Opinion No. 24-09Re: Doing Business in the Philippines

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Commission Securities and Exchange

BAGONG PILIPiNAS

OFFice of the general counsel

24 Apri} 2024 SEC OGC Opinion No.2-09 Re: Doing Business in the Philippines

6819 Ayala Ave., Makati City oliversgarcia@gmail.com ATTY. OLIVER S. GARCIA 19F Yuchengco Tower,RCBC Plaza

Dear Atty. Garcia:

(Lhotse), for an opinion on whether or not it is required to obtain a license in the Philippines. This refers to your letter dated 08 April 2019, requesting, on hehaif of Lhotse Enterprises Limited

In your letter, you disclosed the following matters:

a You stated that Lhotse is a foreign corporation organized and existing under the laws of the British Virgin Islands and that it is a shareholder of the following Philippine corporations:

Name of corparation Number of shares Percentage of ownership Orient Capital Ventures Inc. (OCVI) 49, 98 40 Megasports Holdings Inc. (MHI) 831 33.24%

b) "Other than these passive equity participations in OCVI and MHI, Lhotse does not have any further activities in the Philippines: A 2 3 A No office/s in the Philippines; No employee/s in the Philippines; No activity/ies in the Philippines; and No product/s or service/s offered in the Philippines": and

c} "Lhotse, however, has a services agreement with OcVI xxxx (to] provide support, maintenance[] and development services xxxx performed entirely outside of the Philippines."

Philippines and as such is not required to obtain a license from the Securities and Exchange Commission [SEC]." You are now requesting for confirmation of your opinion that Lhotse is "not doing business in the

Definition of "doing business"

Rules and Regulations, provide that the phrase "doing business" shall include: Section 3(d} of the Foreign Investments Act (FIA) of 1991, as amended, and its Implementing

a) soliciting orders, service contracts, opening offices, whether called "liaison" offices or b appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or branches;

1 Republic Act (R.A.) No. 7042, 13 June 1991. The SEC Headquarters, 7907 Makati Avenue (+63 2)5322 7696 Salcedo Village, Bel-air, Makati City INVESTORS IN PEPLE lvBhsinlan SC

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c)participating in the management, supervision or control of any domestic business, firm, entity d) any other act or acts that imply a continuity of commercial dealings or arrangements and and object of the business organization. contemplate the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose more: or corporation in the Philippines; and

Provided, however, that the phrase "doing business" shall not be deemed to include: a) mere investment as a shareholder by a foreign entity in domestic corporations duly registered b) having a nominee director or officer to represent its interests in such corporation; to do business, and/or the exercise of rights as such investor;

C appointing a representative or distributor domiciled in the Philippines which transacts

business in its own name and for its own account.

subscription in a domestic corporation does not fall within the coverage of the term "doing business" for purposes of licensing of foreign corporations.2 From the foregoing. it is clear that mere investment in the form of stock ownership or

business" in the Philippines. The question now is whether Lhotse's service agreement with OCVI is included in the term "doing

"transacting" business. Each case must be judged in the light of its own peculiar environmental circumstances.3 Notably, there is no general rule or governing principle as to what constitutes "doing" or

Service agreement vis-a-vis doing business

factors may be considered: In determining whether a service contract is deemed "doing business" in the Philippines, several

a) As to perfection and consummation. As a general rule, foreign corporation will not be

regarded as doing business in a State simply because it enters into contracts with the residents of the State, where such contracts are consummated outside the State.4

Pacific is not doing business in the Philippines because: 1. its contract covering copra was entered into and was consummated in the United In a 1955 case, Pacific Vegetable Corp. vs. Singson,5 the Supreme Court held that

2 the payment of the price was made at San Francisco, California; and States;

3.the delivery of the copra was stipulated to be at the Pacific Coast.

which objects of commerce, in general, are delivered and consummated. Thus in 2017, in However, technological advancement has introduced new goods and new ways by.

SEC-0GC Opinion No. 17-03, the Commission opined that a foreign online gaming company is deemed doing business in the Philippines even though its activities are carried outside of the Philippines since the salient points of the online commercial transactions were consummated within the Philippines although they are done in a virtual plane;

b) As to place of performance. An essential condition to be considered as "doing business" in the Philippines is the actual performance of specific commercial acts within the territory of the Philippines.?

opinion on whether or not a foreign company engaged in providing dedicated private voice In SEC-0GC Opinion No. 09-12 3, the Commission had the occasion to render an

5 G.R. No. L-7917, 29 April 1955. [Per J. Bautista Angelo] : SEC-0GC Opinion No. 09-12 addressed to Puyat Jacinto & Santos Law dated 29 May 2009. 2 SEC-0GC Opinion addressed to Atty. Cynthia D. Nuval-Ambrosio dated 30 June 1995 3 Commissioner of Internal Revenue vs. British Overseas Airways Corporation and Court of Tax Appeals, G.R. No. L-65773-74, 30 April 1987. [Per J. Melencio-Herrera, En Banc 4 36 Am. Jur. 2d Foreign Corporations, Sections 335 and 336 as cited in Columbia Pictures Inc. vs. Court of Appeals, G.R. No. 110318, 28 August 1996. [Per J. Regalado, En Banc] 6 SEC-OGC Opinion No. 17-03 addressed to Sycip, Salazar, Hernandez & Gatmaitan dated 04 April 2017. 7 SEC-OGC Opinion No. 11-40 addressed to Mr. Lee Soon Kook dated 30 September 2011.

