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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
overning Laws and Language
Freedom to Contract! In eneral
Formal or "#trinsic Validit$ of Agreements
Capacit$ of Contract Parties
Intrinsic Validit$
Language of Joint Venture Agreements
%efining Joint Ventures Scope of &usiness Activit$
Foreign Investment Act of '(('
"sta)lishing a Corporate Vehicle
Procedure in "sta)lishing a Corporate Vehicle
%oing &usiness in the Philippines
overning Law
*hat Constitutes %oing &usiness
+ualifications to %o &usiness in the Philippines
,egistration under FIA -('
S"C ,egistration
Additional ,e.uirements
"ffects of Non/Compliance with FIA 0(' ,e.uirements
S"C License for Foreign Corporations %oing &usiness
S"C ,e.uirements
Issuance of License
,e.uirements 1pon Issuance of S"C License
"ffects of Failure to Secure S"C License to %o &usiness )$ Foreign Corporation
Incentives Availa)le to Foreign Joint Venture Partners
Preferred Areas of Investments 2&3I ,egistered and with Incentives4
Non/Preferred Area Investor2Investment *ithout Incentives4
Incentives of "#port Processing 5one "nterprises
,estrictions on Activities of Foreign Joint Venture Partners
Financing Joint Ventures
Schemes ,ecogni6ed under the Act
".uit$ Limitations for 3perators of Pu)lic Franchises
,easona)le ,ate of ,eturn on Investments and 3perating and 7aintenance Cost
Period Covered
Financing Allowed
Priorit$ Pro8ects
Preference to Filipino Contractors
,epa$ment Schemes
Land ,eclamation or Industrial "states
,egistration with &3I
Antitrust and Competition Law
Preparation of Ancillar$ %ocuments
9echnolog$ 9ransfer Agreement
Parties to Agreements
,estrictive &usiness Clauses
overning Law
%uration of Contract
*arrant$:uarant$ Provisions
,o$alt$
Incentives
%ispute ,esolutions
Ar)itration Law
Persons and 7atters Su)8ect to Ar)itration
Form of Ar)itration Agreement
Appointment of Ar)itrators
Facilities for Commercial Ar)itration
New ;or< Convention
Impact of Changes in Law Su)se.uent to Formation
%ou)le 9a#ation 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 !overnment encourages the pursuit of construction projects and petroleum
operations under joint venture arrangements "nder the #ational Internal $evenue %ode of 1&&' of the
Philippines (#I$%), joint ventures formed for the purpose of engaging in petroleum operations pursuant to
operating agreements under a service contract with the !overnment, or those formed for the purpose of
undertaking construction projects, are e*empt from corporate income ta*
1
The original paper was submitted by the author to the CENTER FOR INTERNATIONAL LEGAL
STUDIES based in Salzburg, Austria, as part of its international publication.
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
fle*ibility 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 %orporation
%ode and jurisprudence on Philippine %orporate +aw
FORMATION AGREEMENT:
NATURE OF JOINT VENTURES IN PHILIPPINE SETTING
,here is no statutory provision that recogni-es or governs directly joint ventures, although they
have been recogni-ed in jurisprudence and commonplace in commercial ventures %onse.uently, joint
venture arrangements fall generally within the realm of the +aw on %ontracts, and particularly within the
applicable provisions of the +aw on Partnership, both of which are governed under the %ivil %ode of the
Philippines
/ince 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 /ecurities and 0*change %ommission (/0%), 1oard of Investments (12I), or any other
authority
,he prevailing school of thought in the Philippines is that a joint venture is a species of
partnership 1y specific statutory provision when 3two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits among
themselves,3 then a partnership is created by definition of law
4
,he main distinction between an ordinary
partnership and a joint venture is that the ordinary partnership is organi-ed for general business venture and
does not have a definite term of e*istence5 whereas a joint venture is organi-ed for a specific project or
undertaking
,he Philippine /upreme %ourt has adopted 1lack6s definition of a joint venture, thus7 3Joint
venture is defined as an association of persons or companies jointly undertaking some commercial
enterprisegenerally all contribute assets and share risks It re.uires 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 losses3
8
,he foregoing definition of a joint venture essentially falls within the statutory definition of what
constitutes a partnership 2ther reasons on why a joint venture must be considered a species of partnership
is that the +aw on Partnership provides that 39 partnership may be constituted in any form, e*cept where
immovable property or real rights are contributed, thereto, in which case a public instrument shall be
necessary3
:
,hat 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 +aw on Partnership recogni-es that in the Philippines a partnership may either be
universal or particular
;
9 universal partnership of profits comprises all that the partners may ac.uire by
their industry or work during the e*istence of the partnership
<

9 particular partnership has for its object determinate things, their use or fruits, or specific
underta<ing, or the e*ercise of a professional or vocation
'
%learly, 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
=inally, the position that a joint venture is a species of partnership has been upheld in Aur)ach v=
Sanitar$ *ares 7anufacturing Corp=,
>
where the /upreme %ourt held that7
= = ,he 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
e*ecution of a single transaction, and is thus of a temporary nature ,his
observation is not entirely accurate in this jurisdiction, since under the %ivil
%ode, a partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking
&
It would seem
1
Art. 1306, i!il ode.
"
Art. 1#6#, i!il ode.
3
Kilosbayan, Inc. v. Guingona, "3" S$A 110, 1%3&1%%, %1 SA' 6#1 (1))%*, citing
+,A-.S ,A/ '0T012A$3.
%
Art. 1##1, i!il ode.
4
Art. 1##6, i!il ode.
6
Art. 1#50, i!il ode.
#
Art. 1#53, i!il ode.
5
150 S$A 130 (1)5)*.
)
Art. 1#53, i!il ode.
"
therefore that under Philippine law! a 8oint venture is a form of partnership
and should thus )e governed )$ the laws of partnership=
1?
/ince a joint venture is a species or a special type of partnership, it would have the following
characteristics of partnership7
(a) It would have a juridical personality separate and distinct from that of each of the
joint-venturers 9rticle 1'<>, %ivil %ode 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 re.uirements
of law ,herefore, a joint venture as a firm can enter into contract and own
properties in the firm6s name5
11

(b) 0ach of the co-venturers would be liable with their private property to the
creditors of the joint venture beyond their contributions to the joint venture5
(c) 0ven 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 ,his is in consonance with the delectus personarium principle
applicable to partnerships5
(d) !enerally, the co-venturers acting on behalf of the joint venture are agents
thereof as to bind the joint venture5 and
(e) @eath, retirement, insolvency, civil interdiction or dissolution of a co-venturer
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 "nited /tates that a
corporation cannot ordinarily enter into partnerships with other corporations or with individuals ,he 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
,he 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
14
9uason v= &ola>os,
18
recogni-ed in Philippine jurisdiction the doctrine in 9nglo-9merican
jurisprudence that 3a corporation has no power to enter into a partnership3 #evertheless, 9uason
recogni-ed that a corporation may validly enter into a joint venture agreement, 3where the nature of that
venture is in line with the business authori-ed by its charter3
1:

9lthough 9uason does not elaborate on why a corporation may become a co-venturer 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 1eing 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 e*ercise their own business judgment is determining the e*tent by which the
corporation would be involved in the project and the likely liabilities to be incurred ,he situation therefore
in a joint venture arrangement, unlike in an ordinarily partnership arrangement which may e*pose 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
,he previous ruling of the /0% 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
authori-ed agents and officers, which is entirely inconsistent with the policy of the law that the corporation
shall mange its own affairs separately and e*clusively
1;

+ater, the /0% provided for a clear e*ception to the foregoing ruling, and allowed corporations to
enter into partnership arrangement, provided the following conditions are met7
1<
10
Ibid; emphasis supplied.
