Beruflich Dokumente
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Moncada
LLB
Atty. Reyes
Investment Law/Sunday/1:00-3:00 PM
Control Test vs. Grandfather Rule: The true test in determining Philippine Nationality of a
Corporation
In its opinion dated January 19, 1989, the Department of Justice in applying the control
test in determining the nationality of a corporation explained that shares belonging to
corporations or partnership at least 60% of the capital which is owned by Filipinos shall
be considered Philippine National. Upon showing that 60% is Filipino-owned, no further
inquiry shall be made on the nationality of the remaining 40%. Such test is the standard
for determining the nationality of corporations.
On the other hand, the Grandfather rule applies when there are issues about conforming
with the 60-40 requirement. Under this rule, if Filipino citizens own 60% and foreigners
own 40%, then its a straightforward 60-40 venture. Thus as an example given, when the
60-40 corporation invests in another company that is also covered by the 60-40
ownership rule, the foreign component in the cascade company is aggregated.
According to the January 2015 Resolution of the Supreme Court in the case of Narra
Nickel Mining and Development Corp. vs. Redmont Consolidated Mines Corp. (G.R.
No. 195580), the Grandfather test was originally intended to look into the citizenship of
the individuals who ultimately own and control the shares of stock of a corporation for
purposes of determining compliance with the constitutional requirement of Filipino
ownership.
The shareholdings should ideally be traced (i.e. grandfathered) to the point where natural
persons hold the shares. However, this may be impractical and a limit must be set when
tracing through the corporate layers to attribute nationality. Citing a memorandum from
the Securities and Exchange Commission (SEC), the Supreme Court noted the
suggestion of the SEC to apply the Grandfather Rule on two levels of corporate relations
for publicly-held corporations or where shares are traded in the stock exchange, and to
three levels for closely held ones or those which are not traded in any stock exchange.
Clearly, the limits should not go beyond the level of what is reasonable.
The Supreme Court clarified the role of these tests in determining compliance with the
required Filipino equity threshold. The Court explained that the use of the Grandfather
In a fitting ending, the Supreme Court enunciated its original April 2014 decision that
the Control Test is still the prevailing mode of determining whether or not a corporation
is a Filipino corporation. It is only in case of doubt, based on the attendant facts and
circumstances of the case, that the Grandfather Rule is applied.