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Joint ventures in the Philippines: overview

Joint ventures in the Philippines: overview

by Perry L. Pe and Andrea Antonette A. Sese-Relucio, Romulo Mabanta Buenaventura Sayoc & de los Angeles

A Q&A guide to joint ventures law in the Philippines.

The Q&A gives a high level overview of joint ventures law, including regulation of joint ventures, types of joint ventures permitted in the jurisdiction, whether corporate joint ventures are subject to the corporate law, formalities for formation and registration of joint ventures, statutory limits on duration, anti-trust rules, termination, rules relating to joint ventures with foreign members, and incentives. To compare answers across multiple jurisdictions, visit the Joint Ventures Country Q&A tool.

This Q&A is part of the Joint Ventures Law Global Guide.

Domestic company joint ventures (JVs)

Regulation

1. Are JVs expressly regulated?

There is no Philippine law that expressly recognises or governs the formation of JVs.

Instead, courts apply general contract law and the law on partnerships to JVs to delineate the rights and liabilities of the JV and its component parties (Aurbach v Sanitary Wares Manufacturing Corporation, GR No. 75875, 15 December 1989).

A JV can be regarded as a partnership based on the definition of partnership (Article 1767, Civil Code) as two or more persons contributing money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

While a corporation has no power to enter into a partnership, it can validly enter into a JV agreement where the nature of that venture is in line with the business authorised by its charter (Supreme Court in Tuason vs. Bolanos, G.R. No. L-4935, 28 May 1954).

For the purposes of the Competition Act, a JV is defined as a
business arrangement
by which an entity or group of entities contribute capital, services, assets, or a combination of them to undertake an investment activity or a specific project, where each entity has the right to control the policies of the activity or project, with the intention of sharing profits, risks and losses subject to agreement by the entities (Rule 2, Section (i), Implementing Rules and Regulations of the Philippine Competition Act).

An “entity” is defined as any natural or legal person, sole proprietorship, partnership, combination or association in any form, whether incorporated or not, domestic or foreign, including those owned or controlled by the government, engaged directly or indirectly in any economic activity (Rule 2, Section (h), Implementing Rules and Regulations of the Philippine Competition Act).

Types

2. Which types of JV are allowed?

Contractual and corporate JVs are both allowed.

  1. Contractual joint ventures

Contractual JVs are established by a private contract between the parties, without the need to register with the Securities and Exchange Commission (SEC). The basic requirements for a contractual JV are:

The authority to enter into a partnership is expressly conferred by the charter or the articles of incorporation of the corporation.

The nature of the business venture to be undertaken by the partnership is in line with the business authorised by the charter or articles of incorporation.

If it is a foreign corporation, it must obtain a licence to transact business in the country in accordance with the Corporation Code of the Philippines (SEC-OGC Opinion No. 16-22)

Contractual JVs do not have a legal personality separate from the JV members.

  1. Corporate joint ventures

Corporate JVs are undertaken by the formation of a new domestic corporation that must be licensed by the SEC. The co-venturers must subscribe to, and pay up, a certain percentage in the capital stock of the JV company.

Both contractual and corporate JVs are treated by Philippine tax law as corporate taxpayers for purposes of corporate income tax. However, a JV or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government is not separately taxed as a corporate taxpayer (section 22(B) of the National Internal Revenue Code of 1997).

The dividends received by a domestic corporation or a resident foreign corporation from a domestic corporation (in this case, the JV company) are not subject to Philippine tax (section 27(D)(4) and section 28(A)(7)(d), National Internal Revenue Code 1997). The same dividends received by a non-resident foreign corporation are subject to a final withholding tax of 15%, subject to certain conditions (section 28(A)(5)(b), National Internal Revenue Code 1997) or to applicable tax-sparing treaties.

3. What are the principal corporate/company laws governing corporate JVs?

The formation of corporate JVs is governed by the Corporation Code. The Securities and Exchange Commission (SEC) licences and regulates corporate JVs.

