The general rule is that 100% foreign ownership in the Philippines of export-oriented enterprises is available. Such enterprises can be defined as producers, service providers, or traders which export at least 60% of their output or trade.

As for domestic market enterprises, foreigners can also own as much as 100% equity in these savings in areas included in the Negative List.

The Negative List is a periodically updated presidential issuance that consolidates policies on which industries are partly or wholly reserved for Filipino nationals. First made in 1994, it is issued in accordance with the Foreign Investments Act of 1991[i] and is on its 12th iteration as of June 2022.

The guidelines in the Negative List are put together from the limitations set by the Constitution, statutes, as well as administrative rules.

The past year has seen amendments to three statutes that inform the Negative List. These include the Retail Trade Liberalization Act of 2000, the Public Service Act of 1936, and the Foreign Investments Act itself.

These amendments were enacted partly to attract foreign investment in the wake of the pandemic by reducing minimum capitalization requirements or opening new industries up to complete foreign ownership in the Philippines.

Let’s first discuss the Retail Trade Liberalization Act.

[i] Republic Act No. 7042.

Retail trade is defined as the habitual selling direct to the general public of merchandise, commodities or goods for consumption.

This covers a broad array of enterprises, including restaurants, clothing stores, drug stores, department stores, and groceries.

A significant item in the Retail Trade Liberalization Act is the reduction of the minimum capitalization of foreign retailers from $2.5 million to Php 25 million. Also, the minimum investment per store has been lowered from $250,000 to P10 million.

Thus, 100% foreign ownership in the Philippines or a retail business is now made more affordable through the reduced P25 million minimum capitalization.

The amendments also removed the extensive pre-qualification requirements for retailers in the old law.[i]

In place of pre-qualification, the Department of Trade and Industry, the National Economic and Development Authority and the SEC are tasked to monitor companies’ continuing compliance with the minimum paid-up capital.

To register the retail enterprise with the SEC or the Department of Trade and Industry, the foreign retailer must submit either a certificate of inward remittance of its capital investment from the Bangko Sentral ng Pilipinas (BSP) or present other proof certifying that its capital investment is deposited and maintained in a Philippine bank.

The Retail Trade Liberalization Act has thus really streamlined the requirements and made it far more affordable to invest in the Philippines for foreign retailers.

[i] These were often prohibitive barriers because they required the retailer to have:

(a) A minimum of Two hundred million US dollars (US $200,000,000.00) net worth in its parent corporation for Categories B and C, and Fifty million US dollars (US $50,000,000.00) net worth in its parent corporation for category D;

(b) (5) retailing branches or franchises in operation anywhere around the word unless the such retailer has at least one (1) store capitalized at a minimum of Twenty-five million US dollars (US$25,000,000.00);

(c) Five (5)-year track record in retailing; and

(d) Only nationals from, or juridical entities formed or incorporated in Countries that allow the entry of Filipino retailers shall be allowed to engage in retail trade in the Philippines.

 

The retailer was further obliged to secure a Certificate of Prequalification Compliance from the Board of Investments to prove that these requirements had been met.

In aid of attracting foreign investment, these requirements have been reduced or removed by the amendments.

 

The protectionist language of the Public Service Act[i] previously required all companies engaged in industries that the law classified as “public service” to be at least 60% Filipino-owned.

This was because of a broad interpretation of the term “public utilities” which the law specifically reserved for Filipino-owned and controlled companies.[ii]

The Supreme Court previously conflated the two terms, despite their being found in different laws, and it was in light of this understanding that the protectionist provisions in the 1987 Constitution were crafted.

Thus, companies engaged in “public services” such as telecommunications, freight or carrier transport, railway operations, and others were all considered to fall within the language of “public utilities” which were excluded from foreign control or investment.

The new amendments to the Public Service Act change all this.

The amendments create a clear distinction between the two terms, making it plain that they are not the same.

This now means that “public utilities” which the law restricts to Filipino-owned and controlled companies are confined to a smaller subset of industries than “public services” which are not necessarily so restricted.[iii]

The amendments of the Public Service Act narrow the scope of what is considered a “public utility”, limiting it to only those that operate, manage, or control for public use the following sectors:

 

• distribution of electricity,
• transmission of electricity,
• petroleum and petroleum products pipeline transmission systems,
• water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems,
• seaports, and
• public utility vehicles.

The amendments to the Public Service Act explicitly state that no other person shall be deemed a public utility unless a subsequent law provides for it. Consequently, sectors not included in the enumeration are no longer subject to foreign ownership restrictions.

