Setting Up a Factory in the Philippines: A Foreign Investor's Guide

Foreign investors may set up a manufacturing plant in the Philippines in two main ways: as a PEZA-registered enterprise inside a special economic zone, or as a Board of Investments-registered enterprise outside one. Under Republic Act No. 7916, foreign citizens and companies owned by non-Filipinos "in whatever proportion" may set up enterprises in an economic zone, either alone or in joint venture with Filipinos, in any sector of industry, international trade, and commerce within the zone. The usual path is: incorporate with the SEC, secure incentives registration, then obtain PEZA or BOI approval before operations begin.

What Is a Special Economic Zone Under Philippine Law?

Republic Act No. 7916, or "The Special Economic Zone Act of 1995," created the Philippine Economic Zone Authority (PEZA) and the legal framework for special economic zones, called ECOZONES. An ECOZONE is a selected area developed into an agro-industrial, industrial, commercial, banking, investment, or financial center. It may contain industrial estates, export processing zones, free trade zones, and tourist or recreational centers.

An industrial estate is a tract of land subdivided and developed under a comprehensive plan with unified management, basic infrastructure, and utilities, with or without prebuilt standard factory buildings. An export processing zone is a specialized industrial estate, physically or administratively outside customs territory, oriented mainly to export production. Enterprises there may import capital equipment and raw materials free from duties, taxes, and other import restrictions.

Under Section 8 of Republic Act No. 7916, ECOZONES are managed and operated by PEZA as a separate customs territory. PEZA may also issue certificates of origin for products manufactured or processed in each zone.

How Does a Foreign Investor Set Up a Factory?

The process generally follows these steps:

1. Incorporate a Philippine entity. Under the Revised Corporation Code (Republic Act No. 11232), incorporators submit the intended corporate name to the Securities and Exchange Commission for verification, then file the articles of incorporation and bylaws. Corporate existence begins on the date the Commission issues the certificate of incorporation. A stock corporation is not required to have a minimum capital stock unless a special law provides otherwise.
2. Choose a location. An ECOZONE may be established through private initiative, local government initiative with national government assistance, or national government initiative. Areas may be proclaimed as ECOZONES by the President upon PEZA's recommendation, based on criteria such as infrastructure, water and power supply, available land, labor force, and strategic location.
3. Apply for PEZA registration. PEZA registers, regulates, and supervises enterprises in the ECOZONE. It also reviews proposals for establishing zones and endorses them to the President.
4. Secure immigration and employment approvals. PEZA may issue working visas renewable every two years to foreign executives and other aliens with highly technical skills that no Filipino within the ECOZONE possesses, as certified by the Department of Labor and Employment.

What Incentives Are Available Inside an ECOZONE?

Under Section 24 of Republic Act No. 7916, no taxes, local or national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of gross income earned is remitted to the national government, shared as follows: three percent (3%) to the national government, one percent (1%) to affected local government units, and one percent (1%) for a development fund for municipalities outside and contiguous to each ECOZONE.

Business establishments in the zones are also entitled to fiscal incentives under Presidential Decree No. 66 or under Book VI of Executive Order No. 226, the Omnibus Investment Code of 1987. Tax credits for exporters using local materials as inputs enjoy the same benefits provided under the Export Development Act of 1994.

What About Investors Outside an Economic Zone?

Manufacturers locating outside an ECOZONE may register with the Board of Investments under Republic Act No. 5186, the Investment Incentives Act. A registered enterprise is a corporation organized under Philippine laws, engaged in a preferred area of investment, and duly registered with the Board. Incentives under Section 7 include deduction of organization and pre-operating expenses over not more than ten years, accelerated depreciation, net operating loss carry-over, and tax exemption on imported capital equipment within seven years from registration, subject to conditions.

A pioneer enterprise manufactures, processes, or produces goods not yet produced in the Philippines on a commercial scale, or uses a new and untried production design, formula, scheme, method, or process. Pioneer enterprises enjoy additional incentives, including tax exemptions under the National Internal Revenue Code, except income tax, and post-operative tariff protection upon the President's certification.

Investors also hold basic rights under Section 4 of Republic Act No. 5186: repatriation of investment proceeds, remittance of earnings, remittance of payments on foreign loans, freedom from expropriation except for public use or national welfare and defense upon payment of just compensation, and protection from requisition except in war or national emergency.

Frequently asked questions

Can a foreigner fully own a factory in the Philippines? Inside an ECOZONE, foreign citizens and companies owned by non-Filipinos in whatever proportion may set up enterprises, either alone or in joint venture with Filipinos, in any sector of industry, international trade, and commerce within the zone. Outside a zone, ownership rules depend on the applicable investment law and the Constitution.

What is the tax rate for PEZA-registered manufacturers? Business establishments operating within an ECOZONE pay no local or national taxes. Instead, five percent (5%) of gross income earned is remitted to the national government.

Can a foreign investor get permanent resident status in an ECOZONE? Yes. Under Section 10 of Republic Act No. 7916, an investor whose initial investment is not less than One hundred fifty thousand dollars ($150,000), together with the spouse and dependent children under twenty-one, may be granted permanent resident status within the ECOZONE, with freedom of ingress and egress without special authorization from the Bureau of Immigration.

Practical takeaways

• Foreign investors may own enterprises inside an ECOZONE in any proportion, alone or in joint venture with Filipinos, under Section 7 of Republic Act No. 7916.
• ECOZONE enterprises pay no local or national taxes but remit five percent (5%) of gross income in lieu of taxes under Section 24.
• PEZA registers, regulates, and supervises zone enterprises and may issue working visas to qualified foreign executives.
• Outside the zones, BOI registration under Republic Act No. 5186 offers fiscal incentives, with additional benefits for pioneer enterprises.
• Incorporate with the SEC first; corporate existence begins on the date the certificate of incorporation is issued.

Primary sources

The rules discussed above are drawn from the following primary sources, as published in the Official Gazette and the national statute book.

• REPUBLIC ACT NO. 7916 - AN ACT PROVIDING FOR THE LEGAL FRAMEWORK AND MECHANISMS FOR THE CREATION, OPERATION, ADMINISTRATION, AND COORDINATION OF SPECIAL ECONOMIC ZONES IN THE PHILIPPINES, CREATING FOR THIS PURPOSE, THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA), AND FOR OTHER PURPOSES

• REPUBLIC ACT NO. 5186 - AN ACT PRESCRIBING INCENTIVES AND GUARANTEES TO INVESTMENTS IN THE PHILIPPINES, CREATING A BOARD OF INVESTMENTS, APPROPRIATING THE NECESSARY FUNDS THEREFOR AND FOR OTHER PURPOSES.

• REPUBLIC ACT NO. 11232 - AN ACT PROVIDING FOR THE REVISED CORPORATION CODE OF THE PHILIPPINES

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