Investment liberalisation and tax reform in the Philippines

By Benedicta Du-Baladad, Du-Baladad & Associates in Metro Manila

Like any other country in the world, the Philippines was strongly hit by the unexpected shocks and havoc wreaked by the global pandemic. The government partly responded by recalibrating and pursuing fiscal, structural and administrative reforms directed at foreign and local investors. New laws were enacted that further made the country accessible to investments and conducive to starting and doing business.

Earlier, the Philippines passed the Anti-Red Tape Act and the Ease of Doing Business and Efficient Government Service Act to strengthen and facilitate prompt actions to and resolutions of vital government transactions and requisites to do business. The old Corporation Code was also replaced by the Revised Corporation Code after almost four decades to be more updated and competitive in the region. The revision seeks to elevate corporate rules and procedures, especially on governance and social responsibility, to be on par with international best practices and standards, as well as contributing to the ease of doing business in the country.

Benedicta Du-Baladad
Benedicta Du-Baladad
Founding Partner and CEO
Du-Baladad & Associates in Metro Manila
Tel: +63 2 8403-2001 (Ext. 300)

Among others, the revised code removed the minimum number of incorporators and boards of directors. Philippine domestic corporations may now be incorporated by any person (natural or juridical), singly or jointly with others, but not more than 15 in number. Philippine residency is not required for incorporators.

Philippine corporations can now be established by foreign individuals and corporations, without the need of including Philippine residents among its incorporators. Similarly, the revised code removed the minimum number and the Philippine residency requirements for the board of directors. This means that the board of directors could be any number not exceeding 15, and could all be residents outside the country.

Minimum capitalisation is generally not required. However, there are specific instances required by law where a minimum capitalisation is mandated. Also, micro and small domestic enterprises with foreign ownership require a paid-in equity capital of at least USD200,000 or its equivalent. Hence, other than those required by special laws, and for domestic market enterprises, capital infusion by foreign investors is not dictated by law, but by the needs of the business.

And more recently, the Philippines enacted laws geared toward easing restrictions on foreign participation in certain areas or activities, and fiscal reforms intended to create an environment more conducive to doing business in the country.


Consistent with the policy to open more foreign participation in domestic economic activities, the Philippines recently enacted three important laws aimed at realising this objective.

The first is the further liberalisation of retail trade activities in the country. Subject to the condition that the country of the investor does not prohibit entry of Filipino retailers, foreign participation in retail trade activities is allowed, with a minimum paid-up capital of PHP25 million (USD452,000).

Likewise, the law regulating the operation of public utilities, an area reserved to Filipinos by the Philippine Constitution, amended the definition of “public utilities” to cover only limited areas. As a result, activities, which were previously considered as public utilities, are now open for foreign participation. For example, telecommunications, airlines, shipping, railways, logistics facilities and irrigation can now be 100% owned by foreign investors.

The Foreign Investment Act was further amended to promote and encourage productive investments from foreign individuals, partnerships and corporations, as well as from foreign governments. The amended act recognises that non-Philippine nationals can invest in domestic enterprises up to 100% of the capital, unless participation of non-Philippine nationals is prohibited or limited. Likewise, foreign investment in export enterprises is allowed up to 100%, subject to the activities included in the negative list.


The Philippine government successfully rode through the first half of its comprehensive tax reform programme with the enactment of two important tax legislations. The first one is the Tax Reform for Acceleration and Inclusion (TRAIN Law), which deals with individual and consumption taxation.

The second one deals with the reform in corporate income taxation and tax incentives. This was originally referred to as the Corporate Income Tax and Incentives Rationalisation Act but, with the onset of the pandemic, it was subsequently transformed into a stimulus and economic recovery package popularly known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, which contains two important parts: corporate income taxation and tax incentives.

On corporate income taxation, the rate was reduced from the previous single-tiered rate of 30% to the now two-tiered rate of 25% and 20%. The 25% rate applies to all corporate taxpayers – domestic corporations, resident foreign corporations and non-resident foreign corporations – while the 20% corporate income tax rate may apply for a particular taxable year if the net taxable income does not exceed PHP5 million (USD90,000) and the total assets, excluding the land, if any, to which the taxpayer’s office, plant and equipment are situated, do not exceed PHP100 million.

The possible reduction of the corporate income tax rate to 20% was introduced to provide relief to micro, small and medium enterprises. But it applies only to domestic corporations and does not cover resident (Philippine branches of foreign corporations) and non-resident foreign corporations. Thus, from an income tax perspective, if the operations in the Philippines are not expected to yield higher income, a domestic corporation would be the more appropriate vehicle to establish, rather than a branch office.

Previously, tax incentives in the Philippines were covered by a number of laws, with different government agencies known as the investment promotion agencies (IPA), given the power to determine incentives available to their respective investors. This structure was confusing, as the policies differ from one IPA to another, resulting in differences in incentive structures. Investors would have to shop for the IPA that provided the appropriate incentive for their business.

The CREATE Act changed the tax incentives system in the country by incorporating the tax incentive rules in the Tax Code and granting the main authority to determine and grant tax incentives to the Fiscal Incentives and Review Board. In essence, the differences in incentives granted by the different IPAs were eliminated. The new tax incentive structure also provides a limit on the number of years that a registered enterprise may avail of the tax incentives.

For export enterprises and domestic market enterprises, there are multiple tax incentive options available for income tax, including an income tax holiday for four to seven years, depending on the location and industry priorities. After the tax holiday period, enterprises can choose between a 5% special corporate income tax or enhanced deductions for 10 years.

There are also duty exemptions available on the importation of capital equipment, raw materials, spare parts or accessories for a maximum period of 17 years for export enterprises, and 12 years for domestic market enterprises. Export enterprises could also receive a value-added tax exemption on importation and zero rating on local purchases for a maximum period of 17 years.


Aside from the taxation of the entity established in the Philippines, the taxation of the income earned from the investment in the country should also be considered.

For tax on income from investment in debt instruments, the interest income earned by non-resident foreign corporations on their investment in the Philippines attracts 20% income tax, which is paid through the final withholding tax system.

Dividends earned by foreign individuals not engaged in trade or business in the Philippines on their investments in shares of domestic companies are taxed at 25%, which is also paid through the final withholding tax system. For non-resident foreign corporations, the final withholding tax rate on dividends used to be 30%, but the CREATE Act reduces the corporate income tax rate to 25%, and the final withholding tax on dividends was correspondingly reduced to 25%. This is higher than the 15% branch profit remittance tax, which is applicable when the entity established in the Philippines is a branch office. The subsequent disposal of shares of stock attracts a 15% capital gains tax, which is imposed on the net capital gain realised from the sale.

Part of the government’s continuing tax reform programme is a reform in the taxation of capital income and financial services, by redesigning the financial sector taxation into a simpler, fairer and more efficient tax system. And this includes reform in the taxation of capital gains, dividend income and interest income.

Among the objectives of the proposed law is the harmonisation of the rates, such that the rates would be the same regardless of who the investor is and regardless of the nature of the investment instruments. With respect to the interests and dividends, the proposed law fixes the rate at 15%, and this rate would also apply to foreign individuals and corporations, as well as to the dividends and interests earned from the Philippines.

Should the law be passed, this would minimise the practice of relying on the tax treatment as a basis for making investment decisions. The passage of the law would also place the country on par with its neighbours in terms of taxation of investments.

Du-Baladad-and-Associates-(BDB-Law)-1Du-Baladad & Associates
20/F, Chatham House Bldg.
Rufino cor. Valero Sts., Salcedo Village
Makati City
Metro Manila, 1227 Philippines
Tel: +632 8403 2001

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