When it comes to business, most companies are typically engaged in manufacturing products, selling goods, offering services, or conducting other activities aimed at generating profit. In contrast, holding companies, also known as “holdcos,” operate differently. Rather than directly participating in everyday business activities, holding companies primarily exist to own and manage controlling shares of other companies or its subsidiaries.
In this follow-up article, we’ll dive even deeper into the concept of holding companies in the Philippines. We will cover the legal basis for establishing a holding company, provide a step-by-step guide to the registration process, and highlight the common challenges faced by entrepreneurs and investors. Read on and share your insights in the comments.
Understanding a Holding Company
Take SM Investments Corporation (SM) as a prime example. It was incorporated in the 1960s to serve as a holding company of the SM Group, which spans multiple industries, including retail, property development, and banking, among others. Some of its notable subsidiaries include The SM Store, SM Supermarket, SM Hypermarket, SaveMore, SM Prime Holdings, Inc, BDO Unibank, Inc., and China Banking Corporation. As a holding company, SM does not directly manage the daily operations of these subsidiaries, but it oversees their strategic direction, finances, and corporate governance.
As we discussed in another article, establishing a holding company to control multiple subsidiaries comes with advantages and disadvantages. On the positive side, a holding company enjoys legal protection from losses accrued by its subsidiaries, i.e., if a subsidiary goes bankrupt, its creditors cannot go after the holding company. In addition, it may also take advantage of tax efficiencies, risk mitigation, and streamlined corporate management.
On the downside, however, setting up and managing a holding company can be legally complex, often requiring higher capitalization and the establishment of sophisticated management structures. Moreover, it may lead to a more aggressive approach in exercising control over its subsidiaries.
Legal Basis for Establishing a Holding Company in the Philippines
Establishing a holding company in the Philippines is governed by various key laws, with the Revised Corporation Code (RCC) and other regulatory frameworks providing the necessary structure for its formation, operation, and taxation. Here’s an overview of the primary legal bases:
Revised Corporation Code of the Philippines (R.A. 11232)
Enacted in 2019, the law provides the primary legal framework for establishing and operating corporations in the Philippines, i.e., including holding companies. It outlines the requirements, such as having a minimum number of incorporators and capital stock. It also provides flexibility in the ownership structure by allowing different types of shares, e.g., common and preferred shares, which is crucial for holding companies that may require specific ownership arrangements.
Securities Regulation Code (R.A. 8799)
This law ensures that publicly listed holding companies adhere to the requirements for disclosure, reporting, and protection of the rights of the shareholders. Holding companies, especially those with multiple shareholders, must comply with the regulations set forth by the law to ensure transparency and fairness in dealing with investors.
Property Registration Decree (P.D. 1529)
Holding companies that acquire or manage real estate must comply with this decree, which governs the registration of land titles and property ownership in the country. Additionally, this covers the transfer and registration of shares in other corporations, ensuring that the ownership of both physical and intangible assets is property documented and legally recognized.
Foreign Investments Act of 1991 (R.A. 7042)
Holding companies that involve foreign investors or are owned by foreign nationals must comply with this law, which regulates the extent to which foreign entities can own shares or interests in businesses operating in the Philippines. The law sets restrictions on foreign investments in specific sectors, such as public utilities and mass media, while allowing full foreign ownership in others. Moreover, this also provides incentives to foreign investors, which could be beneficial for holding companies engaging in foreign investments.
Tax Code of the Philippines (National Internal Revenue Code)
Holding companies are subject to the Philippine Tax Code. They may qualify for certain tax exemptions or incentives, depending on their business activities and structure. For example, holding companies that primarily receive income from dividends or capital gains may be subject to different tax rates compared to those engaged in active business operations.
Step-by-Step Process in Registering a Holding Company in the Philippines
Like any other business in the Philippines, registering a holding company involves a series of steps to ensure compliance with various local laws and regulations. If you’ve already decided to establish a holding company, then here are the general steps you need to follow:
1. Determine the Type of Holding Company.
As discussed in another article, there are several types of holding companies to choose from — pure holding, mixed holding, immediate holding, and intermediate holding companies. While each serves a unique purpose, it is important to carefully consider which one aligns with your business interests and objectives. In addition to selecting the holding company type, it is crucial to decide on the ownership structure, which determines the shareholders, ownership distribution, and capitalization.
2. Choose a Corporate Name.
The next important step is to choose a unique corporate name that must not be identical or confusingly similar to those already registered. The availability of the name may easily be confirmed through the online name verification system of the Securities and Exchange Commission (SEC). It is highly advised to prepare alternative names in case the first choice is unavailable and to avoid delays in the registration.
Corporate branding for a holding company, represented by its corporate name, reflects a unified vision and connects its diverse portfolio of subsidiaries and industries.
