Investments and ForeignIncentives Reviewer

Investments and Foreign Incentives Law
Atty. Jose Maria Hofilea
Based on the Law/Case List for First Semester, AY 2013-2014
INVESTMENTS AND FOREIGN INCENTIVES LAW
HW 1 DOING BUSINESS IN THE PHILIPPINES

CORPORATION CODE
Sec. 123. Definition and rights of foreign corporations. For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency, (n) Sec. 133. Doing business without a license. No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. Sec. 144. Violations of the Code. Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (PI,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code.
One which owes its existence to the laws of another state, and generally, has no legal existence within the state in which it is foreign (Avon Insurance v. CA, 1997)
License to do Business in the Philippines

Two things required o Primary License ! obtained from the SEC " See Requirements under Sec. 125, Corp. Code o Certificate from the appropriate government agency " Holding companies dont need special licenses. Rationale for the need of a license o To subject the foreign corporations doing business in the PH to the jurisdiction of the courts. o Otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license may successfully, though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts (Avon Insurance v. CA, 1997) o Hofi: Theres room to argue that licensing requirement constitutes residency. How about a foreign entity that is not a corporation? Like a partnership or trust? o SEC treats them the same way in terms of licensing o Sole proprietorships ! register with DTI
Consequence of doing business without a license

It can be prosecuted against, but it cannot sue. (Sec. 133, supra) Hofi: Sec 133 is not a penalty, but more of a consequence Where a foreign corporation does business in the Philippines without the proper license, it cannot maintain any action or proceeding before Philippine courts. (Cargill, Inc. v. Intra Strata Assurance Corp., 2010) An unlicensed foreign corporation doing business in the Philippines cannot sue before Philippine courts; an unlicensed foreign corporation not doing business in the Philippines can sue before Philippine courts. (B. Van Zuiden Bros. v. GTVL Manufacturing Industries, Inc., 2007) A foreign corporation without a license is not ipso facto incapacitated from bringing an action in Philippine courts. A license is necessary only if a foreign corporation is transacting or doing business in the country. (Agilent Technologies Singapore v. Integrated Silicon Tech, 2004).
What is a foreign corporation?

One formed, organized or existing under laws other than those of the Philippines. And whose laws allow Filipino citizens and corporations to do business in its own country and state. (Reciprocity) o Required for the purpose of getting a license (Sec. 125)
Carlo Agdamag, A2015
Investments and Foreign Incentives Law Doing business in the Philippines1

See FIA definition, infra No general rule on what constitutes such. o Jurisprudence implies that it involves a continuity of actions Doing Business implies a continuity of commercial dealings and arrangements and the performance of acts or works or the exercise of some of the functions normally incident to the purpose or object of its organization. (Mentholatum v. Mangaliman, 1941) Transactions Seeking Profit o By and large, to constitute doing business, the activity to be undertaken in the Philippines is one that is for profit-making. (Agilent Technolgies Singapore v. Integrated Silicon Technology, 2004). Single Transaction o Where a single act or transaction is not merely incidental or casual but indicates the foreign corporation's intention to do other business in the Philippines, said single act or transaction constitutes doing business (Far East Int'l. v. Nankai Kogyo 1962). o It is not really the fact that there is only a single act done that is material for determining whether a corporation is engaged in business in the Philippines, since other circumstances must be considered. Where a single transaction of a foreign corporation is not merely incidental or casual but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state, such act will be considered as constituting business. (Litton Mills, Inc. v. Court of Appeals, 1996). Territoriality Rule o To be doing business in the Philippines, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis in its own name and for its own account. (B. Van Zuiden Bros. v. GTVL Manufacturing Industries, 2007) Acts of Solicitations o Solicitation of business contracts constitutes doing business in the Philippines. (Marubeni Nederland v. Tensuan, 1990) Isolated Transactions o Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing or carrying on of business. (e.g., making of a single contract, sale, sale with the taking of a note and mortgage to secure payment, purchase, or mere commission of a tort). There is no purpose to do any other business within the country (MR. Holdings V. Bajar, 2002). o

The law does not prohibit foreign corporations from performing single acts of business. A foreign corporation needs no license to sue before Philippine courts on an isolated transactions. (Lorenzo Shipping v. Chubb and Sons, 2004) o Even a series of transactions which are occasional, incidental and casualnot of a character to indicate a purpose to engage in businessdo not constitute the doing or engaging in business as contemplated by law. (Id.) o Suing on the basis of infringement of trade name is an isolated transaction (General Garments. v. Director of Patens, 1971). Pari Delicto Doctrine o The local party to a contract with a foreign corporation that does business in the Philippines without license cannot maintain suit against the foreign corporation just as the foreign corporation cannot maintain suit, under the principle of pari delicto. (TopWeld Mfg. v. ECED, 1985). Estoppel Doctrine o A foreign corporation doing business in the Philippines may sue in Philippine courts although it is without license to do business here against a Philippine citizen who had contracted with and been benefited by said corporation and knew it to be without the necessary license to do business, under the principle of estoppel. (Merrill Lynch Futures v. CA, 1992; Georg Grotjahn GMBH & C. v. Isnani, 1994); Summary of Doing Business ! The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements: o (1) if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts; o (2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction; o (3) if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporations corporate personality in a suit brought before the Philippine courts; and o (4) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction. (MR. Holdings, Ltd. V. Bajar, 2002; Agilent Technolgies Singapore v. Integrated Silicon Technology Phil. 2004).
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Case doctrines culled from CLVs Corporate Law Outline

one investor to another as in stock purchase. Ownership of bonds [including income bonds], debentures, notes or other evidences of indebtedness does not qualify as investments. Purchase of stock options or stock warrants is not an investment until the holder exercises his option and actually acquires stock from the corporation.
DEFINITION OF TERMS
Under RA 7042 (Foreign Investments Act) and its IRR
Philippine National A citizen of the Philippines A domestic partnership or association wholly owned by citizens of the Philippines; A corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; o If a corporation with non-Filipino stockholders own stocks in another corporation: " At least 60% of the capital stocks outstanding and entitled to vote of both corporations must be owned by Philippine citizens, and " At least 60% of the Board of Directors of both corporations must be Philippine citizens o IRR: The control test shall be used. o Only stocks entitled to vote shall be used as basis o For stocks to be deemed owned by Filipinos " Mere legal title is not enough " There should be full beneficial ownership, coupled with voting rights A trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of the Philippine nationals Foreign Corporation One formed, organized or existing under laws other than those of PH. Branch Office o Carries out the business activities of the head office and derives income from the host country. Representative or Liaison Office o Deals directly, with the clients of the parent company but does not derive income from the host country and is fully subsidized by its head office. o It undertakes activities such as but not limited to information dissemination and promotion of the company's products as well as quality control of products. Investment Equity participation in any enterprise organized or existing under the laws of the Philippines Includes both original and additional investments, whether made directly as in stock subscription, or indirectly through the transfer of equity from
Foreign Investment Equity investment made by a non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank Doing Business Soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; Any other act or acts that: o Imply a continuity of commercial dealings / arrangements " Hofi: this is a catch-all provision o Contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization. The following acts shall not be deemed doing business in PH: o Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; o Having a nominee director or officer to represent its interest in such corporation; o Appointing a representative or distributor domiciled in the Philippines which transacts business in the representative's or distributor's own name and account; o The publication of a general advertisement through any print or broadcast media; o Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; o Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export; o Collecting information in the Philippines; and

o Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.

