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How To Determine Nationality of Corporation (Part 1)

This document discusses two tests - the grandfather rule and the control test - that are used to determine the nationality of a corporation under Philippine law. The grandfather rule takes into account both direct and indirect foreign equity in a corporation, while the control test considers who controls the majority of a corporation's voting stock. The document provides an example corporation (Corporation X) to illustrate how each test would be applied. It finds that under the grandfather rule, Corporation X would not be considered a Philippine national due to excessive indirect foreign ownership. However, under the control test, Corporation X would be deemed a Philippine national since the majority of its voting stock is controlled by another Philippine corporation.

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Ken Aliudin
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158 views1 page

How To Determine Nationality of Corporation (Part 1)

This document discusses two tests - the grandfather rule and the control test - that are used to determine the nationality of a corporation under Philippine law. The grandfather rule takes into account both direct and indirect foreign equity in a corporation, while the control test considers who controls the majority of a corporation's voting stock. The document provides an example corporation (Corporation X) to illustrate how each test would be applied. It finds that under the grandfather rule, Corporation X would not be considered a Philippine national due to excessive indirect foreign ownership. However, under the control test, Corporation X would be deemed a Philippine national since the majority of its voting stock is controlled by another Philippine corporation.

Uploaded by

Ken Aliudin
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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How to determine the nationality of

a corporation
Posted on July 26, 2010 by Hector M. de Leon Jr. • Posted in Constitutional
Law • Tagged corporation, nationality restrictions

The Constitution and various laws reserve certain areas of


activities to Philippine citizens or to corporations that have a
minimum percentage of Filipino ownership. For example, with
respect to corporations, ownership of land is limited to
corporations “at least sixty per centum of whose capital is owned”
by Philippine citizens. If 60% of the capital of a Philippine
corporation is owned by individuals who are Philippine citizens,
then there would be no issue on whether the Philippine
corporation is a Philippine national qualified to own land. On the
other hand, an issue would arise if 60% of the capital of the
Philippine corporation is owned, in turn, by another Philippine
corporation that has foreign stockholders.

If a Philippine corporation has corporate stockholders, how does


one determine whether such Philippine corporation is a Philippine
national? Two tests have been employed in the Philippines: (a)
the grandfather rule; and (b) the control test.

To illustrate how these tests are applied, let’s take a Philippine


corporation (called “Corporation X”) with the following ownership
structure:

(a) non-Philippine citizens own 40% of the capital stock


outstanding and entitled to vote of Corporation X;

(b) another Philippine corporation (called “Corporation Y”) owns


60% of the capital stock outstanding and entitled to vote of
Corporation X.

On other hand, Corporation Y has the following ownership


structure:

(a) non-Philippine citizens own 40% of the capital stock


outstanding and entitled to vote of Corporation Y;

(b) Philippine citizens own 60% of the capital stock outstanding


and entitled to vote of Corporation Y.

Let’s also assume that Philippine citizens constitute at least 60% of


the members of the board of directors of each of Corporation X
and Corporation Y.

If the grandfather rule is applied, Corporation X will not be


deemed a Philippine national because the grandfather rule takes
into account the direct and indirect foreign equity of foreigners in
Corporation X (see SEC Opinion re: Silahis International Hotel,
May 4, 1987). Applying the grandfather rule, the direct and
indirect foreign equity in Corporation X would be 64%, calculated
at follows:

Direct foreign-owned equity in Corporation X – 40%

Indirect foreign owned equity in Corporation X – 24%

Under the above scenario, the foreigners are deemed to have a


24% indirect foreign equity in Corporation X because foreigners
own 40% of Corporation Y, which in turn owns 60% of
Corporation X (i.e., 40% multiplied by 60% equals 24%). Thus,
under the grandfather rule, Corporation X is not qualified to own
land.

On the other hand, if the control test is applied, Corporation X is


deemed to be a Philippine national qualified to own land. Under
the control test, Corporation X is considered a Philippine national
since at least 60% of its capital stock outstanding and entitled to
vote is held by Corporation Y, which is also considered a Philippine
national since at least 60% of its capital stock outstanding and
entitled to vote is held by Philippine citizens.

Which of these two tests should be applied? Watch out for a


subsequent article on this topic.

(Note: This is part of a series of “How To” articles. These articles


intend to give the reader a general overview of the legal aspects of
doing certain things and they will not contain all details regarding
the proposed action. There may be changes to applicable laws and
regulations after the article is posted. You should consult your lawyer
if you wish to take a particular action. See Disclaimer page for
additional disclaimers.)

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