The Different Modes of Doing Business in the Philippines for Foreign Investors
There are several ways a foreign investor or a foreign corporation may do business in the Philippines. In establishing economic presence in the Philippines, foreign investors should consider the advantages and disadvantages of these modes of business, capital requirements and tax implications in relation to their goals and objectives.
What is a Branch Office?
A Branch Office is a unit of a foreign corporation organized under the foreign laws that carries out business activities and derives income from the Philippines. As an extension office which is managed by its parent company through a representative, it does not have a separate personality from its parent company. As such, the parent company remains liable for all obligations that may be incurred by the branch.
Under Philippine laws, the parent company which intends to set up a branch office has to obtain a license to do business in the Philippines from the SEC.
What is the capital requirement for establishing a Branch Office?
Under RA 8179, the branch which carries out business activities in Philippines must have a minimum paid in capital of $200,000. Paid in capital of $100,000 may be allowed if the investment involves advanced technology as determined by the Department of Science and Technology (DOST) or if the branch employs at least 50 employees.
What are the tax implications in establishing a Branch Office?
A Branch Office is taxable on the net income at the rate of 32%. (Section 27(A) of the NIRC) However, it may choose to pay a minimum corporate income tax (MCIT) of 2% on the gross income provided that the (MCIT) is higher than its taxable income computed at the rate of 32%.
At the same time, the profit remitted by a branch to its parent company is subject to 15% withholding tax computed based on the total profits applied or earmarked for remittance without any deduction for the tax component. This is so because the parent company shall be considered as a resident foreign corporation which is taxed on all income derived from sources within the Philippines.
However, if the branch receives income in the form of interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, and other profits from sources outside the Philippines, it shall not be considered as branch profits and no branch profits tax is further required to be paid.
What is a Representative Office?
A Representative office is established for the purpose of dealing directly with the clients of its head office. It is not permitted to engage in business activities and to derive income from the Philippines. It is also fully subsidized by its head office. Its functions are limited to the following:
- Distribution of information about the products of the head office
- Acting as an information and communication centre between the head office and the local entity
- Technical support to the clients of the head office
- Conduct of surveys and studies about the economic condition in the Philippines.
What is the capital requirement in opening a Representative Office?
A Representative Office is required to have a minimum inward remittance in the amount of US$30,000 to cover the necessary operating expenses and must be registered with the SEC. No security deposit shall be required in establishing Representative Office.
What is the tax implication in opening a Representative Office?
Since it does not derive income from within the Philippines it is not subject to income tax.
What is a Domestic or Local Subsidiary?
A Domestic or Local Subsidiary is a corporation that is created under Philippine laws with all or the majority of its shares of stock being owned by its parent company. Under Philippine laws, all or the majority of the shares of stock of domestic subsidiaries may be owned by its parent company. Unlike a branch, Domestic Subsidiaries have juridical personalities distinct and separate from the parent company.
What is the capital requirement in establishing a Domestic Subsidiary?
Under RA 8179, the domestic subsidiary which carries out business activities in Philippines must have a minimum paid in capital of $200,000. Paid in capital of $100,000 may be allowed if the investment involves advanced technology as determined by the Department of Science and Technology (DOST) or if the domestic subsidiary employs at least 50 employees.
What are the tax implications in establishing a Domestic Subsidiary?
As a domestic corporation, a domestic subsidiary is taxable on the net income at the rate of 32%. (Section 27(A) of the NIRC) It may choose to pay a minimum corporate income tax (MCIT) of 2% on the gross income provided that the (MCIT) is higher than its taxable income computed at the rate of 32%.
The profit remitted by a domestic subsidiary to its parent company is subject to 15% withholding tax computed based on the total profits applied or earmarked for remittance without any deduction for the tax component. Its parent company shall be classified as a non-resident foreign corporation under Philippine tax laws which shall be taxed based on its gross income from all income derived from Philippine sources at the rate of 32%. (Section 28 B(1) of the NIRC). The same rate applies for all dividend income received by the parent company from its domestic subsidiaries. However, the tax may be reduced to 15% if the country in which the parent company is domiciled shall allow a credit against the tax due from the nonresident foreign corporation
What is a Regional Headquarters (RHQ)?
A regional headquarter is an administrative unit of the parent company that does not perform income-generating activities. It acts as a supervisory, communications and coordinating centre for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. Unlike a branch or a domestic subsidiary, it may not engage in business activities and earn income in the Philippines. Unlike a representative office, it may not deal directly with the clients of its parent company.
What is the capital requirement in establishing a Regional Headquarters?
Philippine laws require a minimum inward remittance of US$50,000 must be remitted annually to cover its operating expenses in the Philippines. No security deposit is required. Within 30 days from the anniversary date of its registration, it is required to remit at least $50,000 to cover its operating expenses in the Philippines.
What are the tax implications in establishing a Regional Headquarters?
Since RHQs are not supposed to engage in business activities and earn income in the Philippines it is not subject to tax.
What is a Regional Operating Headquarters?
A Regional Operating Headquarters is defined as a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communications; and business development.
What is the capital requirement in establishing a Regional Operating Headquarters?
Philippine laws require a minimum inward remittance of $200,000. No subsequent remittances is required since the operating expenses for the subsequent years may be taken from its income.
What are the tax implications in establishing a Regional Operating Headquarters?
Regional Operating Headquarters is subject to 10% tax on its net income. (Section 28A6b) In addition, the profit remitted by a domestic subsidiary to its parent company is subject to 15% withholding tax computed based on the total profits applied or earmarked for remittance without any deduction for the tax component