11
cf Art. 1##%, i!il ode.
1"
+A6T0STA, T$7AT0S7 12 890,088027 8A$T27$S908 ,A/, 1)#5 7d., at p. ).
13
)4 8hil. 106 (1)4%*.
1%
Ibid, quoting from Wyoming-Indiana Oil Gas o. v. Weston, 50 A.,.$., 10%3, citing
:letcher yc. of orp., 105"*.
14
S7 1pinion, "" 'ecember 1)66, S7 :1,01 1)60&1)#6, at p. "#5; citing 6 :,7T97$
3. 1$8., 8erm. 7d. $e!. $epl. 1)40, Sec. "4"0.
16
S7 1pinion, ") :ebruary 1)50; S7 1pinion, dated 3 September 1)5%. 6nder Sec. 1)"
of the 2AT012A, 02T7$2A, $7<7267 1'7, documentary stamps of 814.00 must be affi=ed on
each pro=y.
3
(a) ,he authority to enter into a partnership relation is e*pressly 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
authori-ed by the charter or articles of incorporation5
(b) ,he 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
partnership5
(c) If it is a foreign corporation, it must obtain a license to transact business in the
country in accordance with the %orporation %ode of the Philippines
In one opinion, the /0% clarified that the conditions imposed meant that since the partners in a
partnership of corporations are re.uired 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 organi-ed as a Ageneral partnershipB
1'
+ately, the /0%, reali-ing 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 Athere is no e*isting Philippine law that e*pressly prohibits a
corporation from becoming a limited partner in a partnershipB In effect, the /0% dropped the second
condition imposed previously
1>
In the field of ,a*ation, both a partnership and a joint venture are treated as corporate ta*payers,
and both are subject to corporate income ta*, e*cept that under the #ational Internal $evenue %ode of
1&&', 3a joint venture or consortium formed for 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 !overnment,3 shall not be ta*ed separately as a
corporate ta*payer
1&
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 e.uity joint venture, by partnership
arrangement, or contractual joint venture ,he /0% has ruled that generally, a joint venture agreement of
two corporations need not be registered with the /0%, provided it will not result in the formation of a new
partnership or corporation Cowever, should there be an intention to ac.uire a separate ,a* Identification
#umber (,I#) from the 1ureau of Internal $evenue for the business venture, the same re.uires registration
with the /0% in order to have a separate legal personality to obtain a separate ,I#
4?

%o-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
e*ecuted between them
0.uity 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 0.uity joint venture may also be pursued where a
co-venturer is allocated the agreed shares of stock in an e*isting corporation, either from new issuances of
the capital stock of the e*isting corporation, or sold shares from those already issued in the names of the
other co-venturers
In e.uity 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
9 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
,he /0% 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 authori-ed by their charters, which
contract need not be registered with the /0%5 provided, however that the joint venture will not result in the
formation of a new partnership or corporation
41

1#
S7 1pinion, "3 :ebruary 1))%, >><000 S7 ?6A$T7$,3 +6,,7T02 15 (2o. 3, Sept.
1))%*.
15
S7 1pinion, 1# August 1))4, >>> S7 ?6A$T7$,3 +6,,7T02 5 (2o. 1, @une 1))6*.
1)
Sec. ""(+*, 20$ of 1))#.
"0
S7 1pinion, 30 Aarch 1))4, >>0> S7 ?6A$T7$,3 +6,,7T02 3" (2o. 3, Sept. 1))4*.
"1
S7 1pinion, ") April 1)54, S7 A226A, 1802012S 1)54, at p. 5).
%
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
follows7
(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
prevail5
(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
,he foregoing rules of resolution are based on the well-established doctrine under Philippine
%orporate +aw that the articles of incorporation is a basic contract document defining the charter of the
corporation ,he articles of incorporation is characteri-ed as a contract between and among three parties7
(a) between the /tate and the corporation5 (b) between the stockholders and the /tate5 and (c) between the
corporation and its stockholders
44

In addition, although the joint venture agreement may contain rules on management and control of
the joint venture corporation, it does not authori-e the joint-venturers, as e.uity owners, to override the
business management of the corporate affairs of the joint venture corporation by its board of directors 9ny
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
,he most important aspects in choosing the form to pursue joint venture arrangement would be the
issues of limited liability, ta* conse.uences, and limitation of foreign e.uity is specified areas of
investments or activities
,he contractual joint venture has the advantage of limiting the e*tent of the arrangement between
and among the joint-venturers, as in undertakings that re.uire privacy In addition, since formal joint
ventures are ta*ed as corporate ta*payer, the contractual joint venture lessens the need to have to register
the project as a separate corporate ta*payer, since the private arrangements should allow the joint-venturers
to continue reporting separately their participation in the project in their own ta* returns 2n 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 !overnment is usually made because the joint venture itself would not be subject
to corporate income ta* liabilities under the #I$%
,he 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 ,he corporate entity route also allows the joint-venturers to take
advantage of -ero rate ta*ability of dividends declared by corporations
In the Philippines, the corporation has traditionally been subjected to heavier ta*ation than other
forms of business organi-ation5 dividends distributed are subject to another ta* when received by the
stockholders Dith the trust of !overnment 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 ta* laws
that tended to make corporate vehicles e*pensive have been abolished 0*cept for dividends declared by
domestic corporation in favor of foreign corporation,
48
dividends received by individuals from
corporation,
4:
as well as inter-corporate dividends between domestic corporations,
4;
are subject to -ero rate
of income ta*ation ,here has also been an abolition of the personal holding companies ta* and ta* on
unreasonably accumulated surplus of corporations
4<

+ately, however, under the reforms embodied in the #I$% of 1&&', a final ta* of 1?E has been re-
imposed on dividends received by residents and citi-ens declared from corporate earnings after 1 January
1&&>5
4'
a final ta* of 4?E on dividends received by a nonresident alien individual has been re-imposed
""
Government of the !.I. v. "anila #ailroad o., 4" 8hil. 6)) (1)")*.
"3
Sec. "4(a* and (b*, 20$ of 1)##.
"%
Sec. "1, 20$ of 1)##.
"4
Sec. "%, 20$ of 1)##.
"6
7=ecuti!e 1rder 2o. 3# (1)56*.
"#
Sec. "%(+*("*, 20$ of 1))#.
