Jurisprudential Tests of Doing Business in the Philippines

Nicolas and De Vega Law Offices Article - Jurisprudential Tests of Doing Business in the Philippines

Implications when an Individual, Corporation or Entity is considered as Doing Business in the Philippines

There are legal implications when a foreign individual, corporation or entity, is considered as doing business in the Philippines. These legal implications include getting taxed, for example, with higher tax rates, getting slapped with fines, or even criminal liability for failure to comply with regulatory compliance or legal requirements, if an unregistered corporation is considered as doing business in the Philippines.

As a matter of fact, Section 150 of Republic Act No. 11232 also known as the Revised Corporation Code of the Philippines, states that an unregistered foreign corporation doing business in the Philippines is not permitted to “to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines”. On the other hand, the same provision authorizes those that would like to sue such unregistered foreign corporation, to sue or proceed against the unregistered foreign entity before the Philippine courts or administrative tribunals, on any valid cause of action recognized under Philippine laws.

Simply stated, an unlicensed foreign corporation doing business in the Philippines does not have the capacity to sue before the Philippine courts, but may be sued or hailed to court. There is a perceived unfairness brought about by this rule. However, this is a legislated response and a policy endeavor of the Philippine government, to require all foreign entities who wish to enter Philippine commerce, to register or obtain a license prior to doing business, or otherwise face sanctions.

This determination becomes even more relevant, on the face of business all over the world, with their own websites, or publishing advertisements and announcements over the internet. With an innumerable number of websites, representing businesses all over the world, displaying their wares and services, and offering their business to any person in any country in the world, one cannot discount that possibility that such website, wherever located, may be considered as doing business in the Philippines. This is notwithstanding the fact that such enterprise has no physical presence in the Philippines.

Thus, the determination of whether a person is doing business is crucial, especially for foreigners and foreign corporations with commercial activity in the Philippines. After all, not all commercial activity is sufficient to give rise to the conclusion that the individual, person or entity is doing business in the Philippines.

 

Jurisprudential Tests to Determine if an Individual, Corporation or Entity is Doing Business in the Philippines.

Philippine law actually defines the term “doing business” “as 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 totalling 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”. This definition is from Section 3(d) of Republic Act No. 7042 or the Foreign Investments Act of 1991.

Fortunately, the law (for the most part) is dynamic. While there are truly unprecedented changes in the manner in which commerce is conducted, the courts have broadened the interpretation of existing laws, and have provided reasonable tests, to determine whether a commercial enterprise is doing business in the Philippines.

As a matter of fact, in the case of Mentholatum Co. vs. Mangaliman, G.R. No. 44701, 27 June 1941, the Supreme Court held that there is no general rule or governing principle that can be laid down as to what constitutes “doing” or “engaging in” or “transacting” business. Indeed, each case must be judged in the light of its peculiar environmental circumstances. Hence, the Philippine Supreme Court fashioned various tests, so that the determination, as to whether a foreign corporation or entity is considered as doing business or not, is judged in light of its peculiar environmental circumstances.

The Substance and Continuity Tests of Doing Business in the Philippines

In Agilent Technologies Singapore (Ptd.) Ltd. vs. Integrated Silicon, G.R. No. 154618, 15 April 2004, the Supreme Court laid down the two general tests in determining whether a foreign corporation is doing business in the Philippines.

 

The Substance Test of Doing Business in the Philippines

The first test is the substance test or whether the foreign corporation is continuing the body of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. The second test is the continuity test or when it 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 the progressive prosecution of, the purpose and object of its organization.

Under the substance test, for a foreign corporation to be considered as doing business in the Philippines without a license, the foreign corporation must have performed acts from which its intention to establish and continue the business in the Philippines may directly be inferred. The test of standard is the intention of the foreign corporation to do business in the Philippines.

Applying the substance test, the foreign corporation must have an intention to establish a business in the Philippines. There must be clear indications on the conduct of the foreign entity, manifested or shown on its website, or in its physical dealings, that would show a clear intention to do business in the Philippines.

The Continuity Test of Doing Business in the Philippines

On the other hand, for a foreign corporation to be considered as doing business in the Philippines under the continuity test, we look into the commercial dealings of the foreign corporation in the Philippines. The commercial dealings must be characterized by a continuity of transactions of the foreign corporation with its customers, with the end view of achieving the purpose and object of the foreign corporation, or related to the prosecution of the substance or purpose for which it was organized.

The Supreme Court in B. Van Zuiden Bros., Ltd. v GTVL Mfg. Industries, G.R. No. 147905, 28 May 2007, held that an essential condition in determining whether a foreign company is doing business in the Philippines is actual performance of specific commercial acts within the territory of the Philippines, and such specific business transactions are performed on a continuing basis in its own name, and for its own account.

Applying the continuity test to a foreign corporation with dealings in the Philippines, if the unregistered foreign corporation has not made any transactions with customers in the Philippines, has not catered to the Philippine users of a sufficient volume as to evidence a continuing commercial dealings, then it cannot be deemed as doing business in the Philippines.  

 

Specific Acts Defined by Law as Not Doing Business in the Philippines

Section 1(f) of the Implementing Rules and Regulations of the Republic Act No. 7042 or the Foreign Investments Act of 1991 clarified that the following acts are not deemed to be “doing business” in the Philippines:

“(1) 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;

(2) Having a nominee director or officer to represent its interests in such corporation;

(3) Appointing a representative or distributor domiciled in the Philippines which transacts business in the representative’s or distributor’s own name and account;

(4) The publication of a general advertisement through any print or broadcast media;

(5) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;

(6) Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export;

(7) Collecting information in the Philippines; and

(8) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.”

About Nicolas and De Vega Law Offices

If you need assistance in registration with the Securities and Exchange Commission, or have issues in corporate law, commercial law, corporate or commercial litigation, or civil or other criminal law-related issues,  we can help you. Nicolas and de Vega Law Offices is a full-service law firm in the Philippines.  You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines.  You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at info@ndvlaw.com. Visit our website https://ndvlaw.com.

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