CLV Joint Ventures

PHILIPPINE LAW GOVERNING JOINT
VENTURES
1
Introduction
Formation Agreement: Nature of Joint Ventures in Philippine Setting
Alternative Legal Forms in Structuring a Joint Venture
Aspects which Influence Choice of Legal Form
Governing Laws and Language
Freedom to Contract, In General
Formal or Extrinsic Validity of Agreements
Capacity of Contract Parties
Intrinsic Validity
Language of Joint Venture Agreements
Defining Joint Ventures Scope of Business Activity
Foreign Investment Act of 1991
Establishing a Corporate Vehicle
Procedure in Establishing a Corporate Vehicle
Doing Business in the Philippines
Governing Law
What Constitutes Doing Business
Qualifications to Do Business in the Philippines
Registration under FIA 91
SEC Registration
Additional Requirements
Effects of Non-Compliance with FIA 91 Requirements
SEC License for Foreign Corporations Doing Business
SEC Requirements
Issuance of License
Requirements Upon Issuance of SEC License
Effects of Failure to Secure SEC License to Do Business by Foreign Corporation
Incentives Available to Foreign Joint Venture Partners
Preferred Areas of Investments (BOI Registered and with Incentives)
Non-Preferred Area Investor(Investment Without Incentives)
Incentives of Export Processing Zone Enterprises
Restrictions on Activities of Foreign Joint Venture Partners
Financing Joint Ventures
Schemes Recognized under the Act
Equity Limitations for Operators of Public Franchises
Reasonable Rate of Return on Investments and Operating and Maintenance Cost
Period Covered
Financing Allowed
Priority Projects
Preference to Filipino Contractors
Repayment Schemes
Land Reclamation or Industrial Estates
Registration with BOI
Antitrust and Competition Law
Preparation of Ancillary Documents
Technology Transfer Agreement
Parties to Agreements
Restrictive Business Clauses
Governing Law
Duration of Contract
Warranty/Guaranty Provisions
Royalty
Incentives
The original paper was submitted by the author to the CENTER

based in Salzburg, Austria, as part of its international publication.
FOR INTERNATIONAL
LEGAL STUDIES
1
Dispute Resolutions
Arbitration Law
Persons and Matters Subject to Arbitration
Form of Arbitration Agreement
Appointment of Arbitrators
Facilities for Commercial Arbitration
New York Convention
Impact of Changes in Law Subsequent to Formation

Double Taxation Agreements and Impact on Joint Venture
Protection of Foreign Investors
INTRODUCTION
Joint venture arrangements are fairly common media of doing business or
undertaking projects in the Philippines, both covering local transactions, such a large
infra-structure undertakings involving the resources of big corporations, or structuring
partnership arrangements between foreign investors and their local partners in the
pursuit of local projects in the Philippines.
In particular, the Government encourages the pursuit of construction projects and
petroleum operations under joint venture arrangements. Under the National Internal
Revenue Code of 1997 of the Philippines (NIRC), joint ventures formed for the purpose
of engaging in petroleum operations pursuant to operating agreements under a service
contract with the Government, or those formed for the purpose of undertaking
construction projects, are exempt from corporate income tax.
Joint venture arrangements have particularly been the more popular medium
when foreign participation is involved in local projects since the contractual nature of the
arrangement allows the parties flexibility to adopt special rules and procedures covering
their situation, which would otherwise be inapplicable in a straight corporate vehicle
because of the restrictive rules of the Philippine Corporation Code and jurisprudence on
Philippine Corporate Law.
FORMATION AGREEMENT:
NATURE OF JOINT VENTURES IN PHILIPPINE SETTING
There is no statutory provision that recognizes or governs directly joint ventures,
although they have been recognized in jurisprudence and commonplace in commercial
ventures. Consequently, joint venture arrangements fall generally within the realm of the
Law on Contracts, and particularly within the applicable provisions of the Law on
Partnership, both of which are governed under the Civil Code of the Philippines.
Since the prevailing contract rule in the Philippines is that parties to a contract
may establish such stipulations, clauses, terms and conditions, as they may deem
convenient, provided they are not contrary to laws, morals, good customs, public order,
or public policy,1 no model joint venture agreements have been published by the
Securities and Exchange Commission (SEC), Board of Investments (BOI), or any other
authority.
The prevailing school of thought in the Philippines is that a joint venture is a
species of partnership. By specific statutory provision when "two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves," then a partnership is created by
definition of law.2 The main distinction between an ordinary partnership and a joint
venture is that the ordinary partnership is organized for general business venture and
does not have a definite term of existence; whereas a joint venture is organized for a
specific project or undertaking.
The Philippine Supreme Court has adopted Black's definition of a joint venture,
thus: "Joint venture is defined as an association of persons or companies jointly
undertaking some commercial enterprisegenerally all contribute assets and share
risks. It requires a community of interest in the performance of the subject matter, a right
to direct and govern the policy connected therewith, and duty, which may be altered by
agreement to share both in profit and losses." 3
The foregoing definition of a joint venture essentially falls within the statutory
definition of what constitutes a partnership. Other reasons on why a joint venture must
be considered a species of partnership is that the Law on Partnership provides that "A
partnership may be constituted in any form, except where immovable property or real
rights are contributed, thereto, in which case a public instrument shall be necessary." 4
That means that no special form, even one seeking to establish a joint venture
arrangement, is necessary to give rise to a partnership.
In addition, the Law on Partnership recognizes that in the Philippines a
partnership may either be universal or particular. 5 A universal partnership of profits
comprises all that the partners may acquire by their industry or work during the
existence of the partnership.6
A particular partnership has for its object determinate things, their use or fruits, or
specific undertaking, or the exercise of a professional or vocation. 7 Clearly, therefore, a
joint venture, as an undertaking of two or more persons who contribute money or
property to a common fund, with intention of dividing the profits from a particular project
or particular undertaking is defined by law as a particular partnership.
Finally, the position that a joint venture is a species of partnership has been
upheld in Aurbach v. Sanitary Wares Manufacturing Corp.,8 where the Supreme Court
held that:
1
Art. 1306, Civil Code.

3
Kilosbayan, Inc. v. Guingona, 232 SCRA 110, 143-144, 41 SCAD 671 (1994), citing BLACK'S LAW
DICTIONARY.
4
5
6
7
8
180 SCRA 130 (1989).
3
2
. . . The main distinction cited by most opinions in common law

jurisdiction is that the partnership contemplates a general business
with some degree of continuity, while the joint venture is formed for
the execution of a single transaction, and is thus of a temporary
nature. . . This observation is not entirely accurate in this jurisdiction,
since under the Civil Code, a partnership may be particular or
universal, and a particular partnership may have for its object a
specific undertaking.9 It would seem therefore that under Philippine
law, a joint venture is a form of partnership and should thus be
governed by the laws of partnership.10
Since a joint venture is a species or a special type of partnership, it would have

the following characteristics of partnership:
(a) It would have a juridical personality separate and distinct from that
of each of the joint-venturers. Article 1768, Civil Code provides
specifically that the partnership has a juridical personality separate
and distinct from that of each of the partners even in case of failure
to comply with the registration requirements of law. Therefore, a
joint venture as a firm can enter into contract and own properties in
the firm's name;11
(b) Each of the co-venturers would be liable with their private property
to the creditors of the joint venture beyond their contributions to the
joint venture;
(c) Even if a co-venturer transfers his interest to another, the transferee
does not become a co-venturer to the others in the joint venture
unless all the other co-venturers consent. This is in consonance
with the delectus personarium principle applicable to partnerships;
(d) Generally, the co-venturers acting on behalf of the joint venture are
agents thereof as to bind the joint venture; and
(e) Death, retirement, insolvency, civil interdiction or dissolution of a coventurer dissolves the joint venture.
Jurisprudence, however, has tended to give joint ventures special treatment not
accorded to ordinary partnerships. Philippine jurisprudence has adopted the prevailing
rule in the United States that a corporation cannot ordinarily enter into partnerships with
other corporations or with individuals. The basis for such prohibition on corporations is
that in entering into a partnership, the identity of the corporation is lost or merged with
that of another and the direction of the affairs is placed in other hands than those
provided by law of its creation.
The doctrine is grounded on the theory that the stockholders of a corporation are
entitled, in the absence of any notice to the contrary in the articles of incorporation, to
assume that their directors will conduct the corporate business without sharing that duty
and responsibility with others.12
Tuason v. Bolaos,13 recognized in Philippine jurisdiction the doctrine in AngloAmerican jurisprudence that "a corporation has no power to enter into a partnership."
Nevertheless, Tuason recognized that a corporation may validly enter into a joint
venture agreement, "where the nature of that venture is in line with the business
authorized by its charter."14