Formation and registration

4. What are the typical JV founding documents for a corporate JV?

The corporate JV is created like an ordinary domestic corporation.

The charter documents of a corporate JV are its articles of incorporation and bye-laws which must both be approved by the Securities and Exchange Commission (SEC).

The articles of incorporation must specify the following:

Name of the corporation.

Specific purpose/s for which the corporation is being incorporated.

Place in the Philippines where the principal office will be located.

Term of the corporation, which must not exceed 50 years.

Names of at least five individual incorporators, the majority of whom must be residents of the Philippines.

Names of directors, not less than five and not more than 15, a majority of whom must also be residents of the Philippines and who must each own at least one share of stock of the corporation, who must act until the first set of directors has been duly elected and qualified.

Name of a treasurer-in-trust.

Amount of the corporation’s authorised capital stock, in local currency, the number of shares into which it is divided, and if the shares are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on subscription.

5. Is the use of foreign language in a JV’s founding documents (both corporate and contractual) restricted?

English and Filipino are the official languages for communication. Official documents, commercial contracts and court pleadings are written in English.

There are no restrictions for the language of the founding documents although English is preferred. However, if the language of the document is an unofficial language, the SEC will require a notarised English translation, duly authenticated in the Philippine embassy or consulate with jurisdiction over the place of execution.
Further, in litigation, such a document will not be admitted as evidence unless accompanied by a translation into English or Filipino.

6. Are public officers (for example, public notaries) involved in a JV’s formation procedure?

The articles of incorporation must be subscribed and sworn before a public notary.

The JV agreement in a contractual JV must also be subscribed and sworn before a public notary if the capital is more than PHP3,000 or if immovable property or real rights are contributed.

7. Are JVs registered with any local registries? Are public sector bodies’ authorisations required for a JV’s establishment?

Local registries

The corporate JV must first be licensed by the Securities and Exchange Commission (SEC) and subsequently registered with the:

Bureau of Internal Revenue as a corporate taxpayer with its own taxpayer identification number.

Local government unit (city) where it has its principal office.

Social Security System, Philippine Health Insurance Corporation and the Home Development Mutual Fund (as an employer).

Further, the foreign equity investment must be registered with the Central Bank Bangko Sentral ng Pilipinas to allow the corporate JV to access foreign exchange from the Philippine banking system for the payment of dividends and repatriation of investment.

Contractual JV agreements do not have to be registered with the SEC.

Qualified JVs (both corporate and contractual) can register with the Board of Investments or the Philippine Economic Zone Authority to take advantage of fiscal and non-fiscal incentives.

Public sector bodies

A JV, whether corporate or contractual, is considered a merger and as such regulated by the Philippine Competition Commission (PCC) in accordance with the Competition Act.

A merger requires notification to the PCC before the execution of definitive agreements if either the value of the assets to be combined or contributed to the JV or the gross revenues generated by the combined or contributed assets will exceed PHP1 billion (rule 4, section 3(d), Implementing Rules and Regulations of the Competition Act).

The parties must not conclude the transaction before the expiry of the relevant waiting periods and/or the approval of the PCC (section 2(b)). A transaction that meets the thresholds and does not comply with the notification requirements and waiting periods will be considered void and will subject the parties to an administrative fine of 1% to 5% of the value of the transaction (section 3(f)g).

8. What other formal requirements must be complied with to validly constitute a JV?

In a contractual JV, if immovable property or real rights are contributed, the JV agreement must also be sworn and subscribed to by the parties before a public notary.

If land is being contributed as equity capital by a party to the JV, the capital contribution can be annotated on the certificate of title of the land. This will serve as a notice against the whole world in case the land is alienated in the course of the JV.

Permitted markets

9. Can the JV structure be used in every industry sector? Are there any restrictions to be considered and carefully assessed before investing in a JV?

There are investment areas or industry sectors which the Constitution, existing laws or public policy reserve only to Philippine nationals.