Doctrine ! Concept of Residence What effectively makes such a foreign corporation a resident corporation in the Philippines is its actually being in the Philippines and licitly doing business here, "locality of existence" being the "necessary element in the signification" of the term, resident corporation A foreign corporation which shows that it is a resident of the Philippines has legal standing to petition for involuntary insolvency of a corporate debtor. 2. Marshall-Wells Company v. Henry Elser & Co., Inc. G.R. No. L-22015 | September 1, 1924 Sec. 69 of old Corporation Law was intended to subject the foreign corporation doing business in the Philippines to the jurisdiction of our courts and not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring domicile for the purpose of business without taking the necessary steps to render it amenable to suit in the local courts. 3. Marubeni Nederland B.V v. Judge Tensuan 190 SCRA 105 | September 28, 1990 Acts of Soliciations Solicitation of business contracts constitutes doing business in the Philippines. 4. Avon Insurance v. CA G.R. No. 97642 | August 29, 1997 Objection to Jurisdiction: Appearance of a foreign corporation to a suit precisely to question the tribunals jurisdiction over its person is not equivalent to service of summons, nor does it constitute an acquiescence to the courts jurisdiction. 5. Cargill, Inc., v. Intra Strata Assurance Corporation G.R. No. 168266 | March 15, 2010 Under Sec. 123 of the Corporation Code, a foreign corporation must first obtain a license and a certificate from the appropriate government agency before it can transact business in the Philippines. Where a foreign corporation does business in the Philippines without the proper license, it cannot maintain any action or proceeding before Philippine courts as provided in Section 133 of the Corporation Code.
Export Enterprise An enterprise which produces goods for sale, or renders services to the domestic market entirely or if exporting a portion of its output fails to consistently export at least 60% thereof Joint Venture Two or more entities, whether natural or juridical, one of which must be a Philippine national, combining their property, money, efforts, skills or knowledge to carry out a single business enterprise for profit, which is duly registered with the SEC as a corporation or partnership. Paid-in Equity Capital Total investment in a business that has been paid-in in a corporation or partnership or invested in a single proprietorship, which may be in cash or in property. It shall also refer to inward remittance or assigned capital in the case of foreign corporations. Foreign Investments Negative List / Negative List A list of areas of economic activity whose foreign ownership is limited to a maximum of 40% of the equity capital of the enterprise engaged therein.
CASES:
1. State Investment House v. Citibank G.R. Nos. 79926-27 | October 17, 1991 Summary: Citibank, Bank of America and HSBC jointly filed a petition for involuntary insolvency against Consolidated Mines, by virtue of its outstanding obligations. This was opposed by State Investment House and State Financing Center (also CMI creditors). They claim that the CFI has no jurisdiction because the banks are not resident creditors of CMI in contemplation of Section 20 of the Insolvency Law. The Court ruled in favor of the banks. The Insolvency Law contains no definition of the term resident, hence recourse was made by looking at other statutes like the NIRC, Offshore Banking Law and the General Banking Act. What effectively makes such a foreign corporation a resident corporation in the Philippines is its actually being in the Philippines and licitly doing business here, "locality of existence" being the "necessary element in the signification" of the term, resident corporation.

Republic Act No. 7042, otherwise known as the Foreign Investments Act of 1991, repealed Articles 44-56 of Book II of the Omnibus Investments Code of 1987, enumerated in Section 3(d) not only the acts or activities which constitute doing business but also those activities which are not deemed doing business. 6. Garcia v. Executive Secretary G.R. No. 100883 | December 2, 1991 Challenge to the constitutionality of the FIA (RA 7042) Ground ! It defeats the constitutional policy of developing a self-reliant and independent national economy effectively controlled by Filipinos and the protection of Filipino enterprises against unfair foreign competition and trade practices. Ruling ! The SC upheld the legality of the law. o The law is intended for foreign investments to supplement Filipino capital. o The over-all strategy of the Act is to develop a self-reliant economy, and promote full employment for Filipinos 7. Steelcase v. DISI G.R. No. 171995 | April 18, 2012 The lack of a Philippine business license is not a hindrance for an aggrieved foreign entity from seeking the courts assistance to enforce the existing obligations against Filipino companies. The doctrine of estoppel may apply to Filipino companies who entered to contracts with foreign corporations operating with no license. 8. Tuna Processing, Inc. vs. Philippine Kingford, Inc. G.R. No. 185582 | February 29, 2012 9. Global Business Holdings v. Surecomp Software G.R. No. 173463 | October 13, 2010 Surecomp entered into a software license agreement with Asian Bank Corp (ABC) for use in the banks computer system for a period of 20 years. ABC then merged with Global Business Holdings, which is the surviving entity. Global found the software unworkable for its operations, hence it terminated the contract with Surecomp. Surecomp filed a complaint for breach of contract. Global filed an MTD alleging that Surecomp no capacity to sue because it was doing business in the Philippines without a license. RTC and CA denied Globals MTD. Issue is W/N Global is estopped from questioning Surecomps capacity to sue. YES it is. As a

rule, unlicensed foreign non-resident corporations doing business in the Philippines cannot file suits in the Philippines. The exception to this rule is the doctrine of estoppel. Global is estopped from challenging Surecomps capacity to sue. A party is estopped from challenging the personality of a corporation after having acknowledged the same by entering into a contract with it. Due to Globals merger with ABC and because it is the surviving corporation, it is as if it was the one which entered into contract with Surecomp. 10. B. Van Zuiden Bros. Ltd. V. GTVL Manufacturing G.R. No. 147905 | May 28, 2007 An unlicensed foreign corporation doing business in the Philippines cannot sue before Philippine courts; an unlicensed foreign corporation not doing business in the Philippines can sue before Philippine courts. Territoriality Rule To be doing or transaction business in the Philippines for purposes of Section 133 of the Corporation Code, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis in its own name and for its own account. 11. Agilent Technologies v. Integrated Silicon Technology G.R. No. 154618 | April 14, 2004 A foreign corporation without a license is not ipso facto incapacitated from bringing an action in Philippine courts. A license is necessary only if a foreign corporation is transacting or doing business in the country. Transactions Seeking Profit Although each case must be judged in light of its attendant circumstances, jurisprudence has evolved several guiding principles for the application of these tests. By and large, to constitute doing business, the activity to be undertaken in the Philippines is one that is for profit-making. 12. Hahn v. CA G.R. No. 113074 | 22 Jan 1997 13. Eriks Pte v. CA G.R. No. 118843 | Feb. 6, 1997 Thus, the sale by petitioner of the items covered by the receipts, which are part and parcel of its main product line, was actually carried out in the progressive prosecution of commercial gain and the pursuit of the purpose and object of its business, pure and simple. For doing business without a license, it cannot file suit in Philippine courts.

