Foreigners Using Locals on Business Paperwork in the Philippines

Atty. Rami Amer G. Hourani

It is a common arrangement in the Philippines for Foreigners, when undertaking a business in the Philippines to use Filipinos as a front. The administrative process in the Philippines, which is tailored for Filipinos to avail of them is often quicker that way. However, this scheme opens up considerable liability for those who choose to employ it. I will list just some of them here.

The Anti-Dummy Law

The Anti-Dummy Law specifically prohibits the use of Filipinos on business registration documents in order to circumvent ownership requirements. It contains stiff penalties. Further, any routine encounters with the law will become very stressful because regulatory authorities will not be kind to entities which they suspect may be using dummies.

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The Inability To Defend Yourself

If you were acting on behalf of a foreign corporation, Sec. 150 of the Revised Corporation Code, makes it so that you are unable to sue anyone. This can become particularly problematic if you are being taken to court because that means you are unable to bring a counterclaim in such proceeding, this considerably weakens your relative bargaining position in a litigation. This is because it is entirely to the advantage of the claimant to bring the suit if there is no threat of a countersuit regardless of how frivolous.

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A Buyer’s Nightmare

With the advent of modern economies and greater facility for the movement of capital. It is very common for businessmen to work towards being bought out as a potential road offramp towards retirement or even just to raise capital for potential expansion plans. However, it is very difficult for a buyer to sign on to a sale of a business where nominees are the ones who own the business. This is because it is effectively impossible to undertake any kind of due diligence and conclude that the sale doesn’t have considerable legal risk attached to it.

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If, say for example, you were buying a share in a resort from a foreigner who had placed properties in the name of his wife. How could you be sure that you’d be able to enforce such an agreement? The good faith and compliance would be dependent on the state of the foreigner’s relationship with his wife. If that relationship went sour there’s a good chance that the business would soon go a similar direction.

The Solution

In consultations with my clients, the misconception I clean up the quickest is the following statement: “I was told that I needed to be 60% Filipino-40% Foreign.” This is a common rule of thumb that foreigners use because a 60 percent Filipino – 40 percent foreign corporation is compliant with most of the laws governing business and land ownership in the Philippines. However, it is possible for a foreigner to own 100 percent of the company that he owns. Generally, all will at least be required to put up show money in the amount of 200,000 USD or 10 Million Pesos in order to show that they can validly operate something called a Domestic Market Enterprise. This amount is reduced to 100 USD or 5,000 Pesos if you are engaged in an export enterprise. There is no requirement that you keep the money in the Philippines after using it to obtain the necessary paperwork. It is possible that the capitalization requirements could be higher based on your industry classification, the SEC keeps a list here. If land ownership is your concern, I have a specific article addressing that here.

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I think though, the best way I can explain it in plain english is like this. If your business fails and you wrap up operations cleanly, then there may be little to no incurred liability for failing to comply with the law. However, if you are successful and operate for some number of years, you have literally everything to lose.

Atty. Hourani practices law in Cebu City, PhilippinesIf you would like to set an appointment with him, you may reach him here.

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