A comparison of M&A laws: Philippines

    By Maria Elizabeth Peralta Loriega, Bryan San Juan, and Recolito Ferdinand N Cantre Jr, Sarmiento Loriega Law Office







    Fuelled by a strong mandate from the people, the Philippines is implementing key reforms affecting M&A.


    Maria Elizabeth Peralta Loriega, Sarmiento Loriega Law Office
    Maria Elizabeth Peralta Loriega
    Founding Partner and Co-Managing Partner
    Sarmiento Loriega Law Office
    Metro Manila
    Email: meploriega@sl-lawoffice.com

    Philippine solar, wind and hydropower projects are now open to 100% foreign ownership. In September 2022, the Department of Justice (DOJ) issued DOJ Opinion No. 21 recognising that solar, wind, hydro and ocean or tidal energy resources are not “natural resources” under the 1987 Constitution.

    In line with this opinion, the Department of Energy (DOE) issued DOE Department Circular No. DC 2022-11-0034 in November 2022, lifting foreign ownership restrictions in the renewable energy industry. Prior to the DOJ opinion, the foreign equity restrictions under article XII, section 2 of the 1987 Constitution were applied to the renewable energy sector.

    The strict constitutional restrictions on natural resources were often viewed as discouraging much-needed foreign investment in the Philippines. Initially, the DOJ opinion was met with skepticism as some viewed it as an unauthorised reinterpretation of the term “natural resources” under the 1987 Constitution. Nevertheless, no one has challenged the validity of the issuances of the DOJ and DOE. Pending the final action of the Supreme Court in an actual case or controversy, investors can rely on the legal principle that these issuances are presumed to be valid and constitutional.


    Philippine telecoms, including several businesses previously regarded as public utilities, are now open to 100% foreign ownership. In March 2022, the Congress of the Philippines enacted Republic Act No. 11659, amending the archaic Commonwealth Act No. 146 that defined public utility. The amendments restricted the definition of public utility to a public service that operates, manages, or controls for public use any of the following:

    • Distribution of electricity;
    • Transmission of electricity;
    • Petroleum and petroleum products including pipeline and transmission systems;
    • Water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems;
    • Seaports; and
    • Public utility vehicles.
    Bryan San Juan, Sarmiento Loriega Law Office
    Bryan San Juan
    Senior Partner
    Sarmiento Loriega Law Office
    Metro Manila
    Email: basanjuan@sl-lawoffice.com

    By restricting the definition of public utility to the above-mentioned exclusive list, Republic Act No. 11659 now excludes numerous businesses traditionally classified as public utilities including airport operations, railway operations and telecommunications, from article XII, section 11 of the 1987 Constitution, which imposes a 40% maximum foreign ownership restriction.

    The restricted definition under the amended law also effectively reverses many opinions rendered by the Securities and Exchange Commission and other government agencies that expanded the definition of public utility, which then included, among others, ground-handling operations at airports.

    In light of the above-mentioned development, the 12th Foreign Investment Negative List (FINL) now reflects that the telecoms industry is not a public utility, for instance, and hence not covered by the 40% maximum foreign equity restriction. So a telecoms company may now be 100% foreign owned, subject only to special conditions including the requirement of reciprocity by the state of the foreign investor where critical infrastructure is involved.

    It is important to note, however, that Republic Act No. 11659 prohibits an entity controlled by or acting on behalf of a foreign government, or foreign state-owned enterprises, from owning capital in any public service classified as a public utility or critical infrastructure. The law defines critical infrastructure to mean any public service that owns, uses or operates systems and assets, whether physical or virtual, so vital to the Philippines that the incapacity or destruction of such systems or assets would have a detrimental impact on national security, including telecoms and other vital services as may be declared by the president.

    Where the public service is critical infrastructure, the law prohibits foreign nationals from owning more than 50% of the capital of entities engaged in the operation and management of said critical infrastructure, unless the country of such foreign national accords reciprocity to Philippine nationals under foreign law, treaty or international agreement. Reciprocity may be satisfied if the country of the foreign investor accords rights of similar value in other economic sectors.

