Foreign corporations will often use non-profitable representative entities to test their presence in the local market, handle local administration, and raise brand awareness without incurring large initial tax liabilities. As markets develop and local business opportunities arise, business leaders will often find they are limited by having a non-profitable entity. This will mean they will not be able to receive any local income or invoice local customers. To convert your office to become an active entity, you will need to comply with strict legal requirements. Converting a representative office in the Philippines to a fully functional branch, regional office, or local subsidiary will allow you to continue trading without interruption and gain full monetization rights.
Corporate Structure
To convert your entity to become an active business, you will need to look at the different corporate structures available to you under your country’s investment laws. Management will need to consider the following factors:
Foreign Branch Office
A branch office will act as an extension to your foreign office. It does not have its own legal entity and will be able to make income. Your foreign parent company will be responsible for the liability of the branch. However, this does mean there will be less administration as everything will be centralized, including the accounts. This is a great option for immediate business as your foreign head office will be able to utilize its history.
Regional Office
A regional office is a specialized entity to act as a central administration and technical center for your international business. It will generate income by providing authorized support services only to your parent company, foreign branches, and regional subsidiaries. Whilst this option has strict licensing rules, it will provide a structured approach to your company and offer specific financial benefits. This is a great structure for companies looking to centralize their shared admin, technical support, and finance.
Domestic Corporation
Creating a domestic corporation will create a separate legal entity under your country’s corporate laws. This will protect your foreign parent company from any local liabilities. If your subsidiary meets the mandatory capital requirements under the foreign investment laws, it will have full rights to carry out local trading and services. This will protect your global parent company, as it will have its own legal entity.
Representative Office vs Branch Office
A representative office is strictly for administration and cannot generate any income or sell any goods/services. A branch office will have full rights to generate income by entering contracts with local customers and will be able to issue invoices. This means you will be able to invoice straight away, whilst a liaison office will depend on fund transfers from your foreign accounts.
Representative Office vs Regional Office
A liaison office cannot generate any income or charge for internal services. A regional office can invoice foreign corporate partners for specific management, technical and analytical support. However, a regional office cannot provide any services to independent local businesses. This makes it an internal service center.
Taxation
When converting your entity to become profitable, you will incur some tax liabilities that would not be applicable to your liaison office. A branch office will incur standard income tax on its net income generated locally. They may also incur profit remittance tax when sending profits back to your foreign head office. Local subsidiaries will incur taxation on their worldwide income and will also have dividend withholding tax. Regional offices will have special taxation rules for their internal services.
Legal Documentation
To convert your non-profitable liaison office to an active business, you will need to submit extensive legal documentation, receive official clearances, and make changes to your structure. This will ensure your business continues without interruption and will comply with your country’s business laws.
Securities and Exchange Commission
The first step to changing your structure will be to submit your registration documents to the commission. You will need to show audited accounts, board resolutions to confirm the change in structure, new operating charters, and official documents from your foreign parent company. Once you have received approval from the commission, you will have your main charter to allow you to receive all your municipal and operational permits.
Capital Requirements
To convert your entity to become profitable, you will need to meet the mandatory capital requirements under your country’s foreign investment laws. Standard foreign owned branch offices will need to have a minimum capital injection of US200,000, which may be reduced to US200,000, which may be reduced to US100,000 if your business uses advanced technology or employs at least fifty local staff. You will need to provide official proof of remittance from your bank.
Bureau of Internal Revenue
As you will now be generating income, you will need to update your tax profile, receive new Tax Identification Numbers, register your company books, and receive official permission to print invoices. This will ensure your company is fully compliant with tax. You will be able to issue official VAT invoices, process local business, and submit company income tax returns. You will also need to close your non-profit tax profile with the tax authorities.
Local Municipal Permits
You will need to update your local permits, Mayor’s Business Permits, and environmental permits. This will ensure your business is operating legally in your area. You will need to renew your municipal tax and business permits each year.
Central Bank
Any capital remittances to meet your minimum capital requirements will need to be registered with your central bank or commercial banks. Registering your capital will ensure you can send your future profits, dividends, and capital back to your foreign head office easily through your commercial banks. Any capital brought into the country without registering with the monetary authorities will not be able to be easily accessed through the banks when converting your local profits.
State Social Insurance Agency
To become an active business, you will need to register your company with more social security agencies. You will need to have active employer registrations with the Social Security System, National Health Insurance Program, and Home Development Mutual Fund. This will ensure you are meeting your legal requirements and your directors will not face any penalties.
Legal Restrictions & Annual Requirements
To keep your company compliant, you will need to adhere to strict legal requirements. If you misunderstand the legal restrictions, you could face penalties.
Representative Office Restrictions
Liaison offices are strictly for market research, promotion, quality assurance, and communication with clients regarding your foreign head office products. They cannot enter into any sales contracts, actively seek business, issue official receipts, or receive any income. This means you will have to convert your structure to grow your business. If you exceed these legal limits, you could face severe penalties.
Regional Office Restrictions
To license your regional office, you will need to show you have an existing foreign corporate presence and that services are only being provided to your international network. A regional office cannot provide any services to third-party clients or engage in any general business. Services can only be provided for administration, planning, technical support, logistics and research.