14. Grotjahn GMBH v. Isnani 267 SCRA 657 | August 10, 1994 Estoppel Doctrine: A foreign corporation doing business in the Philippines may sue in Philippine courts although it is without license to do business here against a Philippine citizen who had contracted with and been benefited by said corporation and knew it to be without the necessary license to do business, under the principle of estoppel. 15. Litton Mills v. CA 235 SCRA 216 | May 15, 1996 It is not really the fact that there is only a single act done that is material for determining whether a corporation is engaged in business in the Philippines, since other circumstances must be considered. Where a single act or transaction of a foreign corporation is not merely incidental or casual but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state, such act will be considered as constituting business.
18. Lorenzo Shipping Corp. v. Chubb and Sons, Inc. G.R. No. 147724 | June 8, 2004 Isolated Transactions Section 133 of the Corporation is clear in depriving foreign corporations which are doing business in the Philippines without a license from bringing or maintaining actions before, or intervening in Philippines courts. The law does not prohibit foreign corporations from performing single acts of business. A foreign corporation needs no license to sue before Philippine courts on an isolated transactions Even a series of transactions which are occasional, incidental and casual not of a character to indicate a purpose to engage in businessdo not constitute the doing or engaging in business as contemplated by law.
19. Universal Shipping Lines v. IAC 188 SCRA 170 | July 31, 1990 Contract Test ! Allied may sue in Philippine courts upon the marine insurance policies issued by it abroad to cover international-bound cargoes shipped by a Philippine carrier, even if it has no license to do business in this country, for it is not the lack of the prescribed license (to do business in the Philippines) but doing business without such license, which bars a foreign corporation from access to our courts.
16. European Resources vs. Birkhahn 435 SCRA 246 | July 26, 2004 17. General Garments v. Director of Patents G.R. No. L-24295 | September 30, 1971 General Garments Corporation is the owner of the trademark Puritan issued by the Philippine Patent Office. In 1964, Puritan Sportswear Corp, organized under USA laws, filed a petition with the PPO for the cancellation of the trademark Puritan for violation of the Trademark Law. General Garments filed am MTD based on Puritan Sportswears lack of capacity to sue, being a a foreign corporation not licensed to do business in the Philippines. PPO dismissed the MTD. The SC sustained the PPO decision. It ruled that Puritan Sportswear may sue. The suit is in the nature of an isolated transaction. A foreign corporation which is unlicensed and unregistered to do business in the Philippines, but is widely and favorably known through the use therein of its products bearing its corporate and trade name has a legal right to maintain an action locally. The purpose of such a suit is to protect its reputation, corporate name and goodwill. The right to the use of the corporate or trade name is a property right, a right in rem, which it may assert and protect in any of the courts of the world. It is also for the protection of purchasers from confusion, mistake or deception as to the goods they are buying.
20. MR Holdings, LTD v. Bajar G.R. No. 138104 | April 11, 2002 Isolated Transactions - Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing or carrying on of business. Typical examples of these are the making of a single contract, sale, sale with the taking of a note and mortgage in the state to secure payment thereof, purchase, or note, or the mere commission of a tort. In these instances, there is no purpose to do any other business within the country.

Acts as an administrative branch of a multinational company engaged in international trade. Does not derive income from sources within the Philippines Does not participate in any manner in the management of any subsidiary or branch office it might have in the Philippines. Required inward remittance ! $50,000 annually o To cover operating expenses
HW 2 SETTING UP BUSINESS / FOREIGN INVESTMENTS ACT

What are the vehicles through which a foreign corporation may do business in the Philippines? 1. Domestic Subsidiary (Corp) / Partnership
Incorporate / form a partnership under domestic law. Minimum Capitalization ! $200,000
2. Branch Office A foreign corporation organized and existing under foreign laws. Carries out business activities of the head office. Derives income from the host country (PH) Minimum Paid-in Capital ! $200,000 o Can be reduced to $100,000 if " Activity involves advanced technology " Company employs at least 50 direct employees Registration with SEC is mandatory. 3. Representative Office
A foreign corporation organized and existing under foreign laws. Does not derive income from the host country. Fully subsidized by its head office. Deals directly with clients of the parent company as it undertakes activities like: o Information dissemination o Communication center o Promote company products o Quality control of products for export Minimum Inward Remittance ! $30,000 o To cover its operating expenses Must register with the SEC
Regional Operating Headquarters (ROHQ) Performs the following services to its affiliates, subsidiaries and branches in the Philippines: o General administration and planning o Business planning and coordination o Sourcing/procurement of raw materials components o Corporate finance advisory services o Marketing control and sales promotion o Training and personnel management o Logistic services o Research and development services and product development o Technical support and communications o Business development Derives income in the Philippines Required capital ! $200,000 one time remittance
Comparisons:
Liability Domestic Corporation o Limited Liability ! liable only to the extent of its assets Partnership o US ! Corporations could be partners in partnership o PH ! Corporations can be partners too. Mostly in powergeneration o General Partnership ! Unlimited liability for the obligations of the partnership. Liable for everything that he has. Could take even his personal property. " But a corporation which is a partner could skirt this liability through structuring. o Limited Partnership ! Liable only to the extent of the amount contributed to the partnership. But you need at least one general partner who becomes liable for everything. Branch Foreign investors typically prefer to form a domestic corporation. Partnership is next because they can structure it in a way that can limit their liability.
4. RHQ / ROHQ
Under RA 8756, any multinational company may establish an RHQ or ROHQ as long as they are existing under laws other than the Philippines, with branches, affiliates and subsidiaries in the Asia Pacific Region and other foreign markets
Regional Headquarters (RHQ) Undertakes activities that shall be limited to acting as supervisory, communication and coordinating center for its subsidiaries, affiliates and branches in the Asia-Pacific Region

Cost/Filing Fees Branch Office ! least preferred / most disadvantageous since they have to put in $100,000 worth of securities, which increases depending on the income of the corporation Facility of registration Which is easier to set up? Branch Office ! more hassle. Documents executed overseas have to be authenticated by the Philippine embassy / consulate abroad. Flexibility of Operations Branch Office !internal functioning governed by the law of their state. o No need to comply with PH laws on corporate governance (meetings, teleconference, etc) Domestic Corp ! PH law Tax Treatment (local to foreign counterpart) Domestic Corp ! subject to dividend tax o Income tax ! worldwide income Branch Office ! Subject to tax on branch profits o Income tax ! taxed on PH source income Dividends / Distribution of Profits Domestic Corp ! There must be unrestricted retained earnings Partnership ! As along as assets dont exceed liabilities o

Pension/retirement fund ! 60% owned by a Filipino; trustee must be a Filipino
FIA ESPOUSES CONTROL TEST

So if a corporation A has corporation B as a stockholder which is 60% Filipino, 40% foreign, then for purposes of the law, corporation A is considered 100% owned by Filipinos by corporation B. As opposed to the grandfather rule, which counts each and every stockholder But SC ! grandfather rule still partly applies
CASES:
1. DOJ Opinion No. 19, s. 1989 January 19, 1989 Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital respectively, of which belong to a Filipino citizens, all of the said shares shall be recorded as owned by Filipinos. But if less than 60%, or, say, only 50% of the capital stock or capital of the corporation or partnership, respectively belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shares shall be recorded as belonging to aliens." The "Grandfather Rule", which was evolved and applied by the SEC in several cases, will not apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural resource is not in doubt. 2. SEC Opinion Dated May 30, 1990 Jericho, a mining corporation inquired on whether its new ownership structure is compatible with the Grandfather Rule, as follows: 40% ! Filipino (original stockholders) 20% ! GFPC (60% Filipino, 40% Australian) 40% ! GFAL (wholly owned Australian corporation) It is worth mentioning that the Commission En Banc, on the basis of the Opinion
HW 3 PHILIPPINE NATIONAL
FOREIGN INVESTMENTS ACT
Two Kinds of Enterprise Export Enterprise ! export up to 60% of its goods/service Domestic Market Enterprise ! caters to Filipinos, exports exceeding 60% Unless there is an express repeal, those in the negative list still applies Definition of a Philippine national o Corporations ! not exceeding 40% o Domestic partnership ! Philippine national if wholly owned by citizens
not

