Foreign Investment Act of 1991 (RA 7042, as amended by RA 11647)

On 02 March 2022, President Rodrigo Duterte signed Republic Act No. 11647 (Act 11647), which amended the Foreign Investment Act (FIA), also known as Republic Act No. 7042. The amendments aim to promote and attract foreign investments by allowing international investors to set up and fully own domestic enterprises (including micro and small enterprises) in the Philippines.

The amendments make it easier for foreign businesses to invest in the Philippine market, with the investments expected to not only contribute to sustainable, inclusive, resilient and innovative economic growth, but to increase competition in the Philippine market, resulting in lower prices and better products and services for the consumers.

What are the amendments to the Foreign Investment Act?

Foreign ownership of small and medium-sized enterprises

Under the FIA, micro, small, and medium-sized enterprises (MSME) with paid-in capital of less than USD200,000.00 are reserved for Philippine nationals; however, under the amendments, foreign nationals can own an MSME with a minimum paid-in capital of USD100,000.00, provided that the enterprises meet the following conditions:

Utilize advanced technology (to be determined by the Department of Science and Technology);
Are endorsed as startup enablers or as a startup in accordance with the Innovative Startup Act; or
The company hires no less than 15 Filipino employees, a reduction from the previous requirement of 50.

The new Inter-Agency Investment Promotion Coordination Committee (IIPC)

Under the amended FIA, the government will create the Inter-Agency Investment Promotion Coordination Committee (IIPCC) which is a body that integrates all the promotion and facilitation efforts to encourage foreign investments. An inter-agency body will provide a uniform approach to foreign investment promotion, since various government agencies may have different strategies when it comes to foreign investment promotion and facilitation.

The IIPC will be under the Department of Trade and Industry (DTI).

Power of the President to suspend, prohibit, or limit foreign investments

To safeguard national interests, the amened FIA gives the President of the Philippines power to order the IIPCC to review foreign investments that may threaten the safety, security, and well-being of Filipinos. Examples include foreign investments involving cyberinfrastructure, military-related industries, and pipeline transportation, among others.

Understudy or skills development program for foreign nationals

Foreign businesses employing foreign nationals and are enjoying fiscal incentives must devise an understudy or skills development program that benefits Filipino workers. This ensures that local workers receive the knowledge and skills from their foreign colleagues.

The program that companies develop will be monitored by the Department of Labor and Employment.

Strengthening the Philippines’ National Security alongside Economic Growth

Along with this push for economic growth, RA 11647 also balances the need to strengthen the country’s national security. Under this law, the IIPCC, in coordination with the National Security Council (NSC) and the National Economic Development Authority (NEDA), shall review foreign investments involving military-related industries, cyber infrastructure, pipeline transportation, or other activities that may threaten territorial integrity and the safety, security and well-being of Filipino citizens in certain instances.

What is the Philippines’ Foreign Investment Act?

Republic Act No. 7042, also known as the “Foreign Investments Act of 1991,” is a law regulating foreign investments in the Philippines. The act allows foreign investors to invest up to 100% equity in domestic market enterprises, but also sets restrictions. The goal of this law is to encourage foreign investors to provide employment opportunities, develop resources, increase the value of exports, and help fuel the overall economy.

The Foreign Investments Negative List (FINL)

The (FINL) is a list of areas or activities that set limits on foreign ownership. It is divided into two: List A and List B.

What is covered in List A?

List A consists of areas of investment reserved for Philippine nationals. The Philippine Constitution restricts foreign ownership in some of these investment areas to a maximum of 40%. Foreign ownership is prohibited in the following areas:

Mass media, except recording
Practice of licensed professions
Retail trade
Cooperatives
Private security agencies

Limited foreign ownership is allowed in the following areas:

Private radio communication networks
Private recruitment
Advertising
Ownership of private lands and condominium units
Exploration, development, and utilization of natural resources

What is covered in List B?

List B indicates limits in foreign ownership for reasons of security, defense, risk to health and morals, and protection of small and medium-scale enterprises. They include but are not limited to:

Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National Police (PNP) clearance such as firearms, gunpowder, and dynamite
Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Department of National Defense (DND) clearance such as guns and ammunition for warfare, gunnery, bombing, fire control systems, and military communication equipment
Telescopic sights, sniper scopes, and other similar devices
All forms of gambling, except those covered by investment agreements with the Philippine Amusement and Gaming Corporation (PAGCOR)

The standard setup for companies with both Filipino and foreign ownership is 60% / 40%, with Filipinos owning the larger share. The company must also be serving the local market. Under this, paid-up capital can be less than USD200,000.00. However, some foreign entities may be interested in owning a bigger stake in a locally registered company. For this, the following conditions have to be met:

The foreign entity wants to own more than 40% of the domestic company;
The area in which the foreign entity wants to enter is not among those stated in the FINL;
The area will serve the domestic market.

The required capital for the endeavor should not be less than US$200 thousand. It can be lowered to US$100 thousand if the activities involve advanced technology or the company has at least 50 direct employees.

Form of Investments

Foreign investments can come in these forms:

Capital goods
Patents
Formulae
Other technological rights or processes

Basic rights and guarantees for the safety of Foreign Investors

Under the Philippine Constitution, all foreign investors have the right to:

Repatriation of investments. If there is a need for repatriation of investments, it has to be in the same currency as what was used when it was first invested, as well as in the same exchange rate of said currency during that time
Remittance of earnings. Interest payments, payment of loans made to foreign entities, and other obligations should also follow the same kind and exchange rate of currency for this remittance.
Freedom from expropriation. The government cannot seize properties stemming from foreign investments unless these are meant for public use or for national In that case, the foreign investor can avail of just compensation, still with the conditions of using the same currency at the time of investment and the prevailing exchange rate of that time.
Non-requisition of investment. No requisition of property stemming from foreign investments is allowed unless it was done in the event of war or a national emergency, and only for that time. However, just compensation must still be made with the same conditions as set in the above-mentioned instances.

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