4
from corporate earnings after 1 January 1&&>5
4>
and the ta* on improperly accumulated earnings has
likewise been re-imposed
4&

,he 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 -ero-rate of dividends for corporation, when
the partnership declares and distributes profits ,he aspect of double ta*ation looms largely in a partnership
joint venture arrangement, since partnerships are subject to the 84E net income ta* for corporations
#evertheless, joint ventures formed for the purpose of undertaking construction projects
8?
and those formed
to engage in petroleum operations pursuant to an operating agreement under a service contract with the
!overnment,
81
are e*empt from corporate ta*ation
GOVERNING LAW AND LANGUAGE
/ince joint venture arrangements are governed primarily by the +aw on %ontracts, the following
rules would be relevant to joint ventures
1. Freedom to Contr!t" In Gener#
,he Philippine %onstitution prohibits any law impairing the obligation of contracts
84
,he
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
88

%ontracts generally are perfected by mere consent, and from that moment the parties are bound
not only to the fulfillment of what has been e*pressly stipulated but also to all the conse.uences which,
according to their nature, may be in keeping with good faith, usage and law
8:
Joint venture arrangements
are therefore generally binding on the joint-venturers in whatever form they were constituted
$. Form# or E%tr&n'&! V#&d&t( o) A*reement'
Philippine laws recogni-e the principle that the formal or e*trinsic validity of contracts, including
a joint venture arrangement, shall be governed by the laws of the country in which they are e*ecuted
8;
,herefore, joint venture arrangements, which are essentially partnership agreements, are valid in whatever
form e*ecuted
+. C,!&t( o) Contr!t Prt&e'
,he capacity of the parties to enter into a joint venture agreement is generally governed by their
national law
8<
Cowever, in case of joint venture agreements covering the alienation or encumbrance of
properties, both real and personal, located in the Philippines, the capacity of the parties is governed under
Philippine laws
8'
-. Intr&n'&! V#&d&t(
,he intrinsic validity of a joint venture agreement, as in all contracts in general e*ecuted in the
Philippines, including consideration or cause thereof, the interpretation or constructions of its provisions,
and the nature and amount of damages for breach thereof, are governed by the law voluntarily agreed upon
by the parties ,he parties to a joint venture arrangement can therefore validly stipulate which laws shall
govern their arrangement
Cowever, any stipulation in the joint venture agreement cannot operate to oust Philippine courts of
their jurisdiction under the law, although the local courts would still apply the laws chosen by the parties to
the agreement
8>
9lthough the parties to a contract, including a joint venture arrangements, are granted liberty
under Philippine laws to stipulate on governing laws, including the laws of another country, nevertheless,
Philippine restrictive laws, on ta*es and prohibition on foreign e.uity in some business areas or activities
"5
Sec. "4(A*(1*, 20$ of 1))#
")
Sec. "), 20$ of 1))#.
30
8res. 'ecree )") (1)#6*.
31
8res. 'ecree 165".
3"
Sec. 10, Art. 000.
33
Art. 1306, i!il ode.
3%
Art. 1314, i!il ode.
34
Art. 1#, i!il ode.
36
Art. 14, i!il ode.
3#
Art. 16, i!il ode.
35
"olina v. $e la #iva, 6 8hil. 1" (1)06*; ompanie de ommerce v. %amburg-&meri'a, 36
8hil. 4)0 (1)1#*.
6
are likely to be imposed as mandatory if suit is brought before a local forum seeking any remedy under the
joint venture arrangement
.. Ln*/*e o) Jo&nt Vent/re A*reement'
,here are likewise no restrictions on the language in which a document or contract may be
e*ecuted, since the language does not go into the validity or enforceability of the agreement #evertheless,
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
"nder /ection 88, $ule 184 of the Philippine $ules of %ourt, documents written in an unofficial
language shall not be admitted as evidence, unless accompanies with a translation into 0nglish or =ilipino
"nder the 1&>' %onstitution of the Philippines, the official languages are =ilipino and, until otherwise
provided by law, 0nglish
8&
Fost, if not practically all, contracts and agreements in Philippine setting are drawn-up and
e*ecuted in 0nglish, since it is the official and dominant language of commerce and the judiciary
DEFINING JOINT VENTURES SCOPE OF 0USINESS ACTIVIT1
,he 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 e.uity and foreign management and control on certain restricted areas or activities
1. Fore&*n In2e'tment A!t o) 1331
$epublic 9ct '?:4, known as the 3=oreign Investment 9ct of 1&&13 or 3=I9 6&13, 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 1y the negative list scheme, the 9ct simply established the restricted areas, and declared all
other areas as open to unlimited foreign e.uity participation
0ssentially, the =I9 G&1 provides for foreign investment negative list which spells out the activities
reserved for Philippine national 0*port enterprises may enter all activities not restricted by +ists 9 and 1
of the negative list, and domestic enterprises, with foreign e.uity, may enter all activities not restricted by
+ists 9, 1, and % of the negative list
,he salient points of =I9 6&1 are the following7
(a) "nder the concept of a negative list, more areas are open to foreign investments,
and investment policy is made transparent and stable5
(b) ,he law redefined 3e*port enterprise3 to mean at least <?E e*port (from the
former '?E e*port level)
(c) It opened the domestic economy to 1??E foreign investments e*cept for those in
the negative lists
(d) 2ne layer of bureaucracy is reduced because there is no need for 1oard of
Investments (12I) approval if the investor is not seeking incentives
,he criteria for the negative list are the following7
L&'t A covers area of investment in which foreign ownership is limited by the %onstitution and
nationali-ation laws, as follows7
NO FOREIGN E4UIT1 ALLOWED 7
(a) Fass media ownership and management5
:?
(b) +icensed professions, like lawyers, accountants, and engineers5
:1
(c) $etail trade5
:4
(d) =isheries5 and
(e) $ice and corn farming
:8
3)
Sec. #, Art. >0<.
%0
Sec. 11, Art. ><0, onstitution.
%1
Sec. 1%, Art. >0<, onstitution.
%"
$ep. Act 2o. 1150. $etail Trade has been liberalized under $ep. Act 2o. 5#6", otherwise
Bnown as the $etail Trade ,iberalization Act of "000.
%3
$ep. Act 2o. 3015; 8res. 'ecree 1)%.
#
$.5 FOREIGN E4UIT1 ALLOWED :
(a) $ecruitment agencies5
::
and
(b) +ocally funded public works project
:;
+65 FOREIGN E4UIT1 ALLOWED :
(a) 9dvertising
:<
-65 FOREIGN E4UIT1 ALLOWED 7
(a) 0*ploitation of natural resources and utili-ation of land ownership5
:'
(b) Public utilities5
:>
(c) 0ducational institutions5
:&
(d) =inancing companies5
;?

(e) %onstruction
;1
(f) %ooperatives5
;4
(g) Private security agencies5
;8
and
(h) /mall-scale mining
;:
"nder the $etail ,rade +iberali-ation 9ct of 4???,
;;
the retail trade industry has been liberali-ed to
accommodate foreign investments and foreign direct participation %urrently, foreigners are e*cluded only
in retail enterprises with paid-up capita of less than "/H4,;??,????? (%ategory 9) which is resecured
e*clusively for =ilipino citi-ens and corporations wholly-owned by =ilipino citi-ens
L&'t 0 covers defense-related materials which by law are licensed and regulated by the
@epartment of #ational @efense, unless specifically authori-ed, with substantial e*port, by the /ecretary of
#ational @efense =or e*ample, :?E foreign e.uity is allowed manufacture, repair storage andIor
distribution of e*plosives, munitions, and armaments
;<

L&'t 0 also includes activities regulated by law because of risks they may pose to public health
and morals =or e*ample, dangerous drugs, gambling, nightclubs, bars, and message clinics are not open for
foreign investments
;'
9 third area under the negative L&'t 0 refers to domestic market enterprises with less than
"/H4??,??? paid in e.uity capital, unless determined by the @epartment of /cience and ,echnology as
involving advanced technology
=inally, the negative L&'t 0 also includes e*port enterprises using raw materials from depleting
natural resources and with less than "/H4??,??? paid in e.uity capital
,he following therefore are covered under +ist 1 and would be open to 1??E foreign e.uity
investments7
(a) Fanufacture and repair of firearms and similar defense-related material with
substantial e*port component and with specific authori-ation from the /ecretary
of #ational @efense
(b) @omestic market enterprises certified by the @2/, as involving advanced
technology even if the paid-in e.uity capital is less than "/H4??,???