This opens a broad array of sectors to a foreign capital since “public services” encompass a far wider list of sectors than those enumerated as “public utilities”.[iv]

There do remain certain safeguards having to do with national security considerations.

For instance, companies controlled by foreign governments or state-owned enterprises are prohibited from investing in public utilities or critical infrastructure.

Entities owned or controlled by foreign governments or state-owned enterprises cannot make new investments in any public utility or critical infrastructure, with the exception of sovereign wealth funds and independent pension funds of states which are subject to a 30% equity limit.

But the foreseen benefits of these amendments to the Public Service Act include attracting more global players in order to modernize sectors like telecommunication, shipping, air carriers, railway, and subways.

The greater foreign investment is intended to create more domestic jobs and income.

The opening of industries is also meant to stimulate increased competition in terms of services and products to the consumers’ benefit, resulting in better quality services and more competitive pricing.[v]

[i] Commonwealth Act No. 146.

[ii] Santos v. The Public Service Commission, G.R. No. 26771, September 23, 1927.

[iii] Republic Act No. 11658.

[iv] Public services include any common carrier, railroad, street railway, traction railway, sub-way, motor vehicle, either for freight or passenger, or both, with or without fixed route and whatever may be its classification, freight or carrier service of any class, express service, steamboat, or steamship line, pontine, ferries, and [small] watercraft, engaged in the transportation of passengers [and] freight, shipyard, marine railway, marine repair shop, warehouse, wharf or dock, ice plant, ice refrigeration plant, canal, irrigation system, [sewerage,] gas, electric light, heat and power, water supply and power, petroleum sewerage system,[telephone] wire or wireless [telegraph] system [and] broadcasting [radio] stations.

[v] Department of Trade and Industry Secretary Ramon Lopez, https://www.dti.gov.ph/archives/news-archives/amended-public-service-act-to-fuel-economic-rebound/

The amendments to the Foreign Investments Act reserve to Philippine nationals those micro, small, and medium-sized enterprises (MSMEs) with a capitalization of less than $200,000.

However, it allows foreign ownership and control of MSMEs with a capitalization of at least $100,000 which meet the following conditions:

1. Utilize advanced technology (as determined by the Department of Science and Technology);
2. Endorsed as startup enablers or as a startup under the Innovative Startup Act; or
3. The company hires no less than 15 Filipino employees (down from the previous requirement of 50).

The amended FIA law requires foreign export enterprises to register with the Bureau of Internal Revenue and follow the export requirements provided by Title XIII of the national tax code to avail of any tax incentive or benefit such as income tax holidays.

Also, the amended FIA law provides for the creation of an Inter-Agency Investment Promotion Coordination Committee (IIPCC). The IIPCC will henceforth be the body that integrates all promotion and facilitation efforts to encourage foreign investments into the country.

The IIPCC shall be composed of the:

• Secretary of the Department of Trade and Industry to preside it as Chairperson;
• Secretary or Undersecretary of the Department of Finance (DOF) as Vice-Chairperson;
• Board of Investments (BOI) Managing Head;
• Director-General of the DTI-Philippine Economic Zone Authority (PEZA);
• Undersecretary of the Department of Foreign Affairs (DFA), Office of the Undersecretary for Multilateral Affairs and International Economic Relations (OUMAIER);
• Secretary of Socioeconomic Planning of the National Economic and Development Authority (NEDA);
• Secretary of the Department of Information and Communications Technology (DICT);
• Chairperson of the Commission on Higher Education (CHED);
• Director-General of the Technical Education and Skills Development Authority (TESDA); and
• Four representatives composed of a representative each from the National Capital Region, Luzon, Visayas and Mindanao, to be chosen from a list of nominees prepared and submitted by nationally recognized leading industry or business chambers, who must be of known competence, probity, integrity and expertise in any of the fields of investment, advertising, banking, financial management and law, with at least ten (10) years of outstanding management or leadership experience.

These principal members may designate their alternates in case of their unavailability.

The amended Foreign Investments Act explicitly provides that it does not cover banks and other financial institutions.

It also does not cover the practice of professions so the law should not be read to exclude foreigners from practicing their profession in the Philippines. The practice of professions is not regulated under the Foreign Investments Act, but only specially regulated by professional regulatory boards or similar bodies or reciprocity agreements with other countries. This adopts the view that the practice of professions is not an investment activity under the scope of the Foreign Investment Act.

The latest Negative List, issued in June 2022 after the passage of these three laws, reflected the relaxation of restrictions that they provided. It is also worth noting that the amended Foreign Investments act specifically provides that a new Negative List shall not be issued more than once every two years.