Ibid; emphasis supplied.
11
cf Art. 1774, Civil Code.
12
BAUTISTA, TREATISE ON PHILIPPINE PARTNERSHIP LAW, 1978 Ed., at p. 9.
13
95 Phil. 106 (1954).
14
Ibid, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing Fletcher Cyc.
of Corp., 1082).
4
10
Although Tuason does not elaborate on why a corporation may become a coventurer or partner in a joint venture arrangement, it would seem that the policy behind
the prohibition on why a corporation cannot be made a partner does not apply in a joint
venture arrangement. Being for a particular project or undertaking, when the board of
directors of a corporation evaluate the risks and responsibilities involved, they can more
or less exercise their own business judgment is determining the extent by which the
corporation would be involved in the project and the likely liabilities to be incurred. The
situation therefore in a joint venture arrangement, unlike in an ordinarily partnership
arrangement which may expose the corporation to any and various liabilities and risks
which cannot be evaluated and anticipated by the board, allows the board to fully bind
the corporation to matters essentially within the boards business appreciation and
anticipation.
The previous ruling of the SEC on the matter is that a corporation cannot enter
into a contract of partnership with an individual or another corporation on the premise
that if a corporation enters into a partnership agreement, it would be bound by the acts
of the persons who are not its duly appointed and authorized agents and officers, which
is entirely inconsistent with the policy of the law that the corporation shall mange its own
affairs separately and exclusively.15
Later, the SEC provided for a clear exception to the foregoing ruling, and allowed
corporations to enter into partnership arrangement, provided the following conditions
are met:16
(a) The authority to enter into a partnership relation is expressly
conferred by the charter or the articles of incorporation of the
corporation, and the nature of the business venture to be
undertaken by the partnership is in line with the business
authorized by the charter or articles of incorporation;
(b) The agreement on the articles of partnership must provide that all
the partners shall manage the partnership, and the articles of
partnership must stipulate that all the partners shall be jointly and
severally liable for all the obligations of the partnership;
(c) If it is a foreign corporation, it must obtain a license to transact
business in the country in accordance with the Corporation Code of
the Philippines.
In one opinion, the SEC clarified that the conditions imposed meant that since
the partners in a partnership of corporations are required to stipulate that all of them
shall manage the partnership and they shall be jointly and severally liable for all the
obligations of the partnership, it necessarily followed that a partnership of corporations
should be organized as a general partnership. 17
Lately, the SEC, realizing that the second condition actually prevented a
corporation from entering into a limited partnership, which if allowed to do so would then
be more congruent with the policy that the corporation would then not be held liable for
its venture beyond the investments made and determined by its board of directors, and
would therefore not be held liable (beyond its investment) for debts arising from the acts
of the general partners, reconsidered its position and ruled that a corporation may
become a limited partner in a limited partnership, since there is no existing Philippine
law that expressly prohibits a corporation from becoming a limited partner in a
partnership. In effect, the SEC dropped the second condition imposed previously. 18
In the field of Taxation, both a partnership and a joint venture are treated as
corporate taxpayers, and both are subject to corporate income tax, except that under
the National Internal Revenue Code of 1997, "a joint venture or consortium formed for
15
SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976, at p. 278; citing 6 FLETCHER CYC.
CORP., Perm. Ed. Rev. Repl. 1950, Sec. 2520.
16
SEC Opinion, 29 February 1980; SEC Opinion, dated 3 September 1984. Under Sec. 192 of the
NATIONAL INTERNAL REVENUE CODE, documentary stamps of P15.00 must be affixed on each proxy.
17
SEC Opinion, 23 February 1994, XXVIII SEC QUARTERLY BULLETIN 18 (No. 3, Sept. 1994).
18
SEC Opinion, 17 August 1995, XXX SEC QUARTERLY BULLETIN 8 (No. 1, June 1996).
5
the purpose of undertaking construction projects or engaging in petroleum, coal,

geothermal and other energy operations pursuant to an operating or consortium
agreement under a service contract with the Government," shall not be taxed separately
as a corporate taxpayer.19
ALTERNATIVE LEGAL FORMS IN STRUCTURING A JOING VENTURE

Parties have a varied choice of legal forms in planning a joint venture
arrangement, and they can pursue the same through a joint venture corporation, or by
straight equity joint venture, by partnership arrangement, or contractual joint venture.
The SEC has ruled that generally, a joint venture agreement of two corporations need
not be registered with the SEC, provided it will not result in the formation of a new
partnership or corporation. However, should there be an intention to acquire a separate
Tax Identification Number (TIN) from the Bureau of Internal Revenue for the business
venture, the same requires registration with the SEC in order to have a separate legal
personality to obtain a separate TIN.20
Co-venturers may pursue the joint venture arrangement by a private contract
between them, and they choose not to represent a separate firm undertaking the project
to third parties. In such an arrangement, the relationship of the venturers, their rights
and liabilities, are governed by the joint venture contract executed between them.
Equity joint ventures are also available in Philippine setting which may cover the
formation of a new joint venture company, with each co-venturer being allocated
proportionate shareholdings in the outstanding capital stock of the joint venture
corporation. Equity joint venture may also be pursued where a co-venturer is allocated
the agreed shares of stock in an existing corporation, either from new issuances of the
capital stock of the existing corporation, or sold shares from those already issued in the
names of the other co-venturers.
In equity joint ventures, the rights and obligations of the parties among
themselves is covered not only in a separate joint venture agreement, but also
implemented by certain provisions of the articles of incorporation and by-laws of the
joint venture corporation.
A third type of joint venture arrangement is to formally operate the joint venture
set-up as a partnership, with a separate and distinct juridical personality.
The SEC has ruled that two or more corporations may enter into a joint venture
through a contract or agreement (contractual joint venture) if the nature of the venture is
authorized by their charters, which contract need not be registered with the SEC;
provided, however that the joint venture will not result in the formation of a new
partnership or corporation.21
In situations where a corporate vehicle is formed in pursuance of the joint venture
arrangements, ideally the joint ventures should be able to fit into the various terms and
clauses of the articles of incorporation and by-laws (the charter) of the joint venture
company the salient features of their joint venture agreements. In situations where joint
venture agreements contain provisions not covered by the charter of the joint venture
corporation or vice-versa, the resolutions of issues arising therefrom shall be as follows:
(a) In case of conflicts between the provisions of the joint venture
agreement and the charter of the joint venture corporation, the
provisions of the latter shall prevail;
(b) In case there are provisions or clauses in the joint venture
agreement not found in the charter of the joint venture corporation,
such provisions and clauses remain binding contracts among the
joint venture parties signatory to the agreement, but do not bind the
joint venture corporation or other parties not signatories thereto.
19
Sec. 22(B), NIRC of 1997.

SEC Opinion, 30 March 1995, XXIX SEC QUARTERLY BULLETIN 32 (No. 3, Sept. 1995).
21
SEC Opinion, 29 April 1985, SEC ANNUAL OPINIONS 1985, at p. 89.
20
The foregoing rules of resolution are based on the well-established doctrine

under Philippine Corporate Law that the articles of incorporation is a basic contract
document defining the charter of the corporation. The articles of incorporation is
characterized as a contract between and among three parties: (a) between the State
and the corporation; (b) between the stockholders and the State; and (c) between the
corporation and its stockholders.22
In addition, although the joint venture agreement may contain rules on
management and control of the joint venture corporation, it does not authorize the jointventurers, as equity owners, to override the business management of the corporate
affairs of the joint venture corporation by its board of directors. Any stipulation therefore
in the joint venture agreement that seeks to arrogate unto the stockholders thereof the
management prerogatives of its board of directors would be null and void.
ASPECTS WHICH INFLUENCE CHOICE OF LEGAL FORM

The most important aspects in choosing the form to pursue joint venture
arrangement would be the issues of limited liability, tax consequences, and limitation of
foreign equity is specified areas of investments or activities.
The contractual joint venture has the advantage of limiting the extent of the
arrangement between and among the joint-venturers, as in undertakings that require
privacy. In addition, since formal joint ventures are taxed as corporate taxpayer, the
contractual joint venture lessens the need to have to register the project as a separate
corporate taxpayer, since the private arrangements should allow the joint-venturers to
continue reporting separately their participation in the project in their own tax returns.
On the other hand, the choice of pursuing a joint venture arrangement for undertaking
constructions projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating agreement under a service contract with the
Government is usually made because the joint venture itself would not be subject to
corporate income tax liabilities under the NIRC.
The use of the corporate entity to pursue the joint venture arrangement allows
the joint-venturers to take full advantage of the limited liability features of the corporate
vehicle especially in projects and undertakings which embody certain risks. The
corporate entity route also allows the joint-venturers to take advantage of zero rate
taxability of dividends declared by corporations.
In the Philippines, the corporation has traditionally been subjected to heavier
taxation than other forms of business organization; dividends distributed are subject to
another tax when received by the stockholders. With the trust of Government to
encourage both local and foreign investments in the country, and to entice the use of
the corporation as the vehicle for such investment, many of the previous tax laws that
tended to make corporate vehicles expensive have been abolished. Except for
dividends declared by domestic corporation in favor of foreign corporation, 23 dividends
received by individuals from corporation, 24 as well as inter-corporate dividends between
domestic corporations,25 are subject to zero rate of income taxation. There has also
been an abolition of the personal holding companies tax and tax on unreasonably
accumulated surplus of corporations.26
Lately, however, under the reforms embodied in the NIRC of 1997, a final tax of
10% has been re-imposed on dividends received by residents and citizens declared
from corporate earnings after 1 January 1998; 27 a final tax of 20% on dividends received
by a nonresident alien individual has been re-imposed from corporate earnings after 1
22
Government of the P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).