The Foreign Investments Act of 1991 defines a Philippine national as any one of the following:

A citizen of the Philippines.

A domestic partnership or association wholly owned by citizens of the Philippines.

A corporation organised under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines.

A corporation organised abroad and registered as doing business in the Philippines under the Corporation Code, of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos.

A trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine nationals.

The Securities and Exchange Commission (SEC) ruled that for corporations that are engaged in activities which are wholly or partially reserved to Filipinos, the minimum percentage of Filipino equity must be applied to both the (Memorandum Circular No. 8, 2013 series):

Total number of outstanding shares of stock, entitled to vote in the election of directors.

Total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.

The investment areas below are wholly or partially reserved to Philippine nationals under the 1987 Constitution and applicable laws and regulations (Tenth Foreign Investment Negative List issued by the President of the Philippines in May 2015).

No foreign equity:

Mass media except recording.

Practice of the following professions.

pharmacy;

radiologic and x-ray technology;

criminology;

forestry;

law (only individuals can practise).

Retail trade enterprises with paid-up capital of less than US$2.5 million.

Private security agencies.

Small-scale mining.

Utilisation of marine resources in archipelagic waters, territorial sea, and exclusive economic zone as well as small-scale utilisation of natural resources in rivers, lakes, bays, and lagoons.

Ownership, operation and management of cockpits.

Manufacture, repair, stockpiling and/or distribution of nuclear weapons, or biological, chemical and radiological weapons and anti-personnel mines.

Manufacture of firecrackers and other pyrotechnic devices.

Up to 20% foreign equity:

Private radio communications network.

Up to 25% foreign equity:

Private recruitment, whether for local or overseas employment.

Contracts for the construction and repair of locally-funded public works, except for

infrastructure/development projects;

projects which are foreign funded or assisted and required to undergo international competitive bidding (where 100% foreign equity is allowed).

Under current rules of the Construction Industry Association of the Philippines, a Regular License with Annotation can be issued by the Construction Accreditation Board to domestic contractor corporations with 100% foreign equity, provided that the corporation has a minimum capitalisation of PHP1 billion. Holders of this licence can undertake the following projects:

vertical projects with a minimum value of PHP5 billion including office or residential condominiums, hotels, malls, hospitals, schools, warehouses, airport terminals, marine terminals, international transport terminals, power generation plants, manufacturing and assembly facilities, tourism resorts, country clubs, and golf courses;

horizontal projects with a minimum value of PHP3 billion including roads, expressways, toll road systems, light rail systems, heavy rail systems, monorail systems, water distribution systems, bulk water systems, sewage and sewerage systems, power transmission and power distribution systems, telecommunications distribution systems, bridges, flyovers, viaducts, overhead carriageways, storm cisterns, dams, dikes, seawalls and breakwater system, and reclamation projects;

contracts for the construction of defence-related structures.

Up to 30% foreign equity

Advertising.

Up to 40% foreign equity

Exploration, development and utilisation of natural resources.

Ownership of private lands.

Operation of public utilities.

Educational institutions other than those established by religious groups and mission boards.

Culture, production, milling, processing, trading except retailing, of rice and corn and acquiring, by barter, purchase or otherwise, rice and corn and their by-products.

Contracts for the supply of materials, goods and commodities to a government-owned or controlled corporation, company, agency or municipal corporation.

Facility operator of an infrastructure or a development facility requiring a public utility franchise.

Operation of deep sea commercial fishing vessels.

Ownership of condominium units.

Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National Police clearance.

Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Department of National Defense clearance.

Manufacture and distribution of dangerous drugs

Sauna and steam bathhouses, massage clinics and other similar activities regulated by law because of risks posed to public health and morals.

All forms of gambling.

Domestic market enterprises with paid-in equity capital of less than the equivalent of US$200,000.

Domestic market enterprises with paid-in equity capital of less than the equivalent of US$100,000 which:

involve advanced technology; or

employ at least 50 direct employees.

