Overview of the Philippine Legal System with a special focus on real estate transactions

2. I. General Background
II. Philippine Legal System
III. Foreign Investments in the Philippines
IV. Investment Incentives
V. Business Vehicles in the Philippines
VI. Regulatory Regime
VII. Taxation
VIII. Special Focus: Real Estate Investments
in the Philippines

3.  The Philippines is an archipelago of 7,107
islands.
 There are three principal regions of the
archipelago: Luzon, Mindanao and Visayas
group of islands.
 The Philippines is a democratic republican
state with a presidential form of
government.
 The Philippine government consists of the
executive, legislative, and judicial
branches.

4.  National population of 103.8 million (as of
July 2012)
 The official national language is Filipino.
Most Filipinos are bilingual, speaking
English fluently as their second language.
It is also the main language used in
business, government, and schools, and
is also common in everyday
communication. Local laws are also
written in English.

5.  The Philippines is the only predominantly
Christian country in Asia with
approximately 83% of the population
belonging to the Roman Catholic
Church.

6.  The Philippine legal system is aptly described as a
blend of customary usage, and Roman (civil law) as
well as Anglo-American (common laws) system.
 The civil law operates in areas such as family
relations, property, succession, contract and criminal
law.
 Statutes and principles of common law origin are
evident in such areas as constitutional law,
procedure, corporation law, negotiable instruments,
taxation, insurance, labour relations, banking and
currency.
 In some Southern parts of the islands, Islamic law is
observed.

7.  The main sources of Philippine law are
the Constitution, statutes, treaties and
conventions, and judicial decisions.
 The Constitution is the fundamental law
of the land and as such, it is authority of
the highest order against which no other
authority can prevail.
 Statutes are intended to supply the
details which the Constitution does not
provide for.

8.  Philippine law is also derived from cases.
› The Civil Code provides that ‘judicial decisions
applying to or interpreting the laws or the
Constitution shall form a part of the legal system of
the Philippines’.
 Only decisions of its Supreme Court establish
jurisprudence and are binding on all other
courts. They are also binding to everyone,
much like the laws are made binding.
 These decisions assume the same authority as
the statutes to which they apply or interpret
until authoritatively abandoned by the
Supreme Court.

9.  First-level courts
 Regional Trial Courts
 Court of Appeals
 Supreme Court
 Other special courts:
› Sandiganbayan
› Court of Tax Appeals
› Shari’a Courts
› “Quasi-courts” (administrative agencies)

10.  The law that governs the participation of
foreign entities in economic and
commercial activities in the Philippines is
Republic Act No. 7042, as amended,
otherwise known as the Foreign
Investments Act of 1991 (“FIA”).
 Negative list system – only the investment
areas and/or activities listed in the foreign
investment negative list shall be reserved to
Philippine nationals. The extent of foreign
equity allowed in such areas varies.

11.  List A – foreign ownership is limited by
mandate of the Constitution and
specific laws
 List B – foreign ownership is limited for
reasons of security, defense, risk to health
and morals and protection of small-and
medium-scale enterprises

12.  A non-Philippine national is a person, corporation, partnership, or
association that is not considered a “Philippine national” under
the FIA.
 A “Philippine national,” as defined under the FIA, is any of the
following:
› a. A citizen of the Philippines;
› b. A domestic partnership or association wholly owned by citizens of the
Philippines;
› c. A corporation organized under the laws of the Philippines, of which at
least 60 percent of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines;
› d. A corporation organized abroad and registered as doing business in
the Philippines under the Corporation Code, of which 100 percent of the
capital stock outstanding and entitled to vote is wholly owned by
Filipinos;
› e. A trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least
60 percent of the fund will accrue to the benefit of Philippine nationals.

13.  However, in a SEC Memorandum circular, companies
which are subject to a foreign investment regulation
were required to observe at all times the required
percentage of Filipino ownership with respect to
both:
› The total number of outstanding shares of stock entitled to
vote in the election of directors; and
› The total number of outstanding shares of stock, whether
or not entitled to vote in the election of directors.
 Additionally, at least 60 percent of the members of
the board of directors must be citizens of the
Philippines, in order that the corporation shall be
considered a Philippine national.