(c) 0*port enterprises that use raw materials from depleting natural resources but
with paid-in capital of at least "/H4??,???
L&'t C enumerates 3ade.uately-served areas3 ,he criteria to determine 3ade.uately served 3areas
of economic activity are the following7
%%
Art. "#, ,abor ode.
%4
omm. Act 2o. 4%1; 8res. 'ecree 14)%; ,10 630.
%6
Sec. 11, Art. ><0, onstitution.
%#
Sec. ", Art. >00, onstitution.
%5
Sec. 11, Art. >00, onstitution.
%)
Sec. %, Art. >0<, onstitution; +atas 8ambansa +lg. "3".
40
$ep. Acts 2os. %466 and 4)50.
41
$ep. Act 2o. 4153.
4"
$ep. Act 2o. 6)35.
43
$ep. Act 2o. 4%5#.
4%
$ep. Act 2o. #0#6.
44
$ep. Act 2o. 5#6" (Aarch, "000*.
46
$ep. Act 2o. #0%".
4#
$ep. Act 2o. #0%".
5
(a) ,he industry is controlled by firms owned at least <?E by =ilipinos5
(b) Industry capacity is ample to meet domestic demand5
(c) /ufficient competition e*ists within the industry5
(d) Industry products comply with Philippine standards of health and safety or, in the
absence of such, with international standards, and are reasonably competitive
.uality with similar products in the same price range imported into the country5
(e) Juantitative restrictions are not applied on imports of directly competing
products5
(f) Industry leaders comply with environmental rules5 and
(g) ,he prices of industry products are reasonable
,he transitory Ne*t&2e L&'t C has already been scrapped under 0*ecutive 2rder #o 1>4 which
established the regular =oreign Investment #egative +ist, and took effect last 2ctober, 1&&: 9here is in
effect no longer Negative List C
E't7#&'8&n* Cor,orte Ve8&!#e
Fere investment by foreign entities into a joint venture company would be covered by the rules on
foreign e.uity allowance under =I9 6&1 ,he registration of the joint venture company itself would be
similar to the normal registration re.uirements of the /0% on the organi-ation, formation and registration
of a domestic corporation
In addition, if aside from e.uity 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 /0%
1. Pro!ed/re &n E't7#&'8&n* Cor,orte Ve8&!#e
9side from the =I9 6&1, the are %orporation %ode provisions and /0% rules and regulations that
must be complied with in setting-up the joint venture company
/ection 1? of our %orporation %ode re.uires the incorporators of a corporation to be not less than
five (;) natural persons, majority of whom must be residents of the Philippines ,his re.uirement is
mandatory even to 1??E foreign-owned corporations /ince the %ode 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 corporation6s capital stock
,he %ode sets the limit to the number of directors to not less than five (;) nor more than fifteen
(1;) /ection 48 of the %ode, moreover, re.uires every director to own at least one (1) share of the capital
stock of the capital stock of the corporation /aid section of the %ode also re.uires majority of the directors
to be residents of the Philippines Cowever, the /0% does not insist on majority residency re.uirements for
directors when the domestic corporation is 1??E foreign-owned
9lien incorporators and subscribers who are residents must furnish provide any of the following7
their immigration certificate of residence, special investor6s resident visa and any kind of visa valid for at
least one (1) year
"nder /0% regulations, an alien may be appointedIelected as treasurer only if he is a resident of
the Philippines
Dhen a joint venture company is to be registered with foreign e.uity, the following re.uirements
are imposed by the /0%7
(a) 9ll subscriptions of foreign incorporators to be fully paid If they will not be fully
paid, the =ilipino incorporators must e*ecute an undertaking to pay for the
unpaid subscription5
(b) 9lien subscribers must submit proof of remittance or affidavit stating the source
of payment of their subscriptions5
(c) 9lien subscribers who wish to register their investments with the %entral 1ank 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
/0%
#ote that the /0% may allow the remittance to be maintained in a foreign currency account (not
converted into pesos) so long as a letter-e*planation is given to the /0% on the non-conversion (eg, the
foreign currency will be immediately used to buy capital e.uipment abroad)
)
$. Do&n* 0/'&ne'' &n t8e P8&#&,,&ne'7
a. Governing Law
9side from direct investment participation discussed above, foreigners may 3do business3 in the
Philippines ,his mode of investment is not available for incentives and is, therefore, governed by =I9 6&1
b. What Constitutes Doing Business
"nder =I9 6&1 3doing business3 in the Philippines is deemed to include the following acts7
(a) /oliciting orders, service contracts, opening offices, whether liaisons offices or
branches5
(b) 9ppointing representatives or distributors operating under full control of the
foreign corporation, domiciled in the Philippines or who in any calendar year
stay in the country for a period or periods totaling 1>? days or more5
(c) Participating in the management, supervision or control of any domestic business,
firm entity or corporation in the Philippines5 and
(d) 9ny other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that e*tent the performance of acts and works,
or the e*ercise of some of the functions normally incident to and in progressive
prosecution of commercial gain or of the purpose or object of the business
organi-ation
c. Qualifications to Do Business in the Philippines
9ny non-Philippine national or entity may do business in the Philippines up to 1??E of its capital
provided7
(a) It is doing business as a domestic market enterprise outside the #egative +ist5
(b) It is doing business as an e*port enterprise whose products or services do not fall
within +ists 9 and 1 (e*cept for defense-related activities which may be
approved or authori-ed) of the #egative +ists
d. Registration under !" #$%
Previously, foreign nationals or foreign entities seeking to do business in the Philippines even
without incentives must secure a certificate of authority from the 12I aside from a license from the /0%
,he passage of =I9 6&1, however, did away with this need for a prior 12I certificate of authority "nder the
=I9, what is only re.uired is registration with the /0%
,he re.uirements of the =I9 6&1 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 =I9 6&1
does not make a distinction between direct foreign investors or those merely seeking to do business in the
Philippines in its re.uirements for registration
e. &'C Registration
Cowever, the %orporation %ode re.uires certain registration compliance =or foreign corporation
or partnerships seeking to do business in the Philippines, the following would be re.uired7
(a) %ertified copy of the board resolution authori-ing the establishment of an office
in the Philippines5 designating the resident agent to whom summons and other
legal processes may be served in behalf of the foreign corporation5 and
stipulating that in the absence of such agent or upon cessation of its business in
the Philippines, the /0% shall receive any summons and legal processes as if the
same is made upon the corporation at its home office5
(b) =inancial statements for the immediately preceding year at the time of the filing
of the application, certified by an independent %ertified Public 9ccountant of the
/0%5
(c) %ertified copies of 9rticles of IncorporationIPartnership with an 0nglish
translation thereof in a foreign language5
(d) =oreign %ompany Information /heet
9ll documents e*ecuted abroad should be authenticated by the Philippine embassy or consular
office
f. "dditional Re(uire)ents
10
,he following would be re.uired for specially defined activities7
(a) =or enterprises wishing to engage in defense-related activities, clearance from the
@epartment of #ational @efense or Philippine #ational Police5
(b) =or small and medium si-ed domestic enterprises with paid-in e.uity capital less
than the e.uivalent of "/H4??,?????, a certificate from the @epartment of
/cience and ,echnology that the investment involves advanced technology
g. 'ffects of Non*Co)pliance with
!" +$% Re(uire)ents
9dministrative sanctions, which would include the impositions of fines and the forfeitures of
benefits
;>
+. SEC L&!en'e )or Fore&*n Cor,ort&on' Do&n* 0/'&ne''