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telecommunications entities for the provision of local loop and co-location services and/or value-added service providers and hiring of on-site engineers or contractors for the company is doing business in the Philippines because it made its services available to supervisions of equipment like routers and firewalls, among others. entities in the Philippines while also performing acts such as engaging local network rendering services to customers located outside the Philippines is considered as "doing business" in the Philippines. In that opinion, the Commission opined that the

C As to income derived. Activities within the Philippine jurisdiction that do not create earnings or profits to the foreign corporation do not constitute doing business in the Philippines.

that most of the Cargill's activities do not bring any direct receipts or profits to the foreign corporation, thus, it held that it is not doing business in the Philippines. In Cargill Inc. v. Intra Strata Assurance Corporation?, the Supreme Court noted

d) As to continuity. An isolated transaction by a foreign corporation cannot qualify as "doing business" since it lacks the element of continuity.

As pronounced by the Court in Magna Ready Mix Concrete Corporation vs. Andersen Bjornstad Kane Jacobs, Inc.10, citing Eriks Pte. Ltd. Vs. Court of Appeals:

The phrase "isolated transaction" has a definite and fixed meaning, i.e., a transaction or sense that there is no intention to engage in a progressive pursuit of the purpose and object of the business organization. Whether a foreign corporation is "doing business" does not series of transactions set apart from the common business of a foreign enterprise in the necessarily depend upon the frequency of its transactions, but more upon the nature and character of the transactions.

following: Likewise, in Steelcase, Inc. v. Design International Selections, Inc.11, the Court held the

The following acts shall not be deemed "doing business" in the Philippines: 8. Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it. and similar incidental services. XXX

Twin Characterization Test

Mentholatum Co., Inc., et. al. v. Mangilimani2 called the Twin Characterization Test where a foreign corporation is considered as "doing business" in the following instances: However, the ultimate test of doing business is that laid down in the landmark case of The

a) Substance Test. When the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another; and

b) Continuity Test. When the foreign corporation is engaged in activities which imply a continuity of commercial dealings and arrangements, and contemplates, to that extent, the and in the progressive prosecution of the purpose and object of its organization. performance of acts or works or the exercise of some of the functions normally incident to,

The Twin Characterization Test has since become the hallmark of what constitutes doing business

country. The number and quantity of transactions are merely evidence of such intention.13 transactions, but more importantly, the intention of an entity to continue the body of its business in the in the Philippines. What is determinative of doing business is not really the number or quantity of the

16 . G.R. No. 196158, 20 January 2021. [Per J. Hernando, Third Division] Philippines, C.T.A. EB CASE No. 2254. 29 October 2021. " G.R. No. 168266, 15 March 2010 [Per J. Carpio, Second Division]; see also Commissioner of Internal Revenue vs. BW Shipping 13 Eriks Pte. Ltd. vs. Court of Appeals and Enriquez, G.R. No. 118843. 06 February 1997. [Per J. Panganiban, Third Division] 11 G.R. No. 171995, 18 April 2012. [Per J. Mendoza, Third Division] 1z G.R. No. 47701, 27 June 1941. [Per J. Laurel. First Division]

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business in the Philippines: are performed entirely outside of the Philippines. However, the facts provided are lacking of the following information, which are crucial to categorically answer the question of whether or not Lhotse is doing In the case of Lhotse, it was stated that the services (i.e., support, maintenance, and development)

a e f} b C Place of perfection or consummation of the contract; Performance of services auxiliary to an existing isolated contract which are not on a Source of income, i.e. whether or not Lhotse will derive income from the performance of Duration of the service agreement; Nature of the services provided and the specific business the company is engaged in: Regularity of the services performed; the services, support and maintenance mentioned in the letter; and

continuing basis.

Lhotse's intention, the Commission opines that Lhotse is not doing business in the Philippines and is therefore not required to secure a license from the Commission provided that the following circumstances Based on the limited disclosure of facts and absent any other circumstances which would clarify

occur:

a) Lhotse only invested in QCVI and MHI through stock ownership or subscription; b} C d} Lhotse has no intention to continue the body of its business in the country, as Lhotse's service agreement with OCVI for support, maintenance, and development is all Lhotse and OcVI's service agreement is an isolated transaction; and normally incident to, and in progressive prosecution of the purpose or object of its evidenced by activities implying continuing commercial dealings and arrangements organization. performed outside of the Philippines;

particular issue raised therein. It shall not be used in the nature of a standing rule binding upon the investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered null circumstances and documents disclosed/submitted, and should be considered relevant solely to the Commission in other cases or upon the courts whether of similar or dissimilar circumstances.14 If upon It shall be understood that the foregoing opinion is rendered solely on the basis of the facts.

and void.

Please be guided accordingly.

ery truly yours.

ROMUALD C. PADILLA Aotmalcfimk

General Counsel

14 Section 7, SEC Memorandum Circular (MC) No. 15, Series of 2003, 16 December 2003.