of the Department of Justice No. 18, S. 1989 dated January 19, 1989 voted and decided to do away with the strict application/computation of the so-called grandfather rule, and instead applied the so-called control test method of determining corporate nationality. Applying the above-ruling to the instant case, GFPC, which is 60% Filipino owned, is considered a Filipino company. Consequently, its investment in Jericho is considered that of a Filipino. The 60% Filipino equity requirement therefore would still be met by Jericho. Considering that under the proposed set-up Jerichos capital stock will be owned by 60% Filipino, it is still qualified to hold mining claims or rights or enter into mineral production sharing agreements with the Government. 3. SEC-OGC Opinion No. 22-07 December 7, 2007 There are two proposed equity structures for a formation of a real estate company. The percentage of foreign equity is the same in both structure options. The only difference is in the par value of the shares which are foreign-owned vis-vis those that are Filipino-owned. It was then ruled that both structures will be in compliance with Filipino ownership requirements. Now, will the difference in par value matter? NO! In both the proposed equity structures, the minimum Filipino equity requirement for purposes of land ownership is met considering that the test for compliance with the nationality requirement is based on the total outstanding capital stock irrespective of the amount of the par value of the shares." The computation of the sixty percent (60%) Filipino ownership for purposes of determining whether or not a corporation is a Philippine national is based on the total number of outstanding capital stock entitled to vote irrespective of the amount of the par value of the shares and likewise, regardless of whether or not such shares have been fully or partially paid. 4. SEC-OGC Opinion No. 10-31 December 9, 2010 Medusa Mining, an Australian company, owns 40% of a joint venture operating an underground gold mine located in Surigao del Sur. The remaining 60% is owned by an ostensible Filipino company, PhilSaga. Mr. Civil questions the actual ownership structure of PhilSaga, saying that it is actually owned by Medusa by

virtue of the Philippine subsidiaries it has investments in. True enough, the joint venture is majority foreign-owned. The SEC applied the grandfather rule. Since there are layers of intervening corporations investing in the mining joint venture, it delved into the citizenship of the individual stockholders of each corporation. The control test should not be applied since it circumvents the Constitutional mandate that corporations engaging in certain activities must be 60% owned by Filipino citizens. Finally, the term "Philippine national" as used in the FlA is not synonymous or equivalent to the concept of "Philippine citizen" as used in the Constitution and the Mining Act. It is only applicable to entities that want to register and derive benefits under the FIA. It does not apply to entities engaging in nationalized activities or activities in the so called "negative lists." 5. SEC Opinion 11-44 October 27, 2011 North Luzon UPC Asia Corporation (NLUPC) wrote the SEC asking whether their proposed ownership structure and board composition is legal and valid, and does not violate the nationality restrictions prescribed by the Constitution. The corporate structure was found to be compliant with the law. However, the SEC had reservations with the composition of the Board of Directors. The anti-dummy law allows foreign participation in the BoD in proportion to the percentage of shares held by foreigners. Since NLUPC has 40% foreign equity, of the 10 BODs, 4 foreigners can be elected. The proposed arrangement is such that foreign corporate stockholders are absolutely allowed to nominate 4 alien (or Filipino) directors out of the 10 but Filipino stockholders can only nominate 4 directors out of 10. As to the remaining 2 independent directors, the foreign corporate stockholder will have an equal say in their nomination. This will result to both factions having 5 directors each. This defeats the mandate of the Anti-Dummy Law and gives the foreign corporate stockholder undue advantage over its Filipino counterpart. This creates an unfair and anomalous situation wherein a Philippine national is placed on equal footing with a foreigner in terms of participation in the Board of a corporation engaged in a partially nationalized activity (energy projects) thereby providing a means to circumvent our nationalization laws. 6. Redmont Consolidated Mines Corporation vs. McArthur Mining Corporation, SEC En Banc Case No. 09-09-177 | March 25, 2010 Redmont contends that certain mining companies, in the guise of being domestic corporations, are actually of foreign nationality. Indeed, it was found out that majority of the funding comes from foreign sources. Thus, the SEC applied the

grandfather rule. The Grandfather Rule should be applied in cases where there is doubt as to how much of the shares are actually foreign owned/Filipino owned. Hofi ! Ask who is deriving the economic benefit? o In this case, it was the foreigners. 7. Gamboa v. Tevez G.R. 176579 | June 28, 2011 Case questioning the ownership structure of PLDT. Issue ! W/N the term capital as provided for in the Constitution includes non-voting shares? NO! The term "capital" refers only to shares of stock entitled to vote in the election of directors, thus in the present case only to common shares, and not to the total outstanding capital stock comprising both common and non-voting preferred shares. Here, the common shares of PLDT are owned 64.27% by foreigners and 35.73% by Filipinos. Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the dividends of PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution that no franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to corporations organized under the laws of the Philippines, at least 60% of whose capital is owned by such citizens 8. Gamboa v. Tevez (MR) G.R. 176579 | October 09, 2012 Motion for reconsideration of the earlier case Under Section 11, Article XII of the 1987 Constitution, to own and operate a public utility a corporations capital must at least be 60 percent owned by Philippine nationals. The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the Constitution to engage in certain economic activities applies not only to voting control of the corporation, but also to the beneficial ownership of the corporation. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non- voting shares must be owned by Filipinos. The 60-40 ownership requirement in favor of Filipinos must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares.

Such uniform application to each class of shares insures that the controlling interest in public utilities always lies in the hands of Filipino citizens. Rehabilitation of Bayan
9. In the Matter of the Corporate Telecommunications Inc. G.R. Nos. 175418-20 | December 5, 2012
Bayantel entered into corporate rehabilitation. Part of the rehab terms include the conversion of debt to equity in excess of 40% of the outstanding capital stock in favor of its foreign creditors (Bank of New York and Avenue Asia Capital Group). This was questioned saying that this violates the constitutional limit on foreign ownership of a public utility. The SC ruled that indeed, the debt-to-equity conversion in excess of 40% violates the pertinent Filipino ownership rules of the Constitution. The parties to the rehabilitation plan intend to convert the unsustainable portion of respondent's debt into common stocks, which have voting rights. If this happens, the Omnibus Creditors which are foreign corporations, shall have control over 77.7% of Bayantel, a public utility company. This is precisely the scenario proscribed by the Filipinization provision of the Constitution. Therefore, the Court of Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on conversion. 10. SEC Memorandum Circular No. 8 series of 2013 Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized Activities This Circular applies to all corporations engaged in identified areas of activities or enterprises specifically reserved, wholly or partly, to Philippine Nationals by the Constitution, the FIA and other laws, except as may otherwise be provided therein. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. Corporations covered by special laws which provide specific citizenship requirements shall comply with the provisions of said law.
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IN
HW 4 NATIONALITY RESTRICTIONS ECONOMIC ACTIVITY