9side from the registration re.uirements of the =I9 6&1 with the /0%, /ection 14; of the
%orporation %ode re.uires foreign corporations wishing to do business in the Philippines to secure a license
from the /0% allowing the foreign corporation to do business in the Philippines
a. &'C Re(uire)ents
,he following documentary re.uirements would have to be filed with the /0%7
(a) 9pplication for a license5
(b) %ertified true copies of articles of incorporation and by-laws5
(c) %ertificate under oath by the authori-ed 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 =ilipino citi-ens and =ilipino corporations to do business
therein, and that the applicant is an e*isting corporation in good standing If
such certificate is in a foreign language, a translation thereof in 0nglish under
oath of the translator shall be attached hereto5
(d) /tatement under oath by the president or any other person authori-ed by the
corporation, showing to the satisfaction of the /0% 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 e*ceeding one (1) year immediately prior to the filing of the
application
b. !ssuance of License
Dhere the /0% is satisfied that the applicant has complied with all the re.uirements of this %ode,
and other special laws, rules and regulations, the /0% shall issue a license to the applicant to transact
business in the Philippines for the purpose or purposes specified in such license "pon 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
%ode or other special laws
c. Re(uire)ents ,pon !ssuance of &'C License
(i) Posting of /ecurities
Dithin si*ty (<?) days after the issuance of a license to transact business in the Philippines, the
licensee shall deposit with the /0% for the benefit of present and future creditors of the licensee in the
Philippines, securities satisfactory to the /0%, consisting of bonds or other evidences of indebtedness of the
!overnment of the $epublic 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 $ep 9ct #o ;1><, shares of stock in domestic corporations registered in the stock
e*change, or any combinations of these kinds of securities, in the actual value of P1??,?????
(ii) Kearly $e.uirement of Posting of 9dditional /ecurities
Dithin < months after each fiscal year, the /0% shall re.uire the licensee to deposit additional
securities e.uivalent in actual market value to two percent (4E) of the amount by which the licensee6s gross
income for that fiscal year e*ceeds P;,???,????? ,he /0% shall also re.uire deposit of additional
45
Section 1%, :0A C)1.
11
securities if the actual market value of the deposit has decreased by ten percent (1?E) of their actual market
value at the time they were deposited
,he /0% 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 1?E of the actual market value of the securities when they were deposited
,he /0% 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) 9ppointment of $esident 9gent
,he appointment of a resident agent is an indispensable re.uirement to the issuance of an /0%
license /hould the foreign corporation be sued, someone must by duly authori-ed to receive summons and
other legal processes, so that the Philippine courts may ac.uire jurisdiction over such corporation
d. 'ffects of ailure to &ecure &'C License
to Do Business b- oreign Corporation
,he following are the legal effects of a foreign corporation doing business in the Philippines for
failing to obtain the /0% license7
(i) %riminal liability - =ine or imprisonment5
;&
(ii) ,he foreign corporation cannot sue in Philippine courts5
<?
and
(iii) ,he foreign corporation can be sued in Philippine courts
<1
INCENTIVES AVAILA0LE TO FOREIGN JOINT VENTURE PARTNERS
0*cept for joint ventures formed for the purpose of undertaking construction projects
<4
and those
for formed for engaging in petroleum operations pursuant to an operating agreement under a service
contract with the !overnment,
<8
which are e*empt from corporate ta*ation, the incentives available to joint
venture partners is directly linked with the activities to be undertaken
Investment incentives are mainly provided for under the 2mnibus Investment %ode of 1&>'
<:
1. Pre)erred Are' o) In2e'tment'
90OI Re*&'tered nd :&t8 In!ent&2e';:
!enerally, 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 1oard of Investments (12I)
1ook I of the %ode classifies the preferred areas of investments into two7 the preferred pioneer
and the preferred non/pioneer ,he yearly IPP then lists down which economic activities are considered
preferred pioneer and which are preferred non-pioneer
=oreigners may invest up to the e*tent of 1??E in the economic activities listed down as preferred
pioneer subject only to constitutional or statutory limitations and only up to :?E in economic activities
declared as preferred non/pioneer
If an enterprise is not listed in the Investment Priorities Plan and foreign e.uity shall not e#ceed
:?E it must, to be entitled to the incentives given, e*port ;?E of its production
If an enterprise is not listed in the Investment Priorities Plan and foreign e.uity shall e#ceed :?E
it must e*port '?E of its production to be entitled to the incentives given
9 location restriction, however is imposed on the enterprise in order to avail of certain incentives
,hus, projects locating in Fetro Fanila are not entitled to income ta* holiday and capital e.uipment
incentives
9mong the incentives granted by the %ode are7
(a) !uarantee of investment repatriation in the currency in which the investment was
originally made and at the e*change rate prevailing at the time of repatriation5
4)
Art. 1%%, orporation ode; Sec. 1%, $ep. Act 33#.
60
Sec. 133, orporation ode.
61
Ibid.
6"
8res. 'ecree )") (1)#6*.
63
8res. 'ecree 165".
6%
7=ecuti!e 1rder 2o. ""6, the 1mnibus 0n!estment ode.
1"
(b) !uarantee of remittance of earnings in the currency in which the investment was
originally made and at the e*change rate prevailing at the time of remittance5
(c) =reedom from e*propriation5
(d) #o re.uisition of investment5
(e) Income ta* holiday for < years from the commercial operation for pioneer firms
and : years for non-pioneer firms5
(f) 9dditional deduction for labor e*pense for the first ; years from the registration
of ;?E of the wages corresponding to the increment in the number of direct
labor for skilled and unskilled workers5
(g) ,a* and duty e*emption on imported capital e.uipment5
(h) ,a* credit on domestic capital e.uipment5
(i) 0*emption from contractor6s ta*5
(f) /implification of customs procedure5
(g) "nrestricted use of consigned e.uipment5
(h) 0mployment of foreign nationals5
(i) ,a* credit for ta*es and duties on raw materials5
(j) 0*emption from ta*es and duties on imported spare parts5 and
(k) 0*emption from wharfage dues and any e*port ta*, duty, impost and fee
$. Non<Pre)erred Are In2e'tor
9In2e'tment W&t8o/t In!ent&2e';:
Previously, before the enactment of =I9 6&1, because foreign e.uity in the enterprise will not
e*ceed :?E, the enterprise is denominated as a permitted investment under the 2mnibus Investment %ode
"nder the %ode, the enterprise may immediately incorporate directly with the /0% without need of prior
12I authority Now the re.uirements of FIA ?(' should )e complied with
+. In!ent&2e' o) E%,ort Pro!e''&n* =one Enter,r&'e:
If the joint venture is to be established within an e*port processing -one area, under the %ode, it
shall have the following incentives7
(a) =acility in employment of foreign nationals5
(b) =avorable ta* treatment of merchandise within the -one5
(c) 0njoy the same incentives as a 12I-registered pioneer enterprise5 and
(d) 0*emption from local ta*es and licenses
In addition, under Pres @ecree #o <<, the following incentives are e*pressly granted to locators
within the e*port processing -one areas are7
(a) 0*emption from customs duties and internal revenue ta*es raw materials,
supplies and e.uipment imported within such areas5
(b) 9llowing net-operating loss carry-over for the first ; years of operations5
(c) 9llowing accelerated depreciation of fi*ed assets to not more than twice the
normal rate of depreciation5
(d) 0*emption from e*port ta*5
(e) 0*emption from local ta*es and licenses5
(f) @eduction of labor-training e*penses incurred of 1I4 the value of such e*penses5
(g) @eduction for organi-ational and pre-operating e*penses over a period of 1?