Sec. 25(a) and (b), NIRC of 1977.
24
Sec. 21, NIRC of 1977.
25
26
Executive Order No. 37 (1986).
27
Sec. 24(B)(2), NIRC of 1997.
23
January 1998;28 and the tax on improperly accumulated earnings has likewise been reimposed.29
The pursuit of joint venture arrangements under a formal partnership
arrangement has the disadvantage of inviting into the arrangement the features of
unlimited liability for partnership debts to the joint-venturers, and also the inability to
take advantage of the zero-rate of dividends for corporation, when the partnership
declares and distributes profits. The aspect of double taxation looms largely in a
partnership joint venture arrangement, since partnerships are subject to the 32% net
income tax for corporations. Nevertheless, joint ventures formed for the purpose of
undertaking construction projects30 and those formed to engage in petroleum operations
pursuant to an operating agreement under a service contract with the Government, 31 are
exempt from corporate taxation.
GOVERNING LAW AND LANGUAGE

Since joint venture arrangements are governed primarily by the Law on
Contracts, the following rules would be relevant to joint ventures.
1. Freedom to Contract, In General
The Philippine Constitution prohibits any law impairing the obligation of
contracts.32 The established rule is that contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public policy.33
Contracts generally are perfected by mere consent, and from that moment the
parties are bound not only to the fulfillment of what has been expressly stipulated but
also to all the consequences which, according to their nature, may be in keeping with
good faith, usage and law.34 Joint venture arrangements are therefore generally binding
on the joint-venturers in whatever form they were constituted.
2. Formal or Extrinsic Validity of Agreements
Philippine laws recognize the principle that the formal or extrinsic validity of
contracts, including a joint venture arrangement, shall be governed by the laws of the
country in which they are executed. 35 Therefore, joint venture arrangements, which are
essentially partnership agreements, are valid in whatever form executed.
3. Capacity of Contract Parties
The capacity of the parties to enter into a joint venture agreement is generally
governed by their national law.36 However, in case of joint venture agreements covering
the alienation or encumbrance of properties, both real and personal, located in the
Philippines, the capacity of the parties is governed under Philippine laws. 37
28
Sec. 25(A)(1), NIRC of 1997

30
Pres. Decree 929 (1976).
31
Pres. Decree 1682.
32
Sec. 10, Art. III.
33
34
35
36
37
29
4. Intrinsic Validity
The intrinsic validity of a joint venture agreement, as in all contracts in general
executed in the Philippines, including consideration or cause thereof, the interpretation
or constructions of its provisions, and the nature and amount of damages for breach
thereof, are governed by the law voluntarily agreed upon by the parties. The parties to a
joint venture arrangement can therefore validly stipulate which laws shall govern their
arrangement.
However, any stipulation in the joint venture agreement cannot operate to oust
Philippine courts of their jurisdiction under the law, although the local courts would still
apply the laws chosen by the parties to the agreement. 38
Although the parties to a contract, including a joint venture arrangements, are
granted liberty under Philippine laws to stipulate on governing laws, including the laws
of another country, nevertheless, Philippine restrictive laws, on taxes and prohibition on
foreign equity in some business areas or activities are likely to be imposed as
mandatory if suit is brought before a local forum seeking any remedy under the joint
venture arrangement.
5. Language of Joint Venture Agreements
There are likewise no restrictions on the language in which a document or
contract may be executed, since the language does not go into the validity or
enforceability of the agreement. Nevertheless, it would be prudent for the parties to
draw the documents in an official language, since any future suit on a document must
always be accompanied by an official transaction in the official language.
Under Section 33, Rule 132 of the Philippine Rules of Court, documents written
in an unofficial language shall not be admitted as evidence, unless accompanies with a
translation into English or Filipino. Under the 1987 Constitution of the Philippines, the
official languages are Filipino and, until otherwise provided by law, English. 39
Most, if not practically all, contracts and agreements in Philippine setting are
drawn-up and executed in English, since it is the official and dominant language of
commerce and the judiciary.
DEFINING JOINT VENTURES SCOPE OF BUSINESS ACTIVITY

The principal consideration in defining the scope of business to be undertaken by
joint venture in the Philippines basically devolve on the issue, when it involves foreign
investment, of restrictions on foreign equity and foreign management and control on
certain restricted areas or activities.
1. Foreign Investment Act of 1991
Republic Act 7042, known as the "Foreign Investment Act of 1991" or "FIA '91",
was enacted to promote foreign investments, and prescribes the procedures for
registering enterprises doing business in the Philippines. It is the basic law that provides
the conditions, activities, and procedures where foreign enterprises may invest and do
business in the Philippines. It applies to joint venture arrangements in the Philippines.
By the negative list scheme, the Act simply established the restricted areas, and
declared all other areas as open to unlimited foreign equity participation.
Essentially, the FIA 91 provides for foreign investment negative list which spells
out the activities reserved for Philippine national. Export enterprises may enter all
activities not restricted by Lists A and B of the negative list, and domestic enterprises,
with foreign equity, may enter all activities not restricted by Lists A, B, and C of the
negative list.
38
Molina v. De la Riva, 6 Phil. 12 (1906); Companie de Commerce v. Hamburg-Amerika, 36 Phil.
590 (1917).
39
Sec. 7, Art. XIV.
9
10
The salient points of FIA '91 are the following:

(a) Under the concept of a negative list, more areas are open to foreign
investments, and investment policy is made transparent and stable;
(b) The law redefined "export enterprise" to mean at least 60% export
(from the former 70% export level).
(c) It opened the domestic economy to 100% foreign investments
except for those in the negative lists.
(d) One layer of bureaucracy is reduced because there is no need for
Board of Investments (BOI) approval if the investor is not seeking
incentives.
The criteria for the negative list are the following:
List A covers area of investment in which foreign ownership is limited by the
Constitution and nationalization laws, as follows:
NO FOREIGN EQUITY ALLOWED:
(a) Mass media ownership and management; 40
(b)
Licensed professions,
engineers;41
like
lawyers,
accountants,
and
(c) Retail trade;42

(d) Fisheries; and
(e) Rice and corn farming.43
40
Sec. 11, Art. XVI, Constitution.

Sec. 14, Art. XIV, Constitution.
42
Rep. Act No. 1180. Retail Trade has been liberalized under Rep. Act No. 8762, otherwise known
as the Retail Trade Liberalization Act of 2000.
43
Rep. Act No. 3018; Pres. Decree 194.
10
41
11
25% FOREIGN EQUITY ALLOWED:

(a) Recruitment agencies;44 and
(b) Locally funded public works project. 45
(a) Advertising.46
(a) Exploitation of natural resources and utilization of land
ownership;47
(b) Public utilities;48
(c) Educational institutions;49
(d) Financing companies;50
(e) Construction.51
(f) Cooperatives;52
(g) Private security agencies;53 and
(h) Small-scale mining.54
Under the Retail Trade Liberalization Act of 2000, 55 the retail trade industry has
been liberalized to accommodate foreign investments and foreign direct participation.
Currently, foreigners are excluded only in retail enterprises with paid-up capita of less
than US$2,500,000.00 (Category A) which is resecured exclusively for Filipino citizens
and corporations wholly-owned by Filipino citizens.
List B covers defense-related materials which by law are licensed and regulated
by the Department of National Defense, unless specifically authorized, with substantial
export, by the Secretary of National Defense. For example, 40% foreign equity is
allowed manufacture, repair storage and/or distribution of explosives, munitions, and
armaments.56
List B also includes activities regulated by law because of risks they may pose to
public health and morals. For example, dangerous drugs, gambling, nightclubs, bars,
and message clinics are not open for foreign investments. 57
A third area under the negative List B refers to domestic market enterprises with
less than US$200,000 paid in equity capital, unless determined by the Department of
Science and Technology as involving advanced technology.
Finally, the negative List B also includes export enterprises using raw materials
from depleting natural resources and with less than US$200,000 paid in equity capital.
The following therefore are covered under List B and would be open to 100%
foreign equity investments:
(a) Manufacture and repair of firearms and similar defense-related
material with substantial export component and with specific
authorization from the Secretary of National Defense.
44
Art. 27, Labor Code.

