When Unregistered Foreign Corporations Do Business Online

Nicolas and De Vega Law Offices Article - Unregistered Foreign Corporations Doing Business Online

Unregistered Foreign Corporations Doing Business Online

If you own, or are doing business as, a foreign corporation, and your company has a website, an online presence, or is otherwise doing business through any online platform, you may want to read this article.

A foreign entity’s online platform or website may be a reason why the Philippine government will consider the company as doing business in the Philippines. When you do business in the Philippines, or are considered as, or found to be, doing business in the Philippines, you are bound by Philippine laws. This means that if your particularly industry requires a secondary license from the Securities and Exchange Commission, the Insurance Commission, the Philippine Contractor’s Accreditation Board, or from other government agencies, and your company is construed as doing business in the Philippines without the requisite license, the unregistered foreign corporation may be slapped with fines, penalties, taxes, and even criminal liability.

When Registration or a License to do Business is Not Necessary

A unilateral declaration from the Philippine government, the Philippine Securities and Exchange Commission, or any other agency of the government, that an unregistered foreign entity is doing business in the Philippines, may seem unfair. Fortunately, there are many tests that are followed and applied by the Philippine government, through these government agencies, to determine whether an unregistered foreign entity can be considered as doing business in the Philippines.

The simplest test would be to classify the activities of the unregistered foreign entity, and determine if it falls under the acts defined under Section 1(f) of the Implementing Rules and Regulations of Republic Act No. 7042, otherwise known as the Foreign Investments Act of 1991, which are not deemed to be “doing business” in the Philippines.

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, are acts which are not considered as doing business in the Philippines. If the unregistered foreign entity is represented by an appointed nominee director, or officer in a domestic corporation, of which the unregistered foreign entity is a stockholder, the unregistered foreign entity is likewise considered as not doing business in the Philippines.

If the unregistered foreign entity appoints a representative or distributor in the Philippines, the foreign entity is not considered as doing business in the Philippines, if the representative or distributor does business under its own name and account. Such arrangements are common in business format or commercial franchising, and also in licensing relationships, where the franchisee or the licensor, as the case may be, operates in the Philippines under its own name.

Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines, or consignment by an unregistered foreign entity of equipment with a local company to be used in the processing of products for export, are also activities outside the scope of doing business in the Philippines, and may be safely carried out in the Philippines by unregistered foreign entities without repercussions.

Data research and collection of information are likewise excluded from the definition of doing business, as these are perceived to be preparatory activities. Another notable exception to the rule is the performance of auxiliary services related to an existing and isolated contract of sale. Emphasis is given on the fact that the contract of sale must be isolated and not on a continuing basis. Otherwise, the transaction, if continuing, will fall under the ambit of doing business in the Philippines, and subject the unregistered foreign entity to punitive measures. Auxiliary services that may be necessary to the item, good or service sold under the isolated transaction, are likewise excluded. These include repairs or servicing, training domestic workers to operate it, and similar incidental services.

Websites Publishing Announcements or General Advertisements Not Included

Website which merely announce or publish general advertisements are also expressly excluded from the definition of doing business in the Philippines.

Section 1(f) of the Implementing Rules and Regulations of Republic Act No. 7042 or the Foreign Investments Act of 1991 expressly states that the publication of a general advertisement through any print or broadcast media is not deemed to be an act of doing business in the Philippines. Therefore, the act of posting materials, advertisements, announcements, and other information, in a website, is not tantamount to doing business in the Philippines. Thus, if a website simply discusses the unregistered foreign entity’s business model, includes general advertisements about its business, or makes announcements, and without any features that permit any commercial, trading or sales transactions within the website of online platform, such website will be considered as a purely informational website, or a mere “publication of a general advertisement through any print or broadcast media” and therefore outside the scope of business in the Philippines.

 
Sliding Scale Test Applied to Websites

In determining whether an online platform owned by an unregistered foreign entity can be basis to consider the entity as doing business in the Philippines, the Securities and Exchange Commission of the Philippines adopted the sliding scale test. The sliding scale test is a test of doing business commonly used in the United States. This test looks into the commercial interactions over the internet, to determine the level or types of activities that will constitute “minimum contacts” for the courts to obtain personal jurisdiction over the foreign corporation.

In SEC-OGC Opinion No. 17-03, the Commission differentiated a passive website, active website and an interactive website:

“A passive website does not actively solicit orders for goods or services or support other commercial activities. Many courts have held the fact that the site exists and can be viewed all over the world does not, by itself, amount to “minimum contacts” sufficient to subject the website owner to jurisdiction in every state in which viewers can access the website.

