The Philippines opens its doors: new foreign investment opportunities
16 October 2023 | 10 minute read
With a rising economy poised to be in the top 20 globally by 2050, a robust English-proficient workforce owing to its population of over 110 million with a median age of 25, and now with reformed regulations that have relaxed foreign nationality restrictions in vital enterprises, the Philippines stands as a country rich in investment possibilities.
Pushed on by then-President Rodrigo Duterte's call to ease foreign nationality restrictions in key industries, in 2022 the Philippine Congress passed amendments to investment laws such as the Foreign Investments Act, the Public Service Act, and the Retail Trade and Liberalization Act. Current President Ferdinand Marcos Jr. is expected to continue the trend, having declared on several occasions the administration's steadfast commitment to pursuing legal and strategic reforms that facilitate the ease of doing business. Most recently, the Philippine Statistics Authority (PSA) announced that the approved foreign investments into the Philippines in the second quarter of 2023 reached 59.09 billion pesos (US$1 billion), marking a year-on-year increase of 27.8 per cent.
In this note, we provide a summary of recent amendments to investment laws and regulations that further enhance the Philippines' viability as an investor destination A discussion on the consequences of non-compliance with these laws and regulations, and ways to ensure compliance, will be presented in a separate note.
Lower capital requirement for foreign retailers
Amendments to the Retail Trade Liberalization Act (Republic Act No. 8762 as amended) have lowered the minimum paid-up capital requirement for foreign retailers and have removed the public offering requirement for retailers previously classified under "Category B" or "Category C."
Prior to the amendments, Section 5 of Republic Act No. 8762 outlined categories for foreign retailers determined by paid-up capital and type of goods sold. "Category A" applied to enterprises with paid-up capital of less than US$2.5 million and was only available to Filipino citizens and corporations wholly owned by Filipinos. "Category B" applied to enterprises with paid-up capital of at least US$2.5 million but less than US$7.5 million and which could be wholly owned by foreigners. "Category C" applied to enterprises with paid-up capital of at least US$7.5 million and which could be wholly owned by foreigners. "Category D" applied to enterprises specializing in high-end or luxury products requiring a paid-up capital of at least US$250,000 per store and which may be wholly owned by foreigners. Moreover, enterprises under "Category B" and "Category C" must have had investments in a store equivalent to at least US$830,000.
Republic Act No. 11595 amended the aforementioned Section 5 and removed the categories altogether. Under the current Section 5, foreign-owned partnerships, associations, and corporations may, upon registration with the Securities and Exchange Commission (or in the case of foreign-owned single proprietorships, with the Department of Trade and Industry) engage or invest in the retail trade business provided that the foreign retailer maintains a minimum paid-up capital of ₱25 million (approx. US$448,000) and the foreign retailer's country of origin does not prohibit the entry of Filipino retailers. The provision also states that for new foreign retailers looking to establish more than one physical store, the minimum investment per store is ₱10 million (approx. US$179,000).
Republic Act No. 11595 also removed the requirement for retail trade enterprises with more than 80% foreign equity and classified under "Category B" and "Category C" to offer at least 30% of their equity to the public within 8 years from the start of their operations.
A foreign retailer is defined under the implementing rules to the amended Retail Trade Liberalization Act as a foreign national, partnership, association, or corporation of which more than 40% of the capital stock is owned and held by such foreign national, engaged in retail trade.
The lowering of the minimum paid-up capital for foreign retailers is expected to increase the number of market participants in the already robust retail industry. Wholesale and retail trade services are a primary contributor to the country's Gross Domestic Product, which posted a growth of 6.4% in the first quarter of 2023 (PSA).
Lower capital requirement for start-ups
Micro and small domestic market enterprises are now more accessible to foreign investors with the latest amendments to the Foreign Investments Act (Republic Act No. 7042 as amended). The amendments also present opportunities for foreign start-up companies looking to set up shop in the Philippines.
Previously, Section 8 of the Foreign Investments Act stated that small and medium-sized domestic market enterprises with paid-in capital of less than US$200,000 were reserved for Philippine nationals, and that the minimum capital requirement for foreign nationals could be lowered to US$100,000 if either a) the enterprise involved advanced technology as determined by the Department of Science and Technology or b) the enterprise employs at least 50 direct employees.
Republic Act No. 11647 introduced amendments to the aforementioned Section 8 to provide more options for foreign investors to avail of the lower minimum paid-in capital requirement as well as to promote the establishment of startup companies. Under the amended Section 8, a corporation with foreign equity exceeding 40% of its total equity may generally engage in a micro and small domestic market enterprise provided it has paid-in equity capital of at least US$100,000 and any of the additional conditions are satisfied:
- The enterprise involves advanced technology as determined by the Department of Science and Technology;
- The enterprise is endorsed by government as a startup or startup enabler, or;
- A majority of the enterprise's direct employees are Filipinos but no less than 15.
If none of these conditions are present, a corporation which is 100% foreign-owned may still generally engage in a domestic market enterprise provided in has a minimum paid-in equity of US$200,000.
A "domestic market enterprise" under the current law refers to an enterprise which produces goods for sale or renders services to the domestic market entirely, or if it is partially engaged in exporting, less than 60% of its output is exported. Meanwhile, regulations define "startup" as any person registered in the Philippines which aims to develop an innovative product, process or business model whereas "startup enabler" is defined as any person registered under the Philippine startup development program that provides goods, services, or capital identified to be critical in supporting the operation and growth of startups by the Department of Trade and Industry.
