Some provisions of the Philippine Constitution restricts public utilities, exploitation of natural resources, and the practice of some professions to Filipino employees or Filipino-owned corporations, which is why the classification of companies involved in these businesses is significant.
The Commonwealth Act No. 108 or the Anti-Dummy Law outlines how Filipinos who evade nationalization laws are penalized. It also prevents foreigners from interfering with the administration, control, management, or operation of nationalized activities.
Violation of this law is considered a criminal act punishable with imprisonment of 5 to 15 years.
The Anti-Dummy Law has been cited in several landmark cases in the past, such as Piatco-Fraport’s involvement in the construction and operation of NAIA’s Terminal 3, and the foreign ownership of Japanese firm NTT Docomo and Hong Kong’s First Pacific Holdings in PLDT.
Control Test
The control test or liberal rule provides that shares owned by partnerships or corporations with at least 60% capital owned by Filipino citizens is legally considered of Philippine nationality. In case the Filipino owners’ stake reaches below 60%, then the number of shares equal to the percentage below 60% is considered of Philippine nationality.
Once Filipino ownership of 60% is officially established, no further inquiries will be made on the citizenship of remaining stockholders.
If a company that’s 60% owned by a Filipino citizen decides to invest in another company that’s covered by the 60-40 ownership rule, its investment is deemed as one created by a Filipino company, which disregards the foreign-owned stake in the investing corporation.
Grandfather Rule
The grandfather rule, on the other hand, is significantly different and more stringent compared to the control test. It is stricter when it comes to allowing foreign-owned companies to establish an ownership structure that could potentially conceal the company’s effective stake. The rule provides that if a Filipino owns 60% and foreigners own the remaining 40% of a corporation’s capital, then it’s considered a 60-40 venture.
Under the grandfather rule, stocks that are owned or registered by a foreigner are sorted and added to verify if they meet the acceptable percentage limit on foreign ownership: 60% for financing companies, 30% for advertising companies, and 25% for recruitment agencies.
Previous SEC rulings show that it utilizes the control test in determining the nationality of a corporation, unless there are questions regarding the true character of ownership. In case there are any questions, the grandfather rule is applied to the corporation, which examines the nationality of the stock owners in order to determine if it fulfills nationality requirements.
60-40 ownership rule
Memorandum Circular No. 8 imposes guidelines and rules that are to be observed in determining compliance with the 60-40 Filipino-foreign ownership under the Constitution and/or established laws by corporations engaged in nationalized and partially nationalized activities.
According to the Supreme Court, the 60% Filipino ownership requirement shall apply uniformly across the board to all classes of stock, regardless of category, comprising the capital stock of a corporation.
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