How to establish a domestic corporation in the Philippines?

It is essential to understand the procedure involved with forming a domestic corporation, regardless of whether you are a foreigner seeking to start a business or expand your existing business in the Philippines. The Philippine government does not offer the traditional options of a Limited Liability Company (LLC) or Private Limited Company (PLC), so the domestic corporation becomes the ideal choice for foreign investors. This guide will explain how to establish a domestic corporation in the Philippines as a foreigner.

What are domestic corporations in the Philippines?

A domestic corporation is a legally recognized business entity organized, registered, and operated under Philippine laws. It is considered a distinct artificial entity, separate from its stockholders and other connected corporations, with its legal personality. 

While the Philippines does not have a legal framework for a Limited Liability Company in the Philippines (LLC), domestic corporations are their closest equivalent. The Corporation Code of the Philippines grants the private corporations in the Philippines their powers and attributes. Like the LLC in the Philippines, domestic corporations assume their liabilities and are legally obligated to fulfill their financial obligations. 

The liability of the stockholders is limited to the extent of their investment or share capital in the corporation. A domestic corporation example incorporated in the Philippines will be considered a domestic business in that country and a foreign business in all other countries. It is important to note that while foreigners cannot buy land in their name, they can establish a domestic corporation in the Philippines and have the company purchase freehold land on their behalf. This allows foreigners to own land in the country indirectly through a locally registered domestic corporation.

Can a domestic corporation buy land and property in the Philippines?

According to the real estate law in the Philippines, foreigners cannot directly own land in the country. However, if foreigners plan to establish a domestic corporation in the Philippines, they can purchase land and property. It states that land may only be owned by Philippine citizens, a domestic partnership or association wholly owned by Filipino citizens, or a corporation organized under the laws of the Philippines. The corporation must have at least 60% of its capital stock outstanding and the entitlement to vote, owned and held by Philippine citizens.

What are the advantages for foreign investors when establishing a domestic company in the Philippines?

Foreign investors have increasingly recognized the Philippines as an attractive destination for business ventures due to its favorable economic climate and investment-friendly policies. Here are four advantages for foreign investors when establishing a domestic corporation in the Philippines:

1. Market potential: With a population of over 100 million and a consumer-driven culture, establishing a domestic corporation in the Philippines offers profitable opportunities for business growth.
2. Cost-effective workforce: Filipinos are hardworking and well-educated, making them ideal employees for businesses, particularly in the business process outsourcing sector, where their English language skills are an advantage and salaries are lower.
3. Infrastructure advancements: The Philippines has good connectivity through seaports and airports, especially in key business hubs like Makati City, Bonifacio Global City, and Ortigas Center, and ongoing infrastructure projects aim to improve the country’s infrastructure further.
4. Government incentives: The Philippine government provides various incentives, including tax holidays, simplification of customs procedures, and resident visas for foreign investors and their families, to attract foreigners who want to establish a domestic corporation in the Philippines.

What are the types of corporations in the Philippines?

Establishing a domestic corporation in the Philippines is classified based on its equity structure. The Philippine Foreign Investments Act of 1991 defines three main types of domestic corporations:

1. 100% Filipino-owned domestic corporation

This type of domestic company is owned entirely by Filipino individuals or entities. Being fully Filipino-owned, these corporations can operate in any economic activity or industrial sector without restrictions.

2. Domestic corporations with less than 40% foreign equity

These domestic corporations have a minority foreign ownership stake of less than 40%. While they have some foreign owners, most corporation ownership remains with Filipino individuals or entities. These corporations can also freely operate in any economic activity or industry, similar to the 100%  Filipino-owned corporations.

3. A foreign-owned domestic corporation with more than 40.01% foreign equity

Establishing a domestic corporation in the Philippines, especially one with a majority foreign corporation ownership exceeding 40.01%, requires compliance with restrictions outlined in the Philippine Foreign Investments Negative List (FINL). The nationality of their shareholders determines the equity structure of these corporations, and they face limitations on their participation in certain economic activities.

Requirements and restrictions to establish a domestic corporation in the Philippines

When establishing a domestic corporation in the Philippines, here are the requirements for a corporation:

1. Articles of incorporation: This document must include the name, purpose/business type of the domestic corporation, the names of incorporators, and the total number of incorporators (at least two). It should also indicate the domestic corporation’s total amount and share of stocks.

2. Shareholder information: Establishing a domestic corporation in the Philippines requires foreign shareholders to provide copies of their passports. Additionally, local shareholders must provide their Tax Identification Number (TIN) and two valid forms of identification.

3. Treasurer’s affidavit: This affidavit certifies that the Treasurer-in-Trust of the planned domestic corporation has certified at least 25% of its authorized capital stock. It must also show that at least 25% of the subscription has been paid and received by the Treasurer-in-Trust in cash for the benefit and use of the domestic corporation.

4. Internal rules and bylaws of the domestic corporation: The domestic corporation must have written rules of conduct for elections of board directors and officers and general meetings. The bylaws must also include the officers’ specific roles and expectations.

The minimum capital requirement when establishing a domestic corporation in the Philippines depends on its type:

What is the organizational structure of a domestic corporation in the Philippines?

