A foreign company can effectively expand its business operations and establish a market presence in the Philippines by setting up a branch office. Among the various business structures available, a branch office often offers the greatest advantages. This option not only facilitates the easiest market entry but also offers potential operational cost savings and tax incentives.
For instance, most IT-BPOs and other companies engaged in outsourcing or offshoring in the Philippines typically register a local branch office. Others also obtain special licenses with Philippine Economic Zone Authority (PEZA) or Board of Investments (BOI) for tax incentives and other benefits.
In this comprehensive article, we’ll delve into what a branch office is, outline the requirements, and explain how a foreign corporation can establish one in the Philippines. Read on and feel free to reach out to us anytime for professional assistance.
What is a Branch Office?
A branch office is an extension of a foreign company or corporation that operates and conducts business in another country, e.g., the Philippines.
Like a representative office, a branch office does not have a separate juridical personality from its parent company. Thus, its liabilities are considered liabilities of the parent company. However, it is subject to the local corporate laws and regulations, compliance requirements, and taxation.
Interestingly, it does not require an entire board of directors; it only needs a resident agent. This agent can either be a Filipino resident or a citizen, who will serve as a point of contact for government communications and transactions.
Top Reasons to Set Up a Branch Office in the Philippines
Setting up a foreign company branch office in the Philippines is more than just a strategic move; it is a venture into a country of promising business opportunities. Below are the top reasons:
Growing Economy and Consumer Market Potential
The Philippines boasts one of the fastest-growing economies in Southeast Asia, as driven by various factors, such as robust consumer spending and a young, dynamic workforce. By entering this new market through branch offices, foreign companies can position themselves strategically while benefiting from the ongoing economic growth.
Cost-Effective Operations
Foreign companies can always benefit from lower operational costs in the Philippines compared to many other countries. Significant business aspects, such as competitive employee wages, affordable office space rentals, and reduced overhead expenses, can be taken as opportunities to allocate resources efficiently for growth initiatives.
Highly Skilled Workforce
The Philippines continuously nurtures a large, well-educated, well-trained, and English-speaking workforce particularly inclined in the booming sectors, such as technology, business process outsourcing, and healthcare. By setting up branch offices, foreign companies can leverage local talents to drive innovation and growth.
Easing Government Regulations and Other Incentives
Several government initiatives have been implemented to attract foreign entrepreneurs and investors and facilitate easier market entry and business establishment. Recent legislation has also streamlined business registration and other government processes through technological integration. Additionally, foreign corporations can take advantage of tax incentives, duty-free imports, and other significant benefits.
Warm Business Climate
Filipinos are inherently hospitable, always creating a welcoming atmosphere for foreigners. The warmth even extends into the business sector, where collaboration and partnership are highly valued. As a result, foreign companies establishing branch offices in the country often find supportive relationships and opportunities for growth within the local community.
Branch Office General Requirements
A foreign parent company or headquarters must provide the necessary documentation to prove its legal existence in another country, financial stability, and authorization to set up a branch office in the Philippines. Below are the general requirements:
Resident Agent
A designated resident agent can be a Philippine resident or a domestic corporation. If a foreigner, he or she should be a holder of a valid Philippine visa, which at the time of its issuance, entitles him or her to stay in the country continuously for at least one (1) year.
Additionally, a resident agent can only open the pre-registration bank account for the purpose of the inward remittance of the required paid-up capital after having received the appointment.
Minimum Paid-Up Capital
In the Philippines, the minimum paid-up capital requirement for a branch office is US$ 200,000; however, this amount can be reduced to US$ 100,000 if it engages in advanced technology activities or employs at least fifty (50) direct employees.
For a branch office to operate as a Domestic Market Enterprise (DME), which will focus solely on selling goods and services within the country, the full capitalization must be inwardly remitted.
Additionally, if it qualifies as an export-oriented enterprise exporting goods and services that account for at least sixty percent (60%) of its gross sales, it can be registered with a significantly lower capital requirement.
Local Office Address
Like an ordinary business entity, a branch office must have a registered office address in the Philippines. It must produce a title certificate (if owned) or a lease contract (if renting) of the address and submit it to the government regulatory agencies and LGUs upon registration. It is also possible to rent a temporary virtual office, soon transfer to a physical office, and update the information in the incorporation documents.
Branch Office Registration Process in the Philippines
Registering a foreign company branch office in the Philippines closely resembles the process of regular company incorporation. It involves obtaining registrations with several entities — SEC for corporate law compliance, local government units (LGUs) for legitimacy of operations within the barangay, municipal, and city jurisdictions, BIR for tax compliance, and other statutory agencies for employees’ social security and benefits.
1. SEC Registration
As just said, a branch office must first be registered with the Securities and Exchange Commission (SEC), the registrar and overseer of the corporate sector in the Philippines. The agency requires the submission of various documents, such as the following (always check the SEC official website or contact the agency directly for latest updates, if any):
[a] SEC Application Form F-103. This form for the Application of a Foreign Corporation to Establish a Branch Office in the Philippines can be downloaded from the SEC official website. This requires basic information about the company such as its corporate name, address, operations, purpose, directors and officers, and capital structure.
