Foreign Ownership Restrictions in the Philippines: A Guide to the Negative List

The Philippines restricts foreign ownership in certain businesses through the Constitution and the Foreign Investments Act of 1991. These restrictions are summarized in the Negative List, which tells foreign investors exactly which industries have ownership limits. If a business is not on the list, foreign investors may generally own up to 100% of it, subject to other laws.

This guide explains how the Negative List works, which industries are affected, and what foreign investors must consider when setting up a Philippine corporation.

What Is the Negative List?

The Negative List is a list of investment areas or activities reserved for Filipino citizens or where foreign ownership is limited to a certain percentage. It is issued under the Foreign Investments Act of 1991 (Republic Act No. 7042). The list has two parts:

• List A: Areas reserved to Filipinos by the Constitution or specific laws.
• List B: Areas where foreign ownership is limited for reasons of national security, defense, health, morals, or protection of small and medium-scale enterprises.

If an industry is not on either list, foreign investors may own up to 100% of a domestic corporation, unless another law says otherwise.

How Foreign Ownership Limits Apply to Corporations

Under the Revised Corporation Code of the Philippines (Republic Act No. 11232), a corporation may classify its shares to ensure compliance with constitutional or legal requirements on ownership. This means a corporation can issue different classes of shares so that the required percentage of capital stock remains in Filipino hands.

For example, if a law requires 60% Filipino ownership, the corporation's articles of incorporation must reflect this. The SEC will not approve articles of incorporation if the required percentage of Filipino ownership under existing laws or the Constitution has not been complied with. This is a specific ground for disapproval under Section 16 of the Revised Corporation Code.

What the Articles of Incorporation Must Say

When forming a corporation that will engage in a business reserved for Filipino citizens, the articles of incorporation must include a specific restriction. The standard form in the Revised Corporation Code requires this statement:

"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation, and this restriction shall be indicated in all stock certificates issued by the corporation."

This restriction protects the required Filipino ownership percentage. It prevents transfers that would bring foreign ownership above the legal limit.

Checking the Ownership Percentage

The articles of incorporation must state the names, nationalities, and residence addresses of the incorporators and original subscribers. This allows the SEC to verify that the required Filipino ownership percentage is met at the time of incorporation.

The SEC may disapprove the articles of incorporation if the required percentage of Filipino ownership has not been complied with. This is one of the specific grounds for disapproval listed in Section 16 of the Revised Corporation Code.

Special Rules for Certain Industries

Some industries have their own ownership rules under special laws. For example, banks, insurance companies, and public utilities are subject to specific constitutional or statutory limits. The Revised Corporation Code also notes that corporations engaged in certain financial activities, such as banks, trust companies, and insurance companies, cannot issue no-par value shares.

For these regulated industries, foreign investors must check both the Negative List and the specific law governing that industry. The SEC will not approve the incorporation of banks, insurance companies, and other financial intermediaries unless accompanied by a favorable recommendation from the appropriate government agency.

Frequently Asked Questions

Can a foreigner own 100% of a Philippine corporation? Yes, if the business activity is not on the Negative List and no other law restricts foreign ownership. The Foreign Investments Act of 1991 generally allows 100% foreign ownership unless the activity is reserved for Filipinos.

What happens if a company's foreign ownership exceeds the legal limit? The articles of incorporation must include a restriction preventing transfers that would reduce Filipino ownership below the required percentage. If this happens, the SEC may disapprove the articles or take action against the corporation.

Do the ownership rules apply to One Person Corporations? Yes. A One Person Corporation (OPC) is a corporation with a single stockholder. If the business activity is reserved for Filipinos, the single stockholder must be a Filipino citizen.

Practical Takeaways

• Check the Negative List first. Before incorporating, determine whether your business activity is on List A or List B of the Foreign Investments Act Negative List.
• Plan your share structure carefully. The Revised Corporation Code allows share classification to ensure compliance with ownership requirements. Use this to maintain the required Filipino ownership percentage.
• Include the required restriction in the articles. If your business is reserved for Filipinos, the articles must contain the standard restriction on share transfers, and the restriction must appear on all stock certificates.
• Verify nationality requirements. The SEC checks the nationalities of incorporators and subscribers. Ensure all documents accurately reflect each person's nationality.
• Consult the specific law for regulated industries. Banks, insurance, and public utilities have their own rules. The SEC requires a favorable recommendation from the appropriate agency for these corporations.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.