Opinion No. 19-58 Re:Foreign Equity Ownership

Republic of the Philippines

Securities and Exchange Commission Department of Finance

OFFICE OF THE GENERAL COUNSEL

12 December 2019

RE: Foreign Equity Ownership SEC-0GC 0pinion No. 19-58

BULALACAO, SANCIO, and BULALACAO-SANCIO

Room 203, STG Building 190 P. Tuazon Blvd. Cubao, Quezon City LAW OFFICE

Attention: Atty. Benjamin B. Bulalacao

Atty. Bulalacao:

equity limit provided for by our Constitution and other relevant laws. not your client, "Media Gadgets International, Inc." (MGI), is compliant with the foreign This refers to your letter dated 28 July 2018 requesting for an opinion on whether or

account as principal or in representative capacity or as agents, upon consignment of all kinds of goods, wares, merchandise, or products whether natural or artificial." engaged "in the business of importing, buying, selling, distributing, marketing at wholesale insofar as may be permitted by law, all kinds of goods such as audio, video component wares and merchandise of every kind and description, to enter into all kinds of contracts for the export, import, purchase, acquisition, sale at wholesale and other disposition for its own A perusal of the Articles of Incorporation which you submitted shows that MGI is

the foreigner. You further stated that fifty percent (50%) of the total shares of MGI was subsequently assigned to a foreigner by virtue of a Deed of Assignment. (15%) shares of stocks of the company while the remaining forty percent (40%) is owned by Filipinos while the other one is a foreigner. Each Filipino incorporator owns fifteen percent In your letter, you stated that MGI has five (5) incorporators, four (4) of whom are

Commission's opinion on (1) whether or not the foreigner may own 50% of the total shares foreigner is not allowed to own said shares. of MGI and (2) what legal action should be filed by the Filipino incorporator in case the Thus, taking into account the whole context of your letter, you now ask the

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FIRST QUERY

Of pertinence to your first query are Sections 6 and 7 of the Foreign Investments Act of 1991 (FIA)1, to wit:

"Section 6. Foreign Investments in Export Enterprises - Foreign investment in export enterprises whose products and services do not fall within Lists A and B of the Foreign Investment Negative List provided under Section 8 hereof is allowed up to one hundred percent (100%) ownership. xxx

Section 7. Foreign Investments in Domestic Market Enterprises. - Non- Philippine nationals may own up to one hundred percent (100%) of domestic market enterprises uniess foreign ownership therein is prohibited or limited by existing law or the Foreign Investment Negative List under Section 8 hereof. {As amended by RA 8179)"

In relation, the FIA defines export and domestic market enterprise, to wit:

e. The term export enterprise shall mean an enterprise wherein a manufacturer, processor or service [including tourism] enterprise exports2 sixty percent (60%) or more of its output3, or wherein a trader purchases products domestically and exports sixty percent (60%) or more of such purchases;

f. The term "domestic market enterprise "shall mean an enterprise which

if exporting a portion of its output fails to consistently export at least sixty produces goods for sale, or renders services to the domestic market entirely or

percent (60%) thereof."

Based from the above definitions, we cannot conclude whether MGI is an export or a domestic market enterprise because your letter does not provide information as to whether it exports 6o% or more of its output to fall under the definition of an export enterprise, or if it fails to consistently export at least 60% thereof in order to be considered as a domestic market enterprise.