Comm. Act No. 541; Pres. Decree 1594; LOI 630.
46
Sec. 11, Art. XVI, Constitution.
47
Sec. 2, Art. XII, Constitution.
48
Sec. 11, Art. XII, Constitution.
49
Sec. 4, Art. XIV, Constitution; Batas Pambansa Blg. 232.
50
Rep. Acts Nos. 4566 and 5980.
51
Rep. Act No. 5183.
52
Rep. Act No. 6938.
53
Rep. Act No. 5487.
54
Rep. Act No. 7076.
55
Rep. Act No. 8762 (March, 2000).
56
Rep. Act No. 7042.
57
Rep. Act No. 7042.
45
11
12
(b) Domestic market enterprises certified by the DOST as involving

advanced technology even if the paid-in equity capital is less than
US$200,000.
(c) Export enterprises that use raw materials from depleting natural
resources but with paid-in capital of at least US$200,000.
List C enumerates "adequately-served areas." The criteria to determine
"adequately served "areas of economic activity are the following:
(a) The industry is controlled by firms owned at least 60% by Filipinos;
(b) Industry capacity is ample to meet domestic demand;
(c) Sufficient competition exists within the industry;
(d) Industry products comply with Philippine standards of health and
safety or, in the absence of such, with international standards, and
are reasonably competitive quality with similar products in the same
price range imported into the country;
(e) Quantitative restrictions are not applied on imports of directly
competing products;
(f) Industry leaders comply with environmental rules; and
(g) The prices of industry products are reasonable.
The transitory Negative List C has already been scrapped under Executive
Order No. 182 which established the regular Foreign Investment Negative List, and took
effect last October, 1994. There is in effect no longer Negative List C.
Establishing a Corporate Vehicle
Mere investment by foreign entities into a joint venture company would be
covered by the rules on foreign equity allowance under FIA '91. The registration of the
joint venture company itself would be similar to the normal registration requirements of
the SEC on the organization, formation and registration of a domestic corporation.
In addition, if aside from equity investment in the local company, the foreign
partners would participate in the affairs or projects of the domestic joint venture
company, it would be considered doing business in the Philippines and would have to
obtain a license to do business from the SEC.
1. Procedure in Establishing a Corporate Vehicle
Aside from the FIA '91, the are Corporation Code provisions and SEC rules and
regulations that must be complied with in setting-up the joint venture company.
Section 10 of our Corporation Code requires the incorporators of a corporation to
be not less than five (5) natural persons, majority of whom must be residents of the
Philippines. This requirement is mandatory even to 100% foreign-owned corporations.
Since the Code provides that only natural persons must be incorporators, a corporation
cannot be considered an incorporator of the corporation to be put up although said
corporation may be among the subscribers to the corporation's capital stock.
The Code sets the limit to the number of directors to not less than five (5) nor
more than fifteen (15). Section 23 of the Code, moreover, requires every director to own
at least one (1) share of the capital stock of the capital stock of the corporation. Said
section of the Code also requires majority of the directors to be residents of the
Philippines. However, the SEC does not insist on majority residency requirements for
directors when the domestic corporation is 100% foreign-owned.
12
13
Alien incorporators and subscribers who are residents must furnish provide any
of the following: their immigration certificate of residence, special investor's resident visa
and any kind of visa valid for at least one (1) year.
Under SEC regulations, an alien may be appointed/elected as treasurer only if he
is a resident of the Philippines.
When a joint venture company is to be registered with foreign equity, the
following requirements are imposed by the SEC:
(a) All subscriptions of foreign incorporators to be fully paid. If they will
not be fully paid, the Filipino incorporators must execute an
undertaking to pay for the unpaid subscription;
(b) Alien subscribers must submit proof of remittance or affidavit
stating the source of payment of their subscriptions;
(c) Alien subscribers who wish to register their investments with the
Central Bank so that they can remit their earnings and capital
abroad, must necessarily remit their respective subscription
payments through the banking system and submit the prescribed
bank certificate of inward remittance as proof of the remittance to
the SEC.
Note that the SEC may allow the remittance to be maintained in a foreign
currency account (not converted into pesos) so long as a letter-explanation is given to
the SEC on the non-conversion (e.g., the foreign currency will be immediately used to
buy capital equipment abroad).
2. Doing Business in the Philippines:
a. Governing Law
Aside from direct investment participation discussed above, foreigners may "do
business" in the Philippines. This mode of investment is not available for incentives and
is, therefore, governed by FIA '91.
b. What Constitutes Doing Business
Under FIA '91 "doing business" in the Philippines is deemed to include the
following acts:
(a) Soliciting orders, service contracts, opening offices, whether
liaisons offices or branches;
(b) Appointing representatives or distributors operating under full
control of the foreign corporation, domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods
totaling 180 days or more;
(c) Participating in the management, supervision or control of any
domestic business, firm entity or corporation in the Philippines; and
(d) Any other act or acts that imply a continuity of commercial dealings
or arrangements, and contemplate to that extent the performance
of acts and works, or the exercise of some of the functions normally
incident to and in progressive prosecution of commercial gain or of
the purpose or object of the business organization.
13
14
c. Qualifications to Do Business in the Philippines

Any non-Philippine national or entity may do business in the Philippines up to
100% of its capital provided:
(a) It is doing business as a domestic market enterprise outside the
Negative List;
(b) It is doing business as an export enterprise whose products or
services do not fall within Lists A and B (except for defense-related
activities which may be approved or authorized) of the Negative
Lists.
d. Registration under FIA 91
Previously, foreign nationals or foreign entities seeking to do business in the
Philippines even without incentives must secure a certificate of authority from the BOI
aside from a license from the SEC. The passage of FIA '91, however, did away with this
need for a prior BOI certificate of authority. Under the FIA, what is only required is
registration with the SEC.
The requirements of the FIA '91 from the foreign nationals who are direct foreign
investors and for those merely seeking to do business in the Philippines under the
foregoing definition are the same. FIA '91 does not make a distinction between direct
foreign investors or those merely seeking to do business in the Philippines in its
requirements for registration.
e. SEC Registration
However, the Corporation Code requires certain registration compliance. For
foreign corporation or partnerships seeking to do business in the Philippines, the
following would be required:
(a) Certified copy of the board resolution authorizing the establishment
of an office in the Philippines; designating the resident agent to
whom summons and other legal processes may be served in behalf
of the foreign corporation; and stipulating that in the absence of
such agent or upon cessation of its business in the Philippines, the
SEC shall receive any summons and legal processes as if the
same is made upon the corporation at its home office;
(b) Financial statements for the immediately preceding year at the time
of the filing of the application, certified by an independent Certified
Public Accountant of the SEC;
(c) Certified copies of Articles of Incorporation/Partnership with an
English translation thereof in a foreign language;
(d) Foreign Company Information Sheet
All documents executed abroad should be authenticated by the Philippine
embassy or consular office.
f. Additional Requirements
The following would be required for specially defined activities:
(a) For enterprises wishing to engage in defense-related activities,
clearance from the Department of National Defense or Philippine
National Police;
(b) For small and medium sized domestic enterprises with paid-in
equity capital less than the equivalent of US$200,000.00, a
certificate from the Department of Science and Technology that the
investment involves advanced technology.
14
15
g. Effects of Non-Compliance with

