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The Philippines is a prime destination for trade and investment. Japanese companies are among the top investors, being the leading foreign investor in the Philippine Economic Zone Authority (PEZA), with 800 registered businesses and an investment of PHP500 billion (USD8.7 billion), generating 300,000 jobs and USD15 billion in exports in 2024.

President Ferdinand Marcos Jr signed Republic Act (RA) No.12066, known as the Corporate Recovery and Tax Incentives for Enterprises to Maximise Opportunities for Reinvigorating the Economy (CREATE MORE) Act, which has reduced income tax rates and provided fiscal incentives for eligible companies. Recent reforms including: amendments to the Public Service Act allowing 100% foreign ownership in more sectors; the Retail Trade Liberalisation Act lowering capital requirements for foreign-owned retail enterprises; and the Foreign Investments Act easing foreign entry into small businesses all enhance the Philippines’ attractiveness to investors.

Foreign Investments Act

Foreign individuals and entities can conduct business in the Philippines, however foreign equity in certain sectors is limited by the 1987 Philippine Constitution and special laws, as provided in the Foreign Investment Negative List (FINL) under RA No.8179, also known as the Foreign Investments Act of 1991. The allowable foreign equity varies by business activity.

Domestic market enterprises primarily serve the local market and can be wholly foreign-owned if they meet these criteria: they must not engage in FINL activities; their home country allows Philippine nationals to operate there; and they have a minimum paid-in capital of USD200,000 (or USD100,000 if utilising advanced technology, endorsed as a startup, or employing at least 50 employees with 15 Filipinos).

Foreign investors can own up to 100% equity in export enterprises registered with PEZA that do not engage in FINL activities. A PEZA-registered corporation is an export enterprise if more than 40% of its working capital is foreign-owned and exports at least 70% of its production output.

Corporate entities

Foreign entities allowed to engage in business activity in the Philippines may establish the following corporate entities.

Representative office. A representative office serves solely as a liaison between its head office and clients in the Philippines. It cannot conclude sales contracts or generate income locally. At least USD30,000 or its equivalent in other acceptable foreign currency must be remitted to the Philippines for the representative office’s use.

A representative office is exempt from income tax and does not need to file a corporate income tax return. However, it must deduct and remit income taxes on employee salaries and other payments to the Bureau of Internal Revenue (BIR).

Regional or area headquarters (RHQ). An RHQ acts as a supervision, communication and co-ordination centre for its subsidiaries and affiliates in the Asia-Pacific region. It cannot generate income in the Philippines. An RHQ must remit at least USD50,000 or its equivalent in other foreign currencies to the Philippines.

An RHQ is exempt from income tax, value-added tax (VAT) and local taxes, except for real property tax on land improvements and equipment. It also benefits from tax and duty-free importation of necessary equipment, subject to prior approval from the Board of Investments (BOI).

Regional operating headquarters (ROHQ). An ROHQ is a branch in the Philippines established by a multinational company to provide qualifying services such as: (1) general administration and planning; (2) business planning and co-ordination; (3) sourcing and procurement of raw materials and components; (4) corporate finance advisory services; (5) marketing control, sales and promotion; (6) training and personnel management; (7) logistics services; (8) research and development services, and product development; (9) technical support and maintenance; (10) data processing and communication; and (11) business development.

An ROHQ must remit at least USD200,000 or its equivalent in other foreign currencies to the Philippines. An ROHQ is subject to: (1) Regular corporate income tax (CIT) of 25% of its net taxable income; (2) a 15% tax on branch profits remittance; (3) tax on certain passive income; and (4) a 12% VAT on gross receipts. It is exempt from local taxes, fees or charges (except for real property tax) and enjoys tax and duty-free importation of necessary equipment, subject to BOI approval.

Branch office. A foreign corporation can establish a branch office in the Philippines to conduct business and generate income. The branch is treated as the same entity as its parent company. An initial remittance of at least USD200,000 is required, which may be reduced to USD100,000 under certain conditions.

A branch office is subject to the following taxes: (1) CIT of 25% of its net taxable income unless the net taxable income (20% if income is ≤ PHP5 million and total assets ≤ PHP100 million); (2) minimum corporate income tax (MCIT) of 2% of gross income at year-end; (3) tax on branch profit remittances; (4) tax on certain passive income; (5) a 12% VAT on gross receipts; and (6) local taxes, fees and charges imposed by the LGU.

Domestic Corporation. A foreign investor may also choose to establish a domestic corporation or local subsidiary in the Philippines. This can be a regular corporation or one person corporation (OPC). A domestic corporation with foreign equity of up to 40% typically does not require a minimum paid-up capital as a domestic market enterprise, unless specified by law. If foreign equity exceeds 40%, the minimum paid-up capital must generally be at least USD200,000.

The taxes imposed on a domestic corporation are: (1) CIT of 25% of its net taxable income; (2) MCIT of 2% of the gross income; (3) Tax on certain passive income; (4) VAT of 12% of its gross receipts; and (5) local taxes, fees and charges imposed by the LGU.

Entitlement to Incentives

Businesses in the Philippines can avail of various fiscal and non-fiscal incentives based on their type, location, and the government agency they register with. Under the CREATE MORE Act and its implementing rules and regulations, registered business enterprises, which are organised under Philippine laws and registered with any of the Philippines’ Investment Promotion Agencies, can receive: an income tax holiday for four to seven years; VAT zero-rating on goods and services directly attributable to their projects; a 5% special corporate income tax or enhanced deductions for up to 17 or 27 years; and duty exemptions on imports of capital equipment and materials. Further, all Investment Promotion Agencies have the flexibility to allow registered business enterprises to implement a 50% work-from-home policy.

Philippine-Japan tax treaty

The Protocol Amending the Convention Between the Philippines and Japan for Avoiding Double Taxation governs the taxation of Japanese investments, offering preferential tax rates:

Administrative challenges and ease of doing business initiatives. The Philippines enacted RA No.11032, also known as the Ease of Doing Business and Efficient Government Service Delivery Act of 2018, which mandates that simple transactions be completed within three working days, and complex ones within seven working days.

Effects of the Philippines’ current investment climate on Japanese companies. Recent reductions in corporate income tax rates and the expansion of fiscal incentives have significantly lowered operational costs. Further, allowing up to 100% foreign ownership in previously restricted sectors enables Japanese firms to enhance their presence in high-growth areas like digital infrastructure, logistics, and transportation – sectors that align well with Japan’s technological strengths and global competitiveness.

The Philippines offers a compelling array of strategic advantages that makes it an appealing destination for Japanese companies looking to expand globally. Its prime geographic location, robust economic growth, evolving policies, infrastructure initiatives, strong economic ties to Japan, and favorable trade agreements bolster its status as a key investment hub for Japanese businesses.