years5
(h) !rant of ta* credit e.uivalent to the sales, compensating and specific ta*es and
duties paid on supplies, raw materials and other products purchased
13
RESTRICTIONS ON ACTIVITIES OF FOREIGN
JOINT VENTURE PARTNERS
Fost of the restrictions placed on joint venture partners are basically on the types of business
which may be undertaken, and the e*tent of e.uity participation allowed in each type of activity or
business, which are drawn-up and detailed under the =oreign Investments #egative +ists
,here has been a thorough liberali-ation of foreign e*change regulations in the Philippines with
the issuance by the %entral 1ank of the Philippines
<;
%ircular #o ; in /eptember, 1&&8 =oreign e*change
may be freely sold and purchased outside the banking system =oreign e*change receipts, ac.uisitions, 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
,here 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 e.uity
infusion and commercial or special loans Dhat has become a very popular scheme of financing joint
ventures covering infrastructure projects is the 1uild-2perate-,ransfer (1-2-,) schemes under $ep 9ct
#o <&;' ,he 9ct implements the declared policy of the Philippine !overnment to recogni-e the
indispensable role of the private sector as the main engine for national growth and development and
provide the most appropriate favorable incentives to mobili-e private resources for the purpose
/ubse.uently, $ep 9ct ''1> e*tended the coverage and applicability of the 1-2-, +aw not
merely to 3government infrastructure projects3 but also to government 3development projects3
1. S!8eme' Re!o*n&>ed /nder t8e A!t
,he schemes now recogni-ed under the 9ct are as follows7
9; Build*.perate*and*/ransfer 0B./1 / 9 contractual arrangement whereby the
contractor undertakes the construction, including financing, of a given
infrastructure facility, and the operation and maintenance thereof
,he 12, scheme includes a supply-and-operate situation which is a contractual
arrangement whereby the supplier of e.uipment and machinery for a given
infrastructure facility, if the interest of the !overnment so re.uires, operates the
facility providing in the process technology transfer and training to =ilipino
nationals
97; Build*and*/ransfer &che)e 0B/1 - ,he 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 e*pended on the project, plus a
reasonable rate of return thereon
,his 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 !overnment
9!; Build*.wn*.perate 0B..1 - 9 project proponent is authori-ed 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 "nder this scheme, the proponent
which owns the assets of the facility may assign its operation and maintenance
to a facility operator
9 3facility operator3 is defined as a company registered with the /0%
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 re.uires a public utility franchise,
the facility operator shall be =ilipino or at <?E owned by =ilipinos
9d; Build*Lease*/ransfer 0BL/1 - 9 project proponent is authori-ed 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 fi*ed period after which ownership of the facility is
64
1fficially designated as (ang'o )entral ng !ilipinas under $ep. Act 2o. #643.
1%
automatically transferred to the government agency or local government unit
concerned
9e; Build*/ransfer*and*.perate 0B/.1 - ,he 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 cost overrun, delay, and
specified performance risks 2nce the facility is commissioned satisfactorily,
title is transferred to the implementing agency ,he private entity however,
operates the facility on behalf of the implement agency under an agreement
9); Contract*"dd*and*.perate 0C".1 - ,he project proponent adds to an e*isting
infrastructure facility which it is renting from the government It operates the
e*panded project over an agreed franchise period ,here may, or may not be, a
transfer arrangement in regard to the facility
9*; Develop*.perate*and*/ransfer 0D./1 - ,he favorable conditions e*ternal 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
98; Rehabilitate*.perate*and*/ransfer 0R./1 - 9n e*isting facility is turned over
to a private sector to refurbish, operate and maintain for a franchise period, at
the e*piry of which the legal title to the facility is turned over to the government
,he term is also used to described the purchase of an e*isting facility from
abroad, importing, refurbishing, erecting and consuming it within the host
country
9&; Rehabilitate*.wn*and*.perate 0R..1 - 9n e*isting facility is turned over to the
private sector to refurbish and operate with no time limitation imposed on
ownership 9s long as the operator is not in violation of its franchise, it can
continue to operate the facility in perpetuity
$. E?/&t( L&m&tt&on' )or O,ertor'
o) P/7#&! Frn!8&'e'
,he ownership structure of the contractor of an infrastructure facility whose operation re.uires a
public utility franchise must be in accordance with the %onstitution, which re.uires at least <?E =ilipino
ownership
2riginally under the 1-2-, +aw, in the case of corporate investors in the 12, corporation, the
citi-enship of each stockholder in the corporate investors shall be the basis for the computation of =ilipino
e.uity in the said corporation ,ep= Act @@'A has done awa$ with the citi6enship test applied to corporate
investors in &39 corporations and its variations involving operation of pu)lic facilities 2e=g=! &33! &93!
