All eyes on foreign investment in the Philippines

Long denied access to full business ownership in the Philippines, foreign investors are poised as new laws are now effective. What do they need to know before they move in?

It’s been billed as a game changer for the Philippines. The nation – long shackled by red tape, corruption and one of the region’s tightest pro-domestic ownership regimes – is enacting laws that open its gates to crucial foreign investment. With it will come expertise and growth in key sectors such as telecoms, infrastructure and energy.

Buoyed by GDP growth of 7.6% last year and with a new leadership keen on courting foreign investment and interests, local law firms are upbeat. They cite interest from around the world as international clients seek information on the key amendments to laws to guide investment selections.

While these are solid indications that protectionism is being set aside in favour of attracting massive economic investment and cutting-edge knowhow, there are also warning signs that need to be read and understood before investors take the plunge.

The laws

Four amendatory laws are taking effect and – on the face of it – placing mouth-watering opportunities within reach of foreign investors:

• The Public Service Act (PSA) Amendatory Law;
• The Foreign Investments Act (FIA) Amendatory Law;
• The Retail Trade Liberalisation Act (RTLA) Amendatory Law; and
• The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law.

Between them, these amendments are cracking holes in a system that has shielded some plum investment opportunities from overseas eyes.

Eric Dykimching, a partner at Cruz Marcelo & Tenefrancia, says the PSA law has rationalised foreign equity restrictions and liberalised key public services by allowing full foreign ownership of businesses in major industries including airports, railways, expressways and telecommunications. “Prior to the amendment, foreign ownership in these industries was limited to 40%,” he says. “We expect more foreign player participation in government projects which will, in turn, potentially lead to more work for the infrastructure practice.”

Dykimching says the RTLA law has lowered capital for foreign investors in the retail trade in the Philippines, from PHP25 million to USD2.5 million (USD500,000). “For foreign retailers [trading] through more than one store, the new law also lowered the minimum investment per store from USD830,000 to about USD200,000. This … will encourage foreign retailers to invest in the country, which will potentially lead to more [legal] work for the corporate practice,” he says.

With the FIA law, Dykimching says, the required capital for a foreign national or entity to engage in a domestic market enterprise has been lowered from USD200,000 to USD100,000 in the following instances:

• The business will involve advanced technology, as determined by the Department of Science and Technology;
• It is endorsed as a startup or startup enablers pursuant to RA No. 11337; or
• If most of its direct employees are Filipinos, but in no case less than 15 employees as certified by the Department of Labour and Employment.

“Prior to the FIA law, micro, small and medium-sized enterprises (MSMEs) with paid-in capital of less than USD200,000 were reserved only for Philippine nationals,” says Dykimching. “The lowering of capital requirements will [now] encourage foreign investors to engage in MSMEs in the country.” This should bring more corporate practice work.