Non-Philippine nationals can engage in an export enterprise in which a manufacturer, processor or service, including tourism, exports 60% or more of its output, or a trader purchases products that are domestically manufactured and exports 60% or more of them.

Non-Philippine nationals cannot own or hold land anywhere in the Philippines.

Purpose

10. Can a JV be established with any purpose?

See Question 9.

Share capital and participation

11. What possible forms of participation are there in a JV’s share capital? How can a JV member contribute and are there statutory limits on the possibility to make contributions in kind?

Forms of participation

Following the definition of a partnership, parties to a JV can contribute money, property, or industry to a common fund.

In a corporate JV where the parties contribute equity, subscription to stock of the corporate JV must be in the form of either cash or property.

Contributions

Other than cash, the following properties can be used as payment for subscription of shares of stock in a corporate JV:

Land, whether registered or unregistered.

Building, including condominium units.

Personal properties and furniture.

Heavy equipment and machinery.

Shares of stock.

Motor vehicle.

Sea vessel or aircraft.

Intangibles, such as intellectual property rights or mining rights.

Conversion of existing debt to equity.

If the JV involves the transfer by one party to another of systematic knowledge for the manufacture of a product, the application of a process, or the rendering of a service, including management contracts, or the transfer, assignment, or licensing of intellectual property rights except software developed for the mass market, the JV is deemed to be a technology transfer arrangement governed by the Intellectual Property Code of the Philippines. Registration of the agreement with the Intellectual Property Office is optional, provided that the JV agreement contains the mandatory clauses and excludes the prohibited clauses.

12. Can a corporate JV’s share capital be denominated in a foreign currency?

The Corporation Code requires the par value of the shares of the corporate JV to be in Philippine pesos.

Duration and limits on membership

13. Are there statutory limits on a JV’s duration?

A corporate JV can exist for a period not exceeding 50 years, unless extended by an amendment in the articles of incorporation.

A contractual JV can exist for the term or purpose stated in the contract.

14. Are there statutory limits on the number of members participating in a JV?

There is no limit in the number of co-venturers in a JV, except that the total foreign equity in the JV company may trigger foreign equity restrictions in reserved investment areas and industries (see Question 9).

Public sector bodies

15. Can a public sector body enter into a JV agreement? Subject to what conditions? In particular, do public private partnerships (PPP) laws and regulations apply?

A public sector body (that is, government entity) can enter into a JV with a private party, subject to applicable foreign equity limitations depending on the activity to be undertaken.

The 2013 Revised Guidelines and Procedures for Entering into Joint Venture Agreements between Government and Private Entities, issued by the National Economic Development Authority, govern the formation of JVs between the government and the private sector. It recognises both corporate and contractual JVs and provides for a general preference for corporate JVs.

Republic Act No. 6957, as amended by Republic Act No. 7718, and its implementing rules and regulations (Build-Operate-and-Transfer (BOT) Law) allow for public private partnerships for qualified infrastructure and development projects. The BOT law permits the following JV schemes:

Build-Operate-and-Transfer (BOT): a contractual arrangement under which the contractor undertakes the construction, including financing, of a given infrastructure facility, and of its operation and maintenance. The BOT scheme includes a supply-and-operate contractual arrangement where the supplier of equipment and machinery (if the interest of the government so requires) operates the facility and provides technology transfer and training to Filipino nationals.

Build-and-Transfer Scheme (BT): the contractor undertakes the construction, including financing, of a given infrastructure facility, and its turnover after completion to the government agency or local government unit concerned which pays the contractor its total investment on the project, plus a reasonable rate of return. This arrangement can be used in the construction of any infrastructure project including critical facilities which, for security or strategic reasons, must be operated directly by the government.