FIA 91 Requirements
Administrative sanctions, which would include the impositions of fines and the
forfeitures of benefits.58
3. SEC License for Foreign Corporations Doing Business
Aside from the registration requirements of the FIA '91 with the SEC, Section 125
of the Corporation Code requires foreign corporations wishing to do business in the
Philippines to secure a license from the SEC allowing the foreign corporation to do
business in the Philippines.
a. SEC Requirements
The following documentary requirements would have to be filed with the SEC:
(a) Application for a license;
(b) Certified true copies of articles of incorporation and by-laws;
(c) Certificate under oath by the authorized official or officials of the
jurisdiction of its incorporation, attesting to the fact that the laws of
the country or state of the applicant allow Filipino citizens and
Filipino corporations to do business therein, and that the applicant
is an existing corporation in good standing. If such certificate is in a
foreign language, a translation thereof in English under oath of the
translator shall be attached hereto;
(d) Statement under oath by the president or any other person
authorized by the corporation, showing to the satisfaction of the
SEC and other government agency in proper cases that the
applicant is solvent and in sound financial condition, and setting
forth the assets and liabilities of the corporation as of the date not
exceeding one (1) year immediately prior to the filing of the
application.
b. Issuance of License
Where the SEC is satisfied that the applicant has complied with all the
requirements of this Code, and other special laws, rules and regulations, the SEC shall
issue a license to the applicant to transact business in the Philippines for the purpose or
purposes specified in such license. Upon the issuance of the license, such foreign
corporation may transact its business in the Philippines and continue to do so for as
long as it retains its authority to act as a corporation under the laws of the country or of
its state of incorporation, unless such license is soonest surrendered, suspended or
annulled in accordance with this Code or other special laws.
c. Requirements Upon Issuance of SEC License
(i) Posting of Securities
Within sixty (60) days after the issuance of a license to transact business in the
Philippines, the licensee shall deposit with the SEC for the benefit of present and future
creditors of the licensee in the Philippines, securities satisfactory to the SEC, consisting
of bonds or other evidences of indebtedness of the Government of the Republic of the
Philippines, its political subdivisions and instrumentalities, or of government owned or
controlled corporations and entities, shares of stock in registered enterprises as this
term is defined in Rep. Act No. 5186, shares of stock in domestic corporations
registered in the stock exchange, or any combinations of these kinds of securities, in the
actual value of P100,000.00
58
Section 14, FIA 91.

15
16
(ii) Yearly Requirement of Posting of Additional Securities

Within 6 months after each fiscal year, the SEC shall require the licensee to
deposit additional securities equivalent in actual market value to two percent (2%) of the
amount by which the licensee's gross income for that fiscal year exceeds
P5,000,000.00. The SEC shall also require deposit of additional securities if the actual
market value of the deposit has decreased by ten percent (10%) of their actual market
value at the time they were deposited.
The SEC may at its discretion release part of the additional securities deposited
with it if the gross income of the licensee has decreased, or if the actual market value of
the securities on deposit has increased by more than 10% of the actual market value of
the securities when they were deposited.
The SEC may, from time to time, allow the licensee to substitute other securities
for those already on deposit as long as the licensee is solvent.
(iii) Appointment of Resident Agent

The appointment of a resident agent is an indispensable requirement to the
issuance of an SEC license. Should the foreign corporation be sued, someone must by
duly authorized to receive summons and other legal processes, so that the Philippine
courts may acquire jurisdiction over such corporation.
d. Effects of Failure to Secure SEC License
to Do Business by Foreign Corporation
The following are the legal effects of a foreign corporation doing business in the
Philippines for failing to obtain the SEC license:
(i) Criminal liability - Fine or imprisonment; 59
(ii) The foreign corporation cannot sue in Philippine courts; 60 and
(iii) The foreign corporation can be sued in Philippine courts. 61
INCENTIVES AVAILABLE TO FOREIGN JOINT VENTURE PARTNERS

Except for joint ventures formed for the purpose of undertaking construction
projects62 and those for formed for engaging in petroleum operations pursuant to an
operating agreement under a service contract with the Government, 63 which are exempt
from corporate taxation, the incentives available to joint venture partners is directly
linked with the activities to be undertaken.
Investment incentives are mainly provided for under the Omnibus Investment
Code of 1987.64
1. Preferred Areas of Investments
(BOI Registered and with Incentives):
Generally, a foreign investor can avail of incentives if he invests in what are
designated as preferred areas of investment as designated in the Investment Priorities
Plan (IPP), a yearly pamphlet issued by the Board of Investments (BOI).
Book I of the Code classifies the preferred areas of investments into two: the
preferred pioneer and the preferred non-pioneer. The yearly IPP then lists down which
59
Art. 144, Corporation Code; Sec. 14, Rep. Act 337.

Sec. 133, Corporation Code.
61
Ibid.
62
Pres. Decree 929 (1976).
63
Pres. Decree 1682.
64
Executive Order No. 226, the Omnibus Investment Code.
60
16
17
economic activities are considered preferred pioneer and which are preferred nonpioneer.
Foreigners may invest up to the extent of 100% in the economic activities listed
down as preferred pioneer subject only to constitutional or statutory limitations and only
up to 40% in economic activities declared as preferred non-pioneer.
If an enterprise is not listed in the Investment Priorities Plan and foreign equity
shall not exceed 40% it must, to be entitled to the incentives given, export 50% of its
production.
If an enterprise is not listed in the Investment Priorities Plan and foreign equity
shall exceed 40% it must export 70% of its production to be entitled to the incentives
given.
A location restriction, however is imposed on the enterprise in order to avail of
certain incentives. Thus, projects locating in Metro Manila are not entitled to income tax
holiday and capital equipment incentives.
Among the incentives granted by the Code are:
(a) Guarantee of investment repatriation in the currency in which the
investment was originally made and at the exchange rate prevailing
at the time of repatriation;
(b) Guarantee of remittance of earnings in the currency in which the
investment was originally made and at the exchange rate prevailing
at the time of remittance;
(c) Freedom from expropriation;
(d) No requisition of investment;
(e) Income tax holiday for 6 years from the commercial operation for
pioneer firms and 4 years for non-pioneer firms;
(f) Additional deduction for labor expense for the first 5 years from the
registration of 50% of the wages corresponding to the increment in
the number of direct labor for skilled and unskilled workers;
(g) Tax and duty exemption on imported capital equipment;
(h) Tax credit on domestic capital equipment;
(i) Exemption from contractor's tax;
(f) Simplification of customs procedure;
(g) Unrestricted use of consigned equipment;
(h) Employment of foreign nationals;
(i) Tax credit for taxes and duties on raw materials;
(j) Exemption from taxes and duties on imported spare parts; and
(k) Exemption from wharfage dues and any export tax, duty, impost
and fee.
2. Non-Preferred Area Investor
(Investment Without Incentives):
Previously, before the enactment of FIA '91, because foreign equity in the
enterprise will not exceed 40%, the enterprise is denominated as a permitted
investment under the Omnibus Investment Code. Under the Code, the enterprise may
immediately incorporate directly with the SEC without need of prior BOI authority. Now
the requirements of FIA '91 should be complied with.
17
18
3. Incentives of Export Processing Zone Enterprise:

If the joint venture is to be established within an export processing zone area,
under the Code, it shall have the following incentives:
(a) Facility in employment of foreign nationals;
(b) Favorable tax treatment of merchandise within the zone;
(c) Enjoy the same incentives as a BOI-registered pioneer enterprise;
and
(d) Exemption from local taxes and licenses.
In addition, under Pres. Decree No. 66, the following incentives are expressly
granted to locators within the export processing zone areas are:
(a) Exemption from customs duties and internal revenue taxes raw
materials, supplies and equipment imported within such areas;
(b) Allowing net-operating loss carry-over for the first 5 years of
operations;
(c) Allowing accelerated depreciation of fixed assets to not more than
twice the normal rate of depreciation;
(d) Exemption from export tax;
(e) Exemption from local taxes and licenses;
(f) Deduction of labor-training expenses incurred of 1/2 the value of
such expenses;
(g) Deduction for organizational and pre-operating expenses over a
period of 10 years;
(h) Grant of tax credit equivalent to the sales, compensating and
specific taxes and duties paid on supplies, raw materials and other
products purchased.
RESTRICTIONS ON ACTIVITIES OF FOREIGN

JOINT VENTURE PARTNERS
Most of the restrictions placed on joint venture partners are basically on the types
of business which may be undertaken, and the extent of equity participation allowed in
each type of activity or business, which are drawn-up and detailed under the Foreign
Investments Negative Lists.
There has been a thorough liberalization of foreign exchange regulations in the
Philippines with the issuance by the Central Bank of the Philippines 65 Circular No. 5 in
September, 1993. Foreign exchange may be freely sold and purchased outside the
banking system. Foreign exchange receipts, acquisitions, or earnings may be sold for
pesos within or outside the banking system, or retained or deposited in foreign currency
accounts, or may be used for any other purpose, whether in the Philippines or abroad.
There are therefore no limits on the repatriation of profits, nor on the duration for
which a joint venture may be formed.
FINANCING JOINT VENTURES

