If you’re an international investor looking to expand your business into the Philippines, understanding which legal entity to choose for your business will help you have greater control over your business whilst also managing your risk. Setting up as a Domestic Corporation in the Philippines or obtaining a license for your overseas branch office will have effects on your tax, liability, and control over your business. Understanding what each entity is and how they work will ensure your executive team can protect your international investment, manage your taxes, and have greater control over your long-term presence in the market.
Corporate Entity Differences and Foreign Ownership Limitations
Before deciding which entity to set up your growing business as, it’s important to understand what each entity means. International executives need to understand the difference between setting up a standalone entity and an overseas extension.
- Domestic Corporation in the Philippines: A Domestic Corporation in the Philippines is a standalone legal entity incorporated under local corporate law.
- Branch Office: A branch is an extension of an overseas corporation that has been licensed to operate in the Philippines.
- Foreign Ownership: Foreign investors can own up to 100% of Domestic Corporations as long as the minimum capital requirements are met and they’re not engaging in any restricted activities found on the Foreign Investment Negative List (FINL).
- Capital Requirements: Setting up a branch typically requires a capital of US 200,000 but can be reduced to US 100,000 if they incorporate advanced technology or employ at least 15 local employees.
- Control: A Domestic Subsidiary will have full control over its business. It can enter contracts, own property, purchase local assets, and has full liability for its debt.
- Board of Directors: Domestic Corporations must have a board of Directors comprising a minimum of five incorporators who have qualifying shares.
- Resident Agent: A Branch must have a legal resident agent based in the Philippines.
- Existence: A Domestic Subsidiary will exist indefinitely under current corporate legislation. However, a branch will only exist whilst its overseas head office exists.
Corporate Liability and Shareholder Protection
Protecting your international balance sheets is a key consideration for international companies looking to expand into emerging markets. Depending on whether you have a local entity or overseas extension, this will have different effects on your risk.
- Protection: A Domestic Corporation in the Philippines will act as a legal barrier to protect your overseas parent company. This means your shareholders will only be liable for the amount they’ve invested.
- Liability: Your overseas parent company will be directly liable for all claims, debts, and obligations of your branch.
- Contracts: Any contracts entered into by your Domestic Subsidiary will only affect the local entity. This means your overseas parent company won’t be liable for any claims.
- Litigation: Any litigation against your overseas branch will affect your overseas parent company. However, any litigation against your local entity will only affect the local entity.
- Protection: Creating a separate legal entity will protect your parent company from any claims by local creditors.
- Credit: Suppliers, landlords and potential customers will often rely on your global balance sheet and credit rating.
- Liability: Environmental liabilities, employee claims and trade issues will be restricted to your local entity.
Corporate Taxation and Capital Transfers
Understanding corporate taxation will help you to calculate your margins, cash flow, and transfer of profits internationally. Depending on whether you have a local entity or overseas branch, your tax, deductible costs, and profit transfer will vary.
- Taxation: A Domestic Corporation in the Philippines will pay a 25% (or 20% for Small Enterprises) Corporate Income Tax (CIT) on all income generated both locally and internationally. On the other hand, a Branch will pay a 25% CIT on all income generated locally.
- Profit Transfer Tax: When transferring profits from your local branch to your overseas headquarters, you’ll typically pay a 15% Branch Profit Remittance Tax.
- Dividend Tax: When paying dividends from your Domestic Corporation to your non-resident parent company, you’ll pay a 25% withholding tax. This can be reduced if you have a double taxation agreement or incentive law.
- Deductible Costs: Both entities can claim back any genuine and necessary costs incurred to generate taxable income. All costs must be accompanied by official BIR receipts.
- VAT: Both Domestic Subsidiaries and overseas branches will need to register for VAT. They will pay a 12% VAT or percentage tax based on income.
- Double Taxation Agreements: If your foreign company is from a country that has an active Double Taxation Agreement with the Philippines, you can claim tax relief to reduce your withholding tax on dividends, interest, and royalties.
- Head Office Costs: Overseas branches can claim a percentage of reasonable head office costs. All submissions must follow BIR regulations.
Legal Registrations
To obtain a legal entity, you will need to complete several registrations with different government and local authorities. Knowing the process will provide a smooth start to your overseas company.
- SEC Registration: To register as a Domestic Corporation in the Philippines, you’ll need to submit Articles of Incorporation and By-Laws to the SEC. To register as a Branch, you’ll need to obtain a License to Do Business in the Philippines.
