Republic Act 7042, also known as the “Foreign Investments Act of 1991,” is a law regulating foreign investments in the Philippines. The act allows foreign investors to invest up to 100% equity in domestic market enterprises, but also sets restrictions. The goal of this law is to encourage foreign investors to provide employment opportunities, develop resources, increase the value of exports, and help fuel the overall economy.
The Foreign Investments Negative List (FINL)
The (FINL) is a list of areas or activities that set limits on foreign ownership. It is divided into two: List A and List B.
What is covered in List A?
List A consists of areas of investment reserved for Philippine nationals. The Philippine Constitution restricts foreign ownership in some of these investment areas to a maximum of 40%. Foreign ownership is prohibited in the following areas:
- Mass media, except recording
- Practice of licensed professions
- Retail trade
- Cooperatives
- Private security agencies
Limited foreign ownership is allowed in the following areas:
- Private radio communication networks
- Private recruitment
- Advertising
- Ownership of private lands and condominium units
- Exploration, development, and utilization of natural resources
What is covered in List B?
List B indicates limits in foreign ownership for reasons of security, defense, risk to health and morals, and protection of small and medium-scale enterprises. They include but are not limited to:
- Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National Police (PNP) clearance such as firearms, gunpowder, and dynamite
- Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Department of National Defense (DND) clearance such as guns and ammunition for warfare, gunnery, bombing, fire control systems, and military communication equipment
- Telescopic sights, sniper scopes, and other similar devices
- All forms of gambling, except those covered by investment agreements with the Philippine Amusement and Gaming Corporation (PAGCOR)
The standard setup for companies with both Filipino and foreign ownership is 60% – 40%, with Filipinos owning the larger share. The company must also be serving the local market. Under this, paid-up capital can be less than US$200 thousand. However, some foreign entities may be interested in owning a bigger stake in a locally registered company. For this, the following conditions have to be met:
- The foreign entity wants to own more than 40% of the domestic company;
- The area in which the foreign entity wants to enter is not among those stated in the FINL;
- The area will serve the domestic market.
The required capital for the endeavor should not be less than US$200 thousand. It can be lowered to US$100 thousand if the activities involve advanced technology or the company has at least 50 direct employees.
Form of investments
Foreign investments can come in these forms:
- Capital goods
- Patents
- Formulae
- Other technological rights or processes
Basic rights and guarantees for the safety of foreign investments
Under the Philippine Constitution, all foreign investors have the right to:
- Repatriation of investments. If there is a need for repatriation of investments, it has to be in the same currency as what was used when it was first invested, as well as in the same exchange rate of said currency during that time
- Remittance of earnings. Interest payments, payment of loans made to foreign entities, and other obligations should also follow the same kind and exchange rate of currency for this remittance.
- Freedom from expropriation. The government cannot seize properties stemming from foreign investments unless these are meant for public use or for national In that case, the foreign investor can avail of just compensation, still with the conditions of using the same currency at the time of investment and the prevailing exchange rate of that time.
- Non-requisition of investment. No requisition of property stemming from foreign investments is allowed unless it was done in the event of war or a national emergency, and only for that time. However, just compensation must still be made with the same conditions as set in the above-mentioned instances.
If you are looking to invest in the Philippines, you can count on the expert advice of the attorneys at Duran & Duran-Schulze. Call (+632) 478 5826 or email info@duranschulze.com today.