Joint ventures projects in Philippine jurisdiction are financed through a
combination of equity infusion and commercial or special loans. What has become a
very popular scheme of financing joint ventures covering infrastructure projects is the
Build-Operate-Transfer (B-O-T) schemes under Rep. Act No. 6957. The Act implements
65
Officially designated as Bangko Sentral ng Pilipinas under Rep. Act No. 7653.
18
19
the declared policy of the Philippine Government to recognize the indispensable role of
the private sector as the main engine for national growth and development and provide
the most appropriate favorable incentives to mobilize private resources for the purpose.
Subsequently, Rep. Act 7718 extended the coverage and applicability of the B-OT Law not merely to "government infrastructure projects" but also to government
"development projects."
1. Schemes Recognized under the Act
The schemes now recognized under the Act are as follows:
(a) Build-Operate-and-Transfer (BOT) - A contractual arrangement
whereby the contractor undertakes the construction, including
financing, of a given infrastructure facility, and the operation and
maintenance thereof.
The BOT scheme includes a supply-and-operate situation which is
a contractual arrangement whereby the supplier of equipment and
machinery for a given infrastructure facility, if the interest of the
Government so requires, operates the facility providing in the
process technology transfer and training to Filipino nationals.
(b) Build-and-Transfer Scheme (BT) - The contractor undertakes the
construction, including financing, of a given infrastructure facility,
and its turnover after completion to the government agency or local
government unit concerned which shall pay the contractor its total
investment expended on the project, plus a reasonable rate of
return thereon.
This arrangement may be employed in the construction of
any infrastructure project including critical facilities which, for
security or strategic reasons, must be operated directly by the
Government.
(c) Build-Own-Operate (BOO) - A project proponent is authorized to
finance, construct, own, operate and maintain an infrastructure or
development facility from which the proponent as allowed to
recover its total investment, operating and maintenance costs plus
a reasonable return thereon by collecting tolls, fees, rentals and
other charges from facility users. Under this scheme, the proponent
which owns the assets of the facility may assign its operation and
maintenance to a facility operator.
A "facility operator" is defined as a company registered with
the SEC which may or may not be the project proponent, and which
is responsible for all aspects of operation and maintenance of the
infrastructure or development facility, including but not limited to the
collection of tolls, fees, rentals or charges from facility users. In
case the facility requires a public utility franchise, the facility
operator shall be Filipino or at 60% owned by Filipinos.
(d) Build-Lease-Transfer (BLT) - A project proponent is authorized to
finance and construct an infrastructure or development facility and
upon its completion turns it over to the government agency or local
government unit concerned on a lease arrangement for a fixed
period after which ownership of the facility is automatically
transferred to the government agency or local government unit
concerned.
(e) Build-Transfer-and-Operate (BTO) - The public sector contracts
out the building of an infrastructure facility to a private entity such
that the contractor builds the facility on a turn-key basis, assuming
19
20
cost overrun, delay, and specified performance risks. Once the

facility is commissioned satisfactorily, title is transferred to the
implementing agency. The private entity however, operates the
facility on behalf of the implement agency under an agreement.
(f) Contract-Add-and-Operate (CAO) - The project proponent adds to
an existing infrastructure facility which it is renting from the
government. It operates the expanded project over an agreed
franchise period. There may, or may not be, a transfer arrangement
in regard to the facility.
(g) Develop-Operate-and-Transfer (DOT) - The favorable conditions
external to a new infrastructure project which is to be built by a
private project proponent are integrated into the arrangement by
giving that entity the right to develop adjoining property, and thus,
enjoy some of the benefits the investment creates such as higher
property or rent values.
(h) Rehabilitate-Operate-and-Transfer (ROT) - An existing facility is
turned over to a private sector to refurbish, operate and maintain for
a franchise period, at the expiry of which the legal title to the facility
is turned over to the government. The term is also used to
described the purchase of an existing facility from abroad,
importing, refurbishing, erecting and consuming it within the host
country.
(i) Rehabilitate-Own-and-Operate (ROO) - An existing facility is
turned over to the private sector to refurbish and operate with no
time limitation imposed on ownership. As long as the operator is not
in violation of its franchise, it can continue to operate the facility in
perpetuity.
2. Equity Limitations for Operators
of Public Franchises
The ownership structure of the contractor of an infrastructure facility whose
operation requires a public utility franchise must be in accordance with the Constitution,
which requires at least 60% Filipino ownership.
Originally under the B-O-T Law, in the case of corporate investors in the BOT
corporation, the citizenship of each stockholder in the corporate investors shall be the
basis for the computation of Filipino equity in the said corporation. Rep. Act 7718 has
done away with the citizenship test applied to corporate investors in BOT corporations
and its variations involving operation of public facilities (e.g., BOO, BTO, CAO, DOT
and ROO).
3. Reasonable Rate of Return on Investments and
Operating and Maintenance Cost
The contractor operates the facility over a fixed term during which it is allowed to
charge facility users appropriate tolls, fees, rentals, and charges sufficient to enable the
contractor to recover its operating and maintenance expenses and its investment in the
project plus a reasonable rate of return thereon.
Republic Act 7718 defines "reasonable rate of return" as the rate of return that
reflects the prevailing cost of capital in the domestic and international markets.
4. Period Covered
The contractor transfers the facility to the government unit concerned at the end
of the fixed term which shall not exceed 50 years.
20
21
5. Financing Allowed
For the construction stage, the contractor may obtain financing from foreign
and/or domestic sources and/or engage the services of a foreign and/or Filipino
contractor.
The financing of a foreign or foreign-controlled contractor from Philippine
government financing institutions shall not exceed 20% of the total cost of the
infrastructure facility or project.
The financing from foreign sources shall not require a guarantee by the
Government or by government-owned or controlled corporation.
Projects which would have difficulty in sourcing funds may be financed partly
from direct government appropriations and/or from Official Development Assistance
(ODA) funds of foreign governments or institutions not exceeding 50% of the project
cost, and the balance to be provided by the project proponent.
6. Priority Projects
The Philippine Congress passed Joint Resolution No. 03 enumerating the
following national priority infrastructure projects:
(a) Highways, including expressways, roads, bridges, inter-changes,
tunnels and related facilities;
(b) Rail-based projects packaged with commercial development
opportunities, e.g., use of government facilities;
(c) Non-rail based mass transit facilities, navigable inland waterways
and related facilities;
(d) Port infrastructure like piers, wharves, quays, storage, handling
ferry services and related facilities;
(e) Airports, air navigation and related facilities;
(f) Power generation, distribution, electrification and related facilities;
(g) Telecommunications, backbone networks, terrestrial and satellite
facilities and related service facilities;
(h) Dams, irrigation and related facilities;
(i) Water supply, sewerage, drainage and related facilities;
(j) Tourism, educational and health infra-structure;
(k) Land reclamation, dredging and other related development
facilities;
(l) Industrial estates, regional industrial centers and export processing
zones including steel mills, iron-making and petrochemical
complexes and related infrastructure facilities and utilities;
(m) Markets, slaughterhouses and related facilities;
(n) Warehouses and postharvest facilities;
(o) Public fishports and fishponds, including storage and processing
facilities;
(p) Environmental and solid waste management-related facilities such
as collection equipment, composting plants, incinerators, landfill
and tidal barriers, among others; and
(q) Development of new townsites and communities and related
facilities.
21
22
7. Preference to Filipino Contractors

