How To Do Business In The Philippines In A Restricted Industry?
By: Noel C Ducusin
This is a follow-up blog post to our initial blog post on whether or not foreigners can do business in the Philippines. If you have not yet read that initial post, you can click this link.
As you will find in the said initial blog post, there are some industries for which foreign participation is either totally restricted, i.e. 0% foreign equity allowed, or partially restricted, i.e. up to 40% foreign equity allowed.
Perhaps, you have concluded from your independent research that the industry in which your company participates is a restricted industry in the Philippines.
What to do now? Should you just skip the opportunity of doing business in the Philippines?
Of course not.
In this article, we will discuss some of the more common permissible workarounds that you can avail of in the event that your particular industry is restricted in the Philippines.
Co-Production Arrangements
In this arrangement, the offshore company and the local entity work together to produce the output for sale.
This is one of the more involved methods. The terms and conditions that govern the relations between the parties will be spelled out in a contract including the revenue sharing component.
Production Sharing Arrangements
In this type of arrangement, it is not necessary for the offshore company to do actual production work. It is sufficient that the offshore company simply provides the raw materials or input with the local entity doing the production.
As in the first example, the terms and conditions of the relationship will be governed by the contract including the revenue sharing component.
Financial Assistance Arrangements
In this method, there is no need for the offshore entity to do any kind of production or give any production input. Only financing or funding is provided in exchange for a revenue share.
This is the least involved of all the methods.
However, depending on the local economic situation, there will be times that it will be much easier for the local entity to secure local funding either via local loans or receivables factoring / discounting. This could potentially remove the opportunity for the offshore company to participate or substantially reduce its bargaining power in terms of revenue share allocation.
One way to make offshore funding more attractive is to provide funding not by way of a loan, which must be paid back regardless of whether or not the products are sold, but instead by way of an arrangement that the funding is returned via a revenue share if and only if the products are sold. This substantially lowers the risk of the local entity and makes such offshore funding very attractive.
Technical Assistance Arrangements
In the arrangement, there is no need to do any kind of production, deliver any raw materials or input, or even give financing.
Here, only technical know-how is contributed in exchange for the revenue share.
An analogous situation is when an offshore intellectual property owner licenses the use of intellectual property to a local entity in exchange for royalties.
While this process may be a little bit more involved, the only substantial thing that this expended is time / man-hours.
This can be more advantageous compared to mere financial arrangements mainly because financial arrangements are generic and have a lot of competition from different funding sources the decision is mostly based on the lowest cost of finance.
Technical know-how, on the other hand, can be quite scarce. This leads results in greater value per unit man-hour and precludes easy competition from others.
Export Sale
You might be wondering why the export sale is included in this list since we are discussing ways within which to do business in the Philippines.
The reality on the ground is that many offshore companies that set up shop in the Philippines do so to benefit from the cost-effective and English-speaking local manpower to service offshore clients.
Common examples of these would be customer service representatives, software engineers, architects or engineers for drafting projects, accountants for finance backroom operations, financial analysts, legal and virtual assistants, as well as technical personnel for analytics all of whom service offshore clients via the internet.
In the case of these onshore export companies, the sale is not made domestically and instead done internationally.
Under the present foreign investment negative list, foreigners may own up to 100% of these export companies even though located inside the Philippines.
Better yet, there is no minimum capital requirement for these export companies.
The above are the most common methods to permissively and legally bypass the ownership restrictions indicated in the Foreign Investment Negative List.
Thus, as long as you're willing to do business in the Philippines using the above-mentioned workarounds, you need not lose the opportunity of doing so.
We will address in a separate blog article how to vet/perform due diligence on potential local partners.
We hope that this has been helpful and delivered in a user-friendly manner.
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We are presently producing an online course on how foreigners can do business in the Philippines which will include this topic. We will keep you posted on the status of this course and let you know when the course nears the launch date. Members of our community and early enrollees in the course will be entitled to discounts.
About the Author
Atty. Noel C. Ducusin is an M&A lawyer who has advised boards, business owners, investors, and family offices on strategic transactions and business transformation for nearly three decades. As Director for M&A at DoingBusinessPH and Senior Partner at N. Ducusin & Partners Law Offices, he advises on mergers and acquisitions, strategic partnerships, capital raising, corporate restructuring, and cross-border investments, while helping international companies establish, invest, and grow in the Philippines. Beyond advising on transactions, he also helps create them by connecting investors, business owners, executives, and advisers whose strategic interests align, believing that many successful opportunities begin with a simple conversation. Through this blog, he shares practical, plain-English insights to help foreign investors, business owners, directors, and executives make better strategic decisions.
"Everything should be made as simple as possible, but no simpler." — Albert Einstein
Connect with him on LinkedIn to compare notes on strategic opportunities and future possibilities.