3. Register the Holding Company with the SEC.
Registering a holding company with the SEC follows almost the same procedure as that of regular corporations. This is a mandatory step to legitimize the juridical unit and permit it to participate legally in business. The process can be conveniently completed through the SEC’s Electronic Simplified Processing of Application for Registration of Company (eSPARC) system. During the online registration, two important documents must be filed — the Articles of Incorporation (AOI), which documents the creation of the company, and the Bylaws, which outlines the rules that govern its internal operations and management.
Additionally, the SEC also requires a paid-up capital to be deposited in a bank under the name of the holding company before it issues the Certificate of Incorporation. Typically, at least twenty-five percent (25%) of the authorized capital stock must be subscribed, and twenty-five percent (25%) of which must be paid up. This ensures that the holding company has sufficient capital to operate and meet regulatory requirements.
4. Obtain BIR Registration.
After registering with the SEC, the holding company must then be registered with the tax authority, the Bureau of Internal Revenue (BIR), through the respective Revenue District Office (RDO) for the issuance of a BIR Certificate of Registration (COR), which contains the Tax Identification Number (TIN), applicable tax types and forms, and other important details related to taxation. In addition, the holding company must also register its books of accounts and ensure the printing of official receipts and invoices based on the BIR standards. These steps are important for the company to legally conduct business and fulfill its tax obligations.
5. Apply for Business Permits.
While processing the registration with the BIR, the holding company can simultaneously apply for the required business permits with the local government units (LGUs). There are two primary business permits to secure — the Barangay Business Permit or Clearance, and the Mayor’s Permit or Business Permit. Apart from these, however, there are other prerequisite permits and clearances to obtain, such as Locational Clearance, Zoning Certificate, Fire Safety and Inspection Certificate (FSIC), and Sanitary Permit.
6. Secure Employer Registrations with Statutory Agencies.
While the holding company is expected to employ people, it is thus mandated to secure employer registrations with the three statutory agencies — the Social Security System (SSS) for the social security protection of the workers, the Philippine Health Insurance Corporation (PhilHealth) for their health insurance coverage, and the Home Development Mutual Fund (Pag-IBIG Fund) for access to the national savings program and shelter financing.
A holding company must register with SSS, PhilHealth, and Pag-IBIG to provide social security, health insurance, and access to savings and shelter financing for employees.
7. Ensure Compliance with Reportorial Requirements.
Holding companies, like all other business entities, must ensure continuous compliance with the regulatory requirements to avoid legal issues and costly penalties. This includes timely filing of the Annual Financial Statements (AFS), General Information Sheet (GIS), and other documents with the various agencies, such as SEC, BIR, and even the LGUs. Mandatory employer-employee social security contributions must also be regularly remitted to the statutory agencies.
Common Challenges When Registering a Holding Company
Registering a holding company in the Philippines can be a complex process, especially for foreign entities and nationals who have limited knowledge of the local laws and regulations. Here are some of the most common challenges faced during registration:
1. Choosing an Invalid or Confusing Corporate Name
While a corporate name is an important aspect of business as it establishes the brand identity, there are factors to consider when choosing the right one to register with the SEC. These often include the availability of the name, as well as the naming conventions based on the Revised Corporation Code. Thus, it is crucial to use the SEC’s online name verification system and revisit the agency’s guidelines for naming holding companies.
2. Failure to Meet Capitalization Requirements
The required minimum capitalization for holding companies may be as low as PHP 5,000 for domestic corporations but may also be as high as USD 200,000 for foreign-owned companies. Equally important, the nature of business and the industry restrictions imposed by the Foreign Investments Act (FIA) may affect the capitalization requirement.
3. Inadequate or Delayed Documentation
Submitting incomplete or inaccurate documents, such as the Articles of Incorporation and Bylaws, can lead to delays or rejection of the registration. Depending on the circumstances, holding companies may also need to submit additional supporting documents, and overlooking them can delay or invalidate the registration.
4. Overlooking the Tax Implications
One of the advantages of establishing a holding company is the tax exemptions and preferential rates imposed on income from dividends or capital gains. Misunderstanding these tax rules can lead to unnecessary tax liabilities or missed opportunities for tax savings. Also, if a holding company is involved in cross-border transactions, it must be aware of tax treaties and regulations that govern dividends or capital gains between countries.
5. Failure to Consider the Legal Structure for Foreign Ownership
Holding companies with foreign investors must be aware of the restrictions on foreign ownership in certain sectors of the economy. The Foreign Investments Act (FIA) of 1991 regulates foreign ownership limits, and the Anti-Dummy Law prevents the use of Filipino nationals as dummies to circumvent these restrictions. Failure to comply with these laws can result in legal issues or penalties.
… and you might just need our assistance.
At FilePino, we simplify the process of registering your holding company, ensuring compliance with all legal requirements. Our team of experts provides end-to-end support — from company registration to regulatory compliance — so you can focus on your investments and growth strategies.
Ready to register your holding company? Set up a consultation with FilePino today! Call us at (02) 8478-5826 (landline) and 0917 892 2337 (mobile) or send an email to info@filepino.com.