Build-Own-Operate (BOO): a project proponent is authorised to finance, construct, own, operate and maintain an infrastructure or development facility from which the proponent is allowed to recover its total investment, operating and maintenance costs plus a reasonable return by collecting tolls, fees, rentals and other charges from facility users. Under this scheme, the proponent which owns the assets of the facility can assign its operation and maintenance to a facility operator. A facility operator is defined as a company registered with the SEC which may or may not be the project proponent, and which is responsible for all aspects of operation and maintenance of the infrastructure or development facility, including but not limited to the collection of tolls, fees, rentals or charges from facility users. If the facility requires a public utility franchise, the facility operator must be Filipino or at 60% owned by Filipinos.

Build-Lease-Transfer (BLT): a project proponent is authorised to finance and construct an infrastructure or development facility and on its completion turns it over to the government agency or local government unit concerned on a lease arrangement for a fixed period after which ownership of the facility is automatically transferred to the government agency or local government unit concerned.

Build-Transfer-and-Operate (BTO): the public sector contracts out the building of an infrastructure facility to a private entity such that the contractor builds the facility on a turn-key basis, assuming cost overrun, delay, and specified performance risks. Once the facility is commissioned satisfactorily, title is transferred to the implementing agency. The private entity however, operates the facility on behalf of the implement agency under an agreement.

Contract-Add-and-Operate (CAO): the project proponent adds to an existing infrastructure facility which it is renting from the government. It operates the expanded project over an agreed franchise period. There may be a transfer arrangement in regard to the facility.

Develop-Operate-and-Transfer (DOT): the favourable conditions external to a new infrastructure project which is to be built by a private project proponent are integrated into the arrangement by giving that entity the right to develop adjoining property, and thus, enjoy some of the benefits the investment creates such as higher property or rent values.

Rehabilitate-Operate-and-Transfer (ROT): an existing facility is [##transferred] to a private sector to refurbish, operate and maintain for a franchise period, at the expiry of which the legal title to the facility is [##transferred back] to the government. The term is also used to described the purchase of an existing facility from abroad, importing, refurbishing, erecting and consuming it within the host country.

Rehabilitate-Own-and-Operate (ROO): an existing facility is turned over to the private sector to refurbish and operate with no time limit imposed on ownership. As long as the operator is not in violation of its franchise, it can continue to operate the facility in perpetuity.

Non-competition and anti-trust clauses

16. Are there statutory constraints on the use of non-competition or anti-trust clauses in a JV agreement?

During period of effectiveness

A non-competition clause to be effective during the JV can be included in the JV agreement between the parties.

Following termination

A non-competition clause that is to be effective on the termination of the JV must be valid, provided that it does not constitute an unreasonable restraint of trade. Jurisprudence holds that a non-competition clause is reasonable if it sets a limitation on the particular type, time and place of the business activity being restrained.

De facto company/partnership

17. Must the contractual JV satisfy any conditions to avoid falling within the definition of de facto company/partnership?

The Supreme Court has ruled that a corporate entity formed must be a JV rather than a corporation to be governed by the laws on partnership.

The following circumstances led the Supreme Court to hold that the parties contemplated a JV rather than a corporation (Aurbach v Sanitary Wares Manufacturing Corporation (GR No. 75875, 15 December 1989)):

Requiring a vote of seven out of nine directors in certain enumerated corporate acts.

Designating a member of the Executive Committee and requiring a vote of this member for certain transactions.

Using the word “designated” and not “nominated” or “elected” in describing the selection of members of the board of directors.

Referring to the entity as a “joint venture” rather than a corporation.

Providing for a fixed number of directors on the board

In another case, the Supreme Court held that a “consortium” is not a JV when there is no community of interest, a sharing of risks, profits, or losses, or even a representation from the members of the consortium that they have come together to form such consortium. In that case, there was no JV agreement or similar instrument executed by the parties to the consortium. The only documentary evidence adduced to prove the existence of a JV was a statement of one party that it represented the consortium but this was not supported by a declaration from the other parties that they authorise the other to bind them (Information Technology Foundation of the Philippines v Commission on Elections (GR No. 159139, 13 January 2004)).