Republic Act 7718 raises the standards that must be met by Filipino contractors
in order for them to be accorded preference over foreign contractors bidding for B/T and
BLT contracts.
In order to be accorded preference, a Filipino contractor is required to submit an
equally advantageous bid with the same price and technical specifications as that of the
foreign contractor. A Filipino contractor will not be accorded preference unless his bid is
at par, on both price and technical aspects, with that of the foreign contractor.
8. Repayment Schemes
For the financing, construction, operation and maintenance of any infrastructure
project undertaken pursuant to the B-O-T Law, the contractor shall be entitled to a
reasonable return of its investment and operating and maintenance costs in accordance
with its bid proposal as accepted by the concerned contracting infrastructure agency or
local government unit and incorporated in the contract's terms and conditions.
In the case of a BOT arrangement, this repayment scheme is to be effected by
authorizing the contractor to charge and collect reasonable tolls, fees, rentals, and
charges for the use of the project facility not exceeding those proposed in the bid and
incorporated in the contract.
The government infrastructure agency or local government unit concerned shall
approve the fairness and equity of the tolls, fees, rentals, and charges except in case of
tolls for national highways, roads, bridges and public thoroughfares which shall be
approved by the Toll Regulatory Board.
The imposition and collection of tools, fees, rentals and charges shall be for a
fixed term as proposed in the bid and incorporated in the contract but in no case shall
this term exceed 50 years.
During the lifetime of the franchise, the contractor shall undertake the necessary
maintenance and repair of the facility in accordance with standards prescribed in the
bidding documents and in the contract. In the case of build-and-transfer arrangement,
the repayment scheme is to be effected through amortization payments by the
government infrastructure agency or local government unit concerned to the contractor
according to the scheme proposed in the bid and incorporated in the contract.
Republic Act 7718 also allows for the receipt by the project proponent of payment
in non-monetary terms such as land (subject, however, to constitutional limitations on
ownership of land).
9. Land Reclamation or Industrial Estates
In the case of land reclamation or the building of industrial estates, the
repayment scheme may consist of the grant of a portion or percentage of the reclaimed
land or industrial estate built, subject to the constitutional requirements with respect to
the ownership of lands only by Filipino citizens.
10. Registration with BOI
Republic Act 7718 provides that projects costing in excess of P1 Billion shall be
registered with the Board of Investments and entitled to the incentives provided under
the Omnibus Investments Code.
ANTI-TRUST AND COMPETITION LAW

The Philippine Constitution provides for the policy: "The State shall regulate or
prohibit monopolies when the public interest so requires. No combinations in restraint of
trade or unfair competition shall be allowed." 66 There are however very few detailed
66
Sec. 19, Art. XII.

22
23
legislations governing antitrust and unfair competition, nor to implement the

constitutional policy against restraint of trade or unfair competition.
The remaining unrepealed portions of Act No. 3247 (1925) merely grants the
Supreme Court and the Regional Trial Courts concurrent jurisdiction to prevent and
restrain acts of monopolies or combinations in restraint of trade, and authorizes the
Solicitor General and public prosecutors to institute proceedings to prevent and restrain
such violations. It also provides that any person who shall be injured in his business or
property by any other person by reason of anything forbidden or declared to be unlawful
under the Law shall recover threefold the damages sustained by him, and the costs of
suit, including reasonable attorney's fees.
The Revised Penal Code of the Philippines penalizes:
(a) Any person who shall enter into any contract or agreement or shall
take part in any conspiracy or combination in the form of a trust or
otherwise, in restraint of trade or commerce or to prevent by
artificial means free competition in the market;
(b) Any person who shall monopolize any merchandise or object of
trade or commerce, or shall combine with any other person or
persons to monopolize said merchandise or object in order to alter
the price thereof by spreading false rumors or making use of any
other artifice to restrain free competition in the market;
(c) Any person who, being a manufacturer, producers, or processor of
any merchandise or object of commerce or an importer of any
merchandise or object of commerce from any foreign country, either
as principal or agent, wholesale or retailer, shall combine, conspire
or agree in any manner with any person likewise engaged in the
manufacture, production, processing, assembling or importation or
such merchandise or object of commerce, or with any person not
so similarly engaged, for the purpose of making transactions
prejudicial to lawful commerce, or of increasing the market price in
any part of the Philippines.
Whenever any of the offenses described above is committed by a corporation or
association, the president and each one of the directors or managers of said corporation
or association or its agent or representative in the Philippines, in case of foreign
corporations or associations, who shall have knowingly permitted or failed to prevent the
commission of such offenses, shall be held liable as principals thereof.
PREPARATION OF ANCILLARY DOCUMENTS

When a joint venture arrangement involves the use and transfer of intellectual
property or technology, certain basic intrinsic and registration requirements are
mandated by Philippine laws.
1. Technology Transfer Agreement
Contracts or agreements entered into by and between domestic companies and
foreign companies and/or foreign-owned companies involving the: transfer of systematic
knowledge for the manufacture of a product, the application of a process; rendering of a
service, management contracts; licensing of computer softwares; and the transfer,
assignment or licensing of all forms of industrial property rights including
marketing/distributorship agreements involving the license to use foreign trademarks,
tradenames and service marks and other marks of a proprietary nature must be
registered with the Technology Transfer Registry.67
67
Sec. 1[b], Rule I, Rules of Procedures of the TTR.

23
24
The registration with the Registry will enable the remittance of royalty fees and
similar foreign exchange obligations arising from a technology transfer arrangement.
Under Central Bank Circular No. 1062, parties to the technology transfer
arrangement can purchase foreign exchange from a bank to cover royalty remittances
only when the bank is shown the certificate of registration with the Technology Transfer
Board.
2. Parties to the Agreement
The Rules provide that the term "domestic company" refers to an enterprise,
partnership, corporation, branch or other form of business organization, formed,
organized, chartered or existing under the laws of the Philippines. The foreign company
would include:
(a) A foreign company or an alien enterprise or foreign firm,
association, partnership, corporation or any form of business
organization not organized or existing under the laws of the
Philippines;
(b) A foreign-owned company which refers to an enterprise,
partnership, corporation, or any form of business organization
formed, organized, chartered or existing under the laws of the
Philippines, the majority of the outstanding capital of which is
owned by aliens.
3. Restrictive Business Clauses
Under the Rules, the following clauses are not allowed in any technology transfer
arrangement in view of their restrictive nature:
(a) Clauses which restrict directly or indirectly the export of the
products manufactured by the technology recipient, unless justified
for the protection of the legitimate interest of the technology
supplier and the technology recipient;
(b) Restrictions on the use of the technology supplied after expiration
of the arrangements; provisions which restrict the manufacture of
similar or competing products after expiry of the arrangement; and
provisions requiring the continued payment for patents and other
industrial property rights after their expiration, termination or
invalidation;
(c) Provisions providing that the technology recipient will not contest
the validity of any of the patents being licensed under the
arrangement;
(d) Provision which prohibit the technology recipient in a non-exclusive
technology transfer arrangements from obtaining patents or
unpatented technology from other technology suppliers with regard
to the sale or manufacture of competing products;
(e) Contracts which contain provisions requiring the technology
recipient to purchase its raw materials, components and equipment
exclusively, or a fixed percentage of the supply requirement, from
the technology supplier or a person designated by him;
(f) Clauses which restrict the R&D activities of the technology recipient
designated to absorb ad adapt the transferred technology to local
conditions; provisions which prevent the technology recipient from
adapting the imported technology to local conditions, or introducing
innovations to it, as long as it does not impair the quality standards
prescribed by the technology supplier;
24
25
(g) Provisions requiring the technology recipient to keep part or all of

the information received under the arrangement confidential
beyond a reasonable period; and
(h) Provisions which exempt the technology supplier from liability for
non-fulfillment of his responsibilities under the arrangement and/or
liability arising from third party suits brought about the by use of the
licensed products or licensed technology.
4. Governing Law
Under the Rules, the governing law under a technology transfer arrangement
shall be Philippine laws in the interpretation of the contract, and in the event of litigation,
the venue shall be the proper courts in the place where the technology recipient has its
principal office.
5. Duration of the Contract
Under the Rules, the term of the agreement shall not exceed 10 years with no
automatic renewal. However, indefinite term may be allowed for royalty-free agreements
and arrangement for the outright purchase of technology.
6. Warranty/Guarantee Provisions
Under the Rules, a warranty from the technology supplier is required reflecting
that the technology, if used in accordance with the specific instructions of the technology
supplier, is suitable for the manufacture of the licensed products or for the extension of
services pursuant to the technology transfer arrangement.
7. Royalty
Except for pure trademark licensing agreements where a maximum royalty fee of
1% of net sales is allowed, the Rules do not prescribe any ceiling on the rate of fees
due under a technology transfer arrangement. However, the rate is subject to evaluation
by the Registry based on set criteria in the Rules.
8. Incentives
A bonus royalty of 2% of net foreign exchange earnings can be availed of by a
supplier who commits to an export development program to assist the recipient to
penetrate the export market for the first time.
DISPUTE RESOLUTION
Outside of judicial remedies, parties to a joint venture arrangement are
authorized to submit their controversies to arbitration, 68 or they can provide as part of
their joint venture arrangements that all issues and controversies shall be resolved by
arbitration through a procedure drawn out in the joint venture contract. The stipulation
on arbitration can validly provide that the resolution or decision of the board of
arbitrators is valid and final.69
When the parties to a contract have a provision requiring arbitration in case of
disputes, no party may seek remedy from the courts of law. However, should a case be
filed in court without having resorted to prior arbitration, the court will not dismiss the
case; instead the court will refer the matter to the arbitrators. 70
68

