Foreign Ownership in the Philippines

RA10881: Foreign Ownership of Finance Companies in the Philippines

The new law, RA10881, approved and enforced in the third quarter of 2016, has allowed foreign investors to have full ownership of finance companies in the Philippines. This law is expected to further boost investments in the country, prompting more finance companies to engage corporate lawyers in the Philippines to fully understand and operate within the auspices of the law. It is crucial for both local and foreign players to fully understand the law to improve business’ operations while promoting competition in the local market.

The amended law has lifted the restrictions in specific laws which have made it difficult for foreign investors to participate in the finance market. The Philippines lagged far behind its neighbors when it comes to engaging investors due to the requirements in citizenship and form of organization and capital. Investors saw these in specific laws for financing, lending, and adjustment companies.

What are Finance Companies?

To further appreciate the implications of this law, it is best to first understand what Finance Companies are. Finance companies are organizations offering loan benefits or credits to individuals and / or businesses. These companies are required to be registered as a corporation under the Securities and Exchange Commission. These companies are supposed to secure the a legitimate certificate of registration from SEC. Finance companies which are subsidiaries of banks or non-bank financial institutions with quasi banking license are regulated and monitored by the Bangko Sentral ng Pilipinas.

Financing companies are corporations, except banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable property (Sec. 3. of Republic Act No. 8556 known as the Financing Company Act of 1998).

Take note, Finance companies are different from lending companies and insurance adjustment firms. These are addressed separately under the new law.

Why was the law considered restrictive before?

Prior to the amendments, foreigners could only own up to 60 percent of  investment, finance, and lending firms. They, too, can own up to 40 percent of insurance adjustment firms. While these parameters seem reasonable, one other clause added to the restriction. The law also set a P10-million minimum requirement for paid up capital for finance companies in Metro Manila, P5 million for cities outside the national capital, and P2.5 million in municipalities.

How can new market players realize the benefits of this new law?

New market entrants can take advantage of this opportunity by engaging foreign counterparts who can fully finance local operations. But since it is expected for local, long-standing industry players to toughen up and offer more competitive packages, new entrants should consider engaging the services of credible corporate lawyers in the Philippines. Local legal services can offer a fuller and broader understanding of this new law and can ensure comprehensive assistance in setting up the business.

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