FILIPINO FIRST POLICY
CERTAIN AREAS
OF
Article XII, Section 10, Constitution Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos. In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos. The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities. Cases: 1. Taada v. Angara G.R. No. 118295 | May 2, 1997 Summary: Petitioners assail the constitutionality of the Philippines acceding to the World Trade Organization for being violative of provisions which are suppose to give preference to Filipino workers and economy and on the ground that it infringes legislative and judicial power. The WTO, through it provisions on most favored nation and national treatment, require that nationals and other member countries are placed in the same footing in terms of products and services. However, the Court brushed off these contentions and ruled that the WTO is constitutional. Sections 10 and 12 of Article XII (National Economy and Patrimony) should be read in relation to Sections 1 and 13 (promoting the general welfare). Also, section 10 is self-executing only to rights, privileges, and concessions covering national economy and patrimony but not every aspect of trade and commerce. There are balancing provisions in the Constitution allowing the Senate to ratify the WTO agreement. Also, the constitution doesnt rule out foreign competition. States waive certain amount of sovereignty when entering into treaties. Is the Filipino First Policy provision self-executing? These provisions are not self-executing o Merely guides in the exercise of judicial review and in making laws.
Secs. 10 and 12 of Article XII should be read and understood in relation to the other sections in said article, especially Sec. 1 and 13: o A more equitable distribution of opportunities, income and wealth; o A sustained increase in the amount of goods and services o An expanding productivity as the key to raising the quality of life The issue here is not whether this paragraph of Sec. 10 of Art. XII is selfexecuting or not. Rather, the issue is whether, as a rule, there are enough balancing provisions in the Constitution to allow the Senate to ratify the Philippine concurrence in the WTO Agreement. And we hold that there are. WTO Recognizes Need to Protect Weak Economies o Unlike in the UN where major states have permanent seats and veto powers in the Security Council, in the WTO, decisions are made on the basis of sovereign equality, with each members vote equal in weight. Specific WTO Provisos Protect Developing Countries o Tariff reduction developed countries must reduce at rate of 36% in 6 years, developing 24% in 10 years o Domestic subsidy developed countries must reduce 20% over six (6) years, developing countries at 13% in 10 years o Export subsidy developed countries, 36% in 6 years; developing countries, 3/4ths of 36% in 10 years Constitution Does Not Rule Out Foreign Competition o Encourages industries that are competitive in both domestic and foreign markets The Court will not pass upon the advantages and disadvantages of trade liberalization as an economic policy. It will only perform its constitutional duty of determining whether the Senate committed grave abuse of discretion Manila Prince Hotel v. GSIS G.R. No. 122156 | February 3, 1997
2.
Summary: Pursuant to its privatization program, GSIS bidded out its 51% stake in Manila Hotel. The winning bidder was a Malaysian firm, Renong Berhard. Manila Prince, a domestic corporation, matched Berhards offer. However, GSIS wont accept this and awarded the hotel to the foreign firm. Manila Prince filed suit in the SC, invoking the Filipino First Policy. SC ruled in its favor and held the following: Filipino First Policy is self-executing A constitutional provision is self-executing if the nature and extent of the right conferred and the liability imposed are fixed by the constitution itself, so that they can be determined by an examination and construction of its terms, and there is no language indicating that the subject is
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referred to the legislature for action When the Constitution mandates that in the grant of rights, privileges, and concessions covering national economy and patrimony, the State shall give preference to qualified Filipinos, it means just thatqualified Filipinos shall be preferred It is a mandatory, positive command which is complete in itself and which needs no further guidelines or implementing laws or rules for its enforcement. From its very words the provision does not require any legislation to put it in operation. It is per se judicially enforceable.

Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant. The State shall protect the nation's marine wealth in its archipelagic waters, territorial sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens. The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as cooperative fish farming, with priority to subsistence fishermen and fish- workers in rivers, lakes, bays, and lagoons. The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources. The President shall notify the Congress of every contract entered into in accordance with this provision, within thirty days from its execution. Cases: 1. La Bugal Blaan Tribal Association, Inc. vs. Ramos G.R. 127882 (focus on Financial and Technical Assistance Agreements issues) Summary: In line with the newly-enacted Mining Act (RA 7942), President Ramos entered into a financial and technical assistance agreement with Western Mining Philippines covering 99,387 hectares of land in Mindanao. The La Bugal tribal people questioned the said law and agreement, saying that the FTAA is in the nature of a management / service contract not allowed under the constitution. SC ruled in favor of La Bugal. RA 7942 is invalid insofar as said Act authorizes service contracts. Although the statute employs the phrase financial and technical agreements in accordance with the 1987 Constitution, it actually treats these agreements as service contracts that grant beneficial ownership to foreign contractors contrary to the fundamental law. Only FTAAs are covered by the Constitution The phrase management or other forms of assistance in the 1973 Constitution was deleted in the 1987 Constitution, which allows only technical or financial assistance.
Manila Hotel is part of National Patrimony When the Constitution speaks of national patrimony, it refers not only to the natural resources of the Philippines but also to the cultural heritage of the Filipinos For more than eight (8) decades Manila Hotel has bore mute witness to the triumphs and failures, loves and frustrations of the Filipinos; its existence is impressed with public interest; its own historicity associated with our struggle for sovereignty, independence and nationhood. For sure, 51% of the equity of the MHC comes within the purview of the constitutional shelter for it comprises the majority and controlling stock, so that anyone who acquires or owns the 51% will have actual control and management of the hotel. In this instance, 51% of the MHC cannot be disassociated from the hotel and the land on which the hotel edifice stands. *How to reconcile these two cases? Personally, I think the reason why the Filipino First Policy argument was not bought by the SC in Tanada is that the WTO itself is replete with provisions that gives protection to the domestic economy. Notwithstanding its liberal underpinnings, Filipinos would not be at a disadvantage; but to the contrary, it might be even beneficial for us.
NATURAL RESOURCES
Article XII, Section 2, Constitution Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens.
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Are service contracts included? NO! Under the new Constitution, foreign investors (fully alien-owned) can NOT participate in Filipino enterprises except to provide: (1) Technical Assistance for highly technical enterprises; and (2) Financial Assistance for large-scale enterprises. The intent of this provision, as well as other provisions on foreign investments, is to prevent the practice (prevalent in the Marcos government) of skirting the 60/40 equation using the cover of service contracts. In any case, the constitutional provision allowing the President to enter into FTAAs with foreign-owned corporations is an exception to the rule that participation in the nations natural resources is reserved exclusively to Filipinos. Accordingly, such provision must be construed strictly against their enjoyment by non-Filipinos. Initiatives for Dialogue and Empowerment v. Power Sector Assets and Liabilities Management G.R. No. 192088 | October 9, 2012