In Kilosbayan In. v Guingona, Jr (GR No. 113375, 5 May 1995), the Supreme Court ruled that a contract of lease actually constituted a JV when the provisions of the contract showed that both parties participated in the profits and equally bore the risk of loss in an online lottery system that was supposed to be the subject of the lease.

In Philex Mining Corp v Commissioner of Internal Revenue (GR No. 148187, 16 April 2008), the Supreme Court treated as a JV agreement a special power of attorney that identified the parties as “principal” and “manager”, respectively. The court concluded this way because the power of attorney in fact established a common fund and a joint interest in the profits of the business by way of a 50-50 sharing in the income of the subject mining project.

Limiting member liability

18. Can a JV agreement provide that a JV member can participate without incurring any risk, loss or reward?

The co-venturers can agree on the share of each party to the capital, profits, or losses of the JV. However, as far as third parties are concerned, all partners are jointly and severally liable with the partnership for everything chargeable to the partnership, including loss or injury caused to a third person, or penalties incurred due to any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of their co-partners (J Tiosejo Investment v Ang GR No. 174149, 8 September 2010).

Anti-trust

19. Do any anti-trust rules, guidelines or policies apply to a JV agreement?

Technology transfer arrangements must not contain any clauses that (Intellectual Property Code of the Philippines, section 87):

Impose on the licensee the obligation to acquire from a specific source capital goods, intermediate products, raw materials, and other technologies, or of employing personnel indicated by the licensor.

Allow the licensor reserves the right to fix the sale or resale prices of the products manufactured on the basis of the licence.

Contain restrictions regarding the volume and structure of production.

Prohibit the use of competitive technologies in a non-exclusive technology transfer arrangement.

Establish a full or partial purchase option in favour of the licensor.

Obligate the licensee to transfer for free to the licensor the inventions or improvements that can be obtained through the use of the licensed technology.

Require payment of royalties to the owners of patents for patents which are not used.

Prohibit the licensee to export the licensed product unless justified for the protection of the legitimate interest of the licensor such as exports to countries where exclusive licences to manufacture and/or distribute the licensed product(s) have already been granted.

Restrict the use of the technology supplied after the expiration of technology transfer arrangement, except in cases of early termination of the technology transfer arrangement due to reason(s) attributable to the licensee.

Require payments for patents and other industrial property rights after the expiration or termination of the technology transfer arrangement.

Require that the technology recipient does not contest the validity of any patents of the technology supplier.

Restrict the research and development activities of the licensee designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes or equipment.

Prevent the licensee from adapting the imported technology to local conditions, or introducing innovation to it, as long as it does not impair the quality standards prescribed by the licensor.

Exempt the licensor from liability for non-fulfilment of his/her responsibilities under the technology transfer arrangement and/or liability arising from third party suits brought about by the use of the licensed product or the licensed technology.

Governance and limits on directors

20. Can the parties to a JV freely regulate the JV or are they subject to certain restrictions?

Since the JV is essentially a contract, the law allows the contracting parties such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Other than contract law, partnership laws govern the relations between the parties in the absence of any specific provision in the JV agreement.

In a corporate JV, the Corporation Code requires the affirmative vote of at least two thirds of the outstanding capital stock at a meeting duly called for the following purposes:

Amendment of articles of incorporation.

Removal of directors.

Ratification a contract of a director/officer with the corporation.

Extension or shortening the corporate term.

Increase or decrease of the capital stock.

Incurring, creating or increasing bonded indebtedness.

Sale, lease, exchange, mortgage, pledge of all or substantially all the corporate assets.

Investment of corporate funds in another corporation or for any purpose other than the primary purpose for which the corporation was organised.

Issuance of stock dividends.

Delegation to board of directors of the power to amend or repeal the bye-laws or adopt new bye-laws.

Approval or amendment of a plan of merger or consolidation.

Dissolution of a corporation.

The following acts require the vote of shareholders:

Election of directors.

Execution of management contracts.

Adoption, amendment or repeal of bye-laws.