14.  The Philippines has an Anti-Dummy Law that imposes criminal
and civil penalties on persons violating foreign equity limitations.
 As an example, the following arrangements will not be allowed
under the Anti-Dummy Law:
› In a corporation engaged in a nationalized activity with 10 members in
the board of directors, a maximum of 4 foreign members of the Board is
allowed. Thus, the election of 5 or more non-Filipinos as members of the
Board is not allowed.
› A corporation whose outstanding shares of stock entitled to vote in the
election of directors which are owned by non-Filipinos is 40% but the total
outstanding shares of stock whether or not entitled to vote in the election
of directors which are owned by non-Filipinos is 55% is not allowed.
› A clause in the shareholders’ agreement which provides that if
shareholders do not agree, the non-Filipino shareholder’s view is
controlling whether in general or with respect to certain items.
› A clause in the shareholders’ voting agreement which ignores the actual
voting weight according to the percentage of shares held and replaced
by an equalization of the voting power of the each of the shareholders,
whether Filipino or non-Filipino.

15.  Ownership of private lands is restricted to
Filipino citizens and to companies that
are at least 60% owned by Philippine
nationals. However, foreign investors
may obtain 50-year leases, renewable
for another 25 years, on private land.

16.  Incentives are offered by various
government agencies, depending on
the type of industry or the place
where the business wishes to operate.
 Generally, the Philippines grants various
incentives such as tax, non-tax, and industry
incentives.

17.  Tax incentives include income tax holidays for three to
eight years, special tax deductions and duty-free
importation of some items through customs bonded
warehouses. After the income tax holiday, companies
are also entitled to a special tax rate of 5% on gross
income (measured as sales less direct costs) in lieu of all
Philippine national and local taxes.
 Non-tax incentives include simplified customs
procedures for imports and exports, the generally
unrestricted use of consigned equipment, and
employment in general of foreign nationals in
supervisory, technical, or advisory positions for five years
from registration.
 Industry-specific incentives also available in the mining
industry, mini-hydroelectric power developers, and
tourism.

18.  There are three general forms of business organizations
in the Philippines: sole proprietorship, partnership, and
corporation (domestic or foreign).
› A sole proprietorship is a business owned and operated by
a single natural person. The liability of the sole proprietor is
unlimited, and the personality of the business enterprise is
not distinct and separate from that of the owner.
› A partnership is created by virtue of a contract whereby
two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.
› Subject to nationality requirements pertaining to the
intended activity, Philippine law allows foreign investors to
establish and incorporate a domestic corporation, and
foreign corporations to transact business in the Philippines
as a branch or a representative office.

19.  A domestic corporation may be a joint
venture or a wholly owned subsidiary.
 A branch and a representative office of
a foreign corporation are mere
extensions of their head offices.
 A foreign investor may also invest as a
limited or general partner in a
partnership.

20.  Foreign corporations are required to
obtain a license from the Securities and
Exchange Commission (SEC) before they
may do business in the Philippines, which
typically involves remitting capital of at
least $200,000 to the Philippines. Failure
to obtain a license will result in the
corporation losing its ability to sue in
local courts.

21.  “Doing business” shall include:
› Soliciting orders;
› Service contracts;
› Opening offices, whether called “liaison” offices or branches;
› Appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a
period or periods totalling one hundred eighty (180) days or
more;
› Participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines;
and
› Any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
organization.

22.  “Doing business” shall not be deemed to
include:
 Mere investment as a shareholder by a foreign
entity in domestic corporations duly registered to
do business, and/or the exercise of rights as such
investor;
 Having a nominee director or officer to represent
its interests in such corporation;
 Appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own account.

23.  The most common form of corporate vehicle
used by foreign investors is the corporation.
 A corporation readily accommodates the
requisite Filipino ownership. They are also the
only vehicle that can be used if an investor
wants to establish a regional headquarters in
the Philippines.
 Finally, the absence of tax profit remittances
should make the branch the vehicle of choice
for investors locating in a special economic
zone.

24.  Joint ventures tend to be feasible
investment vehicles only for construction
projects and certain energy operations.
Joint ventures in other activities are subject
to unfavourable tax treatment as
partnerships.

25.  The two main agencies for business registrations are the
Department of Trade and Industry (DTI) and the Securities
and Exchange Commission (SEC).
 Businesses owned by individuals must register with the DTI,
while businesses operated through corporations or
partnerships must register with the SEC.
 At a minimum, a business must also register with the Bureau of
Internal Revenue (BIR), the Home Development Mutual Fund
(HDMF), the Social Security System (SSS), and the Philippine
Health Insurance Corporation.
 The enterprise must also register with the local government
unit of the place where its business will be conducted, unless
it is registered with one of the agencies responsible for
administering Philippine incentive laws (other than the Board
of Investments).