However, only Filipino citizens may be granted water rights. The intent to preserve water resources under the full supervision and control of the State is evident when PSALM was obligated to prescribe safeguards to enable the national government to direct water usage to domestic and other requirements "imbued with public interest." There is no express requirement for the transfer of water rights in all cases where the operation of hydropower facilities in a multi-purpose dam complex is turned over to the private sector. NPC shall continue to be the holder of the water permit even as the operational control and day-to-day management of the AHEPP is turned over to K-Water
LAND OWNERSHIP
Article XII, Section 2 and 3, Constitution Section 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands and national parks. Agricultural lands of the public domain may be further classified by law according to the uses to which they may be devoted. Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or associations may not hold such alienable lands of the public domain except by lease, for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and not to exceed one thousand hectares in area. Citizens of the Philippines may lease not more than five hundred hectares, or acquire not more than twelve hectares thereof, by purchase, homestead, or grant. Taking into account the requirements of conservation, ecology, and development, and subject to the requirements of agrarian reform, the Congress shall determine, by law, the size of lands of the public domain which may be acquired, developed, held, or leased and the conditions therefor. Cases: 1. Chavez v. Public Estates Authority G.R. No. 133250 | May 6, 2003 Requirements before PEA can sell lands of the public domain transferred to it by the Government: A. Two official acts be done (by the government/president) Classification that these lands (of the public domain) are alienable or disposable and open to disposition A declaration that these lands are not needed for public service B. Law authorizing the sale of such lands (if lands were transferred to a government entity) C. Sale be done through a public auction
2.
Summary: Petitioners (including some local water/power-generation firms) are suing PSALM to stop the sale of Angat Hyrdro-Electric Power Plant (AHEPP) to Korea Water Sources Corporation (K-Water) which won the bidding. Among other things, the petitioners assail the constitutionality of the sale because K-Water is a foreign corporation which will own water resources. The Constitution proscribes the ownership of foreigners in natural resources. A corporation must be at least 60% of the capital is owned Filipino citizens. The SC upheld the sale (see reasons below) but the water permit of the National Power Corporation (NPC) shall not be transferred to K-Water as it in contravention of the Constitution. Sale of AHEPP to a foreign corporation not prohibited Foreign ownership of a hydropower facility is not prohibited under existing laws. The construction, rehabilitation and development of hydropower plants are among those infrastructure projects which even wholly-owned foreign corporations are allowed to undertake under the BOT Law. The DOJ has consistently regarded hydropower generation by foreign entities as not constitutionally proscribed based on the definition of water appropriation under the Water Code. Since the NPC remains in control of the operation of the dam by virtue of water rights granted to it, there is no legal impediment to foreign-owned companies undertaking the generation of electric power using waters already appropriated by NPC, the holder of water permit.
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If it fails a negotiated sale is allowed in, which case the commission on audit must approve the selling price

First, identify into which class of shares the debt shall be converted, whether common shares, preferred shares that have the right to vote in the election of directors or non-voting preferred shares; Second, determine the number of shares with voting right held by foreign entities prior to conversion. If upon conversion, the total number of shares held by foreign entities exceeds 40% of the capital stock with voting rights, the constitutional limit on foreign ownership is violated. Otherwise, the conversion shall be respected. JG Summit Holdings, Inc. v. Court of Appeals G.R. No. 124293 | September 24, 2003
2. Lee v. Republic G.R. No. 128195 | October 3, 2001 Doctrine: If land is invalidly transferred to an alien who subsequently becomes a citizen or transfers it to a citizen, the flaw in the original transaction is considered cured and the title of the transferee is rendered valid. Thus, the subsequent transfer of the property to qualified Filipinos may no longer be impugned on the basis of the invalidity of the initial transfer. The objective of the constitutional provision to keep our lands in Filipino hands has been achieved.
3.
PUBLIC UTILITIES
Article XII, Section 11, Constitution Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. Cases: 1. Gamboa v. Tevez G.R. 176579 | 10-09-12 and 06-28-11 *see above* 2. Express Investments v. Bayan Telecommunications G.R. Nos. 174457-59, 17418-20, 177270 | 12-05-12
Summary: The National Government, through a government corporation, and Kawasaki entered into a Joint Venture Agreement for the construction and operation of a shipyard (Philseco). The agreement granted a right of first refusal to both parties in case they decide to sell their stake. Corys admin embarked on privatizing non-performing government interests, including that of the shipyard. Hence, bidding was conducted where JG Summit emerged as the winning bidder. Prior to this, the right of first refusal was converted into a right to top the winning offer. Philyard Holdings exercised this right in favor of Kawasaki. JG Summit filed a case questioning the exercise of such right. CA dismissed the case. SC reversed first, but on MR (this decision) it sustained the CA. Issue: W/N Philseco is a public utility. NO! A shipyard cannot be considered a public utility. Its nature dictates that it serves but a limited clientele whom it may choose to serve at its discretion. While it offers its facilities to whoever may wish to avail of its services, a shipyard is not legally obliged to render its services indiscriminately to the public. It has no legal obligation to render the services sought by each and every client. The fact that it publicly offers its services does not give the public a legal right to demand that such services be rendered. What is a public utility? Public utility ! a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph. The facility must be necessary for the maintenance of life and occupation of the residents. However, the fact that a business offers services or goods that promote public good and serve the interest of the public does not automatically make it a public utility. Public use is not synonymous with public interest. As its name indicates, the term public utility implies public use and service to the public. The principal determinative characteristic of a public utility ! service to an indefinite public or portion of the public as such which has a legal right to demand and receive its services or commodities.
*see above (Corporate Rehabilitation of Bayantel) Two steps must be followed in order to determine whether the conversion of debt to equity in excess of 40% of the outstanding capital stock violates the constitutional limit on foreign ownership of a public utility:
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4. Bagatsing v. Committee on Privtization G.R. No. 112399 | July 14, 1995

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment. (4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. Case: 1. Crisostomo v. Securities and Exchange Commission G.R. Nos. 89095 and 89555 | November 6, 1989 Summary: The investments in UDMC of Japanese Doctors Yamada and Enatsu do not violate the Constitutional prohibition against foreigners practising a profession in the Philippines for they do not practice their profession (medicine) in the Philippines, neither have they applied for a license to do so. They only own shares of stock in a corporation that operates a hospital. No law limits the sale of hospital shares of stock to doctors only. The ownership of such shares does not amount to engaging (illegally,) in the practice of medicine, or, nursing. If it were otherwise, the petitioner's stockholding in UDMC would also be illegal.
Petron is not a public utility! Summary: Petitioner questions the validity of the sale of PNOCs shares in Petron to ARAMCO as part of the privatization program by the government. Under the terms, Petron, will sell 40% to one partner (the eventual winner of the bidding ARAMCO), and 20% to the public whether foreign or not. The SC said it was valid. The last issue discussed was whether Petron is a public utility. No, it is not. A "public utility" under the Constitution and the Public Service Law is one organized "for hire or compensation" to serve the public, which is given the right demand its service. PETRON is not engaged in oil refining for hire and compensation to process the oil of other parties. Likewise, the activities considered as "public utility" under Section 7 of R.A. No. 387 refer only to petroleum which is indigenous to the Philippines. Hence, the refining of petroleum products sourced from abroad as is done by Petron, is not within the contemplation of the law.
EDUCATIONAL INSTITUTIONS
Article XIV, Section 4, Constitution Section 4.(1) The State recognizes the complementary roles of public and private institutions in the educational system and shall exercise reasonable supervision and regulation of all educational institutions. (2) Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of the capital of which is owned by such citizens. The Congress may, however, require increased Filipino equity participation in all educational institutions. The control and administration of educational institutions shall be vested in citizens of the Philippines. No educational institution shall be established exclusively for aliens and no group of aliens shall comprise more than one-third of the enrollment in any school. The provisions of this subsection shall not apply to schools established for foreign diplomatic personnel and their dependents and, unless otherwise provided by law, for other foreign temporary residents. (3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.
MASS MEDIA AND ADVERTISING

Article XVI, Section 11, Constitution Section 11. (1) The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly- owned and managed by such citizens. The Congress shall regulate or prohibit monopolies in commercial mass media when the public interest so requires. No combinations in restraint of trade or unfair competition therein shall be allowed. (2) The advertising industry is impressed with public interest, and shall be regulated by law for the protection of consumers and the promotion of the general welfare. Only Filipino citizens or corporations or associations at least seventy per centum of the capital of which is owned by such citizens shall be allowed to engage in the advertising industry. The participation of foreign investors in the governing body of entities in such industry shall be limited to their proportionate share in the capital thereof, and all the executive and managing officers of such entities must be citizens of the Philippines.
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The foreign investor shall be required to maintain in the Philippines the full amount of the prescribed minimum capital unless the foreign investor has notified the SEC and the DTI of its intention to repatriate its capital and cease operations in the Philippines. Failure to maintain the full amount of the prescribed minimum capital prior to notification of the SEC and the DTI, shall subject the foreign investor to penalties or restrictions on any future trading activities/business in the Philippines. Foreign retail stores shall secure a certification from the BSP and the DTI, which will verify or confirm inward remittance of the minimum required capital investments.
HW 5 NATIONALITY RESTRICTIONS ECONOMIC ACTIVITY (CONT.)

