Expats Guide: Starting a Business in the Philippines

Starting a Business in the Philippines

According to World Bank figures, now is the time to be starting a business in the Philippines. It expects the Philippine gross domestic product (GDP) to grow 6.7 percent this 2018 and sustain it till the next year. In fact, it sees a robust economy sustained for the next three years, being the “fastest –growing economy in the Southeast Asian Nations (ASEAN),” a recent news item quoted a World Bank report.

 

Equity Restrictions for Foreigners

You may be a foreigner eyeing to set up business here but are wary about equity restrictions. For instance, who would want to pour out capital on something they cannot own? But the good news is, foreign investments actually are lured or encouraged by government with fiscal and non-fiscal incentives in most industries here. There are grounds allowing foreign ownership of local businesses.

For instance, Republic Act 7042, or the Foreign Investments Act of 1991, outlines what industries foreign capital can enter into, what percentage of foreign ownership is possible and the concomitant incentives. Foreigners planning to be entrepreneurs here will find it a reliable expat guide to starting a business in the Philippines.

Understandably, some industries have strict foreign equity restrictions to protect them from being controlled mostly by foreign firms. These are key industries crucial to our economic development as a nation and therefore considered as critical to our national security. Majority of their capital investments should be Filipino-owned. For more on these industries, the Philippine Foreign Investment Negative List will prove a big help as an expat guide to starting a business in the Philippines especially with regards to equity restrictions.

 

Unrestricted Industries

For other industries without strict equity restrictions, the following rules apply:

  1. For local enterprises (companies making at least 40 percent of their profits in the country), allowable foreign capital is 40 percent. In this case, no company president can be a foreigner. Nonetheless, if your company has a minimum paid in capital amounting to US$200K or more, the equity limit can be canceled and you can fully own your business. Additionally, if you employ 50 workers or more, or utilize advanced technology for your business, the minimum capital can be lowered to only US$100K.
  2. For exporting companies (those making at least 60 percent of their profits outside the country), the capital requirement can exceed the 40 percent equity limit and make the business venture more lucrative.

 

Anti-Dummy Law

When the rules on foreign equity limits are violated the Anti-Dummy Law applies, or the Commonwealth Act No. 108. The same is true with those found to be circumventing nationalization laws. Hefty penalties are imposed.

Sometimes, foreigners connive with some local partners to twist ownership of a business. A “dummy arrangement” is when locals buy land or own businesses in the country for their foreign partners under the names of the local partners. The locals pretending to own the properties or businesses are called dummies.

This may seem a smart way of cheating on the equity rule. But when caught, penalties for both parties (local and foreign) may either be 5 years imprisonment or a fine, depending on certain violation factors. It’s not a smart way of starting business in the Philippines after all.

A popular practice here is using scripted or artificially arranged marriages. Aliens look for local people willing to hatch up a legal “marriage” with them and then buy properties under their local spouse’s name. This, too, is considered dummy ownership of a property though it is hard to contest. But it can prove very risky on the part of the foreigner, nonetheless.

This is not to say, however, that foreigners marrying locals here and naming properties under their names is illegal.

 

Legit Requirements When Starting a Business in the Philippines

But for expats looking to seriously and legally do a business in the country, here is a summary of what needs to be done:

  1. Register the name of the business. Submit the name of your business to the Department of Trade and Industry, or DTI, if it’s a sole proprietorship. For business corporations or partnerships, submit the name to the Securities and Exchange Commission, or SEC. Both government offices have online registration sites. After processing your application they release your certificates.
  2. Get local permits. You need to visit the local government in charge of the locality where your business is located. The local city government issues the business permit, sometimes called “Mayor’s Permit.” Initially, it may require some documents from you:
  • Barangay clearance
  • DTI or SEC Registration
  • Birth Certificate of the owner

The city government may require more documents, depending on the kind of business to be set up. Schools may be required certain documents from the Department of Education. Laboratories may be required some permits from the Department of Environment and Natural Resources.

Restaurants, eateries or business engaged in food or supplement manufacturing may be required certain permits from the Food and Drugs Authority or FDA. Often, zonal clearances are required by the city government to prove that your establishment is located in the right area or zone designated accordingly by government.

Businesses relating to real estate may be required land titles and deed of sale. Those that need to rent commercial spaces may be required a contract of lease. Occupancy permit is often asked before you can be given a building permit if new building construction is needed. In this process, you may be asked to secure fire clearance from the designated fire department, plus sanitary, electrical, and mechanical clearances.

Definitely, the city government will require the Taxpayer Identification Number or TIN of the business owner. Sometimes, it even asks for proof of registration (or Certificate of Registration) with the Bureau of Internal Revenue.

Other requirements are specified as the process progresses. When starting a business in the Philippines, the number of requirements really depends on the nature of the business establishment.

 

Shortened Permit Processing

But here’s good news. A bill aimed at cutting short the process of getting business permits was approved by Congress on June 4, 2018. The bill will shorten Barangay processing to one day, simple permit applications to three days and complex applications to 10 days, with a maximum of 30 days.

President Duterte himself had promised to end government red-tape in 2016. He was quoted in 2016 as saying: “My proposal is–in all government institutions–I will see that the clearances and business permits are given 72 hours. After 72 hours, you are no longer allowed to release the documents or papers. You have to forward it to me, and I will ask you why it took you more than three days to process the papers.” For expats looking forward to starting a business in the Philippines, this is welcome news.

 

Requirements for Employees

Finally, when you hire employees for your establishment, you need to make sure they are registered in the following: Social Security System (SSS), PhilHealth (for government health insurance), Home Development Mutual Fund or what is commonly known in the country as PAG-IBIG, and BIR.

 

Sources:

http://business.inquirer.net/243868/breaking-business-world-bank-asean-economy-fastest-growth-2018-global-economic-prospects-gdp

http://primer.com.ph/business/2017/04/23/expats-quick-guide-to-starting-a-business-in-the-philippines/

http://news.abs-cbn.com/halalan2016/business/05/16/16/no-more-waiting-duterte-vows-to-cut-red-tape

http://www.manilatimes.net/bill-shortening-processing-business-permits-okayed/353571/

 

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