    As in the case of relaxation of the constitutional restrictions on the utilisation of natural resources, the amendment to the definition of public utility was also initially met with criticism from conservative constitutionalists who look at the definition of public utility as not merely a statutory one but, more importantly, a constitutional one. As a constitutional concept, it has been argued that the same cannot be modified by a mere statute. Nevertheless, the law is presumed valid unless annulled by appropriate courts.


    Recolito Ferdinand N Cantre Jr, Sarmiento Loriega Law Office
    Recolito Ferdinand N Cantre Jr
    Senior Partner
    Sarmiento Loriega Law Office
    Metro Manila
    Email: rncantre@sl-lawoffice.com

    The FINL also reflects amendments to the Retail Trade Liberalisation Act, lowering the paid-up capital of retail trade enterprises from USD2.5 million to PHP25 million (USD458,000). Hence, foreign entities engaged in retail trade enterprises may set up business more easily.

    The manufacture or distribution of products requiring clearance from the Department of National Defence was removed from the 12th FINL, effectively removing any foreign equity restriction. Previously, the manufacture of guns and ammunition for warfare, military ordnance, guided missiles, tactical aircraft, space vehicles and military communication equipment were limited to 40% foreign equity.


    Parties to M&A must also consider the new merger notification thresholds set by the Philippine Competition Commission (PCC): the size of the parties test; and the size of the transaction test.

    From 1 March 2023, M&A parties are required to notify the PCC if the size of the party exceeds PHP7 billion and the size of the transaction exceeds PHP2.9 billion.

    Failure to comply with merger notification exposes parties to substantial fines ranging from 1% to 5% of the value of the transaction. Under the Philippine Competition Act, the M&A agreement is also void without prejudice to the PCC’s finding that the M&A is prohibited if it leads to a substantial lessening of competition in the relevant market. A declaration that the M&A is void for non-compliance with the merger control requirements also exposes future transactions of the parties to stricter regulatory scrutiny.


    Two tax reform packages via the Tax Reform for Acceleration and Inclusion (TRAIN) Law and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law introduced major changes to the Philippine Tax Code. Since 1 July 2020, the applicable corporate income tax rate is now 25% (previously 30%). For corporations that have a net income not exceeding PHP5 million and assets (excluding land where the business is located) not exceeding PHP100 million, the corporate income tax rate was further lowered to 20%.

    A notable change is the repeal of the Tax Code provision on improperly accumulated earnings tax (IAET). Improperly accumulated earnings refer to the retained earnings of a corporation that have not been distributed as dividends to its shareholders or appropriated for legitimate business purposes. The repeal allows the investor to park their funds indefinitely at the domestic subsidiary level for other business purposes without the risk of assessment for IAET.

    As to documentary stamp taxes (DST), the TRAIN Law increased most of the prior rates by 100%, except the DST on debt instruments, which was increased by only 50% to the current rate of 0.75% of the issue price of the debt instrument. The DST on property insurance policies, fidelity bonds and other insurance, indemnity bonds, deeds of sale, conveyances and donations of real property remain unchanged.

    The TRAIN Law removed the requirement for a tax-free exchange confirmatory ruling from the Bureau of Internal Revenue (BIR) and the inclusion into the Tax Code text of previous interpretations found only in BIR rulings covering tax-free exchanges. These amendments remove most of the issues that previously hindered M&A structured as tax-free exchanges in the Philippines.

    Another notable amendment is the clear exception to the “deemed gift” provision in the Tax Code, which imposes donor’s tax on transfers of property for less than an adequate and full consideration. Under the TRAIN Law, a bona fide sale, exchange or other transfer of property made in the ordinary course of business, and at arm’s length, is carved out from the “deemed gift” provision and, consequently, from the coverage of the donor’s tax. Such a transaction is considered bona fide and at arm’s length if it is free from any donative intent and is, therefore, made for an adequate and full consideration in money, or money’s worth.

    The CREATE Law introduced tax incentives such as income tax holidays, special corporate income tax rates, enhanced deductions, duty exemptions and value-added tax exemptions. These tax incentives apply to certain activities and registered businesses and enterprises provided under the Strategic Investment Priority Plan (SIPP), which covers industries such as agriculture, fishery, forestry, alternative energy, mass housing and green eco-systems, among others. Under the SIPP, the industries are classified into three tiers, each one determining the duration and kinds of tax incentives available to an activity or business enterprise.

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