Law 702: Corporation Law

Nationality
Requirements
Reporter: Atty. Nadine Christine A. Diamante
Nationality of Corporations
Foreign Domestic
A corporation formed, A corporation formed,
organized or existing under laws organized and existing under
other than those of the Philippine laws.
Philippines and whose laws
allow Filipino citizens and
corporations to do business in
its own country or State (Sec.
140, RCC)
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Tests in Determining Nationality
▸ Place of Incorporation Test
▸ Control Test
▸ Grandfather Rule

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Place of Incorporation Test

Nationality is determined by the

state of incorporation, regardless of
the nationality of the stockholders.

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Place of Incorporation Test
Exception: Foreign Investment Act of 1991
- Corp organized or incorporated abroad
- Registered as doing business in the Philippines
- 100% of the OCS and entitled to vote is wholly owned
by Filipinos

5
Control Test
-Determines the nationality of the corporation
by the nationality of the controlling stockholders

-Adopted by the FIA as a general guideline in

determining the nationality of corporations
engaged in a nationalized activity

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Control Test
-Nationalized activities under the Constitution
• Exploitation and development of natural
resources – 60%
• Public utilities – 60%
• Advertising – 70%
• Mass media – 100
-”of whose capital is owned” by Filipino citizens

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Section 2, Article XII of
1987 Constitution
 “
All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils,
all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and
other natural resources are owned by the State. With the exception of agricultural lands,
all other natural resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and supervision of the State.
The State may directly undertake such activities, or it may enter into co-production, joint
venture, or production-sharing agreements with Filipino citizens, or corporations or
associations at least sixty per centum of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five years, renewable for not more
than twenty-five years, and under such terms and conditions as may be provided by law.
In cases of water rights for irrigation, water supply fisheries, or industrial uses other than
the development of water power, beneficial use may be the measure and limit of the grant.

” 9
 “
The State shall protect the nation’s marine wealth in its archipelagic waters, territorial
sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to
Filipino citizens.

The Congress may, by law, allow small-scale utilization of natural resources by Filipino
citizens, as well as cooperative fish farming, with priority to subsistence fishermen and
fish workers in rivers, lakes, bays, and lagoons.

” 10
 “
The President may enter into agreements with foreign-owned corporations involving
either technical or financial assistance for large-scale exploration, development, and
utilization of minerals, petroleum, and other mineral oils according to the general terms
and conditions provided by law, based on real contributions to the economic growth and
general welfare of the country. In such agreements, the State shall promote the
development and use of local scientific and technical resources.

The President shall notify the Congress of every contract entered into in accordance with
this provision, within thirty days from its execution.

” 11
Control Test
▸ In Gamboa vs. Teves, G.R. No. 176579, October 9, 2012,
the SC ruled: “The term ‘capital’ in Section 11, Article
XII of the 1987 Constitution refers only to shares of
stock entitled to vote in the election of directors, and
thus, in the present case, only to common shares, and
not to the total outstanding capital stock (common
and non-voting preferred shares).”
▸
▸

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Control Test
▸ SEC Memorandum Circular No. 8, s. of 2013 - Guidelines on
compliance with the Filipino-Foreign Ownership requirements
prescribed in the constitution and/or existing laws by corporations
engaged in nationalized and partly nationalized activities.

▸ -Uses the two-tiered test in determining compliance with the

required percentage of Filipino ownership.
▸ -Under the two-tiered test, the 60% required Filipino ownership shall
be applied to both:
▸ a) the total number of outstanding shares of stock entitled to vote in
the election of directors; and
▸ b) the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.

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Control Test
In Roy vs Herbosa, GR No. 207246, November 22, 2016, the
“beneficial ownership” refers to the ownership of the
subject shares. It is a question of who, in fact, is the
beneficial owner of the individual shares for the purpose
of classifying it as either Filipino-owned or non-Filipino
owned (beneficial ownership test).

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Control Test

Full beneficial ownership of 60 percent of the

outstanding capital stock, coupled with 60
percent of the voting rights, is required.
(vote + ownership = control)

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Illustration
Company X:

100 common shares

100 Class A preferred shares (with right to elect directors)
100 Class B preferred shares (without right to elect directors)

If at least a total of 120 of common shares and Class A preferred

shares are owned and controlled by Filipinos = ✔️

If at least a total of 180 shares of all the outstanding capital stock of

Company X are owned and controlled by Filipinos, provided that
among those 180 shares a total of 120 of the common shares and
Class A preferred shares are owned and controlled by Filipinos = ✔️

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Grandfather Rule
-A method of determining the nationality of a
corporation which in turn is owned by another
corporation by breaking down the equity
structure of the shareholders of the corporation.
- Applies only when the 60-40 Filipino-foreign
equity ownership is in doubt. “Doubt” refers to
various indicia that the “beneficial ownership”
and “control” of the corporation do not in fact
reside in Filipino shareholders but in foreign
stakeholders. 17
Grandfather Rule
-A method by which the percentage of Filipino
equity in a corporation engaged in nationalized
and/or partly nationalized areas of activities is
computed in case where corporate
shareholders are present, by attributing the
nationality of the second or even subsequent
tier of ownership to determine the nationality
of the corporate shareholder.

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Grandfather Rule Illustration
69% of Corp X’s shares are owned by Corp Y, while the
other 31% are owned by Filipino stockholders.

Corp Y on the other hand has the following ownership:

-47% Filipino owned
-53% Foreign owned

May Corp X engage in the development of natural

resources in the Philippines?
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 FILIPINOS
47%
CORP Y
69%
FOREIGNERS
53%
GRANDFATHER RULE CORP X
ILLUSTRATION

FILIPINOS
31%

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Foreign Investment Negative List
(FINL)
▸ The FINL is a document released by the government to
regulate the foreign ownership percentage in certain
industries. The 1991 Foreign Investments Act (FIA) allows
foreign investors to engage in any type of business in the
Philippines, on the condition that their industry does not
fall under categories stated in the Foreign Investment
Negative List (FINL).
▸ The FINL consists of lists A and B and separates business
lines that are open to foreign investment, and those that
are available only for Filipino entrepreneurs. Also note
that if an industry is not in the negative list, it is 100%
open to foreign investment. 21
Retail Trade Liberization Act of
2000 (RA 8762)
Up to 100% foreign ownership is allowed for retail trade
enterprises for two categories of businesses:

▸ Category A: Have a paid-up capital of USD 2.5 Million

or more
▸ Category B: Specializing in high end or luxury
products, provided that the paid-up capital per store
is not less than USD 250,000.00 (Sec. 5 of R.A. 8762)

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Export Businesses
▸ 100% foreign ownership is allowed for export
businesses, as long as it doesn’t fall under the
negative lists. A business is considered as an export
business if at least 60% of its output or sales are
exported.

▸ Call centers, BPOs, KPOs, back offices and similar

businesses can all be considered as export
businesses provided they adhere to the output rule.

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Anti-Dummy Law
(Commonwealth Act No. 108)
Violations of nationality restrictions usually result in
criminal penalties under the Anti-Dummy Law.
It seeks to penalize persons and corporations which
circumvent these foreign equity restrictions. The
offender can be: (i) any citizen of the Philippines, or (ii)
any citizen of any other specific country. The proscribed
offense includes the act of using the “name” or
“citizenship” of a Filipino citizen to be used for the
purpose of evading the foreign ownership limitations.
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Thank you!