Revocation of the power given to the board of directors to amend or repeal the bye-laws.

A company must declare dividends when its retained earnings are in excess of 100% of its paid-in capital stock, except when:

Justified by definite corporate expansion projects or programs approved by the board.

The corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its consent, and such consent has not been secured.

It can be clearly shown that such retention is necessary under special circumstances, such as when there is a need for special reserve for probable contingencies.

21. Are there limits or restrictions on the eligibility of an individual as a member of the board of directors/statutory auditor?

The majority of the board of directors of must also appoint a:

President, who must be a director.

Treasurer who may or may not be a director.

Corporate secretary who must be a resident and citizen of the Philippines.

Two or more positions can be held concurrently by the same person, except that no one can act as president and secretary or as president and treasurer at the same time.

Termination

22. What legal regime applies to a JV’s termination? Can a JV be terminated for just cause on request of one party?

In a corporate JV, dissolution may be effected by the affirmative vote of the stockholders owning at least two-thirds of the outstanding capital stock.

In a contractual JV, the agreement can provide for causes of termination or a term or particular undertaking, the fulfilment of which will result in the termination. If no term or undertaking is specified, the JV can also be terminated by the exercise in good faith by any partner of the power to withdraw from the JV at will.

23. Is the termination of a JV agreement subject to any public sector body’s approval?

A corporate JV must be dissolved on the recommendation of the SEC. Its tax liabilities must also be assessed and cleared by the Bureau of Internal Revenue.

A contractual JV must be dissolved, its going concern wound up, and is assets liquidated in accordance with the terms of the JV agreement or the applicable law on partnership.

Choice of law and jurisdiction

24. Are there constraints on the choice of the law and the jurisdiction applicable to a JV?

A choice of a foreign substantive law is generally recognised and given effect under Philippine law, provided that:

The contract has a substantial connection with the law chosen.

The contract’s provisions are not against prohibitive laws of the Philippines, public order, public policy, or good customs.

However, for litigation in the Philippines, the foreign substantive law must be proven in court. Otherwise, the court must assume that the foreign substantive law is the same as Philippine law. The chosen law must also have a connection to the contract. This connection may arise from the place of the execution of the contract, place of performance, situs of the subject matter of the contract, or the place of incorporation, place of business, or domicile of the contracting parties.

A contract can also stipulate a forum chosen by the parties, other than Philippine courts, which will decide on disputes and claims arising out of the contract. However, the stipulation will not deprive Philippine courts of jurisdiction over a subject matter if the court believes that it is a convenient court to which the parties may resort, if it is in a position to make an intelligent decision as to the law and the facts of the case, and if it has the power to enforce a decision.

JVs with foreign members

Validity and authorisation

25. What are the rules relating to validity and authorisation of JVs with foreign parties?

Validity

JVs with foreign parties are allowed, provided that they comply with applicable foreign equity restrictions (see Question 7).

Limits

Certain investment areas or business activities are reserved for Philippine nationals (see Question 9).

In a contractual JV, a Philippine national partnership is one where the partnership is wholly owned by citizens of the Philippines.

In a corporate JV, a Philippine national is one of the following:

A corporation set up under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines.

A corporation set up abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos.

Authorisation

In the case of a corporate JV, a declaration must be made before the SEC if there is a foreign participation in the corporate JV.

Effect of foreign membership

26. Are any of the rules relating to domestic company JVs (see Questions 1 to 24) different for JVs with members incorporated under, or governed by, the laws of a foreign country?

See Question 9.

Economic or financial incentives

27. Are there economic or financial incentives for foreign direct investments in a JV?

Registered enterprises can take advantage of the incentives offered by either the Philippine Economic Zone Authority (PEZA) or the Board of Investments (BOI).

The incentives offered to PEZA registrants include:

Income tax holiday for four years.

After the income tax holiday, special income tax rate of 5% of gross income, in lieu of all national and local taxes except real property taxes on land.

Exemption from import duties on machinery and equipment.

