[ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES]
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owned by foreign equity. If the brands of the foreign business entity are already well-known locally, then a domestic affiliate may be the best choice. If a particular business is controversial or prone to litigation, then some entities, such as the domestic branch office, should be avoided to shield the parent corporation from liability. A domestic subsidiary, on the other hand, has the personality to sue and be sued without involving the foreign “parent” corporation. 2. The specific activities sought to be undertaken in the Philippines. If the objective is simply to promote products and services, or to have an office that will act as a command center for a company’s regional operations, and which office will not engage in the frontline selling of products and services, then establishing a representative office or a regional area headquarters will accomplish those things, without the hassle of incorporation or licensing. 3. The tax treatment afforded to each entity. The Philippines employs a semi-schedular, semi-global tax scheme. Each activity is taxed differently, and particular activities are taxed differently for different entities. The tax treatment for each entity, thus, must always be part of any due diligence when deciding on the vehicle used to do business in the Philippines. To use the “branch or subsidiary” example, a domestic branch or local affiliate office will always be considered a resident foreign corporation under Philippine tax laws. This is because the branch does not enjoy a separate personality from the foreign entity. Hence, such branch will be taxed
only on all its income derived from Philippine sources, and on remittances it made to the foreign “parent” company. On the other hand, a domestic subsidiary corporation is, for all intents and purposes, also a domestic corporation. As such, it is liable for income taxes for all revenue, whether sourced from the Philippines or internationally, following the residency rule. III. Steps and Timing to Establish a Business Entity More than differences in the steps required to constitute and establish them, it is important to note that different business entities also have different documentary and capitalization requirements, as will be discussed below. 1. Domestic Corporation Under the former Corporation Code of the Philippines , it was required that a domestic corporation be formed by at least five (5) original incorporators. With the advent of Republic Act No. 11232, otherwise known as the Revised Corporation Code of the Philippines (“RCC”) 38 , this minimum requirement for incorporators was abolished. In fact, the RCC now allows the establishment of a One-Person Corporation (“OPC”) composed of a single shareholder who may be a natural person, a trust, or an estate. To establish a domestic corporation, a corporate name will have to be officially reserved and the Articles of Incorporation and By-Laws of the proposed corporation will have to be filed with the Securities and Exchange Commission. Depending on the nature of the business, certifications are
38 The concerned government agencies have yet to issue the implementing rules and regulations for the RCC.
ILN Corporate Group – Establishing a Business Entity Series
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