CA3! %39 and ,334
+. Re'on7#e Rte o) Ret/rn on In2e'tment' nd O,ert&n*
nd M&ntenn!e Co't
,he contractor operates the facility over a fi*ed 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 e*penses and its investment in the project plus a reasonable rate of return thereon
$epublic 9ct ''1> defines 3reasonable rate of return3 as the rate of return that reflects the
prevailing cost of capital in the domestic and international markets
-. Per&od Co2ered
,he contractor transfers the facility to the government unit concerned at the end of the fi*ed term
which shall not e*ceed ;? years
.. F&nn!&n* A##o:ed
=or the construction stage, the contractor may obtain financing from foreign andIor domestic
sources andIor engage the services of a foreign andIor =ilipino contractor
,he financing of a foreign or foreign-controlled contractor from Philippine government financing
institutions shall not e*ceed 4?E of the total cost of the infrastructure facility or project
,he financing from foreign sources shall not re.uire a guarantee by the !overnment or by
government-owned or controlled corporation
Projects which would have difficulty in sourcing funds may be financed partly from direct
government appropriations andIor from 2fficial @evelopment 9ssistance (2@9) funds of foreign
14
governments or institutions not e*ceeding ;?E of the project cost, and the balance to be provided by the
project proponent
@. Pr&or&t( ProAe!t'
,he Philippine %ongress passed Joint $esolution #o ?8 enumerating the following national
priority infrastructure projects7
(a) Cighways, including e*pressways, roads, bridges, inter-changes, tunnels and
related facilities5
(b) $ail-based projects packaged with commercial development opportunities, eg,
use of government facilities5
(c) #on-rail based mass transit facilities, navigable inland waterways and related
facilities5
(d) Port infrastructure like piers, wharves, .uays, storage, handling ferry services and
related facilities5
(e) 9irports, air navigation and related facilities5
(f) Power generation, distribution, electrification and related facilities5
(g) ,elecommunications, backbone networks, terrestrial and satellite facilities and
related service facilities5
(h) @ams, irrigation and related facilities5
(i) Dater supply, sewerage, drainage and related facilities5
(j) ,ourism, educational and health infra-structure5
(k) +and reclamation, dredging and other related development facilities5
(l) Industrial estates, regional industrial centers and e*port processing -ones
including steel mills, iron-making and petrochemical comple*es and related
infrastructure facilities and utilities5
(m) Farkets, slaughterhouses and related facilities5
(n) Darehouses and postharvest facilities5
(o) Public fishports and fishponds, including storage and processing facilities5
(p) 0nvironmental and solid waste management-related facilities such as collection
e.uipment, composting plants, incinerators, landfill and tidal barriers, among
others5 and
(.) @evelopment of new townsites and communities and related facilities
B. Pre)eren!e to F&#&,&no Contr!tor'
$epublic 9ct ''1> raises the standards that must be met by =ilipino contractors in order for them
to be accorded preference over foreign contractors bidding for 1I, and 1+, contracts
In order to be accorded preference, a =ilipino contractor is re.uired to submit an e.ually
advantageous bid with the same price and technical specifications as that of the foreign contractor 9
=ilipino contractor will not be accorded preference unless his bid is at par, on both price and technical
aspects, with that of the foreign contractor
C. Re,(ment S!8eme'
=or the financing, construction, operation and maintenance of any infrastructure project
undertaken pursuant to the 1-2-, +aw, 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 contract6s
terms and conditions
In the case of a 12, arrangement, this repayment scheme is to be effected by authori-ing the
contractor to charge and collect reasonable tolls, fees, rentals, and charges for the use of the project facility
not e*ceeding those proposed in the bid and incorporated in the contract
,he government infrastructure agency or local government unit concerned shall approve the
fairness and e.uity of the tolls, fees, rentals, and charges e*cept in case of tolls for national highways,
roads, bridges and public thoroughfares which shall be approved by the ,oll $egulatory 1oard
,he imposition and collection of tools, fees, rentals and charges shall be for a fi*ed term as
proposed in the bid and incorporated in the contract but in no case shall this term e*ceed ;? years
16
@uring 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 amorti-ation
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
$epublic 9ct ''1> 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)
3. Lnd Re!#mt&on or Ind/'tr&# E'tte'
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 re.uirements with respect to the ownership of lands only by =ilipino citi-ens
16. Re*&'trt&on :&t8 0OI
$epublic 9ct ''1> provides that projects costing in e*cess of P1 1illion shall be registered with
the 1oard of Investments and entitled to the incentives provided under the 2mnibus Investments %ode
ANTI<TRUST AND COMPETITION LAW
,he Philippine %onstitution provides for the policy7 3,he /tate shall regulate or prohibit
monopolies when the public interest so re.uires #o combinations in restraint of trade or unfair competition
shall be allowed3
<<
,here are however very few detailed legislations governing antitrust and unfair
competition, nor to implement the constitutional policy against restraint of trade or unfair competition
,he remaining unrepealed portions of 9ct #o 84:' (1&4;) merely grants the /upreme %ourt and
the $egional ,rial %ourts concurrent jurisdiction to prevent and restrain acts of monopolies or
combinations in restraint of trade, and authori-es the /olicitor !eneral 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 +aw shall recover threefold the damages sustained by him, and the costs of suit, including
reasonable attorney6s fees
,he $evised Penal %ode of the Philippines penali-es7
(a) 9ny 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
market5
(b) 9ny person who shall monopoli-e any merchandise or object of trade or
commerce, or shall combine with any other person or persons to monopoli-e
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
market5
(c) 9ny 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
Dhenever 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 ANCILLAR1 DOCUMENTS
Dhen a joint venture arrangement involves the use and transfer of intellectual property or
technology, certain basic intrinsic and registration re.uirements are mandated by Philippine laws
66
Sec. 1), Art. >00.
1#
1. Te!8no#o*( Trn')er A*reement
%ontracts or agreements entered into by and between domestic companies and foreign companies
andIor foreign-owned companies involving the7 transfer of systematic knowledge for the manufacture of a
product, the application of a process5 rendering of a service, management contracts5 licensing of computer
softwares5 and the transfer, assignment or licensing of all forms of industrial property rights including
marketingIdistributorship agreements involving the license to use foreign trademarks, tradenames and
service marks and other marks of a proprietary nature must be registered with the ,echnology ,ransfer
$egistry
<'
,he registration with the $egistry will enable the remittance of royalty fees and similar foreign
e*change obligations arising from a technology transfer arrangement
"nder %entral 1ank %ircular #o 1?<4, parties to the technology transfer arrangement can
purchase foreign e*change from a bank to cover royalty remittances only when the bank is shown the
certificate of registration with the ,echnology ,ransfer 1oard
$. Prt&e' to t8e A*reement
,he $ules provide that the term 3domestic company3 refers to an enterprise, partnership,
corporation, branch or other form of business organi-ation, formed, organi-ed, chartered or e*isting under
the laws of the Philippines ,he foreign company would include7
(a) 9 foreign company or an alien enterprise or foreign firm, association, partnership,
corporation or any form of business organi-ation not organi-ed or e*isting under
the laws of the Philippines5
(b) 9 foreign-owned company which refers to an enterprise, partnership, corporation,
or any form of business organi-ation formed, organi-ed, chartered or e*isting
under the laws of the Philippines, the majority of the outstanding capital of
which is owned by aliens
+. Re'tr&!t&2e 0/'&ne'' C#/'e'
"nder the $ules, the following clauses are not allowed in any technology transfer arrangement in
view of their restrictive nature7
(a) %lauses which restrict directly or indirectly the e*port of the products
manufactured by the technology recipient, unless justified for the protection of
the legitimate interest of the technology supplier and the technology recipient5
(b) $estrictions on the use of the technology supplied after e*piration of the
arrangements5 provisions which restrict the manufacture of similar or competing
products after e*piry of the arrangement5 and provisions re.uiring the continued
payment for patents and other industrial property rights after their e*piration,
termination or invalidation5
(c) Provisions providing that the technology recipient will not contest the validity of
any of the patents being licensed under the arrangement5
(d) Provision which prohibit the technology recipient in a non-e*clusive technology
transfer arrangements from obtaining patents or unpatented technology from
other technology suppliers with regard to the sale or manufacture of competing
products5
(e) %ontracts which contain provisions re.uiring the technology recipient to
purchase its raw materials, components and e.uipment e*clusively, or a fi*ed
percentage of the supply re.uirement, from the technology supplier or a person
designated by him5
(f) %lauses which restrict the $L@ activities of the technology recipient designated
to absorb ad adapt the transferred technology to local conditions5 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 .uality standards prescribed by the technology supplier5
(g) Provisions re.uiring the technology recipient to keep part or all of the
information received under the arrangement confidential beyond a reasonable
period5 and
(h) Provisions which e*empt the technology supplier from liability for non-
fulfillment of his responsibilities under the arrangement andIor liability arising
6#
Sec. 1DbE, $ule 0, $ules of 8rocedures of the TT$.