Understanding a domestic corporation’s organizational structure is crucial for starting a business in the Philippines. Here is the required organizational structure when establishing a domestic corporation in the Philippines:

• There must be at least two incorporators or directors but no more than 15. According to the Articles of Incorporation, each must hold at least one capital stock share.
• The incorporators must be majority residents of the Philippines, but they don’t necessarily have to be citizens of the country.
• If a foreign company wants to operate a business in the Philippines, the company must have one resident agent to accept all legal processes, including summons that arise from the company’s operations in the Philippines.

In addition to the above requirements, establishing a domestic corporation in the Philippines needs at least four officers:

• President: The president can be a non-resident citizen, but they must be a director and hold at least one share.
• Treasurer: The treasurer must be a resident of the Philippines.
• Corporate secretary: The corporate secretary should be a citizen of the Philippines.
• Compliance officer: The compliance officer must be a resident of the Philippines.

How to form a corporation in the Philippines in 5 steps

Establishing a domestic corporation in the Philippines can be difficult and time-consuming. It involves the acquisition of licenses and registrations, which are necessary to complete the corporate structure and filings. Here is a step-by-step guide on how to form a corporation in the Philippines:

Step 1: Register your business with the SEC

Register your company with the Securities and Exchange Commission (SEC) to establish a domestic corporation in the Philippines. Visit the SEC’s Company Registration System and set up an account. Verify the availability of your preferred company name, reserve it, and then proceed with the online registration process. Compile the necessary documents, such as the Articles of Incorporation and By-laws, Joint Affidavit of two incorporators, and Treasurer’s Affidavit. After the SEC approves your application, they will issue a Certificate of Registration, which formally acknowledges the existence of your corporation.

Step 2: Obtain a barangay clearance

Obtain a clearance from the barangay or municipality where your business will be located. Present your SEC Certificate of Registration and two valid forms of identification and proof of address for your local office. This step helps ensure compliance with local government regulations when establishing a domestic corporation in the Philippines.

Step 3: Acquire your company’s business permit from the local mayor’s office

Visit your municipality’s local office to secure a business permit for your corporation. Along with your permit application, submit your SEC Certificate of Registration, two valid forms of identification, and proof of address for your local office. This permit allows you to operate legally within the municipality.

Step 4: Register your company with the Bureau of Internal Revenue (BIR)

Register your corporation with the Bureau of Internal Revenue (BIR) to fulfill your tax obligations. Visit the BIR’s Regional District Office (RDO) and follow these steps:

1. Complete BIR Form 1903 – Application for Registration.
2. Submit your SEC Certificate of Registration, Barangay Clearance, Business Permit, proof of address, and valid IDs.
3. If applicable, pay the Registration Fee (BIR Form 0605) and Documentary Stamp Tax (BIR Form 2000).
4. Register your account books and up-to-date invoices.
5. Wait for your BIR Certificate of Registration (BIR Form 2303).

Step 5: Register as an employer

Register as an employer with the following government agencies:

• Social Security System (SSS) for social security benefits.
• Philippine Health Insurance Corporation (PhilHealth) for health benefits.
• Home Development Mutual Fund (HDMF or Pag-IBIG Fund) for housing loan benefits.

What are the taxes for domestic corporations in the Philippines?

When establishing a domestic corporation in the Philippines, knowing the various tax responsibilities that must be fulfilled is important. Here is an overview of the taxes for domestic corporations in the Philippines:

1. Value-Added Tax (VAT) or Other-Percentage Tax (OPT): A Filipino domestic corporation may be subject to monthly/quarterly VAT or OPT. VAT (12% on gross selling price) is for larger businesses, while OPT is a non-VAT option for those who earn less than PHP 3 million annually.
2. Income tax: The income tax rate for domestic corporations is a flat 30% based on their taxable net income. This means that 30% of the company’s net income after deductions will be allocated for income tax payment.
3. Documentary Stamp Tax (DST): Establishing a domestic corporation in the Philippines may require payment of DST on certain transactions, such as issuing new shares or lease agreements. The rate of DST varies depending on the nature of the transaction.
4. Withholding taxes on income payments: Domestic corporations are also responsible for withholding taxes on specific income payments made to individuals or entities. For example, rental income payments are generally subject to a withholding tax rate of 5%.

Non-compliance or failure to meet tax responsibilities when establishing a domestic corporation in the Philippines can result in the following penalties:

• Surcharges: A 25% surcharge on the unpaid amount may be imposed if taxes are not paid on time.
• Interest: Besides the surcharge, an interest rate of 20% per annum is applied to the unpaid taxes from the deadline until the full payment is made.
• Penalty fees: Failure to comply with tax responsibilities may also result in penalties ranging from ₱ 200 ($3.60) to ₱ 50,000 ($900).

Get help in establishing a domestic corporation in the Philippines

Are you interested in establishing a domestic corporation in the Philippines but feel overwhelmed by the process? Our legal team is here to help you. With our knowledge and experience in the local market, we can assist you with legal matters related to establishing any type of corporation in the Philippines, as well as various real estate matters.

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