Zero-rated VAT during the income tax holiday and exemption from VAT after the income tax holiday.

Additional deduction from taxable income equivalent to half of the value of training expenses incurred in developing skilled or unskilled labour or for managerial development programs.

Exemption from local business taxes and local business permits.

The incentives offered to BOI registrants include:

Income tax holiday of four years from the start of commercial operations.

After the income tax holiday, BOI registrants are covered by the regular income tax regime. However, they can also apply for PEZA registration and convert their BOI registration to PEZA registration to enjoy that scheme’s preferential income tax rates after their income tax holiday.

Zero-rated import duties on machinery and equipment.

Zero-rated VAT for enterprises that export 100% of their services.

Additional deduction from taxable income equivalent to 50% of the wages of additional skilled and unskilled workers in the direct labour force.

Employment of foreign nationals in supervisory, technical, or advisory positions for a period of five years from the date of registration.

Minimum investments/contributions

28. Are there mandatory minimum equity investments or contributions in kind thresholds for a foreign JV member?

Subject to the foreign ownership restrictions previously discussed, there is a minimum but not a maximum equity investment or required contribution for a foreign co-venturer, depending on the extent of its equity ownership.

A corporate JV that seeks to engage in business as a domestic market enterprise with between 40% and 100% foreign equity must have a paid-in equity capital of at least US$200,000 or at least US$100,000 provided the enterprise involves an advanced technology as declared by the government or employs at least 50 direct employees.

A domestic market enterprise is one which produces goods for sale, or renders services, to the domestic market entirely, or in case of exporting a portion of its output, it consistently exports under 60%].

The regulatory authorities

Securities and Exchange Commission

Main activities. Regulates and supervises, and grants licences to, corporations and partnerships.

W www.sec.gov.ph

Board of Investments

Main activities. Administers incentives for enterprises registered with it.

W www.investphilippines.gov.ph

Philippine Economic Zone Authority

Main activities. Registers and administers incentives for enterprises located in special economic zones

W www.peza.gov.ph

Online resources

Corporation Code

W www.officialgazette.gov.ph/1980/05/01/batas-pambansa-bilang-68/

Description. This is a link to the text of the Corporation Code of the Philippines.

Civil Code

W www.officialgazette.gov.ph/1949/06/18/republic-act-no-386/

Description. This is a link to the text of the Civil Code of the Philippines which contains the law on partnership.

Tenth Foreign Investments Negative List

W www.officialgazette.gov.ph/downloads/2015/05may/20150529-EO-0184-BSA.pdf

Description. This is a link to the text of the Tenth Foreign Investments Negative List which identifies the investment areas which are open to foreign investors or reserved for Philippine nationals.

Board of Investments

W www.boi.gov.ph/files/ipp%202017.pdf

Description. This is a link to the text of the 2017 Investment Priorities Plan which contains investment areas that qualify for registration with the Board of Investments

Contributor profiles

Perry L. Pe, Senior Partner

Romulo Mabanta Buenaventura Sayoc & de los Angeles

Image 1 within Joint ventures in the Philippines: overview​

T +555 9555

F + 810 3110

E Perry.Pe@Romulo.com

W www.romulo.com

Professional qualifications. Lawyer, Philippines Bar (1985)

Areas of practice. Energy, infrastructure, mining, oil and gas exploration, telecommunications, public-private partnerships

Languages. English, Filipino

Professional associations/memberships. Former president, Management Association of the Philippines.

Andrea Antonette A. Sese-Relucio,Associate

Romulo Mabanta Buenaventura Sayoc & de los Angeles

Image 2 within Joint ventures in the Philippines: overview​

T +555 9555

F + 810 3110

E Andrea.Relucio@Romulo.com

W www.romulo.com

Professional qualifications. Lawyer, Philippines Bar (2001); New York Bar (2012).

Areas of practice. Energy, banking and finance, infrastructure, telecommunications, public-private partnerships

Languages. English, Filipino

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Harvey Yan

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