Mistakes Foreign Investors in the Philippines Need to Avoid

Mistakes Foreign Investors in the Philippines Need to Avoid

The Philippines has always been a great business location for foreign investors, with its strategic position in Southeast Asia, abundance of natural resources, and highly skilled workforce. But without a clear understanding of the laws and processes involved in setting up a foreign-owned business, you could end up with more costs than returns on your investment. Here are the mistakes you need to avoid as a foreign investor in the Philippines:

Not knowing your limits

First, you must clarify what field of industry or type of business operations you are planning to invest in. This will help you not only in processing your business registration requirements more efficiently but also in navigating the restrictions or incentives in your chosen industry. The Eleventh Regular Foreign Investment Negative List opened up more opportunities for foreign participation in key investment areas and activities, allowing 100% foreign ownership for export businesses, such as those in the retail trade, IT or BPO services, and financing and investing. Industries such as manufacturing, construction, private land ownership, exploration of natural resources, and informal education and training centers now allow up to 40% foreign equity. However, some activities and enterprises are completely off-limits for foreign investors, such as:

  • Mass media, with exceptions for recordings and private radio communication networks
  • Practice of professions, subject to the Annex on Professions in the Foreign Investment Negative List
  • Retail trade enterprises with capital less than $2.5 Million
  • Cooperatives
  • Private detective operations or security guard agencies
  • Small-scale mining
  • Utilization of resources in archipelagic waters, territorial sea, and exclusive economic zone, as well as in rivers, lakes, bays, and lagoons
  • Ownership or management of cockpits
  • Operations involving nuclear weapons; biological, chemical, and radiological weapons; and anti-personnel mines
  • Manufacture of firecrackers and other pyrotechnic devices

Ignoring your incentives and advantages

Foreign companies can also take advantage of fiscal and non-fiscal incentives if they are registered with the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA), ranging from tax exemptions and cost deductions to special protection and benefits. Knowing which incentives your company is eligible for can help increase the returns on your investment. According to the Omnibus Investments Code of 1987 and the Special Economic Zone Act of 1995, these incentives can include:

  • Protection of patents and other proprietary rights
  • Income tax holidays
  • Duty exemption on imported capital equipment
  • Exemption from wharfage dues and export tax
  • Tax exemption on breeding stocks and genetic materials
  • Tax credits on imported raw materials
  • Tax and duty-free importation of consigned equipment
  • Additional deduction for labor expense
  • Employment of foreign nationals
  • Simplification of customs procedures for imported products
  • Privilege to operate a bonded manufacturing or trading warehouse, depending on custom rules and regulations

Underestimating the legal groundwork involved

There are many requirements and legal procedures involved in setting up a business in the Philippines. To secure your investment, your company needs to undergo several registration processes at various government agencies, where you need to acquire the following:

  • A Certificate of Incorporation from the Securities and Exchange Commission (SEC)
  • A barangay clearance, business permit, and company Community Tax Certificate (CTC) from your local government units
  • A Certificate of Registration and other tax documents from the Bureau of Internal Revenue (BIR)
  • A Certificate of Registration from the BOI
  • Other clearances, permits, and licenses from relevant government agencies depending on the investment area and business operations involved

Some of these processes can be complicated, so work with business professionals and experts in Philippine corporate law to ensure a smooth registration process.

Using vague nominee agreements or “dummies”

Nominee agreements are documents in which one person agrees to act on behalf of another person in legal matters. While this might seem like a more convenient and cost-effective route to establishing your business, it is also extremely risky if not properly structured or handled by a reputable business consultancy. Vague nominee agreements can lead to hefty costs, investment scams, and even undesirable legal situations, especially if it categorizes as an act of evasion under the Philippine Anti-Dummy Law.

Not knowing your rights as a foreign investor

In line with the Investment Incentives Act, foreign investors are entitled to the basic rights and guarantees provided in the Philippine Constitution, as well as the rights to:

  • Repatriate their investment
  • Remit earnings from their investment
  • Remit sums necessary to pay foreign loans or fulfill contracts
  • Be free from expropriation, or to remit sums as a compensation for expropriated investment (in the interest of national welfare or for public use)
  • No requisition of the property represented by the investment, except in the event of war or national emergency

Our FilePino team can help you start your business in the Philippines today. Call us at +1.806.553.6552 or send an email to [email protected]. You can also send us a message here.