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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
Related Topic: How foreign corporations can do business in the Philippines
The Philippine business landscape has been developing in the past years and continues to grow. One of the reasons for this growth is the accessibility of the international market wherein a number of foreign corporations chose to do business here in the Philippines and local businesses can easily deal with them. With the growing number of foreign entities choosing to deal and transact businesses in the Philippines, it is only cautious for said foreign corporations to be familiar on what they need to know to protect their interests.
A foreign corporation is one formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state (Section 123, The Corporation Code of the Philippines).
Not all foreign corporations transacting in the Philippines are considered to be “doing business” and thus required to have a license to be duly authorized to do so. While the Corporation Code of the Philippines does not define what the phrase doing business is, Section 3(d) of Republic Act No. 7042 also known as the Foreign Investments Act of 1991 provided for its definition stating that it includes:
“soliciting orders, service contracts, opening offices, whether called ‘liaison’ offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization”.
The most important element to be considered as “doing business” is the continuity of commercial dealings in the Philippines, that is, it is not merely casual or only involves an isolated case, but is systematic and regular that its intent to actually transact business in the Philippines is evident.
It does not include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interest in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.
However, the same cannot be said as to investment as a shareholder by a foreign entity in a partnership. The rules provide that investment in a domestic corporation is not doing business. It does not cover investment in a partnership. “Considering that the exemption from the doing business rule pertains only to investment in a corporation, investment in any other business organization, firm, or entity (e.g., partnership) would not automatically constitute an exemption”. For instance, investment in a partnership may constitute doing business if there is participation in the management, supervision and control. Investment in a partnership will only be akin to an investment in a corporation that is exempt from the doing business rule only when the foreign corporation is exclusively a limited partner and takes no part in the management and control of the business operation of the limited partnership (See: SEC OGC Opinion No. 14-01 dated February 21, 2014).
Purpose of the need for Foreign Corporations doing business in the Philippines to obtain license to do so
When a corporation is doing business in the Philippines, it is required to secure a license. The purpose of the law in requiring that foreign corporations doing business in the Philippines to be licensed to do so is to subject the foreign corporations to the jurisdiction of the local courts, otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully, though unfairly, plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts (Avon Insurance PLC v. Court of Appeals, G.R. No. 97645, August 29 1997).
With it, the foreign corporation doing business in the Philippines may sue or intervene in any judicial or administrative action in the Philippines. However, a corporation doing business in the Philippines without a license to do so may not sue in any court or tribunal but it can be sued before any Philippine courts on any valid grounds recognized under our laws.
It must also be noted that foreign corporations not doing business in the Philippines can sue before Philippine courts even without a license on an isolated case.
An example of an isolated transaction is the case of Cargill, Inc. v. Intra Strata Assurance Corporation, G.R. No. 168266, wherein the petitioner is a foreign company importing molasses from a Philippine exporter. The Supreme Court ruled in said case that Cargill, Inc. is not doing business in the Philippines. The rule is that a foreign company that merely imports goods from a Philippines exporter without opening an officer or appointing an agent in the Philippines, is not doing business in the Philippines.
Summary of Rules regarding a Foreign Corporation’s right to sue in local courts
The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements:
1. If a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts;
2. If a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction;
3. If a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation’s corporate personality in a suit brought before Philippine courts; and
4. If a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction.
Criminal Liability of Foreign Corporations doing business in the Philippines without securing license to do so
The prohibition against doing business without first securing license is now given penal sanctions. The sanction that applies to other violations of the Corporation Code under the general provisions of Section 144 of the Code applies to the act of doing business without a license. (See: SEC-OGC Opinion No. 10-07 dated February 5, 2010).
A foreign corporation is one formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state (Section 123, The Corporation Code of the Philippines).
Not all foreign corporations transacting in the Philippines are considered to be “doing business” and thus required to have a license to be duly authorized to do so. While the Corporation Code of the Philippines does not define what the phrase doing business is, Section 3(d) of Republic Act No. 7042 also known as the Foreign Investments Act of 1991 provided for its definition stating that it includes:
“soliciting orders, service contracts, opening offices, whether called ‘liaison’ offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization”.
The most important element to be considered as “doing business” is the continuity of commercial dealings in the Philippines, that is, it is not merely casual or only involves an isolated case, but is systematic and regular that its intent to actually transact business in the Philippines is evident.
It does not include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interest in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.
However, the same cannot be said as to investment as a shareholder by a foreign entity in a partnership. The rules provide that investment in a domestic corporation is not doing business. It does not cover investment in a partnership. “Considering that the exemption from the doing business rule pertains only to investment in a corporation, investment in any other business organization, firm, or entity (e.g., partnership) would not automatically constitute an exemption”. For instance, investment in a partnership may constitute doing business if there is participation in the management, supervision and control. Investment in a partnership will only be akin to an investment in a corporation that is exempt from the doing business rule only when the foreign corporation is exclusively a limited partner and takes no part in the management and control of the business operation of the limited partnership (See: SEC OGC Opinion No. 14-01 dated February 21, 2014).
Purpose of the need for Foreign Corporations doing business in the Philippines to obtain license to do so
When a corporation is doing business in the Philippines, it is required to secure a license. The purpose of the law in requiring that foreign corporations doing business in the Philippines to be licensed to do so is to subject the foreign corporations to the jurisdiction of the local courts, otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully, though unfairly, plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts (Avon Insurance PLC v. Court of Appeals, G.R. No. 97645, August 29 1997).
With it, the foreign corporation doing business in the Philippines may sue or intervene in any judicial or administrative action in the Philippines. However, a corporation doing business in the Philippines without a license to do so may not sue in any court or tribunal but it can be sued before any Philippine courts on any valid grounds recognized under our laws.
It must also be noted that foreign corporations not doing business in the Philippines can sue before Philippine courts even without a license on an isolated case.
An example of an isolated transaction is the case of Cargill, Inc. v. Intra Strata Assurance Corporation, G.R. No. 168266, wherein the petitioner is a foreign company importing molasses from a Philippine exporter. The Supreme Court ruled in said case that Cargill, Inc. is not doing business in the Philippines. The rule is that a foreign company that merely imports goods from a Philippines exporter without opening an officer or appointing an agent in the Philippines, is not doing business in the Philippines.
Summary of Rules regarding a Foreign Corporation’s right to sue in local courts
The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements:
1. If a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts;
2. If a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction;
3. If a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation’s corporate personality in a suit brought before Philippine courts; and
4. If a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction.
Criminal Liability of Foreign Corporations doing business in the Philippines without securing license to do so
The prohibition against doing business without first securing license is now given penal sanctions. The sanction that applies to other violations of the Corporation Code under the general provisions of Section 144 of the Code applies to the act of doing business without a license. (See: SEC-OGC Opinion No. 10-07 dated February 5, 2010).
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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