Notes when setting up a company in the Philippines

To ensure effective business operations and legal compliance in the Philippines, setting up a company also needs to focus on several important aspects. Initially, choosing the right type of business is key, with popular options such as Joint Stock Company (equivalent to a limited liability company), Private Enterprise (equivalent to a one-member company) or Partnership (equivalent to a partner company). However, there are some notes when establishing a company in the Philippines, Viet An Law would like to mention some important issues through the article below.

Notes on the operating structure when setting up a company in the Philippines

A company incorporated in the Philippines needs to comply with the requirements of the executive structure, including:

• Board of Directors/Founders: Number of members from 2 to 15. It is mandatory that the majority of these members reside in the Philippines.
• Key Titles: There must be at least three of the following titles:
  • President: The legal representative and signatory of the company’s documents. The president is not required to be a resident of the Philippines, but must be a member of the Board of Directors and own at least one shareholder.
  • Corporate Secretary: Responsible for legal matters related to the Securities and Exchange Commission (SEC), as well as the company’s internal administrative affairs. The Company Secretary is required to be a citizen and resident of the Philippines.
  • Corporate Treasurer: Manages and certifies the company’s financial documents, and ensures compliance with Internal Revenue Bureau (BIR) regulations. The Corporate Treasurer is required to be a resident of the Philippines.

Notes on foreign capital when setting up a foreign company in Philippines

Philippine law allows domestic companies to have foreign investment. The percentage of foreign capital in a company will affect its rights and obligations, especially in some specific areas of business. Foreign capital is classified into three main levels:

• More than 40.01% Foreign Capital: When the percentage of foreign capital exceeds 40%, the company is considered to have the majority of foreign capital. This means:
  • The company may face restrictions on its operations in certain sectors covered by the Foreign Investments Negative List. This list lists industries that are restricted or prohibited by Philippine law from foreign investment, often related to national security, defense, mass media, and several other fields.
  • The company may need to comply with special regulations on management and reporting under Philippine law.
  • However, having more than 40% foreign capital also brings the advantage of access to capital and technology from abroad.
• Less than 40% Foreign Capital: When the foreign capital ratio is below 40%, the company is considered to have the majority of domestic capital. This offers several advantages:
  • The company is less restricted in operating in various sectors than the company with more than 40% foreign capital.
  • Often enjoy more preferential policies for domestic businesses.
• 0% Foreign Capital: This is the case where the entire capital of the company is owned by Filipino individuals or organizations. These companies enjoy full benefits and incentives for domestic businesses and are not restricted by the Foreign Investment Negative List (except for general regulations that apply to all businesses).

Notes on minimum charter capital when setting up a company in the Philippines

The minimum capital requirement to set up a company in the Philippines depends on the percentage of foreign capital ownership. This is divided into three main levels, which directly affect the amount of capital that investors need to prepare:

• 0% Foreign Capital (100% Philippine Capital): If the company is wholly owned by a Filipino citizen or legal entity, the minimum capital requirement is very low, only about 100 USD (equivalent to about PHP5,000). This facilitates small and medium-sized businesses in the country.
• Less than 40% Foreign Capital: Similar to the case of 100% Philippine capital, if the foreign capital ratio is less than 40%, the minimum capital requirement is still 100 USD (about PHP5,000). This encourages foreign investors to enter the Philippine market with a smaller percentage of capital.
• More than 40.01% Foreign Capital: If the foreign capital ratio exceeds 40%, the minimum capital requirement increases significantly, reaching USD 200,000 (approximately PHP 4,800,000). This capital level applies to foreign-invested companies accounting for the majority.

Timing of capital contribution: Capital can be contributed to the company after the company has opened a bank account in the Philippines. This ensures transparency and effective cash flow management.

Cases eligible for capital requirement reduction:

Philippine law also provides for a number of circumstances in which the minimum capital requirement is reduced to US$100,000 (approximately PHP2,400,000) even if the foreign capital ratio is above 40.01%, specifically:

• Recruit at least 50 Filipinos: Creating jobs for Filipinos is encouraged, and this is one way to reduce capital requirements.
• Demonstrate the use of cutting-edge technology: If the company demonstrates the adoption of cutting-edge technology in its business, the capital requirement is also reduced. This encourages investors to bring new technology into the Philippines.
• Export at least 70% of the product: If the company commits to exporting at least 70% of the product’s output, the capital requirement will return to the low level of 100 USD (about PHP5,000). This boosts export activity and strengthens foreign exchange for the Philippines.

Example:

• A 100% Filipino-owned company that wants to open a small retail store only needs about PHP 5,000 capital.
• A joint venture company with 30% Japanese capital also only needs equivalent capital.
• An American technology corporation that wants to establish a subsidiary in the Philippines with 100% of the investment capital, if it does not fall into the circumstances of capital reduction, it needs to prepare USD 200,000. However, if they hire 50 Filipino workers, the capital requirement will be reduced to $100,000.