEC within 30 days of the corporation’s incorporation.
4. Minutes of Meetings and Special Transactions: Records of all corporate meetings and specific transaction reports must be maintained and available for SEC inspection.

BIR Compliance

1. Annual and Quarterly Tax Returns: Corporations must file annual income tax returns by April 15 and quarterly VAT returns by the 20th of the month following each quarter.
2. Withholding Tax Returns: These include taxes withheld from employee compensation and payments to non-residents, filed monthly or quarterly.
3. Information Returns: Annual information returns, such as BIR Form 1604-C and 1604-E, summarizing withholding taxes, must be filed.

Local Government Unit (LGU) Compliance

1. Business Permits and Renewals: Must obtain and annually renew business permits and licenses from the LGU, including compliance with zoning, environmental, and health standards.
2. Regular Inspections: Subject to fire safety, building, and sanitary inspections to ensure compliance with local regulations.

Employee Welfare Compliance

1. SSS, PhilHealth, and Pag-IBIG Registration: Corporations must register with these agencies to ensure social security, health insurance, and housing benefits for employees.

VAT and tax considerations for companies

The Philippines operates a territorial tax system, meaning only income generated within the country is subject to Philippine taxes. Here’s a concise breakdown of the key elements of the tax structure:

Corporate Income Tax (CIT)

Standard Rate: The corporate income tax rate is 25% on net income for both domestic and resident foreign corporations.

Preferential Rate: Domestic micro, small, and medium-sized enterprises (MSMEs) with taxable income up to PHP 5 million (US$85,611) and gross sales not exceeding PHP 100 million (US$1.7 million) benefit from a reduced rate of 20%.

Domestic companies are taxed on their worldwide income, while non-resident companies are taxed only on their Philippine-sourced income.
Ease of Paying Taxes (EOPT) Act The Ease of Paying Taxes Act (Republic Act No. 11976) aims to modernize tax administration and streamline processes for easier compliance.

Taxpayer Classification:

Micro: Less than PHP 3 million (US$51,379)
Small: PHP 3 million to less than PHP 20 million (US$342,529)
Medium: PHP 20 million to less than PHP 1 billion (US$17.1 million)
Large: PHP 1 billion and above

Minimum Corporate Income Tax (MCIT)

A 2% MCIT is imposed on the gross income of domestic and resident foreign corporations starting from the fourth taxable year of operations. MCIT applies when it exceeds the regular 20% CIT. Excess MCIT can be carried forward and credited against normal tax for the next three years.

Withholding Tax

Resident company dividends are subject to a 25% withholding tax. Dividends paid to non-residents are taxed at 15%, provided the non-resident's home country allows a 15% tax credit.

Branch Profit Remittance Tax (BPRT)

Foreign company branches are taxed at 30% on income. A 15% BPRT applies to after-tax profits remitted to the head office, excluding non-business income like interests, dividends, rents, royalties, and capital gains.

Value-Added Tax (VAT)

Standard Rate: A 12% VAT is imposed on most goods and services with gross sales exceeding PHP 3 million (US$51,379).

Exporter Exemption: Registered export enterprises are exempt from VAT on local purchases of goods and services for up to 17 years, covering items like equipment, supplies, and packaging materials.