Relocating a Production Line to the Philippines: Legal Workstreams Explained

Relocating a production line to the Philippines is primarily a corporate, tax, and incentives exercise. A foreign manufacturer typically incorporates a Philippine corporation with the Securities and Exchange Commission (SEC), registers with an investment promotion agency such as the Philippine Economic Zone Authority (PEZA) if locating in an economic zone, and complies with national tax rules on income, value-added tax, and imports. The Revised Corporation Code governs incorporation; the Special Economic Zone Act of 1995 governs ecozone locators and their incentives; and the National Internal Revenue Code, as amended, governs tax treatment. Each workstream has distinct documentary and approval requirements.

Incorporating the Philippine Entity

Under Section 10 of the Revised Corporation Code, any person, partnership, association, or corporation — singly or jointly, but not more than fifteen (15) in number — may organize a corporation for any lawful purpose. Incorporators who are natural persons must be of legal age, and each incorporator of a stock corporation must own or subscribe to at least one share.

The articles of incorporation must state, among others, the corporate name, the specific purpose or purposes, the principal office (which must be within the Philippines), the term, the incorporators' names, nationalities, and residence addresses, the number of directors, and the capital structure. Under Section 12, stock corporations are not required to have a minimum capital stock, except as otherwise specifically provided by special law.

Corporate existence begins on the date the SEC issues the certificate of incorporation under its official seal (Section 18). If the corporation does not formally organize and commence business within five (5) years from incorporation, its certificate of incorporation is deemed revoked (Section 21).

A production entity should also note Section 16, which lists grounds for disapproval of articles of incorporation — including failure to comply with the required percentage of Filipino ownership of capital stock under existing laws or the Constitution.

Locating in an Economic Zone: PEZA Registration

The Special Economic Zone Act of 1995 (Republic Act No. 7916) created PEZA and the framework for ecozones, which may contain industrial estates, export processing zones, and free trade zones. Under Section 4, an export processing zone is a specialized industrial estate located physically and/or administratively outside customs territory and predominantly oriented to export production. Enterprises in such zones are allowed to import capital equipment and raw materials free from duties, taxes, and other import restrictions.

Section 7 expressly allows foreign citizens and companies owned by non-Filipinos, in whatever proportion, to set up enterprises in an ecozone, either alone or in joint venture with Filipinos, in any sector of industry, international trade, and commerce within the ecozone. Their assets, profits, and other legitimate interests are protected, subject to PEZA's authority to require a minimum investment in freely convertible currencies.

Section 8 provides that ecozones are managed and operated by PEZA as a separate customs territory. PEZA is also vested with authority to issue certificates of origin for products manufactured or processed in each ecozone.

Tax Treatment for Ecozone Locators

Section 24 of Republic Act No. 7916 provides that, notwithstanding existing laws, no taxes — local or national — shall be imposed on business establishments operating within an ecozone. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ecozone 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.

Section 23 also entitles ecozone establishments to fiscal incentives under Presidential Decree No. 66 or Book VI of Executive Order No. 226 (the Omnibus Investment Code of 1987).

For manufacturers outside ecozones, the National Internal Revenue Code, as amended by Republic Act No. 12066, imposes a 25% income tax rate on domestic corporations effective July 1, 2020, with a reduced 20% rate for corporations with net taxable income not exceeding Five million pesos (P5,000,000) and total assets not exceeding One hundred million pesos (P100,000,000), excluding land. Registered business enterprises under the enhanced deductions regime are taxed at 20% on income from registered projects or activities.

VAT and Import Considerations for Exporters

Export-oriented manufacturers should review the zero-rating rules. Under Section 106 of the National Internal Revenue Code, as amended, export sales are subject to zero percent (0%) VAT, including sales of goods to an export-oriented enterprise whose export sales are at least seventy percent (70%) of total annual production in the preceding taxable year. Section 108 similarly zero-rates services performed for qualifying export-oriented enterprises.

Importation of goods by an export-oriented enterprise meeting the 70% threshold is exempt from VAT under Section 109, provided the goods are directly attributable to the export activity. Section 293 defines "capital equipment" and "directly attributable" for registered business enterprises, and requires a certificate of authority to import issued by the investment promotion agency as proof of entitlement to exemption.

Refunds of creditable input tax are governed by Section 112, which requires the Commissioner to act within ninety (90) days from submission of supporting documents, with recourse to the Court of Tax Appeals in case of denial or inaction.

Immigration and Workforce Matters

Section 10 of Republic Act No. 7916 grants permanent resident status within the ecozone to any 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 (21) years of age. PEZA may also issue working visas renewable every two (2) years to foreign executives and other aliens possessing highly technical skills that no Filipino within the ecozone possesses, as certified by the Department of Labor and Employment.

Frequently asked questions

Can a foreign company fully own a manufacturing operation in the Philippines? Within an ecozone, Section 7 of Republic Act No. 7916 allows foreign citizens and companies owned by non-Filipinos, in whatever proportion, to set up enterprises in any sector of industry, international trade, and commerce. Ownership limits outside ecozones depend on the applicable special law and the Constitution, and the SEC may disapprove articles of incorporation for non-compliance with required Filipino ownership percentages under Section 16 of the Revised Corporation Code.

What incentives do ecozone locators get? Under Section 24 of Republic Act No. 7916, no national or local taxes are imposed on ecozone establishments; instead, 5% of gross income is remitted, shared among the national government, local government units, and a development fund. Section 23 also grants fiscal incentives under Presidential Decree No. 66 or the Omnibus Investment Code of 1987.

Is there a minimum capital requirement to incorporate? Under Section 12 of the Revised Corporation Code, stock corporations are not required to have a minimum capital stock, except as otherwise specifically provided by special law. PEZA may, however, require a minimum investment for ecozone enterprises in freely convertible currencies.

Practical takeaways

• Incorporate with the SEC first; corporate existence begins only upon issuance of the certificate of incorporation under Section 18 of the Revised Corporation Code.
• Evaluate PEZA ecozone registration early — Section 7 of Republic Act No. 7916 permits full foreign ownership of ecozone enterprises in any sector of industry, trade, and commerce.
• Model the 5% gross income tax in lieu of all national and local taxes under Section 24 of Republic Act No. 7916 against the regular 25% corporate income tax under the National Internal Revenue Code.
• Track the 70% export sales threshold, since VAT zero-rating and import exemptions for export-oriented enterprises depend on meeting it.
• Plan immigration early: the $150,000 investment threshold for ecozone permanent resident status and PEZA-issued working visas both require advance documentation.

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. 11232 - AN ACT PROVIDING FOR THE REVISED CORPORATION CODE OF THE PHILIPPINES

• 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. 12066 - AN ACT AMENDING SECTIONS 27, 28, 32, 34, 57, 106, 108, 109, 112, 135, 237-A, 269, 292, 293, 294, 295, 296, 297, 300, 301, 308, 309, 310, AND 311, AND ADDING NEW SECTIONS 135-A, 295-A, 296-A, AND 297-A OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES

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