Your guide to starting a business in the Philippines

The Philippines is known for its strategic location, skilled workforce, and rapidly growing economy, offering a favorable environment for local and foreign investors. With its diverse industries, supportive government policies, and dynamic marketplace, the country has become a hub for entrepreneurial success. In this article, we will discuss the essential steps and crucial considerations when starting a business in the Philippines.

Can foreigners start a business in the Philippines?

Foreigners can start a business in the Philippines subject to specific rules and regulations. Certain enterprises can own up to 100% ownership of domestic and export enterprises, but others demand limited equity participation or Filipino partners. Corporations, partnerships, sole proprietorships, and branches of existing foreign companies can be used when starting a business in the Philippines for foreigners. Regional administrations and other organizations require many procedures and licenses to register a business. Hiring foreign workers requires work licenses and visas. Foreigners can still benefit from the Philippines’ economy and welcoming investment climate by launching an international business in the Philippines, despite the regulatory barriers.

Understanding the business laws and regulations in the Philippines

There are several benefits that are available when starting a business in the Philippines to encourage foreign investment in various sectors. The Foreign Investments Act of 1991 (FIA), Republic Act No. 7042, outlines the benefits and conditions for foreign investors. The Foreign Investment Negative List in the Philippines also describes the constraints and limitations for maximum capital investment in particular industries, which is maintained to enable foreign investment. Foreigners should become familiar with this list before starting a business in the Philippines.

Rules for foreign equity capital:

• Domestic market enterprises: This category applies to a local business in the Philippines that generates 40% or more of its revenue from sources within the country. This indicates that these businesses generate a significant portion of their income from their operations. Foreigners are not allowed to hold the position of company president when starting a business in the Philippines unless the enterprise has a minimum paid-up capital of $200,000 or more, in which case, the equity cap can be lifted.
• Export-oriented enterprises: This local business in the Philippines generates at least 60% of its revenue from sources outside the Philippines. They are exempt from the $200,000 capitalization requirement and can exceed the 40% cap on equity foreigners own, as there are no restrictions on the extent of foreign ownership in export enterprises.

When starting a business in the Philippines, an anti-dummy law is enforced. This law penalizes individuals who breach the regulations on foreign equity ownership and those who attempt to evade nationalization laws.

Business types in the Philippines

Starting a business in the Philippines requires understanding the different business structures available and their legal and tax implications. These can be classified as either foreign or local. Here are the different business types in the Philippines:

Foreign corporations

• Branch Office (BO): This refers to an extension of a foreign corporation operating in the Philippines. It operates under the parent company’s authority and complies with the rules and regulations of the Securities and Exchange Commission (SEC).
• Regional Operating Headquarters (ROHQ): An ROHQ assists affiliates without endorsing goods or services for the main company or its divisions.
• Regional Area Headquarters (RHQ): RHQ supervises branches and subsidiaries of multinational firms but does not do business or generate revenue in the Philippines; financial support comes from parent firms.
• Representative Offices (RO): Global corporations set up these offices for activities like information sharing and marketing. However, when starting a business in the Philippines, they cannot earn money there and are bound to their parent firm.

Business structures under Philippine laws

• Sole proprietorship: This is a firm owned by one person who is responsible for all company debts and entitled to all profits. When starting a business in the Philippines, a sole proprietorship must be registered with the Department of Trade and Industry (DTI).
• One Person Corporations (OPCs): These are corporations limited to natural persons, trusts, or estates with only one stockholder. They provide individual control and limited liability.
• Domestic corporation: A legal entity that operates individually and is subject to obligations and debts with limited accountability for stockholders, similar to limited liability companies (LLCs) and private limited companies (PLCs).
• Partnership: It is a legal entity that is governed by two or more individuals. When starting a business in the Philippines, limited partnerships have limited liability determined by capital contributions, whereas general partnerships have unlimited liability. 

