A local subsidiary is a Philippine-incorporated domestic firm entirely or majority-owned by a foreign multinational corporation. In the Philippines, subsidiaries are generally registered as LLCs or corporations.
Since subsidiaries are locally incorporated, they are classified as domestic entities. Hence, the legal identity of a subsidiary business in the Phillippines is separate and distinct from both its shareholders and the parent company.
It is a highly favored business expansion option for foreign investors due to the simple set-up model and the many benefits.
What are the Different Types of Subsidiaries in the Philippines?
There are two types of subsidiaries in the Philippines – wholly-owned and partially owned.
A wholly-owned subsidiary is when a parent business owns all of the common shares. The parent firm can diversify, manage, and perhaps minimize its risk by forming wholly-owned subsidiaries. Unlike other subsidiaries, a wholly-owned subsidiary has no duties to minority shareholders.
In a partially owned subsidiary, the parent firm holds at least 50% shares of the subsidiary company. However, even if the parent firm does not have complete control, it should have a controlling interest in the subsidiary.
How to Set up a Subsidiary in the Philippines?
Before setting up a subsidiary in the Philippines, business owners should identify the factors affecting different business entities.
It is essential to figure out the following things:
- The business entity or structure
- The industry of operations
- Trade agreements existing with the parent company
- Nationality of the employees
- Local business practices affecting the business operations
After checking everything, follow the steps below for setting up a subsidiary in the Philippines:
- Select and register the business name with the Securities and Exchange Commission
- Deposit the minimum paid-up capital
- Notarize the articles of association
- Obtain the pre-registered Taxpayer Identification Number (TIN) from the Securities and Exchange Commission (SEC).
- Acquire the barangay clearance
- Pay the annual community tax at the City Treasurer’s Office for the community tax certificate.
- Obtain the necessary permits and licenses for starting business operations.
The entire process may take about a month to complete. Thus, it is vital to consider the business type, the time required, and finances when setting up a subsidiary in the Philippines.
Benefits of Setting Up a Subsidiary in the Philippines
There are several advantages to forming a subsidiary business in the Philippines. Entering a new market can offer access to diverse opportunities, driving increased revenues for your company.
The advantages of forming a subsidiary business in the Philippines are:
- Access to the products/services of a new market
- Increased brand outreach and recognition
- Free trade opportunities
- Tax benefits
- Risk diversification
- Access to affordable local talent
- Access to advanced technology and infrastructure
- Opening a subsidiary in the Philippines allows you to take advantage of tax deductions owing to the double taxation agreements signed with other states.
Subsidiary company formation is a common and effective strategy to increase your company’s profitability.
Incorporating a subsidiary business in the Philippines follows the same steps as establishing a new business. However, first, you must clearly understand the local laws and industry regulations to ensure that your set-up process is smooth and streamlined. Thus, you must prepare and file the necessary formation paperwork with the concerned government bodies.
Documents to Prepare When Opening a Subsidiary in the Philippines
You must submit the following documents for the incorporation of a foreign subsidiary in the Philippines:
- The Memorandum of the new company
- The Articles of Association of the new company
- A declaration document from the Treasurer’s Office
- A company name verification paper
- A registration datasheet
What Business Forms can the Philippines Subsidiaries Take?
The Filipino subsidiary is legally considered a local corporation, allowing a foreign firm to use the Company Act’s business forms. In the Philippines, these two are the most popularly used company forms for subsidiaries:
- A domestic limited liability company or corporation must have at least 40% foreign ownership.
- A foreign-owned limited liability company where foreign ownership can range between 40% to 100%.
The share capital for establishing a Filipino subsidiary depends on the parent company’s decision. When registering a foreign-owned subsidiary in the Philippines, the minimum share capital is 200,000 USD.
Another factor business owners must consider when forming a wholly foreign-owned subsidiary because they cannot conduct business in specific sectors. However, foreign companies can create a local corporation in such a scenario.
Philippines Subsidiary Laws
Subsidiary laws in the Philippines differ according to the business entity you choose to establish. Hence, understanding the rules governing different business entities is crucial for running a subsidiary successfully and avoiding compliance issues.
For instance, a foreign business owner can form a wholly-owned domestic corporation in the Philippines. If the company’s operation is subject to foreign equity constraints, foreign investors must establish a domestic corporation with a qualified joint venture partner from the Philippines.
It often gets challenging for foreigners to understand the nuances of another nation’s laws and rules. Thus, it is best to hire a global EOR firm or a legal consultant while setting up a subsidiary in the Philippines.
Post Incorporation Compliance
The following are post-incorporation requirements for all business types in the Philippines:
- Submit a first report/list
- Publish a notice of the incorporation in local publications
The following are annual obligations that all businesses must fulfill:
- Submit an annual report with the state along with the necessary costs
- Pay the franchise tax
- Pay federal and state taxes
Taxes on Subsidiaries in the Philippines
Subsidiary companies must obtain the tax identification number (TIN) from the Securities and Exchange Commission. Tax TIN is the basis for the registration of the subsidiary with the Bureau of Internal Revenue.
Those establishing subsidiaries in the Philippines should be aware of the following taxes:
- A 30% withholding tax is imposed on dividend payments offered to the subsidiary’s non-resident shareholders.
- A standard rate of 12% of VAT is imposed
- A 0% VAT is imposed on the subsidiary’s export services
- A 30% withholding tax is charged on the subsidiary’s global income
- A 10% earnings tax is levied on the subsidiary’s earnings if relevant authorities deem the accumulated amount ” improper.”
Tax Incentives for Businesses Setting Up a Subsidiary in the Philippines
Investors – both Filipino and non-Filipino – can take advantage of tax breaks and other benefits under Philippine investment regulations. However, they must register their firms with the appropriate government agencies or invest in government-favored regions to reap the advantage of government benefits.
Other Important Considerations
Business owners looking to set up a subsidiary business in the Philippines must know that it is a long and expensive process. There is much paperwork involved that may demand to and fro travel to the Phillippines.
Moreover, the parent company’s management should calculate the company’s financial implications of expanding to the Philippines. They must be adequately prepared to invest the requisite funds for establishing their subsidiary business in the Philippines.
Once the incorporation process is completed, companies must start hiring employees, which puts an additional burden on the company’s HR team. In addition, managing international teams is a different ballgame that often requires advanced collaboration tools and sufficient human resources.
How Multiplier’s Employer of Record Can Help You Hire & Expand in the Philippines?
Starting business operations while fulfilling the legal requirements is a challenge. Setting up a subsidiary in the Philippines demands significant time and financial investments. Plus, foreign companies must comply with the country’s laws and regulations.
However, you can ease your burden by hiring a global EOR service provider like Multiplier. We can help you begin operations and onboard employees without establishing a subsidiary in the Philippines.
Our experts can handle employee onboarding and payroll, draft legal contracts, and manage your international teams. Rest assured, we can help you test the new market and reap the benefits of growing overseas.