70
Bengson v. Chan, 78 SCRA 113 (1977).
69
25
26
In case there is a provision for arbitration, and one party refuses to arbitrate, the
other party may, through a summary court proceeding, enforce the arbitration provisions
of their contract; but the court is without authority to resolve the issues on the merits. 71
1. Arbitration Law
The special or particular law governing arbitration stipulation and proceedings is
Republic Act No. 876 (1953), formally designated as "The Arbitration Law."
a. Persons and Matters Subject to Arbitration
Under the said Law, two and more persons or parties may submit to the
arbitration of one or more arbitrators any controversy existing, between them at the time
of the submission and which may be subject of an action, or the parties to any contract
may in such contract agree to settle by arbitration a controversy thereafter arising
between them.
Such submission or contract shall be valid, enforceable and irrevocable, save
upon such grounds as exist at law for the revocation of any contract. Also, such
submission or contract may include questions arising out of valuations, appraisals or
other controversies which may be collateral, incidental, precedent or subsequent to any
issue between the parties.
b. Form of Arbitration Agreement
A contract to arbitrate a controversy thereafter arising between the parties, as
well as a submission to arbitrate an existing controversy shall be in writing and
subscribed by the party sought to be charged, or by his lawful agent. The making of a
contract or submission for arbitration shall be deemed a consent of the parties to the
jurisdiction of the Regional Trial Court of the province or city where any of the parties
resides, to enforce such contract or submission.
c. Appointment of Arbitrators
If, in the contract for arbitration or in the submission to arbitration, provision is
made for a method of naming and appointing arbitrators, such method shall be followed;
but if no method be provided therein, it is the Regional Trial Court that shall designate
an arbitrator or arbitrators.
The Arbitration Law provides specifically for the procedure of arbitration,
qualification of arbitrators, challenge of arbitrators, hearing by arbitrators, rendering of
awards and the form and contents of award, confirmation of award, grounds for
vacating, modifying or correcting awards, and appeals procedure.
2. Facilities for Commercial Arbitrations
The Philippine Chamber of Commerce and Industry, as a service to its members
and in response to request for assistance to provide arbitration facilities and services to
parties to a commercial dispute, has adopted its own Rules on Conciliation and
Arbitration.
In the construction industry, The Philippine Domestic Construction Board was
created under Pres. Decree No. 1476 "to adjudicate and settle claims and disputes in
the implementation of public construction contracts" and to "formulate and recommend
rules and procedures for the adjudication and settlements of claims and disputes in the
implementation of contracts in private construction." Subsequently, the Philippine
Construction Industry Arbitration Commission (CIAC) was constituted under Executive
order No. 1008, giving it original and exclusive jurisdiction over claims and disputes
arising from or connected with public and private constructions contracts in the
Philippines.
71
Mindanao Portland Cement Corp. v. McDonough, 19 SCRA 808 (1967).

26
27
3. New York Convention

In 1965, the Philippines adhered, 72 to the 1958 United Nations Convention on the
Recognition and Enforcement of Foreign Arbitral Awards, otherwise known as the New
York Convention. The Convention seeks to make arbitral awards rendered in a foreign
state enforceable in any state which is a party to the Convention.
IMPACT OF CHANGES IN THE LAW SUBSEQUENT TO FORMATION

The general rule under Philippine laws is that subsequent changes in the law,
such as the introduction of new incentives or abolition of existing incentives, is within the
power of Legislature to so provide even as it affects existing enterprises, including joint
ventures.
This rule emanates from constitutional doctrines that provide that even with a
guarantee of non-impairment of contract obligations, it does not prevent changes of
rights of parties to a contract only as between them, and not with reference to thirdparties, including the State. More importantly, Section 11, Article XII of the Philippine
Constitution provides for a reservation clause in favor of the Government to revoke or
amend existing grants and privileges, including incentives granted to investors: "Neither
shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common good so
requires."
DOUBLE TAXATION AGREEMENTS AND

IMPACT ON THE JOINT VENTURE
As of 20 November 1995, the Philippines had tax treaties in force with the
following countries: Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland,
France, Germany, Indonesia, Italy, Japan, Korea, Malaysia, Netherlands, New Zealand,
Norway, Pakistan, Singapore, Spain, Sweden, Thailand, United Kingdom, and the
United States.
The tax treaties reduce the effects of double taxation and provide for certain
favorable tax benefits.
For example, although under the Philippine National Internal Revenue Code,
royalty payments are subject to a final 20% tax, pursuant to the tax treaty with the
United States, royalties paid to a U.S. corporation are subject to only 10% withholding
tax.
Another illustration, under certain conditions, the sale of shares of stock in a
domestic corporation by a Swedish corporation is tax-exempt. Fees paid to a Japanese
corporation for the dispatch of its personnel to provide technical assistance to a
domestic corporation pursuant to a technical assistance agreement constitute "royalties"
subject to the 10% withholding tax under the RP-Japan tax treaty.
Gains to be realized by a U.S. citizen from the transfer of his shares of stock in a
domestic corporation are taxable only in the U.S. The royalty fees paid to a U.S.
corporation pursuant to software license agreement are subject to only 10% tax under
the most-favored-nation clause of the RP-US tax treaty.
Finally, gains realized by a US-based firm not doing business in the Philippines
from all its outstanding shares of stock in its local subsidiary are taxable only in the U.S.
under the RP-US tax treaty.
72
Senate Resolution No. 71 (May, 1965).

27
28
PROTECTION OF FOREIGN INVESTORS

The following are basic guarantees under the Philippine Constitution as
protection to foreign investors:
(a) Freedom from expropriation without just compensation;
(b) Right to remit profits, capital gains and dividends within the
guideline of the Central Bank of the Philippines;
(c) Right to obtain foreign exchange to meet principal and interest
payments on foreign obligations.
oOo
APPENDIX C-LAW ON JOINT VENTURES\06-22-2001
28

CLV Joint Ventures

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

CLV Joint Ventures

Transféré par

Droits d'auteur :

Formats disponibles

PHILIPPINE LAW GOVERNING JOINT

The original paper was submitted by the author to the CENTER

Impact of Changes in Law Subsequent to Formation

Art. 1306, Civil Code.

. . . The main distinction cited by most opinions in common law

Since a joint venture is a species or a special type of partnership, it would have

Art. 1783, Civil Code.

the purpose of undertaking construction projects or engaging in petroleum, coal,

ALTERNATIVE LEGAL FORMS IN STRUCTURING A JOING VENTURE

Sec. 22(B), NIRC of 1997.

The foregoing rules of resolution are based on the well-established doctrine

ASPECTS WHICH INFLUENCE CHOICE OF LEGAL FORM

Government of the P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).

GOVERNING LAW AND LANGUAGE

Sec. 25(A)(1), NIRC of 1997

DEFINING JOINT VENTURES SCOPE OF BUSINESS ACTIVITY

The salient points of FIA '91 are the following:

(c) Retail trade;42

Sec. 11, Art. XVI, Constitution.

25% FOREIGN EQUITY ALLOWED:

Art. 27, Labor Code.

(b) Domestic market enterprises certified by the DOST as involving

c. Qualifications to Do Business in the Philippines

g. Effects of Non-Compliance with

Section 14, FIA 91.

(ii) Yearly Requirement of Posting of Additional Securities

(iii) Appointment of Resident Agent

INCENTIVES AVAILABLE TO FOREIGN JOINT VENTURE PARTNERS

Art. 144, Corporation Code; Sec. 14, Rep. Act 337.

3. Incentives of Export Processing Zone Enterprise:

RESTRICTIONS ON ACTIVITIES OF FOREIGN

FINANCING JOINT VENTURES

cost overrun, delay, and specified performance risks. Once the

7. Preference to Filipino Contractors

ANTI-TRUST AND COMPETITION LAW

Sec. 19, Art. XII.

legislations governing antitrust and unfair competition, nor to implement the

PREPARATION OF ANCILLARY DOCUMENTS

Sec. 1[b], Rule I, Rules of Procedures of the TTR.

(g) Provisions requiring the technology recipient to keep part or all of

Art. 2042, Civil Code.

Mindanao Portland Cement Corp. v. McDonough, 19 SCRA 808 (1967).

3. New York Convention

IMPACT OF CHANGES IN THE LAW SUBSEQUENT TO FORMATION

DOUBLE TAXATION AGREEMENTS AND

Senate Resolution No. 71 (May, 1965).

PROTECTION OF FOREIGN INVESTORS

APPENDIX C-LAW ON JOINT VENTURES\06-22-2001

Vous aimerez peut-être aussi