The 60-40 equity rule was enacted by the Philippine government in order to regulate foreign investments and businesses in the country. The Foreign Investment Act (R.A. 7042, 1991, amended by R.A. 8179, 1996) states that at least 60% of the business should be owned by a Filipino citizen, while the rest can be owned by the foreign investor.
This Foreign Investment Act contains policies and rules that govern the registration of foreigners looking to do business in the Philippines. The Philippine government welcomes these kinds of foreign investments because it contributes to economic development.It generates jobs and allows Filipinos the opportunity to earn higher wages.
If you’re a foreign investor who’s looking to set up a sole proprietorship, partnership, or a corporation in the Philippines, here are a few important things you need to know about the 60-40 equity rule:
Be mindful of the Negative List
The Foreign Investment Negative List is a list of activities in the Philippines that foreigners are not allowed or are limited to own or invest in. The list is divided into two parts: List A and List B.
List A allows little to no foreign equity at all based on principles stated in the Philippine Constitution and other specific laws. The activities that don’t allow foreign equity are:
- Mass media
- Practice of pharmacy, radiologic, criminology, forestry, law professions
- Retail trade enterpriseswith less than USD$2.5M paid-in capital
- Cooperatives
- Private security agencies
- Small-scale mining
- Using marine resources and natural resources
- Owning and managing cockpits
- Manufacturing and distributing nuclear, biological, chemical, radiological weapons
- Manufacturing of pyrotechnic devices
Other items in List A allow up to a limited amount of equity for foreign investors. The activities are:
Up to 20% foreign equity
- Private radio networks
Up to 25% foreign equity
- Private recruitment
- Contracts for public works that are locally-funded
- Contracts for the construction of structures that are defense-related
Up to 30% foreign equity
- Advertising
Up to 40% foreign equity
- Exploration, development, and usage of natural resources
- Operation of public utilities
- Educational institutions aside from those put up by religious groups and mission boards
- Production and trading of rice and corn
- Contracts for the supply of materials, goods, and commodities to government-owned corporations
- Facility operator of an infrastructure
- Deep-sea fishing operations
- Adjustment companies
- Owning condominium units
List B also has a limited amount of foreign ownership, since it involves the security, defense, health, morals, and protection of Filipinos. The maximum number a foreigner can own is 40%.
Activities on this list are:
- Manufacturing, repairing, storing, and distribution of products that need the approval of the Philippine National Police clearance
- Manufacturing, repairing, storing, and distribution of products that need the approval of the Department of National Defenseclearance
- Manufacturing and distributing dangerous drugs
- Owning sauna and steam bathhouses
- Owning massage clinics
- All forms of gambling
- Domestic market enterprises with less than USD 200,000 paid-in equity capital
If the business you’re planning to set up is not on the Foreign Investment Negative List, the 60-40 equity rule may apply to you and your business, if the company does not meet the USD 200,000 paid capital requirement and most of your revenue will come from the Philippines
The minimum paid-in capital is USD 200,000
As a foreign investor, and if you want to fully own your business, or at least own the majority of the business, you must invest a minimum of USD 200,000. This requirement can be brought down to USD 100,000 as long as it meets the advance technology requirement of the Department of Science and Technology and if you have at least 50 direct employees.
An exception to this rule is if your company exports goods or services. The amount that you’re exporting should be around 60% of your gross sales. If that’s the case, your business now becomes a foreign-owned export enterprise in which the 60-40 equity rule does not apply.
For foreign investors who are seeking to set up a sole proprietorship, they must register with the Department of Trade and Industry (DTI). For the establishment of partnerships and corporations, investors must register with the Securities and Exchange Commission.
A Filipino partner must have at least 60% ownership
If the USD 200,000 is too steep, and the revenue of the company you wish to establish will mostly come from the Philippines, it’s time to find a Filipino partner. Note that your Filipino partner must own at least 60% of the business. Being a company majority owned by Filipinos, the USD 200,000 paid in capitalization requirement will no longer apply.
Learn more about owning a business in the Philippines
For more information, get in touch with Duran & Duran-Schulze Law at info@duranschulze.com or (+632) 478 5826.