100% foreign investment in public services
Under the amended Public Service Act (Commonwealth Act No. 146 as further amended by Republic Act No. 11659) corporations that are 100% foreign owned may now engage in the operation of public services such as airports, telecommunications, railways, toll ways, and shipping as they are no longer considered "public utilities" subject to foreign nationality restrictions.
The Constitution of the Philippines states that a "public utility" is a service that may only be operated by citizens of the Philippines or corporations organized under the laws of the Philippines with a maximum foreign equity percentage of 40%.
Prior to Republic Act No. 11659, the concept of a "public utility" was broadly defined under jurisprudence to encompass businesses engaged in regularly supplying the public with some commodity or service of public consequence. Thus, foreign nationals looking to invest in industries such as telecommunications and shipping were constrained to partner with a Filipino investor and devise of corporate structures that would comply with the "60-40" nationality restriction imposed by the Constitution.
Section 13 of Commonwealth Act No. 146 was amended by Republic Act No. 11659 to provide an express and limited definition of "public utility." Under Section 13 (d) of the amended law, a "public utility" refers to a public service that operates, manages or controls for public use any of the following:
- Distribution of electricity;
- Transmission of electricity;
- Petroleum and petroleum products pipeline transmission systems;
- Water pipeline distribution systems and wastewater pipelines systems;
- Seaports; and
- Public utility vehicles.
Thus, with the new law, generally all services that cater to the public and not covered by the above list are no longer considered as "public utilities" and no longer subject to the 40% restriction on foreign ownership for corporations.
Republic Act No. 11659 also introduced the concept of "critical infrastructure" which is defined as "any public service which owns, uses, or operates systems and assets, whether physical or virtual, so vital to the Republic of the Philippines that the incapacity or destruction of such systems or assets would have a detrimental impact on national security." At present, only telecommunications has been classified as "critical infrastructure," although the President of the Philippines is authorized to declare other vital services as "critical infrastructure."
Under the current law, foreign nationals are not allowed to own more than 50% of the capital of entities engaged in the operation and management of "critical infrastructure" unless the country of such national provides reciprocity to Filipinos. Moreover, the same law prohibits entities controlled by or acting on behalf of foreign governments or foreign state-owned enterprises (i.e., those in which a foreign state owns more than 50% of the capital, controls the exercise of more than 50% of the voting rights, or holds the power to appoint a majority of members of the board of directors or equivalent body) from owning capital in any public service classified as a "public utility" or "critical infrastructure."
Enabling more foreign investment in renewables projects
The Rules and Regulations Implementing the Renewable Energy Act of 2008 ("IRR") has been amended to remove the nationality requirement on entities looking to engage in the development of renewable energy. The amendment was prompted by an opinion issued by the Philippine Department of Justice that solar, wind, hydro, and ocean or tidal energy sources are not natural resources as they are not subject to depletion but are forms of kinetic energy and are thus not covered by the 40% foreign equity limitation under the Philippine Constitution.
The Philippine Constitution states that the exploration, development, and utilization of natural resources may be undertaken directly by the State or in cooperation with Filipino citizens or corporations or associations at least 60% of whose capital is owned by Filipinos, via a co-production, joint venture, or production-sharing agreement.
Prior to the amendment, the prevailing view was that forms of renewable energy were natural resources. Thus, Section 19(B) of the IRR previously stated that the State may enter into co-production, joint venture, or co-production sharing agreements with Filipino citizens or corporations or associations at least 60% of whose capital is owned by Filipinos. Similar to the situation before the amendments to the Public Service Act were introduced, foreign investors who were interested in entering into agreements with the government for the development of renewable energy had to partner with Filipino investors and implement corporate structures in compliance with the "60-40" requirement.
The amended IRR now states that the State may enter into renewable energy service or operating contracts with Filipino and/or foreign-owned corporations or associations.
Notably, IRR clarifies that the following are still covered by the 40% foreign equity restriction:
- Appropriation of water direct from a natural resource;
- The exploration, development, and utilization of geothermal resources (except for financial or technical agreements covering the large-scale exploration, development, and utilization of such resources); and
- The utilization of timber and non-timber forest products from lands of the public domain and qualified private lands, or the utilization of naturally occurring flora on lands of the public domain.
Thus, a corporation that is 100% foreign owned may now engage in the exploration, development, and utilization of solar, wind, hydropower, and ocean energy.
According to the 2021 Key Energy Statistics published by the Department of Energy, the Philippines currently has a total installed generating capacity of 26,882 MW, with coal, oil, and natural gas collectively accounting for approximately 70% of such capacity whereas renewable sources of energy account for just around 30%. Moreover, the total power generated by all sources is 106,115GWh and accounts for only 45% of total demand. There is therefore an untapped potential in the renewable energy sector.
Pursuant to its National Renewable Energy Program, the Philippine Department of Energy is targeting a minimum of 35% renewable energy share in the power generation mix by 2030 and 50% by 2040.
On the horizon
Withers is monitoring the issuance of new regulations allowing foreign contractors to obtain a Regular Contractor's License, following a pronouncement by the Supreme Court, the highest court in the Philippines, in 2020 that setting foreign equity restrictions on such license has no basis in law. Moreover, amendments to the Build-Operate-Transfer law ("BOT Law"), the legislation governing public bidding for infrastructure projects, are being pushed by various government sectors to encourage more public-private partnership projects. Significantly, President Marcos has declared that the revised BOT Law is one of his priority bills for 2023.
Luis Seña, who is qualified in the Philippines and New York, regularly advises clients investing in the Philippines. For more detailed and curated advice regarding to any of the matters discussed in this article, including assistance in navigating through related regulatory issues, you may contact Luis.