Doing Business In The Philippines – Why Does A Foreign Company Need A License?

“Where is the definition of ‘transacting business’ or ‘doing business’ found?”

There are two sources of the “definition” of doing business in the Philippines. The combination of these sources forms the framework for determining if a foreign company is doing business in the Philippines.  One source is the jurisprudence laid by the Philippine Supreme Court.  The other source is the Foreign Investments Act of 1991 (FIA) and its Implementing Rules and Regulations (IRR).  The Securities and Exchange Commission (SEC) is the Philippine government agency tasked with implementing the FIA and its IRR.  The official opinions of the SEC offer guidance on its interpretation of the Philippine Supreme Court’s rulings, the FIA and the IRR, and its views on this subject.

“How does the FIA define ‘doing business’ in the Philippines?”

The statutory definition of “doing business in the Philippines” in Section 3(d) of the FIA can be broken down, as follows:

  1. soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches;
  2. appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more;
  3. participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and
  4. any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization.

Expressly excluded by law from “doing business” are the following:

  1. mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;
  2. having a nominee director or officer to represent its interests in such corporation; and
  3. appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.

The essence of what is referred to as the Substance Test is reflected in the statutory definition of “doing business” in the FIA (specifically in the fourth item of the list above).  However, though this statutory definition does not expressly state where “acts that imply a continuity of commercial dealings or arrangements” have to take place to be deemed “doing business” in the Philippines, considering that the other acts such as soliciting orders, appointing representatives, and participating in management all have to take place in the Philippines, it is reasonable to infer that the “acts that imply a continuity of commercial dealings or arrangements” must take place in the Philippines too.  

The statutory definition in the FIA is reiterated in Section 1(f), Rule 1 of its IRR, as follows:

“Doing business” shall include soliciting orders, service contracts, opening offices, whether liaison offices or branches; appointing representatives or distributors, operating under full control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period totaling one hundred eighty [180] days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to and in progressive prosecution of commercial gain or of the purpose and object of the business organization.

The following acts shall not be deemed “doing business” in the Philippines:

  1. mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;
  2. having a nominee director or officer to represent its interest in such corporation;
  3. appointing a representative or distributor domiciled in the Philippines which transacts business in the representative’s or distributor’s own name and account;
  4. the publication of a general advertisement through any print or broadcast media;
  5. maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;
  6. consignment by a foreign entity of equipment with a local company to be used in the processing of products for export;
  7. collecting information in the Philippines; and
  8. performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.

The definition in the IRR mirrors most of what is deemed to be “doing business” but also expands on the list of activities which are not deemed “doing business” in the Philippines.

According to the Supreme Court, there is no firm rule on what constitutes “doing business” because each case is to be judged according to its peculiar circumstances. Essentially though, activities within Philippine jurisdiction that do not create earnings or profits to the foreign corporation do not constitute doing business in the Philippines.

In the case Eriks Pte. Ltd. vs. Delfin F. Enriques Jr., et al., the Supreme Court said that “the test of “doing business” is not the number or quantity of transactions, but rather the intention of the entity to continue its business in the country.” Following this pronouncement, a foreign corporation is not “doing business” if it engages in an isolated transaction, or, a transaction or series of transactions different from or unrelated to the common business of the foreign enterprise in the sense that there is no intention to engage in the progressive pursuit of the purpose and object of the business organization. 

The significance of determining whether or not a foreign company is doing business in the Philippines is found in Section 150 of Republic Act No. 11232, otherwise known as the Revised Corporation Code of the Philippines, which states, as follows:

No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. 

In short, a foreign company that does business without a license can be sued but cannot file suit in the Philippines. A corporation has a legal status only within the state or territory in which it was organized. Therefore, a corporation organized in another country has no personality to file suits in the Philippines. In order for Philippine courts to acquire jurisdiction over a foreign corporation, it must acquire a license from the SEC and appoint an agent for service of process. Without such license, it cannot institute a suit in the Philippines.