Regional Office Accounting
You will need to meet minimum capital requirements, produce detailed transfer pricing documents and provide regular updates. Your accounting should clearly show any charges for services provided to your network and ensure no unauthorized third-party business is being carried out. Your annual accounts must be audited by an independent CPA.
Branch Office Requirements
Your foreign branch office will need to have a nominated resident agent to receive any legal notices and court actions on behalf of your foreign parent. Your foreign branch office will need to pay a reasonable security deposit to the authorities. This will be based on your gross income. If you do not meet these requirements, your branch may lose its right to operate.
Transfer Pricing & Income Tax
Converting your liaison office to an active business will mean you will have full income tax audits, value-added tax, and income tax. Foreign entities will need to have official transfer pricing policies in place to meet international arm’s length rules. This will ensure no tax adjustments or penalties are incurred. All transactions with your domestic branches and international headquarters must have documented intercompany agreements.
Annual Requirements
Foreign entities will need to submit regular reports to remain active in the country. This includes annual accounts audited by a CPA, General Information Sheets showing who is currently managing your company, and updated compliance statements. Submitting your reports on time will prevent you from facing any penalties.
Process To Convert Your Liaison Office
Careful planning will be needed to ensure your conversion goes smoothly. Having a clear plan will help you keep good relations with your local suppliers, landlords, and customers.
Foreign Head Office Approval
Your board of directors at your foreign parent company will need to approve the conversion. This will include approving the capital injection and giving your local company officers power of attorney to sign legal documents on your behalf. This documentation will need to be notarised, legalized, and apostilled in your country of origin.
Name Check & Charters
You will need to check that your chosen company/branch name is available on the online portal. This will ensure you do not infringe any trademarks. Your operation charters and registration documents will need to show your new company’s aims, structure, and management. Getting your company name approved early will help you avoid any delays when submitting your main application.
Bank Accounts
You will need to open company accounts with an authorized bank to receive your capital. This will ensure the government can confirm you have met your capital requirements. Your bank remittance advice should state the money is being sent in as capital.
Vendor Assignments
All your current leases, vendor contracts, utilities and admin from your liaison office will need to be legally assigned or novated to your new entity. This will ensure you are legally responsible for your contracts and your expenses are correctly recorded for tax deductions. Signing assignment documents will protect your history.
Cancel Your Non-Profitable License
Once you have received your official certificates for your new branch or local subsidiary, you will need to officially cancel your liaison license. This will include paying any outstanding liabilities, receiving tax clearance certificates, and closing your previous company. This will ensure you do not have to complete duplicate annual submissions.
Start Trading
Once you have all your permits and tax approvals, you can start trading your new licensed business. You will be able to start entering contracts, issue tax-compliant invoices, and receive payments. You can also start setting up company credit lines, merchant accounts and bidding on public and private tenders.
Professional Help
Managing your conversion documentation, capital verification, registrations, and company restructuring can be complicated. Using a professional company setup service will help ensure your changes are fully compliant and you won’t face any delays.
Complicated Legal Requirements
Setting up your conversion will require a good understanding of your country’s business laws, income tax rules, municipal permits, and central bank foreign exchange rules. We recommend using BusinessRegistrationPhilippines.com as this process can be complicated. You will need multiple government approvals, complicated capital verification, and strict company requirements. Our experienced advisors will help speed up your application process, prepare compliant board resolutions, and help you navigate the requirements.
Avoid Delays & Penalties
If your documentation is incomplete, your foreign documents are not authenticated, or your capital remittance details are incorrect, this could cause delays to your project. Using a professional legal service will ensure your company stays on track. Having your documents reviewed by qualified professionals will ensure there are no errors when submitting.
Choose The Right Structure & Taxation
Choosing between a foreign branch, regional office, or local subsidiary will require careful consideration. Our experienced business advisors can help your foreign company choose the right structure for your company. This will give you more flexibility and protect your company. Strategically setting up your company will reduce any international tax issues and ensure you are fully compliant.
Fast Government Approvals
Our experienced local representatives will have good relationships with key officers so we can respond quickly to any queries. Using a professional service will speed up your processing times with your municipal offices, revenue, and national authorities. Our local knowledge will help your foreign company avoid any duplicate documentation.
Manage Both Entities
Using a professional company advisory service will help manage both the closure of your non-profitable liaison and the setup of your active business. This will ensure your leases are reassigned, tax clearance applications are made, and your assets are transferred without causing any disruption to your business.
Summary
Converting your liaison to an authorized profitable business is a key strategic move for foreign companies looking to expand their business in the country. Converting your representative office in the Philippines to an active business will give you full access to local income, open up opportunities, and ensure you have strong governance in the region. By considering the different structures, meeting capital requirements, submitting documentation to multiple agencies, and following strict legal requirements, foreign businesses can achieve long-term success. Using a specialist legal and company setup service will help you convert your structure seamlessly and protect your assets.
Is Assistance Available?
Yes! BusinessRegistrationPhilippines.com can provide you with expert legal, company, and regulatory advice to help you convert your representative office in the Philippines to an active business. Our team of experienced specialists will manage all aspects of your registration to ensure you are fully compliant. Contact us today to book an initial consultation.
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