Law On Joint Ventures

PHILIPPINE LAW GOVERNING
JOINT VENTURES1
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
1The original paper was submitted by the author to the CENTER FOR INTERNATIONAL LEGAL
STUDIES based in Salzburg, Austria, as part of its international publication.
2
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
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.
3
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.
1Art. 1306, Civil Code.

3Kilosbayan, Inc. v. Guingona, 232 SCRA 110, 143-144, 41 SCAD 671 (1994), citing BLACK'S LAW
DICTIONARY.
4
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:
. . . 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;

8180 SCRA 130 (1989).
10Ibid; emphasis supplied.
11cf Art. 1774, Civil Code.
5
(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 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 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
Anglo-American 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
Although Tuason 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. 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.
12BAUTISTA, TREATISE ON PHILIPPINE PARTNERSHIP LAW, 1978 Ed., at p. 9.

1395 Phil. 106 (1954).
14Ibid, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing Fletcher
Cyc. of Corp., 1082).
6
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
15SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976, at p. 278; citing 6 FLETCHER CYC.
CORP., Perm. Ed. Rev. Repl. 1950, Sec. 2520.
16SEC 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.
17SEC Opinion, 23 February 1994, XXVIII SEC QUARTERLY BULLETIN 18 (No. 3, Sept. 1994).
18SEC Opinion, 17 August 1995, XXX SEC QUARTERLY BULLETIN 8 (No. 1, June 1996).
7
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 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
19 Sec. 22(B), NIRC of 1997.

20SEC Opinion, 30 March 1995, XXIX SEC QUARTERLY BULLETIN 32 (No. 3, Sept. 1995).
21SEC Opinion, 29 April 1985, SEC ANNUAL OPINIONS 1985, at p. 89.
8
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.
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 joint-venturers, 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
22Government of the P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).
9
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 January 1998; 28 and the tax on improperly
accumulated earnings has likewise been re-imposed. 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 projects 30 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.
23Sec. 25(a) and (b), NIRC of 1977.

24Sec. 21, NIRC of 1977.
25Sec. 24, NIRC of 1977.
26Executive Order No. 37 (1986).
27Sec. 24(B)(2), NIRC of 1997.
28Sec. 25(A)(1), NIRC of 1997
29Sec. 29, NIRC of 1997.
30Pres. Decree 929 (1976).
31Pres. Decree 1682.
10
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
32Sec. 10, Art. III.

11
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.
38Molina v. De la Riva, 6 Phil. 12 (1906); Companie de Commerce v. Hamburg-Amerika, 36 Phil.

590 (1917).
39Sec. 7, Art. XIV.
12
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.
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, like lawyers, accountants, and
engineers;41
(c) Retail trade;42
(d) Fisheries; and
(e) Rice and corn farming.43
40Sec. 11, Art. XVI, Constitution.

41Sec. 14, Art. XIV, Constitution.
42Rep. Act No. 1180. Retail Trade has been liberalized under Rep. Act No. 8762, otherwise
known as the Retail Trade Liberalization Act of 2000.
43Rep. Act No. 3018; Pres. Decree 194.
13
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
44Art. 27, Labor Code.

45Comm. Act No. 541; Pres. Decree 1594; LOI 630.
46Sec. 11, Art. XVI, Constitution.
47Sec. 2, Art. XII, Constitution.
48Sec. 11, Art. XII, Constitution.
49Sec. 4, Art. XIV, Constitution; Batas Pambansa Blg. 232.
50Rep. Acts Nos. 4566 and 5980.
51Rep. Act No. 5183.
55Rep. Act No. 8762 (March, 2000).
14
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.
(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

15
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.
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;
16
(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.
17
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
18
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.
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
58Section 14, FIA 91.
19
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
(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.
20
(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
59Art. 144, Corporation Code; Sec. 14, Rep. Act 337.