[b] Name Verification and Reservation Slip. This must be secured to ensure that the name of the branch office is unique and not similar with any other SEC-registered business names. This is already part of the online SEC registration.
[c] Board Resolution. A certified and apostilled copy of the parent company’s board resolution authorizing the establishment of the company branch office and designating a resident agent to receive summons and legal proceedings must be attached to the application.
[d] Latest Audited Financial Statements (AFS). These must be recent and approved by an independent certified public accountant (CPA) and authenticated by the Philippine consulate or embassy. If the financial statements are not required to be audited, a certification from a legal practitioner or certified public accountant in that particular country stating that per rules, the country where the parent company is established does not require an audited financial statement may suffice.
[e] Articles of Incorporation. A copy of the parent company’s Articles of Incorporation (AOI) duly certified and apostilled must also be attached to the application. This document serves as the basis of the SEC for the incorporation details of the company in the country of origin.
[f] Certificate of Inward Remittance or Certificate of Bank Deposit. The certificate must indicate a remittance or deposit amounting to US$ 200,000 if the company branch office will be a domestic enterprise or a company whose revenue will mostly be derived from the Philippines. A lower remittance, however, is allowed if the company is an export-based company, subject to the rules of the Foreign Investment Act (FIA) and the Foreign Investment Negative List (FINL).
[f] Resident Agent Appointment Acceptance. This is a formal document that must be attached, particularly if the resident agent is not the signatory of the application form. This provides the agent’s acceptance of the appointment to act on behalf of the parent company.
Once the branch office is registered, it will be issued a License to Do Business in the Philippines and may already secure other local business permits and licenses.
2. LGU Business Permits (Barangay and Mayor’s Permits)
After SEC registration, the branch office may already be registered with local government units (LGUs), i.e., the barangay and city or municipality with jurisdiction over the business address for the barangay and mayor’s permits.
[a] Barangay Business Permit. This is the local permit issued by the barangay (the smallest administrative division in the Philippines) to allow the company branch office within its jurisdiction. It is also a prerequisite for a Mayor’s Permit and other clearances.
[b] Mayor’s Permit. This is another local permit issued by the city or municipal government through its Business Permit and Licensing Office (BPLO) that allows the business to operate within its jurisdiction and ensures compliance with the local regulations and ordinances.
Aside from the barangay and mayor’s permits, other clearances and certificates to secure in this processing stage include:
[c] Zoning Clearance. This is obtained to certify that the proposed location of the company branch office complies with local zoning regulations and other related requirements. It ensures that it can operate legally within the designated area.
[d] Occupancy Certificate. This document certifies that the building or facility occupied by the branch office is structurally sound. Having this certification is essential for legal compliance and safety of the occupants and customers.
[e] Fire Safety Inspection Certificate (FSIC). This document is issued by the Bureau of Fire Protection (BFP) to certify that the branch office and its establishment have been inspected and comply with the fire safety standards under the Fire Code of the Philippines and other regulations.
[f] Sanitary Permit to Operate. This mandatory permit or license issued by the LGU through its City or Municipal Health and Sanitation Department to certify that the for-registration branch office meets the minimum sanitation requirements in accordance with the Sanitation Code and local ordinances.
[g] Other Certificates. Additional certificates and clearances may be required depending on the existing ordinances of the city or municipality. These may include an occupational permit, a water potability test, and a non-gaming certificate, among others.
3. BIR Certificate of Registration (COR)
While the Mayor’s Permit is no longer a prerequisite for obtaining the BIR Certificate, both can now be processed and secured simultaneously. The BIR Certificate of Registration (COR), or the BIR Form 2303, is essential for legal compliance, enabling the branch office to issue official receipts, pay taxes, and access various government services.
4. Registrations with Other Government Agencies
If the branch office will employ staff right away, then employer registrations with the Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and Home Development Mutual Fund (Pag-IBIG) must also be processed immediately. Additional clearances or endorsements from appropriate government agencies may also be required, depending on the industry.
Branch Office Taxation
As an income-generating entity in the Philippines, a foreign company branch office is subject to local taxation, i.e., a thirty percent (30%) corporate income tax and a twelve percent (12%) value-added tax (VAT) on its local sales. It must also withhold taxes on employee compensation and can pass on the twelve percent (12%) VAT on purchases from VAT-registered suppliers.
Profits remitted by a local branch office to its parent company or headquarters abroad are subject to a branch office profit remittance tax of fifteen percent (15%). This may, however, be reduced under applicable tax treaties. For instance, tax treaties with the Netherlands, Japan, Germany, and Austria offer a preferential rate of ten percent (10%) on remittances. If it operates within a special economic zone designated by the Philippine Economic Zone Authority (PEZA), it is exempt from the branch office remittance tax.
Additionally, a branch office is not subject to documentary stamp tax (DST) because it does not issue shares of stocks. It is also not liable to pay the ten percent (10%) improperly accumulated earnings tax.
In the end, foreign corporations can greatly benefit from the emerging Philippine economy. While it is possible to set up a branch office independently, we strongly recommend seeking professional assistance from a trusted and leading company formation service provider in the Philippines. By doing so, you can take advantage of the expedited and streamlined process and other comprehensive services.
… and you might just need our assistance.
Ready to set up a foreign company branch office in the Philippines? 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.
