Pres. Duterte Signs Law Allowing 100% or Full Foreign Ownership in Key Foreign Investment Industries

The 1987 Constitution provides that the “State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities.” In line with this, several laws have been enacted limiting the allowable threshold for foreign ownership for specified industries that the State, through the Congress, deems are to be reserved to citizens in keeping with the State’s national economic goals.

Two of the notable legislations limiting the allowable foreign ownership are the Foreign Investments Act of 1991 and the Public Services Act of 1936.

The Foreign Investments Act of 1991 provides that “[a]s a general rule, there are no restrictions on extent of foreign ownership of export enterprises. In domestic market enterprises, foreigners can invest as much as one hundred percent (100%) equity except in areas included in the negative list.” Despite this, the law encourages local participation in permitted endeavors as “foreign owned firms catering mainly to the domestic market shall be encouraged to undertake measures that will gradually increase Filipino participation in their businesses.”

The Public Service Act was enacted to create the Public Service Commission who is empowered “control over all public services and their franchises, equipment, and other properties.” The law effectively regulates the permissible public services in the country to whom a franchise to operate may be issued.

These laws have been amended by more recent enactments which loosened up the parameters with regard to permitting the entry of foreign juridical entities to do business in the Philippines. Note that the view then, in enacting protectionist policies in the Constitution, was to uphold the State’s sovereignty by keeping it free from the participation of foreign entities.

As time went on, however, realization came that protectionist policies impede economic growth because foreign investments in the Philippines are totally repelled. The few who can still get through the Philippines are the few market players who are already dominant in the market, thereby eliminating opportunities to small-scale players. It has also been found that loosening foreign restrictions generate more jobs and thus would be more of a pro than a con.

Recently, last 02 March 2022, President Rodrigo Duterte signed Republic Act No. 11647. This law amends the Foreign Investments Act of 1991. This amendment is in keeping with the Foreign Investments Act of 1991’s declared policy of “attract[ing], promot[ing], and welcom[ing] productive investments from foreign individuals, partnerships, corporations and governments, including their political subdivisions in activities which significantly contribute to sustainable, inclusive, resilient, and innovative economic growth.”

The particular amendments are as follows:

1. The amendment allows, for the first time, international investors to set up and fully own domestic enterprises (including micro and small enterprises) in the Philippines.

2. The amendment established the Inter-Agency Investment Promotion Coordination Committee (“IIPC”) tasked with integrating the promotion activities to encourage Philippine foreign investments.

3. The President is now empowered to order the IIPCC to review foreign investments that may threaten the safety, security, and well-being of Filipinos.

4. Doing business of non-Philippine nationals is now allowed upon registration with the Securities and Exchange Commission or the Department of Trade and Industry, as the case may be; provided, that the business of the non-Philippine national is not subject to other limited requirements under the law.

5. The law also included a penalty provision to any public officials who involved in a foreign investment promotion and shall violate the Anti-Graft and Corrupt Practices Act in the process.

6. The law reserves unto Philippine nationals micro and small domestic enterprises with paid-in equity capital of less than USD200,000.00. This amount is lowered to USD100,000.00 if it is proven that the enterprise is:

a. Involved in advanced technology, as determined by the Department of Science and Technology;

b. Endorsed as start-up or start up enablers by the lead host agencies pursuant to the Innovative Startup Act; or

c. Majority of the employees, who are not less than 15, are Filipinos.

7. The law mandates a continuous review of the Foreign Negative Investment List not more than once every two years.

The full text of Republic Act No. 11647 can be accessed here.

Additionally, last 21 March 2022, Republic Act No. 11659 or “An Act Amending Commonwealth Act No. 146 otherwise known as the Public Service Act” was also signed into law.

The salient amendments are as follows:

1. Previously, for a franchise to be granted unto a public utility operating in the Philippines, they are required to have at least sixty percent (60%) of their capital to be owned by Filipino citizens. Now, the definition of “public utilities” have been limited and only the following are subject to the 40% foreign ownership limitation under the Constitution:

a. Distribution and transmission of electricity;

b. Petroleum and petroleum products pipeline transmission systems;

c. Water pipeline distribution systems;

d. Wastewater and sewerage pipeline systems;

e. Seaports; and

f. Public Utility Vehicles (“PUVs”).

2. Further, the definition of PUVs has been expanded to include “internal combustion engine vehicles” and “domestic cargo for a fee.” Not just “road vehicles” as stated in the old law. Additionally, transport vehicles accredited with and operating through transport network corporations are not considered PUVs deemed as public utilities and thus are not subject to the 40% foreign ownership limit.

3. Critical infrastructure refers to “any public service which owns, uses, or operates systems and assets, whether physical or virtual, so vital to the Republic of the Philippines that the incapacity or destruction of such systems or assets would have a detrimental impact on national security, including telecommunications and other such vital services as may be declared by the President of the Philippines.”

4. Foreign nationals are allowed to own more than 50% of capital in public services engaged in the operation and management of critical infrastructure if the country of such foreign nationals accords reciprocity to Philippine nationals under foreign law or a treaty.

5. Any entity controlled by or acting on behalf of a foreign government or foreign state-owned enterprises shall be prohibited from owning capital in any public service classified as public utility or critical infrastructure, provided that the prohibition shall only apply to investments made after the effectivity of this amendatory law.

6. Upon the recommendation of the National Economic Development Authority, the President may recommend to Congress to classify a specific public service as a public utility on the basis of the criteria set forth under the amendatory law.

The full text of Republic Act No. 11659 can be accessed here.

With the forthcoming entrance of foreign players in the local market given the relaxation of some Foreign Equity Restrictions, competition is expected to arise because of the increased number of players. By giving up a little bit of the aspect of sovereignty, the government now welcomes other foreign investors in the Philippines that could offer efficiencies not yet known to the industry players in the Philippine market place.

In order to successfully enter the Philippine market given these opportunities introduced by these amendatory laws, it is best to consult and be assisted by foreign investment law firm proficient in the field of Foreign Investments and Doing Business in the Philippines.

*Arceo & Irasusta Law Firm is foreign investment law office in Quezon City that serves clients anywhere in the Philippines. Its corporate lawyers have an extensive experience in facilitating the due diligence and start-up requirements of foreign corporations in the Philippines. Our investment lawyers have successfully advised foreign clients in both the private and public sectors especially in handling the incorporation, registration, PEZA and BOI incentives, corporate secretarial services, and compliance along with the compliance with reportorial requirements post-registration, among others. Should you wish to learn more about Foreign Investments and Doing Business in the Philippines, you may contact us at lawfirm@arceotandoc.com to get in touch with any of our foreign investment lawyers.