60Sec. 133, Corporation Code.
61 Ibid.
62Pres. Decree 929 (1976).
63Pres. Decree 1682.
64Executive Order No. 226, the Omnibus Investment Code.
21
down which economic activities are considered preferred pioneer and which are
preferred non-pioneer.
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
22
(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.
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.
23
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 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-O-T 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
65Officially designated as Bangko Sentral ng Pilipinas under Rep. Act No. 7653.
24
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 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.
25
(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.
26
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.
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;
27
(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.
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.
28
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 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:
66Sec. 19, Art. XII.
29
(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
30
marks of a proprietary nature must be registered with the Technology Transfer

Registry.67
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;
67Sec. 1[b], Rule I, Rules of Procedures of the TTR.

31
(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;
(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
32
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
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

70Bengson v. Chan, 78 SCRA 113 (1977).
71Mindanao Portland Cement Corp. v. McDonough, 19 SCRA 808 (1967).
33
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.
34
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 third-parties, 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.
72Senate Resolution No. 71 (May, 1965).
35
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.
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

Law On Joint Ventures

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Law On Joint Ventures

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PHILIPPINE LAW GOVERNING

Registration with BOI

1Art. 1306, Civil Code.

In addition, the Law on Partnership recognizes that in the Philippines a

. . . The main distinction cited by most opinions in

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

(a) It would have a juridical personality separate and distinct

5Art. 1776, Civil Code.

(c) Even if a co-venturer transfers his interest to another, the

Jurisprudence, however, has tended to give joint ventures special

12BAUTISTA, TREATISE ON PHILIPPINE PARTNERSHIP LAW, 1978 Ed., at p. 9.

ALTERNATIVE LEGAL FORMS IN STRUCTURING A JOING VENTURE

19 Sec. 22(B), NIRC of 1997.

In situations where a corporate vehicle is formed in pursuance of the joint

(a)In case of conflicts between the provisions of the joint venture

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

ASPECTS WHICH INFLUENCE CHOICE OF LEGAL FORM

petroleum, coal, geothermal and other energy operations pursuant to an

23Sec. 25(a) and (b), NIRC of 1977.

GOVERNING LAW AND LANGUAGE

1. Freedom to Contract, In General

2. Formal or Extrinsic Validity of Agreements

3. Capacity of Contract Parties

32Sec. 10, Art. III.

5. Language of Joint Venture Agreements

DEFINING JOINT VENTURES SCOPE OF BUSINESS ACTIVITY

38Molina v. De la Riva, 6 Phil. 12 (1906); Companie de Commerce v. Hamburg-Amerika, 36 Phil.

1. Foreign Investment Act of 1991

The criteria for the negative list are the following:

40Sec. 11, Art. XVI, Constitution.

25% FOREIGN EQUITY ALLOWED:

30% FOREIGN EQUITY ALLOWED:

40% FOREIGN EQUITY ALLOWED:

44Art. 27, Labor Code.

List C enumerates "adequately-served areas." The criteria to determine

(a) The industry is controlled by firms owned at least 60% by

The transitory Negative List C has already been scrapped under

57Rep. Act No. 7042.

Establishing a Corporate Vehicle

1. Procedure in Establishing a Corporate Vehicle

(a) All subscriptions of foreign incorporators to be fully paid. If

(b) Alien subscribers must submit proof of remittance or affidavit

2. Doing Business in the Philippines:

b. What Constitutes Doing Business

(a) Soliciting orders, service contracts, opening offices, whether

c. Qualifications to Do Business in the Philippines

(a) It is doing business as a domestic market enterprise outside

d. Registration under FIA 91

(a) Certified copy of the board resolution authorizing the

All documents executed abroad should be authenticated by the Philippine

(a) For enterprises wishing to engage in defense-related

g. Effects of Non-Compliance with

3. SEC License for Foreign Corporations Doing Business

(a) Application for a license;

setting forth the assets and liabilities of the corporation as of

c. Requirements Upon Issuance of SEC License

(ii) Yearly Requirement of Posting of Additional Securities

(iii) Appointment of Resident Agent

d. Effects of Failure to Secure SEC License

(i) Criminal liability - Fine or imprisonment; 59

INCENTIVES AVAILABLE TO FOREIGN JOINT VENTURE PARTNERS

1. Preferred Areas of Investments

59Art. 144, Corporation Code; Sec. 14, Rep. Act 337.