An active website serves as a gateway for conducting business over the internet between the website owner and residents of a particular state. Courts will exercise personal jurisdiction over a corporate website that knowingly and repeatedly transmits computer files over the internet to residents of a foreign state or repeatedly sells any products or services to residents of a specific state via its website.

An interactive website allows users to exchange information with the website creator, order products, make reservations and conduct other business, often with a credit card.”

It is based on the premise that “the likelihood that ‘personal jurisdiction’ can be constitutionally exercised is directly proportionate to the nature and quantity of commercial activity that an entity conducts over the internet.

On one end of the spectrum are situations where a company regularly and knowingly enters into contracts, or engages in activities with residents of the Philippines. Here, personal jurisdiction would be proper, and the company will be considered as doing business in the Philippines.

At the opposite end of the spectrum, a company may have a passive website that is not targeting individuals in the Philippines, but simply putting information on the Internet for those who are interested, whether residents of the Philippines or not. Personal jurisdiction in such instances would not be proper, and the company that owns the passive website is not considered as doing business in the Philippines.

To distinguish, passive websites would not generate sufficient contacts with a foreign country to establish personal jurisdiction and therefore be considered as doing business in such foreign country, while active websites generate sufficient business over the internet to establish personal jurisdiction, and likewise gives rise to the determination that it is doing business in such foreign country. To be an active website, it must serve as a gateway or avenue for the conduct of the business over the internet between the website owner and residents of a particular state. This means that the website must have the ability to allow the residents of a particular state to buy, purchase or otherwise avail of the goods or services of the company, through its online platform.

Lastly, in the middle of the spectrum are interactive websites, where users may exchange information with host computers. Here, a case-by-case approach is implemented, and a court will examine interactivity levels and the commercial nature of the website to determine whether exercising personal jurisdiction would be proper. (Zippo Mfg. Corp. v. Zippo Dot Com, Inc., 952 F. Supp. 1119, 1121 (1997))

Thus, posts on a website should not amount to active solicitation, sufficient to give rise to the determination that the unregistered foreign entity is doing business in the Philippines, where the posts merely contains information which is accessible or available online, or are merely mere informative posts. This conclusion can be bolstered if such website does not contain facilities or any gateway to conduct business, to purchase goods or services, or to make payment, and provided that the website must not be not be actively soliciting orders for goods or services or supporting other commercial activities. Websites of such a nature are clearly passive websites, and do not possess the necessary levels of interactivity and commerce, to exercise personal jurisdiction and admit of a finding that the owner of the website is doing business in the Philippines.

In a recent case entitled W Land Holdings Inc. vs. Starwoods Hotel, G.R. No. 222366, 04 December 2017, the Philippine Supreme Court ruled that the mere use of a mark on a website, which can be accessed anywhere in the world, will not automatically mean that the mark has been used in the ordinary course of trade of a particular country. Thus, the use of mark on the internet must be shown to result into a within-State sale, or at the very least, discernibly intended to target customers that reside in that country.

This being so, the use of the mark on an interactive website, for instance, may be said to target local customers, when they contain specific details regarding or pertaining to the target State, sufficiently showing an intent towards realizing a within-State commercial activity or interaction. These details may constitute a local contact phone number, specific reference being available to local customers, a specific local webpage, whether domestic language and currency is used on the website, and/or whether domestic payment methods are accepted.

Notably, this paradigm of ascertaining local details to evince within-state commercial intent is subscribed to by a number of jurisdictions, namely, the European Union, Hong Kong, Singapore, Malaysia, Japan, Australia, Germany, France, Russia, and the United Kingdom.

It was also reiterated by the Supreme Court in this case, that in order for a corporation to be considered as doing business in the Philippines, the use of its mark on the website must be coupled with the acts, which would show that the corporation has targeted the Filipino customers, with the view of continuously transacting with them. Among the local information or details mentioned are local contact phone number, specific local webpage, whether domestic language and currency is used on the website, and/or whether domestic payment methods. With these factors, it can be said that the corporation is doing a within-State sale which results to doing business in the Philippines.

A website that does not contain these facilities or information is not an active website, and the entity that owns the website, if an unregistered foreign entity, will not be considered as doing business in the Philippines.

Applying the ruling in W Land Holding Inc., if an examination of the website of an unregistered foreign entity will show no clear intention from the entity to do a within-State sale through the website, if the website did not specifically target customers residing in the Philippines, coupled by the fact that there are no specific local details on the website such as a local contact phone number, or a specific reference available to local customers, such as use of its currency, among others, such unregistered foreign entity cannot be considered as doing business in the Philippines. The absence of the specific local details is indicative of the lack of intention of the unregistered foreign entity to do business in the Philippines.

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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