RETAIL TRADE LAW (RA 8762)
IN
CERTAIN AREAS
OF
Definitions Retail trade ! any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or good for consumption, but the restriction of this law shall not apply to the following: o Sales by manufacturer, processor, laborer, or worker, to the general public of the products manufactured, processed or produced by him if his capital does not exceed P100,000.00; o Sales by a farmer or agriculturist selling the products of his farm; o Sales in restaurant operations by a hotel owner or inn-keeper irrespective of the amount capital: provided, that the restaurant is incidental to the hotel business; and o Sales which are limited only to products manufactured, processed or assembled by a manufactured, processed or assembled by a manufacturer though a single outlet, irrespective of capitalization. High-end or luxury goods ! goods which are not necessary for life maintenance and whose demand is generated in large part by the higher income groups. These include, but are not limited to products such as; jewelry, branded or designer clothing and footwear, wearing apparel, leisure and sporting goods, electronics and other personal effects. Foreign Equity Participation Foreign-owned partnerships, associations and corporation formed and organized under PH laws may, upon registration with the SEC and the DTI, or in case of foreign owned single proprietorships, with the DTI, Engage or invest in the retail trade business, subject to the following categories: Category A Enterprises with paid-up capital of less than US$2,500,000.00 shall be reserved exclusively for Filipino citizens and corporations wholly owned by Filipino citizens. Category B Enterprises with a minimum paid-up capital of US$2,500,000.00 but less US$7,500,000.00 may be wholly owned by foreigners. Category C Enterprises with a paid-up capital of US$7,500,000.00, or more may be wholly owned by foreigners: Provided, however, That in no case shall the investments for establishing a store in vestments for establishing a store in Categories B and C be less than US$830,000.00. Category D Enterprises specializing in high-end or luxury products with a paid-up capital of US$250,000.00 per store may be wholly owned by foreigners.
Public Offering of Shares of Stock All retail trade enterprises under Categories B and C in which foreign ownership exceeds eighty percent (80%) of equity shall offer a minimum of 30% of their equity to the public through any stock exchange in the Philippines within 8 years from their start of operations. Qualification of Foreign Retailers. - No foreign retailer shall be allowed to engage in retail trade unless all the following qualifications are met: A minimum of US$200,000,000.00 net worth in its parent corporation for Categories B and C, and US$50,000,000.00 net worth in its parent corporation for category D; Five (5) retailing branches or franchises in operation anywhere around the world unless such retailer has at least one (1) store capitalized at a minimum of US$25,000,000.00; Five (5)-year track record in retailing; and Only nationals from, or juridical entities formed or incorporated in Countries which allow the entry of Filipino retailers shall be allowed to engage in retail trade in the Philippines. (reciprocity) Prohibited Activities of Qualified Foreign Retailers Qualified foreign retailers shall not be allowed to engage in certain retailing activities outside their accredited stores through the use of mobile or rolling stores or carts, the use of sales representatives, door-todoor selling, restaurants and sari-sari stores and such other similar retailing activities: Espina v. Zamora (G.R. No. 143855 | September 21, 2010) The constitutionality of the Retail Trade Act was being challenged since it allows foreigners to engage in retail trade in PH. SC upheld the law. The Constitution does not rule out the entry of foreign investments, goods, and services. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only on foreign competition that is unfair. Besides, the law itself has strict safeguards on foreign participation in retail trade.
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2. People v. Quasha G.R. No. L-6055 | June 12, 1953 Doctrine: Temporal element of nationality requirement The Constitution does not prohibit the mere formation of a public utility corporation without the required formation of Filipino capital. What it prohibits is granting a franchise or other form of authorization for the operation of a public utility to a corporation already in existence but without the requisite proportion of Filipino capital The moment for determining whether a corporation is entitled to operate as a public utility is when it applies for a franchise, certificate, or any other form of authorization for that purpose. That can be done after the corporation has already come into being and not while it is still being formed. At that moment, the corporation must show that it has complied not only with the requirement of the Constitution as to the nationality, but also with the requirements of other applicable laws. 3. Sui Bi et al. v. Court of Appeals G.R. No. 129507 | September 29, 2000 Doctrine: If there is evidence showing that a Filipino purchased real estate through his own money or for his own benefit and not that of an alien, then the Filipino should not be considered a dummy. Even if an alien donated money to a Filipino so that the latter could invest it in the purchase of lands, such act would not necessarily violate the law so long as it was done in good faith 4. Pua et al. v. Court of Appeals G.R. No. 134992 | November 20, 2000 Doctrine: The acts sought to be punished by the Anti-Dummy Law are allowing the use of the name of a citizen of the Philippines for the purpose of evading any constitutional or legal provision requiring Philippine citizenship as a requisite for the exercise or enjoyment of a right, franchise or privilege, and the profiting of any alien thereby. There must be evidence and sufficient basis for any prosecution under the said law.
ANTI-DUMMY LAW (COMMONWEALTH ACT NO. 108)

