Opinion No. 18-20 Re: Application of the Control Test to Retail Companies pursuant to the Retail Trade Liberalization Act.

Securities and Exchange Commission Republic of the Philippines Department of Finance

OFFICE oF THE GENERAL CoUNSEL

21 November 2018

SEC-OGC Opinion No. 18-20 RE: Application of the Control Test to Retail Companies pursuant to the Retail Trade Liberalizaton Act.

No. 7 The Coating Industries Compound ATTY. JOFRED PAUL P. JANDAYAN

Sheridan St., Shaw Boulevard Mandaluyong City

Dear Atty. Jandayan:

This refers to your letter dated 25 0ctober 2016 requesting for an opinion on whether your client (Company A), which is a 60% Filipino and 4o% foreign-owned corporation, can invest in a domestic corporation {Company B) which will be incorporated together with other Filipino individuals to engage in the restaurant business, an activity considered as retail and therefore subject to 100% Filipino ownership.

You mentioned that Company B is required by law to be 100% Filipino-owned. You also posited that by applying the Control Test, as long as Company A is 60% owned by Filipinos, shareholdings in Company B shall be considered owned by Filipinos for its existing and would-be

purposes of computing the required Filipino equity for Company B. You quoted the decision of the Supr Urt in Narra Nickel Mining and Development Corporation, et al. v. Redmont Consolidated Mines Corporation1 wherein the High Court acknowledged the existence of two tests, the Control Test and the Grandfather Rule, as a means to determine the nationality of a corporation engaged in nationalized activities. You also referred to paragraph 7 of D0J Opinion No. 020, Series of 2005, wherein the Department of Justice described the Control Test as a "liberal rule" in determining the nationality of a corporation.

1G.R. No. 195580, 21 April 2014

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investment in retail trade business: Liberalization Act (RTLA)2 provides for the extent of allowable foreign We answer in the negative. Section 5 of the Retail Trade

Section 5. Foreign Equity Participation. - Foreign-owned

organized under the laws of the Philippines may, upon following categories. partnerships, associations and corporation formed and (SEC) and the Department of Trade and Industry (DTI), or in case of foreign owned single proprietorships, with the DTi, registration with the Securities and Exchange Commission engage or invest in the retail trade business, subject to the

equivalent in Philippine Peso of less than Two Category A - Enterprises with paid-up capital of the million five hundred thousand Us dollars

Filipino citizens. Filipino citizens and corporations wholly owned by (US$2,500,000.00) shall be reserved exclusively for

XXXX

Furthermore, Section 1, Rule III of the Rules and Regulations Implementing Republic Act No. 8762 provides that:

associations and corporations, partially or wholly-owned by foreigners, formed and organized under the laws of the Section 1. Foreign Equity Participation - Partnerships, Philippines may upon registration with the Securities and Exchange Commission (SEC), or in case of foreign-owned single proprietorships, with the Department of Trade and Industry

to the following categories: (DTI), may engage or invest in the retail trade business, subject

Category A - Enterprises with paid-up capital of the

hundred thousand US dollars (US$2,500,000.00) shall be equivalent in Philippine Pesos of less than Two million five

wholly owned by Filipino citizens. reserved exclusively for Filipino citizens and corporations

XXXX

2 An Act Liberalizing the Retail Trade Business, Repealing for the Purpose Republic Act No. 1180, As Amended, and for Other Purposes [Retail Trade Liberalization Act 2000], Republic Act 8762, Section 5 200

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shall be reserved exclusively to corporations wholly-owned by Filipino Investment Negative List.3 citizens when their paid-up capital is less than the_peso eguivalent of US$_2.500.000.00. This rule is likewise reflected in the 11th Foreign It is clearly provided that all investments in retail trade enterprises

owned, this presupposes that Company B has a paid-up capital of less than US$2,500,000.00 or its peso equivalent. 0therwise, if Company B satisfies the Filipino-owned per the afore-quoted provision. capitalization requirement, it would no longer be required to be 100% When stating that Company B is required by law to be 100% Filipino-

having a capitalization less than US $ 2,500,000.00, your position that the long been held that the Control Test merely creates the legal fiction that legal fiction would make it appear that Company B is compliant, when in fact is it not as it is not fully or absolutely Filipino-owned. Control Test should be used, and that Company B should be considered Filipino as long as Company A is 60% Filipino-owned, is misplaced. It has when a corporation is at least 60% Filipino owned, it is considered or presumed to be Filipino. However, the principle should not apply to corporations that are subject to the strictest nationality requirement (i.e those required to be 100% Filipino-owned). If we use the Control Test, the Assuming that Company B is required to be 100% Filipino-owned for

binding upon the courts, or upon the Commission in other cases of similar or issues raised therein and shall not be used in the nature of a standing rule facts relied upon are different, this opinion shall be rendered null and void.4 solely on the facts disclosed in the query and relevant solely to the particular dissimilar circumstances. If upon investigation, it will be disclosed that the It shall be understood that the foregoing opinion is rendered based

Please be guided accordingly.

CAMHS.CORREA General Counsel

4 SEC Memorandum Circular 2003-15, No.7 3 Executive Order No.65 dated 29 October 2018