15
from third party suits brought about the by use of the licensed products or
licensed technology
-. Go2ern&n* L:
"nder the $ules, 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
.. D/rt&on o) t8e Contr!t
"nder the $ules, the term of the agreement shall not e*ceed 1? years with no automatic renewal
Cowever, indefinite term may be allowed for royalty-free agreements and arrangement for the outright
purchase of technology
@. Wrrnt(DG/rntee Pro2&'&on'
"nder the $ules, a warranty from the technology supplier is re.uired 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 e*tension of services pursuant to the technology transfer
arrangement
B. Ro(#t(
0*cept for pure trademark licensing agreements where a ma*imum royalty fee of 1E of net sales
is allowed, the $ules do not prescribe any ceiling on the rate of fees due under a technology transfer
arrangement Cowever, the rate is subject to evaluation by the $egistry based on set criteria in the $ules
C. In!ent&2e'
9 bonus royalty of 4E of net foreign e*change earnings can be availed of by a supplier who
commits to an e*port development program to assist the recipient to penetrate the e*port market for the first
time
DISPUTE RESOLUTION
2utside of judicial remedies, parties to a joint venture arrangement are authori-ed to submit their
controversies to arbitration,
<>
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 ,he stipulation on arbitration can validly provide that the resolution or decision of the board of
arbitrators is valid and final
<&
Dhen the parties to a contract have a provision re.uiring arbitration in case of disputes, no party
may seek remedy from the courts of law Cowever, should a case be filed in court without having resorted
to prior arbitration, the court will not dismiss the case5 instead the court will refer the matter to the
arbitrators
'?
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 contract5 but the court is
without authority to resolve the issues on the merits
'1
1. Ar7&trt&on L:
,he special or particular law governing arbitration stipulation and proceedings is $epublic 9ct #o
>'< (1&;8), formally designated as 3,he 9rbitration +aw3
a. Persons and 2atters &ub3ect to "rbitration
"nder the said +aw, two and more persons or parties may submit to the arbitration of one or more
arbitrators any controversy e*isting, between them at the time of the submission and which may be subject
of an action, or the parties to any contract may in such contract agree to settle by arbitration a controversy
thereafter arising between them
/uch submission or contract shall be valid, enforceable and irrevocable, save upon such grounds
as e*ist at law for the revocation of any contract 9lso, such submission or contract may include .uestions
65
Art. "0%", i!il ode.
6)
Art. "0%%, i!il ode.
#0
(engson v. han, #5 S$A 113 (1)##*.
#1
"indanao !ortland ement orp. v. "c$onough, 1) S$A 505 (1)6#*.
1)
arising out of valuations, appraisals or other controversies which may be collateral, incidental, precedent or
subse.uent to any issue between the parties
b. or) of "rbitration "gree)ent
9 contract to arbitrate a controversy thereafter arising between the parties, as well as a submission
to arbitrate an e*isting controversy shall be in writing and subscribed by the party sought to be charged, or
by his lawful agent ,he making of a contract or submission for arbitration shall be deemed a consent of the
parties to the jurisdiction of the $egional ,rial %ourt of the province or city where any of the parties
resides, to enforce such contract or submission
c. "ppoint)ent of "rbitrators
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 followed5 but if no method be provided therein,
it is the $egional ,rial %ourt that shall designate an arbitrator or arbitrators
,he 9rbitration +aw provides specifically for the procedure of arbitration, .ualification 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
$. F!&#&t&e' )or Commer!&# Ar7&trt&on'
,he Philippine %hamber of %ommerce and Industry, as a service to its members and in response to
re.uest for assistance to provide arbitration facilities and services to parties to a commercial dispute, has
adopted its own $ules on %onciliation and 9rbitration
In the construction industry, ,he Philippine @omestic %onstruction 1oard was created under Pres
@ecree #o 1:'< 3to adjudicate and settle claims and disputes in the implementation of public construction
contracts3 and to 3formulate and recommend rules and procedures for the adjudication and settlements of
claims and disputes in the implementation of contracts in private construction3 /ubse.uently, the
Philippine %onstruction Industry 9rbitration %ommission (%I9%) was constituted under 0*ecutive order
#o 1??>, giving it original and e*clusive jurisdiction over claims and disputes arising from or connected
with public and private constructions contracts in the Philippines
+. Ne: 1orE Con2ent&on
In 1&<;, the Philippines adhered,
'4
to the 1&;> "nited #ations %onvention on the $ecognition and
0nforcement of =oreign 9rbitral 9wards, otherwise known as the #ew Kork %onvention ,he %onvention
seeks to make arbitral awards rendered in a foreign state enforceable in any state which is a party to the
%onvention
IMPACT OF CHANGES IN THE LAW SU0SE4UENT TO FORMATION
,he general rule under Philippine laws is that subse.uent changes in the law, such as the
introduction of new incentives or abolition of e*isting incentives, is within the power of +egislature to so
provide even as it affects e*isting enterprises, including joint ventures
,his 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 third-parties, including the /tate Fore importantly, /ection 11,
9rticle MII of the Philippine %onstitution provides for a reservation clause in favor of the !overnment to
revoke or amend e*isting grants and privileges, including incentives granted to investors7 3#either shall
any such franchise or right be granted e*cept under the condition that it shall be subject to amendment,
alteration, or repeal by the %ongress when the common good so re.uires3
DOU0LE TAFATION AGREEMENTS AND
IMPACT ON THE JOINT VENTURE
9s of 4? #ovember 1&&;, the Philippines had ta* treaties in force with the following countries7
9ustralia, 9ustria, 1elgium, 1ra-il, %anada, @enmark, =inland, =rance, !ermany, Indonesia, Italy, Japan,
Norea, Falaysia, #etherlands, #ew Oealand, #orway, Pakistan, /ingapore, /pain, /weden, ,hailand,
"nited Ningdom, and the "nited /tates
,he ta* treaties reduce the effects of double ta*ation and provide for certain favorable ta* benefits
=or e*ample, although under the Philippine #ational Internal $evenue %ode, royalty payments are
subject to a final 4?E ta*, pursuant to the ta* treaty with the "nited /tates, royalties paid to a "/
corporation are subject to only 1?E withholding ta*
#"
Senate $esolution 2o. #1 (Aay, 1)64*.
"0
9nother illustration, under certain conditions, the sale of shares of stock in a domestic corporation
by a /wedish corporation is ta*-e*empt =ees 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 3royalties3 subject to the 1?E withholding ta* under the $P-Japan ta* treaty
!ains to be reali-ed by a "/ citi-en from the transfer of his shares of stock in a domestic
corporation are ta*able only in the "/ ,he royalty fees paid to a "/ corporation pursuant to software
license agreement are subject to only 1?E ta* under the most-favored-nation clause of the $P-"/ ta*
treaty
=inally, gains reali-ed by a "/-based firm not doing business in the Philippines from all its
outstanding shares of stock in its local subsidiary are ta*able only in the "/ under the $P-"/ ta* treaty
PROTECTION OF FOREIGN INVESTORS
,he following are basic guarantees under the Philippine %onstitution as protection to foreign
investors7
(a) =reedom from e*propriation without just compensation5
(b) $ight to remit profits, capital gains and dividends within the guideline of the
%entral 1ank of the Philippines5
(c) $ight to obtain foreign e*change to meet principal and interest payments on
foreign obligations
GoOoG
9PP0#@IM %-+9D 2# J2I#, P0#,"$0/Q?<-44-4??1
"1

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