value, determined from invoices, bills of lading, inward letters of credit, loading certificates, and other commercial documents, 2 Implementing Rules and Regulations of FIA, Section 1(h) - Exports shall mean the volume or the Philippine port F.O.B. peso of products exported direct!y by an export enterprise or the value of services including tourism sold by service-oriented and Provided, finally, that without actual exportation, the following shall be considered constructively exported for purposes o enterprises to non-resident foreigners or the net selling price of export products sold by an export enterprise to another export enterprise that subsequently exports the same; Provided, That sales of export products to another export enterprise shall onty be deemed exports when actually exported by the latter, as the Act: (1) sales of products to bonded manufacturing warehouses of export enterprises; (2) sales of products to expor RA No.7042{As amended by R.A.8179) evidenced by loading certificates or similar commercial documents

r0c2 sin0 z0i enterprises; {3} sales of products rprises operating bonded trading warehouses supplying raw

value in case of heterogeneaus products and volume in case of homogenous products. xxx whether paid for in foreign currency or pesos funded from inwardly remitted foreign currency, xxx other agencies and/or instrumentalities granted tax immunities of locally manufactured, assembled or repacked products 3 Supra, Section 1(i). -Output shail refer to the export enterprise's total sales in a taxable year. The term sales shall refer to materials used in the manufacture of export products; and (4) sales of products to foreign mititary bases, diplomatic missions and

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IF MGI IS AN EXPORT ENTEPRISE

Assuming, however, that MGI is an export enterprise, it should not fall within Lists A and B of the Eleventh Foreign Investment Negative List (FINL-11)4 in order for it to be 100% foreign-owned. MGI's business of wholesale, unlike retail, is not included in List A; nor is it covered by List B of the FINL-11. Consequently, MGI can be 100% foreign-owned allowing the foreigner to own 50% of its total shares.

IF MGI IS A DOMESTIC ENTERPRISE

On the other hand, assuming that MGI is a domestic market enterprise, the same rule

Philippine nationals. In relation, List B of the FINL-11 restricts foreign equity ownership to applies; that is, it should not fall within Lists A and B of investment areas reserved to a maximum of 4o% in small and medium-sized domestic market enterprises in cases where the paid-in capital is less than the equivalent of Two Hundred Thousand US Dollars (US$200,000)5.

failed to state the minimum paid-in capital of MGI; thus, we cannot determine whether it falls under List B. In your case, while the business of MGI does not fall under List A, your letter, however.

is less than the equivalent of US$200,0007, its foreign participation is limited to 40%; hence, US$200,0006, it may be 100% foreign-owned, provided it does not own land. Consequently. the foreigner may own 50% of MGI's total shares. However, if MGI's minimum paid-in capital the foreigner's ownership of MGI's shares cannot be 50%. From the foregoing, if the minimum paid-in capital of MGI is equivalent to at least

Articles of Incorporation, states that: "No transfer of stock or interest which shall reduce the 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.": ownership of Filipino citizens to less than the reguired percentage of capital as provided by That said, Section 14 of the Revised Corporation Code which prescribes the form of

SECOND QUERY

render opinion on matters which are litigious in nature, and which involves the substantive With regard to your second query, please be advised that the Commission does not

8 Eleventh Item. 4 Executive Order No. 65, Series of 2018 5As to domestic market enterprises which involve advanced technology or employ at least 50 d 7 See Note 5. a paid-in equity capital of less than the equivalent of One Hundred Thousand US Dollars (US$100,000) is required. (List B, Item7 of the FINL-11) 6 Supra. employees, only

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and contractual rights of private parties who would, in all probability, contest the same in court if the opinion turns out to be adverse to their interest.9

Your second query is litigious in nature involving as it does a contract, the Deed of Assignment, pursuant to which the private parties thereto have substantive and contractual rights. Any opinion that the Commission may issue that would be adverse to their respective interests may result to litigation in court. Thus, the Commission is enjoined to issue an opinion over the matter.

It shall be understood, that the foregoing opinion is rendered based solely on the facts and circumstances disclosed and relevant solely to the particular issue raised therein. It shall not be used in the nature of a standing rule binding upon the Commission in other cases or upon the courts whether of similar or dissimilar circumstances.10 If, upon further inquiry or investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered void.

Please be guided accordingly. AMa& ROMUALD C. PADILLA

Officer-in-Charge

9 SeC Memorandum No. 15, Series of 2003. 10 SeC Memorandum Circular 2003-1 5, No.7.