However, if the activities of the foreign company in the Philippines is an isolated transaction or one of the exceptions enumerated in Section 3(d) of the FIA or Section 1(f), Rule 1 of its IRR, the foreign company does not need to get a license to do business from the SEC. Further, the foreign company can file suit in the Philippines to enforce its rights and collect on obligations owed to it. 

Interestingly, on more than one occasion, the Supreme Court said that an exception to the rule that unlicensed foreign non-resident corporations doing business in the Philippines cannot file suits in the Philippines is the Doctrine of Estoppel.

In one case, the Supreme Court said:

A foreign corporation doing business in the Philippines without license may sue in Philippine courts a Filipino citizen or a Philippine entity that had contracted with and benefited from it. A party is estopped from challenging the personality of a corporation after having acknowledged the same by entering into a contract with it. The principle is applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract.

In conclusion, foreign companies that do business in the Philippines are encouraged to obtain the requisite license from the SEC. This is consistent with the provisions of Republic Act No. 11232, otherwise known as the Revised Corporation Code of the Philippines (“Code”) and considerations of sound public policy. A foreign company that is in violation of the Code may be subjected to the administrative sanctions in its Section 158. 

However, a foreign company that is deemed to be doing business in the Philippines without a license may still resort to the Philippine courts to enforce its rights on the basis of estoppel (which is consistent with the pronouncements of the Supreme Court on this matter). Further, even if a Philippine court should dismiss the foreign company’s suit because it does not have a license to do business in the Philippines, the foreign company’s lack of capacity to sue can be cured if it obtains the requisite license from the SEC.

Doing Business In The Philippines

On 20 February 2019, President Rodrigo Roa Duterte signed into law Republic Act No. 11232, otherwise known as the Revised Corporation Code of the Philippines (Code).

Title XV of the Code specifically covers foreign companies and the license to do business in the Philippines. 

“When is a foreign company deemed to be doing business in the Philippines?”

A foreign company deemed to be doing business in the Philippines if:

  • it participates in the management, supervision, or control of any domestic business, firm, entity, or corporation in the Philippines; and/or
  • it solicited orders, entered into service contracts, and/or opened an office in the Philippines;
  • it appointed a representative or a distributor that operates under full control of the foreign company and that representative or distributor is domiciled in the Philippines or stays in the Philippines for a total of at least 180 days, whether or not continuous, in a calendar year; 
  • it actually performs in the Philippines specific acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent, the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain, or the purpose and object of the business organization.

The last item is where most of Philippine jurisprudence on “doing business” has developed.

“What is a foreign company/foreign corporation?”

There is a legal (although not encompassing) definition of doing business in the Philippines. It begins with a definition of what is a “foreign company” or, as it is referred to by the Code, a “foreign corporation”.

The Code defines a foreign corporation as one that is “formed, organized or existing under laws other than the Philippines’ and whose laws allow Filipino citizens and corporations to do business in its own country or State.”  

This definition has two components: first, the corporation must not be formed under Philippine law and, second, the corporation’s home state must allow Filipinos to do business there.  An entity that meets these two requirements is considered a “foreign corporation” under Philippine law.  In practice this definition has been extended to encompass legal entities such as partnerships, limited liability companies, and sociedad anonima even if some of these legal entities do not exist under Philippine law.

“When is a license to transact business in the Philippines needed?”

The Code then says that a foreign corporation “shall have the right to transact business in the Philippines after obtaining a license for that purpose in accordance with this Code and a certificate of authority from the appropriate government agency.”  

Here is where we first encounter the concept of “transacting business” or “doing business” in the Philippines.  On its face, it appears that the Code requires that a foreign company must first get a license to transact business from the appropriate government agency (i.e., the Philippine Securities and Exchange Commission [SEC]) before that foreign company has the right to transact business in the Philippines.  In the succeeding article, I shall explain that this is not the case and that there are exceptions to this license requirement.