Any foreign corporation that seeks to establish its business presence in the Philippines must first decide a mode in which to do so. You may establish your company as either a representative office, a branch, a subsidiary, or as an independent domestic corporation.
How do you choose? Well, the best mode and kind of establishment you would like to register your company as shall be dependent upon the nature of your business operations and reasons for investing in the Philippines. Below are the descriptions of each mode as well as their differences from each other.
Representative Office
The representative office is characterized by Philippine law as any corporation that is allowed to do business in the Philippines WITHOUT deriving any local income. This means that the representative office acts as a conduit for transactions and data of clients of the main branch of the company. It is fully supported by its head office, and it deals directly with the clients of said office, relaying information, conducting studies and surveys of the Philippine economic market, or ensuring the quality and promotion of the company’s goods and services.
One can simply think of a representative office as a “satellite” or “extension” of the main branch. Therefore, the foreign head office is also liable for all the liabilities and assets of the said representative office. The determining factor of whether you should sign up as a representative office would be if you seek to derive income from operations in the local scene. The features of a representative office include:
1. May be established with only one person acting as resident agent
2. Considered non-resident foreign corporation engaging in business that is non-income generating
3. Not subject to Value Added Tax as no income is directly made from operations of this office
4. Not subject to income tax unless the office needs technical service fees, which will be considered royalty fees subjected to the 30% income tax
5. Requires inward remittance of $ 30,000 for the registration with the SEC
Branch Office
A branch office is like a representative office in that it is an extension of a head office. The foreign head office is likewise liable for liabilities of the branch. There are some stark differences, however. These are listed down below:
1. Subject to an income tax rate of 30% on income made within the Philippines
2. Profit remitted to Head branches are subject to branch profit remittance tax depending on the tax treaties as well as the economic zone – special economic zones are tax exempt.
3. Not subjected to documentary stamp taxes
4. Must have capital of at least $ 200,000 unless the branch’s goods or services will be exported or generate revenue from areas abroad, equating to over 60% of its gross sales.
5. Required to secure an initial deposit to the Securities and Exchange Commission (SEC) equivalent to the PH market value of P 100,000
6. Foreign companies that apply for such are considered as completely foreign-owned entities
Subsidiary Corporation
A subsidiary corporation is considered a separate legal entity from its parent company; therefore, its liabilities may not be considered liabilities of the parent company. This type of classification is described as a corporation wherein over 50% of the voting stock is controlled directly or indirectly through conduits by another “parent” corporation. Setting up this mode of business will allow you to enjoy incentives given to foreigners.
Subsidiary Corporations with foreign-owned parent companies are covered by the provisions of the Foreign Investments Act, thus requiring a minimum paid-in capital of at least $200,000, which may be reduced to $100,000 if the subsidiary entails advanced technology as ascertained by the Department of Science and Technology.
Other features include:
- Being a domestic corporation, an income tax of 30%b total income must be paid to the BIR
- Remittances to the parent company are taxed at, generally, 30% of the amount remitted, which may be reduced to 15% if the parent corporation is domiciled in a country that grants a tax-sparing credit or does not at all impose any tax on received remittances.
- Requires at least 5, but no more than 15, incorporators and directors who must be natural persons with the majority being Philippine nationals.
- Application requires fees equal to 0.22% of the corporation’s commissioned capital stock.
Independent Domestic Corporation
Independent Domestic Corporations are corporations not covered by the Foreign Investments Act and will therefore be independent of a foreign corporation BUT partially owned by foreign entities. In this route, you will still face various limitations as a foreign corporation because of various rules and regulations. Philippine laws on corporations indicate that Independent Domestic Corporations must have 60% of capital stock owned by Filipino shareholders, with foreign ownership being no more than 40% of said capital stock. The minimum capitalization for this classification of corporation is P 25,000. The corporation must also have at least 5, but no more than 15, incorporators.
As a foreigner doing business in the Philippines, the requirements to establish your corporation can be quite overwhelming. You will have to follow guidelines and comply with requests from various national agencies and local government units. Thus, it would be best to seek help with business registration services. To facilitate this process and have your company up and running in no time, give our team a call. Our team of professional accounting experts and business consultants can get you started on the right track. We offer free 30-minute consultations.
