Doing Business in the Philippines for Foreign Corporations

“And when the danger passed, and the people joined together again, they grieved their losses, and made new choices, and dreamed new images, and created new ways to live and heal the earth fully, as they had been healed”

-Kitty O’Meara (2020)

The gradual disintegration of borders between countries have paved way for an effective and efficient distribution of resources, mass collaboration and decentralization. While the removal of barriers in the movement of goods and people is condemned as one of the main causes of the high rate of infection among people across nations, the removal or loosening of trade restrictions, coupled with the digitalization of trade, paved way for international business.

Doing Business in the Philippines

In the Philippines, doing business requires prior registration from government authorities. What constitutes “doing business” is however a very vague concept, especially in the age of information technology where online social media and business platforms are easily accessible.

Traditionally, the Court has relied on the archaic case of Mentholatum Co v Mangaliman in determining whether an act constitutes “doing business” in the country. Accordingly, the prime consideration as to whether or not a company is “doing business” in the Philippine is its intention to continue the body or substance of its business in the country.[1] Thus, it has been held that doing business “implies a continuity of commercial dealings and arrangements, and contemplates, 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, the purpose and object of its organization”[2].

With the rapid digitalization of business and the rise of e-commerce, the Court had difficulties applying the “continuity” test espoused by the Mentholatum case to online businesses. While before, the physical presence of stores and employees is mandatory to conduct business, online platforms and remote servers enabled businesses to conduct trade without the need to have a physical presence in the country. Realizing the futility of the traditional method in determining “doing business”, the Securities and Exchange Commission adopted the “sliding scale” test provided for by the American case of Zippo Manufacturing Company v. Zippo Dot Com, Incorporated[3].

In that case, the court divided the internet activities into three kinds- active, passive and interactive. An active online business activity deliberately makes extensive use of the Internet, such as where it enters into contracts with customers online. A good example of this would be businesses selling products in Lazada and Shopee, where customers can actually buy the products being advertised on their website. A passive online business activity, by contrast, is merely informational, and neither solicits nor expects activity in the places it reached. A good example would be putting advertisement in websites showing the features of the products or services being sold. The middle ground of the active and passive online business activity is an “interactive” online business activity. Under which, while merely under the guise of advertising, certain functions allow the customers to communicate with the advertiser. A good example of which is a facebook page which allows the visitors to chat the page manager.

Hence, as to a company proposing to provide an online platform in the Philippines for online gaming and online community, the Securities and Exchange Commission held that, notwithstanding the fact that they would not have any physical office in the Philippines, the mere fact of marketing and advertising their online platform coupled with the fact of accepting online payments in any currency is sufficient to warrant a finding that the company is “doing business” in the country.[4]

Similarly, offering online English tutorial class as a formal training course or program for a fee coupled with the issuance of Certificates of Training or Diplomas for Program Completion constitutes “doing business” in the country as an educational institution, subject to the 40% foreign ownership limitation.[5]

Foreign Investments Act

In order to promote and welcome productive investments from foreign individuals, partnerships, and corporations, the Foreign Investments Act of 1991 was enacted clarifying the term “doing business” in the Philippines. Accordingly,

“the phrase “doing business” shall include 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: Provided, however, That the phrase “doing business” shall not be deemed to 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 interests 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”[6]

It must be noted that the list is not exhaustive, as it covers “any other act or acts that imply a continuity of commercial dealings or arrangements… 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” constitutes “doing business” in the country. Hence, despite not soliciting orders or appointing representatives, if a foreign person makes continuous commercial transactions in the country incidental to its main business, such person may be deemed “doing business” in the country. The definition provided therein seems similar to that of the Mentholatum case provided above.

Now that the concept of "doing business" has been discussed already, what is its relevance in terms of licensing and suing in the Philippine courts? The remaining portion of this article, which will be posted within the week, shall discuss it in detail.

Christian Andrew Labitoria Gallardo recently graduated with a degree of Juris Doctor at the Ateneo School of Law and is currently an associate of the Sangalang & Gaerlan, Business Lawyers. You may reach him at andrew.gallardo@paladinslaw.org

[1] The Mentholatum Co. Inc et al v Anacleto Mangaliman et. al., G.R. No. L-47701 (1941).

[2] Id.

[3] Zippo Manufacturing Company v. Zippo Dot Com, Incorporated

[4] SEC OGC Opinion No. 17-03

[5] SEC OGC Opinion No. 17-05.

[6] § 3(d), RA 7042, Foreign Investments Act of 1991.