26.  The Philippines has no formal Anti-Trust Law.
 However, there are legal provisions which
prohibit any combination of businesses that
would result in unfair competition or restrain
trade to artificially prevent free competition
in the market.
 They also give a right of action to persons
who suffer damage from acts constituting
unfair competition in agricultural,
commercial or industrial enterprises, or in
labor.

27.  Philippine taxes are imposed by both the national government
and the local government units.
 Corporate income tax:
› A domestic corporation is taxed on its net income (gross income
less allowable deductions) from all sources at the rate of 30
percent.
› A resident foreign corporation, such as a branch, is taxed only
on its net income from Philippine sources at the same rate as a
domestic corporation.
› A non-resident foreign corporation is subject to final withholding
tax on its gross income (without the benefit of deductions) from
Philippine sources at the rate of 30 percent.
› A foreign corporation is considered a resident when it is
engaged in trade or business in the Philippines and is licensed by
the SEC to engage in trade or business in the Philippines.

28.  Value-Added Tax (VAT)
› VAT is a tax on consumption levied on the
sale, barter, exchange, or lease of goods or
properties and services in the Philippines,
and on the importation of goods into the
Philippines.
 Documentary Stamp Taxes (DST)
› Documentary stamp taxes must be affixed to
certain documents, instruments, and papers
evidencing business transactions.

30.  Ownership of private lands in the
Philippines is reserved to Philippine
citizens and corporations that are
considered Philippine nationals.
 Foreign nationals and companies
therefore may not own private lands in
the Philippines. However, they may
indirectly own private lands by taking a
minority interest (up to 40%) in domestic
corporations.

31.  Since the prohibition only applies to private
lands, foreign nationals and foreign
corporations may own or take 100% interest
in buildings, machineries, and other forms of
real property other than lands.
 A leasehold right over the land where the
building or other real property is built is also
acquired.
 The execution of a lease agreement
between the land owner and the building
owner is also required.

32.  As a general rule, the foreign owner can
generally lease private lands for 25 years and
may be renewed for another 25 years.
 It can be extended to another 25 years (for a
total of 75 years) under the Investor's Lease Act,
depending on the purpose to which the building
will be used.
 If the lease is made under the Investor’s Lease
Act, it is required to be registered with the
Department of Trade and Industry (“DTI”).
 To be granted an extension, the foreign lessee
must also show to the DTI that it has made social
and economic contributions to the country.

33.  Foreign companies that locate in government-
designated economic and industrial zones may also
enter into lease agreements with a maximum lease
term of 50 years and is also renewable for 25 years.
 In case of extension, the foreign company must also
present proof before the administrative agency
managing the economic and industrial zone that it has
made social and economic contributions to the
country.
 Additionally, foreign companies which acquire real
properties in the Philippines for the purpose of
establishing business or commercial operations in the
Philippines are required to obtain a license to do
business from the Securities and Exchange
Commission.

34.  As an alternative to owning land, foreign
nationals and companies may also own
condominium units in condominium
projects.
 If the condominium project is set up on
leased land, the corresponding
condominium corporation may be
established by a foreign corporation. The
land ownership restriction does not apply
in this case.

35.  Where the condominium corporation is a Filipino
corporation which owns the land on which the
condominium project is situated, no interest in the
condominium may be transferred to non-Filipinos or
to corporations more than 40% of the capital stock of
which is owned by non-Filipinos.
 When the common areas are held by a
condominium corporation, the transfer to non-
Filipinos of units in the project may be made only up
to the point where the accompanying transfer of
stockholdings in the condominium corporation would
not cause the non-Filipino interest in such corporation
to exceed 40% of its entire capital stock.

36.  Apart from the maximum allowable period
of a lease by foreign corporations, there
are no other rules or regulations only
applicable to foreign nationals or
corporations.
 Generally, the lessee cannot assign the
lease without the consent of the lessor
unless there is a stipulation to the contrary.
However, the lessee may sublease the
property in the absence of express
prohibition.

37.  There are also no special or formal
requirements for the execution or
perfection of the lease. However, if the
lease is longer than one year, it must be in
writing in order to be enforceable. Also, the
lease must be recorded in the Registry of
Property to be binding upon third persons.
 The leasehold right that is acquired under
long-term lease contracts may be sold,
transferred or assigned to another foreign
company or a Filipino national. It may also
be used as a security for a loan agreement.