- BIR Registration: Both entities will need to register with the Bureau of Internal Revenue (BIR). They will obtain Tax Identification Numbers, register their books of account, and have the right to print tax receipts.
- Local Registration: Growing companies will need to obtain a Barangay Clearance and Mayor’s Business Permit from the local government unit that has authority over your address.
- Social Benefits: Companies will need to register with national social benefits organizations such as the Social Security System (SSS), PhilHealth, and the Home Development Mutual Fund (Pag-IBIG Fund).
- Capital Verification: Investment must be proven by providing official bank certificates or proof of capital transfers. This will show that the required capital or investment funds have been transferred to local banks.
- BSP Investment: Registering your investment with the Bangko Sentral ng Pilipinas will allow your business to utilize the banking sector for future profit remittances and currency conversion.
- Incentive Board Requirements: If you wish to obtain tax holidays or duty-free incentives from PEZA or the Board of Investments, you’ll need to meet strict requirements.
- Legal Existence: Both entities will need to remain legally active by submitting audited accounts from CPAs and General Information Sheets (GIS) annually to the SEC.
Professional Advice
Completing registrations for your business will require you to manage strict documentation standards, changing foreign investment regulations, and obtaining approvals from a variety of government bodies. As this can be complicated and time-consuming, it’s best to seek advice from professionals to ensure you fully comply.
- Multiple Registrations: Whether you’re setting up as a Domestic Corporation in the Philippines or obtaining a license for your branch, you will need to liaise with many government bodies. Having advice will help avoid delays and unnecessary costs.
- Compliance: Having expert corporate legal advice will ensure your capital, corporate charter, and ownership fully comply with current foreign investment laws.
- Speed Up Process: Having local expertise will help you obtain the relevant permits, register with the tax board, and obtain approval from the SEC quickly.
- Risk Reduction: Having professional business advice will help you understand the risks you could be exposed to. You’ll have better tax planning and avoid any financial penalties.
- Corporate Charters: Advisors can help you create bespoke Articles of Incorporation and By-Laws to protect your capital, shareholder agreements, and minority rights.
- Foreign Documentation: Professional teams can help your overseas head office legalize, apostille, and obtain official confirmation of your foreign corporate documents.
- Maximise Incentives: Working with knowledgeable consultants will help you obtain any tax breaks, holidays, and duty-free imports.
- Expert Help: BusinessRegistrationPhilippines.com is an expert provider of full corporate setup and registration services. We can help you set up your business in compliance.
Important Considerations
Choosing the right entity to set up your business will lay the foundations for your success in the Philippine market. Consider your ownership requirements, tax, liability, and long-term business goals.
- Consider Your Goals: Deciding between setting up a standalone entity or a branch must be in line with your business goals, capital goals, and target market.
- Tax Considerations: Consider the effects of having global taxation or branch taxation. Also consider your dividend and branch profit tax.
- Risk Tolerance: Companies working in complex and volatile industries often choose to set up as a Domestic Subsidiary to protect their parent company from any unexpected claims or litigation.
- Realistic Timelines: Obtaining approvals from government bodies can be done smoothly with realistic timelines for setting up bank accounts, capital transfers, legalizing documents, and registering with multiple bodies.
- Opportunities: Having a strong presence in the market will help your foreign business gain opportunities in the market, attract skilled staff, and utilize trade routes.
- Future Capital/Ownership Changes: Consider how easy it will be to change your ownership in the future. Will your chosen entity allow you to restructure your equity, bring in new investors, or divest?
- Current Legislation: Ensure you’re aware of the current changes to corporate tax, foreign ownership, and local licensing laws.
- Expert Help: Starting as a Domestic Corporation in the Philippines will provide great protection and position for your business when using expert business registration advice.
Final Thoughts
Knowing what entity to set up will impact everything you do in the Philippines. Incorporating as a Domestic Corporation in the Philippines will provide great protection and a unique corporate presence. Setting up a branch office will give you a direct connection to your overseas parent company. Considering your liability, tax, capital, and annual requirements will help you create a strong foundation for your international business. By ensuring your business goals match local legislation, you can take advantage of growth opportunities and manage your risks.
Is Assistance Available?
BusinessRegistrationPhilippines.com offers full legal, tax, and registration services to make entering the market easier. Our expert team will ensure you have a smooth experience so you can build and grow your business with confidence. Get in touch today to book your initial consultation.
- Contact Us Here
- Fill Out the Form Below
- Call us at +63 (02) 8540-9623