Among other burgeoning industries, the startup scene in the Philippines is booming. By 2020, the country aims to have 500 startup companies that have raised a total of US$200 million in funding and US$2 billion in valuation. The country has huge plans for its startup ecosystem, which makes the present a very good time for starting a business in the Philippines.
If you’re a foreigner and have decided to make the Philippines your next entrepreneurial area, here’s a short guide on how to open your business.
Foreign Equity Restrictions
It is a common misconception that foreigners cannot own their businesses in the Philippines. In fact, in most industries, foreign investment is not only allowed, but promoted by fiscal and non-fiscal incentives. The country’s Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA) outlines these incentives and their requirements for availment.
That being said, there do remain some industries that place restrictions on foreign equity in terms of maximum capital investment, and all of them can be found in the Philippine Foreign Investment Negative List. If your business of choice falls into the industries outlined in the negative list, you have to follow the defined cap.
In cases other than above, the rules for foreign equity capital are as follows:
- For domestic market enterprises (which are defined as companies deriving at least 40% of their revenue from sources within the Philippines), Foreign equity is limited to 40%. It also means that you cannot be company president.However, if your domestic market business has a minimum paid in capital of US$200,000 or more, the equity cap can be lifted and foreigners can fully own their businesses. Moreover, if your business will employ 50 people or more, or operate with advanced technology, the cap-related capital can be reduced to just US$100,000.
- For export oriented enterprises (which are defined as companies deriving at least 60% of their revenue from sources outside the Philippines), they can do away with the capitalization requirement and go beyond the 40 percent cap on equity owned by foreigners.
The Philippines also has an Anti-Dummy Law, formally known as the Commonwealth Act No. 108, which penalizes individuals who violate the restrictions on foreign equity and those who evade laws on nationalization.
The Anti-Dummy Law also forbids the so-called “dummy arrangement” wherein foreign investors arrange for locals to buy a land in the Philippines and register the property under the local’s name. Both locals and foreign nationals caught violating this law could be jailed for five to 15 years or asked to pay a hefty fine.
It has been a practice by foreign investors to use their marriage partner’s name or partner with a local to work around the restrictions, but this arrangement poses several risks as well.
Procedures Needed to Open a Business in the Philippines
Here are the main steps you need comply with when starting a business in the Philippines.
- Register your business name.
- For sole proprietors, you need to register through the Department of Trade and Industry (DTI). Interested parties can also do their DTI business registration online.
- For corporations and partnerships, you need to register with the Securities and Exchange Commission (SEC) i-Register Facility.
- Obtain several business permits from local government units where your new business will be based.
- For sole proprietors, you need to get a DTI Business Name Certificate. For corporations and partnerships, you need to secure a SEC Certificate of Incorporation/Partnership.
- For businesses who rent commercial space, you need to secure a Contract of Lease. For businesses who operate on private lands, you need to secure a Land Title. For businesses which function in a subdivision, condominium complex, or village, you need to secure a Homeowner’s Association Certificate.
- Get a mayor’s permit.
- The requirements for the mayor’s permit vary per municipality, but mainly, the list includes a contract of lease, barangay clearance, occupancy permit, sanitary permit, fire permit, and a community tax certificate.
- Secure a Certificate of Registration (COR) from the Bureau of Internal Revenue (BIR).
- Now that you’ve registered your business, you need to handle the requirements of your employees. You need to ensure that they are registered with the Social Security System (SSS), PhilHealth, Home Development Mutual Fund (HMDF)/PAG-IBIG, and BIR.
- Applicants can process this online. Upon submission of requirements and payment of fees, the applicant will receive an email from the IPOPHL with the application number and filing date.
- After a search process, which also ensures compliance to regulations, a certificate of registration will be issued with a 10-year validity. The certificate will be printed in the IP Philippines Gazette and be included in the official records.
Despite the restrictions, starting a business in the Philippines can be a huge investment given the booming startup scene. The procedures can be tedious and time consuming, but you can hire a firm who can help you navigate the legal challenges of starting your own company. More importantly, a partner with thorough knowledge of the legal and business environment in the country can help you make the right steps to speed up the process.
Inquire now for a free consult with EnterPH for more information.