What is the Anti-Dummy Law? It is an act to punish evasion of the laws on the nationalization of certain rights, franchise and privileges. Any violation is a criminal act punishable with 5-to-15 year-imprisonment. Punishable Acts A person who, having in his name or under his control a right, franchise, privilege, property or business, the exercise or enjoyment of which is expressly reserved by law to Philippine citizens or to corporations or associations where at least 60 percent of the capital is owned by such citizens, is prohibited from: Permitting or allowing the use, exploitation or enjoyment of such right, franchise, privilege, property or business by a person, corporation or association not possessing the qualifications prescribed by law, or In any manner permitting or allowing any person not so qualified to intervene in the management, operation, administration or control of such right, franchise, privilege, property or business, whether as an officer, employee, or laborer, with or without remuneration. o However, foreign nationals may serve as Board members of corporations engaged in partially nationalized activities in a number proportionate to their actual and allowable equity in the company. o No foreigner allowed in the Board of a wholly-nationalized activity. Simulation of minimum capital stock (nationality requirement for ownership) Badges of dummy status (DOJ Opinion 165, series of 1984) That the foreign investor provides practically all the funds for the joint investment undertaken by Filipino businessmen and their foreign partner. That the foreign investors undertake to provide practically all the technological support for the joint venture. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies. Cases: 1. Roque v. Commission on Elections G.R. No. 188456 | September 10, 2009 Doctrine: The Anti-Dummy Law has been enacted to limit the enjoyment of certain economic activities to Filipino citizens or corporations. For liability for violation of the law to attach, it must be established that there is a law limiting or reserving the enjoyment or exercise of a right, franchise, privilege, or business to citizens of the Philippines or to corporations or associations at least 60 per centum of the capital of which is owned by such citizens.
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Capability of operating on a sound and efficient basis of contributing to the national development of the preferred area in particular and of the national economy in general; If proposal is to engage in activities other than preferred projects, it has to install an accounting system adequate to identify the investments, revenues, costs, and profits or losses of each preferred project.
HW 6 INVESTMENT INCENTIVES
OMNIBUS INVESTMENTS CODE (EO 226)
Investment Policies The state shall encourage Filipino & foreign investments in different industries. Holistic development social, cultural and ecological life of the people o Conduct consultations with affected communities Fiscal incentive system for the realization of the Codes objectives Private sector as the prime mover of economic growth State shall play a supportive role rather than a competitive one Fiscal incentives shall be extended to stimulate the establishment and assist initial operations of the enterprise, and shall terminate after a period of not more than 10 years from registration or start-up of operation unless a specific period is otherwise stated. Investment Priorities Plan (IPP) Not later than the end of March of every year, the Board of Investments, after consultation with the appropriate government agencies and the private sector, shall submit to the President an Investment Priorities Plan. The determination of preferred areas of investment to be listed in the IPP shall be based on long-run comparative advantage, taking into account the value of social objectives and employing economic criteria along with market, technical, and financial analyses. It may designate certain areas a pioneer/non-pioneer. The President shall proclaim the whole or part of such plan as in effect; or alternatively, return the whole or part of the plan to the Board of Investments for revision. Subject to certain rules on amendments and publication. Qualification of a Registered Enterprises Citizen of the Philippines (for corps 60% capital requirement) Exception: (all must concur) o Proposed to engage in a pioneer project which cannot be readily and adequately filled by Philippine nationals; or 70% of total production is for export o That it obligates itself to attain the status of a Philippine national within 30 years from date of registration; however, enterprises that export 100% of its output need not comply with this. o That the pioneer area it will engage in is not limited by the Constitution for Filipinos. The applicant is proposing to engage in a preferred project under the IPP. If not, at least 50% of total production is for export.
Basic Rights & Guarantees Repatriation of Investments Remittance of Earnings Foreign Loans and Contracts Freedom from Expropriation Requisition of Investment Incentives to Registered Enterprises Income Tax Holiday o Pioneer Firms 6 years from commercial operation o Non-pioneer Firms 4 years from commercial operation o Registered Expanding Firms 3 years from commercial operation o For pioneer/non-pioneer, may be extended for another year, in any of the following cases: " Project meets prescribed ratio of capital equipment to number of laborers " Utilization of indigenous materials " Net forex earings or savings amount to at least $500,000 during first 3 years of operations o No registered firm may avail of this for more than 8 years. Additional Deduction for Labor Expense o For the first 5 years from registration, additional deduction from taxable income of 50% of the wages Tax & Duty Exemption on Imported Capital Equipment Tax Credit on Domestic Capital Equipment Exemption from Contractors Tax Simplification of Customs Procedure Unrestricted Use of Consigned Equipment Employment of Foreign Nationals Exemption on Breeding Stocks and Genetic Materials Tax Credit on Domestic Breeding Stocks and Genetic Materials Tax Credit for Taxes and Duties on Raw Materials Access to Bonded Manufacturing/Trading Warehouse System Exemption from Taxes and Duties on Imported Spare Parts Exemption from Wharfage Dues & any Export Tax, Duty, Impost and Fee Cases:
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1. Garcia v. Board of Investments G.R. No. 92024 | November 9, 1990 2. First Lepanto Ceramics v. Court of Appeals G.R. No. 117680 | February 9, 1996 o o o

Sale of foreign exchange Remittance of foreign exchange The underlying foreign exchange transaction The seller/remitter shall require submission of receipts evidencing payment of taxes.
SPECIAL ECONOMIC ZONE ACT (RA 7916)

Terms
CERTAIN SPECIAL ECONOMIC ZONES (RA 7227)

Bases Conversion & Development Authority Governing body for all eco-zones Case: 1. John Hay Peoples Alternative Coalition v. Lim G.R. No. 119775 | October 24, 2003 2. Coconut Oil Refiners v. Torres G.R. No. 132527 | July 9, 2005
HW 7 BANGKO SENTRAL NG PILIPINAS MANUAL REGULATIONS ON FOREIGN EXCHANGE TRANSACTIONS

MANUAL OF REGULATIONS ON FOREIGN EXCHANGE TRANSACTIONS
OF
General Policy on Foreign Exchange Transactions Sale of foreign exchange may be freely made o Between and among AABs o By AAB-forex corps to AABs o By individuals/entities other than AAB/AAB-forex corps " Provided that the sale of foreign exchange by non-bank BSP-supervised entities and their subsidiary/affiliate forex corps, including foreign exchange dealers/money changers and remittance agents that are not AABs shall not be covered by this Manual. The seller/remitter of foreign exchange shall ensure that applicable Philippine taxes are paid with respect to:
Foreign Investments General Policy: BSP supports policy to encourage foreign investment o GR: Foreign investments need not be registered with BSP o Exception: unless the forex needed to service the repatriation of capital and the remittance of dividends, profits and earnings which accrue thereon shall be purchased from AABs/AAB-forex corps. Categories of Inward Foreign Investment: o Direct Investment in PH firm/enterprises o Portfolio Investments Foreign Direct Investment (FDI) o May be in cash or kind o For registration purposes, forex funding for cash investments must be inwardly remitted but need not be converted to pesos. o Assets eligible for registration as investment: (assessed and appraised by BSP before its operations) " Machinery and equipment " Raw materials, supplies, spare parts " Other items including intangible assets necessary for the operations of the investee firm " Expenses incurred pursuant to government-approved service contracts/other contracts for oil, gas and geothermal energy exploration Foreign Portfolio Investment (FPI) o Shall refer to the following instruments: 1. Peso-denominated securities issued onshore by the national government and other public sector entities 2. Securities of listed enterprises listed at the PSE 3. Peso time deposits with an AAB, with at least 90 days maturity 4. Other peso-denominated debt instruments issued onshore by private resident firms (bonds, notes, bills payable) o For registration purposes, the forex funding of FPIs must be inwardly remitted and converted to pesos.
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Investments and Foreign Incentives Law NOTES

Foreign Investments putting money in the Philippines Only registration No BSP approval required o Why? In loan, there/s a real obligation to pay. In investment, its money youre prepared to lose. Theres no obligation to pay unless the business flourishes o Loan - there are certain purposes. o Investments anything! Foreign Loans Needs both registration and BSP approval In order for the corp to access the banking system for dollars, the foreign loan must be approved by the BSP Without BSP approval, you can only source your dollar from outside the banking system Loan proceeds should be used for the purpose in which it was approved After the loan is released, there is a certain period in which it must be registered. o What gets registered is the actual amount you drew out
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Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

Based on the Law/Case List for First Semester, AY 2013-2014

INVESTMENTS AND FOREIGN INCENTIVES LAW

HW 1 DOING BUSINESS IN THE PHILIPPINES

License to do Business in the Philippines

Consequence of doing business without a license

What is a foreign corporation?

Carlo Agdamag, A2015

Investments and Foreign Incentives Law Doing business in the Philippines1

Atty. Jose Maria Hofilea

Case doctrines culled from CLVs Corporate Law Outline

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

HW 2 SETTING UP BUSINESS / FOREIGN INVESTMENTS ACT

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

FIA ESPOUSES CONTROL TEST

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

HW 4 NATIONALITY RESTRICTIONS ECONOMIC ACTIVITY

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

MASS MEDIA AND ADVERTISING

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

HW 5 NATIONALITY RESTRICTIONS ECONOMIC ACTIVITY (CONT.)

Carlo Agdamag, A2015

Investments and Foreign Incentives Law

Atty. Jose Maria Hofilea

ANTI-DUMMY LAW (COMMONWEALTH ACT NO. 108)

Carlo Agdamag, A2015