Different classifications of businesses

When classifying businesses, they generally fall into distinct categories based on their operations and primary functions. Here are the different classifications when starting a business in the Philippines:

• Service business: In the Philippines, service businesses deliver intangible goods or services to consumers and make money by charging for labor or services. Examples are construction businesses and BPO companies.
• Merchandising business: Purchase and resell goods from manufacturers or other businesses to customers. They benefit by raising the pricing of the products they sell.
• Manufacturing business: When starting a business in the Philippines, manufacturing businesses produce finished goods that are sold to consumers by converting raw materials, labor, and overhead.
• Other businesses: Other industries don’t fall under the service, retail, or industrial categories, such as mining and agriculture. These companies are involved in producing and exploring raw or natural materials.

How to open a business in the Philippines in 8 steps

Starting a business or small business in the Philippines can be a challenging but rewarding experience. However, it is essential to understand the local regulations, culture, and market dynamics to ensure a successful venture. Here are eight steps in starting a business in the Philippines for foreigners:

Step 1: Discover your desired industry

Before anything else, identify which industries are open to foreigners in the Philippines. Foreign ownership has limitations, particularly in defense, health, and protecting small and medium enterprises. Consulting with Philippine government agencies responsible for business registration can help clarify these limitations and provide other necessary information when opening a business establishment in the Philippines.

Step 2: Organize your finances

Starting a business in the Philippines requires a capital ranging from ₱ 100,000 ($1,800) to ₱ 1 million ($18,000). This budget covers the registration fees for various regulatory bodies, including the Bureau of Internal Revenue (BIR), the Securities and Exchange Commission (SEC), and the Local Government Units (LGUs). Considering these charges, arranging your finances before establishing a local company in the Philippines is important.

Step 3: Choose and register a business name in the Philippines

Depending on the type of business establishment in the Philippines you plan to register, you must determine the proper department for name registrations. The DTI handles sole proprietorships, while the SEC manages registration for corporations and partnerships for starting a business in the Philippines.

Step 4. Prepare legal requirements for starting a business in the Philippines

Here are various requirements to start a business in the Philippines:

• SEC registration for partnerships or corporations.
• DTI permit for the business trade name (BTR).
• Obtain the mayor’s/business permit and pay local business taxes.
• Register with the BIR for a TIN and pay various taxes.
• Obtain a barangay clearance to prove good moral character and residency.
• Register with government agencies (SSS, PhilHealth, and Pag-Ibig) as an employer to remit employee contributions and employer shares.

Before a business may be registered with the BIR and the city/municipality Office, they often require a certificate of registration from the SEC or DTI. Therefore, you must register with those offices to begin a start-up business in the Philippines.

Step 5: Tax registration

Tax compliance is a fundamental responsibility of any international business in the Philippines. Navigating the complex and frequently changing regulations requires up-to-date knowledge of tax laws. Some essential taxes include:

• Value Added Tax (VAT) for most goods and services sold in the Philippines.
• Income tax for both businesses and individuals.
• Withholding taxes for employers to deduct from employee salaries based on income and filing status.
• Goods and Services Tax (GST) for consuming goods and services replaced VAT and other indirect taxes in the Philippines.

Step 6: Open a bank account

By establishing a business bank account, you can clearly distinguish between your personal and business finances. This separation simplifies financial management and boosts the professionalism of starting a business in the Philippines.

Step 7: Set up your office

Create a functional workspace to support your daily operations, whether a physical office or a home-based setup. To begin a start-up business in the Philippines involves acquiring the necessary equipment, facilities, and utilities to support your work.

Step 8: Market your business

When starting a business in the Philippines, ensuring effective business promotion is essential when advertising your products and services. Brand awareness can be increased through traditional marketing methods and social media platforms.

Start your business in the Philippines

Starting a business in the Philippines requires understanding and navigating through a complex legal landscape. Our expert legal team is ready to guide you at every step, offering comprehensive services tailored to the unique needs of establishing a business in the Philippines. From analyzing the legal framework relevant to your industry and ensuring regulatory compliance to aligning your business goals with legal prerequisites, we cover all aspects of business setup, including incorporation and operational legalities.

To discover how our legal experts can help you launch your business in the Philippines, please leave your contact details below or email us at [email protected].

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