FOREIGN INVESTMENT ACT NOTES BY ATTY.

TALEON [COMMREV 2020] [4D]

NOTES ON REPUBLIC ACT 7042 FOREIGN percent of the voting rights, is required. The legal and
INVESTMENT ACTS OF 1991 AS AMENDED BY beneficial ownership of 60 percent of the outstanding
REPUBLIC ACT NO. 8179 - AN ACT TO FURTHER capital stock must rest in the hands of Filipino
LIBERALIZE FOREIGN INVESTMENTS. nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered
I. Foreign Investment as non-Philippine national[s]." (Emphasis supplied)
Foreign investment shall mean an equity
investment made by a non-Philippine national in the This is consistent with Section 3 of the FIA which
form of foreign exchange and/or other assets actually provides that where 100% of the capital stock is held
transferred to the Philippines and duly registered with by "a trustee of funds for pension or other employee
the Central Bank which shall assess and appraise the retirement or separation benefits," the trustee is a
value of such assets other than foreign exchange. Philippine national if "at least sixty percent (60%) of
the fund will accrue to the benefit of Philippine
II. Philippine National nationals." Likewise, Section 1(b) of the Implementing
A. When the law provides that ownership in a Rules of the FIA provides that "for stocks to be
Corporation is limited to Philippine Nationals (whether deemed owned and held by Philippine citizens or
fully or in part), Philippine National shall mean: Philippine nationals, mere legal title is not enough to
1. a citizen of the Philippines or a domestic meet the required Filipino equity. Full beneficial
partnership or association wholly owned by citizens of ownership of the stocks, coupled with appropriate
the Philippines; or voting rights, is essential."
2. a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the Since the constitutional requirement of at least 60
capital stock outstanding and entitled to vote is owned percent Filipino ownership applies not only to voting
and held by citizens of the Philippines or control of the corporation but also to the beneficial
3. a corporation organized abroad and registered ownership of the corporation, it is therefore imperative
as doing business in the Philippine under the that such requirement apply uniformly and across the
Corporation Code of which board to all classes of shares, regardless of
i. one hundred percent (100%) of the capital nomenclature and category, comprising the capital of
stock outstanding and entitled to vote is wholly owned a corporation. Under the Corporation Code, capital
by Filipinos or stock consists of all classes of shares issued to
ii. a trustee of funds for pension or other stockholders, that is, common shares as well as
employee retirement or separation benefits, where the preferred shares, which may have different rights,
trustee is a Philippine national and at least sixty privileges or restrictions as stated in the articles of
percent (60%) of the fund will accrue to the benefit of incorporation.
Philippine nationals:
4. Provided, That where a corporation and its . The Corporation Code allows denial of the right to
non-Filipino stockholders own stocks in a Securities vote to preferred and redeemable shares, but
and Exchange Commission (SEC) registered disallows denial of the right to vote in specific
enterprise, at least sixty percent (60%) of the capital corporate matters. Thus, common shares have the
stock outstanding and entitled to vote of each of both right to vote in the election of directors, while
corporations must be owned and held by citizens of preferred shares may be denied such right.
the Philippines and at least sixty percent (60%) of the Nonetheless, preferred shares, even if denied the
members of the Board of Directors of each of both right to vote in the election of directors, are entitled to
corporations must be citizens of the Philippines, in vote on the following corporate matters: (1)
order that the corporation shall be considered a amendment of articles of incorporation; (2) increase
Philippine national; and decrease of capital stock; (3) incurring, creating
or increasing bonded indebtedness; (4) sale, lease,
B. Case of Heirs of Gamboa vs FinanceSecretary mortgage or other disposition of substantially all
Teves October 9, 2012 (Resolution on the Motion for corporate assets; (5) investment of funds in another
Reconsideration ) business or corporation or for a purpose other than
(But please read 2011 original Decision ) the primary purpose for which the corporation was
1. “The 28 June 2011 Decision on the case organized; (6) adoption, amendment and repeal of by-
declares that the 60 percent Filipino ownership laws; (7) merger and consolidation; and (8)
required by the Constitution to engage in certain dissolution of corporation.
economic activities applies not only to voting control
of the corporation, but also to the beneficial ownership Since a specific class of shares may have rights
of the corporation. To repeat, we held: and privileges or restrictions different from the rest of
the shares in a corporation, the 60-40 ownership
Mere legal title is insufficient to meet the 60 requirement in favor of Filipino citizens in Section 11,
percent Filipino-owned "capital" required in the Article XII of the Constitution must apply not only to
Constitution. Full beneficial ownership of 60 percent shares with voting rights but also to shares without
of the outstanding capital stock, coupled with 60 voting rights. Preferred shares, denied the right to

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 FOREIGN INVESTMENT ACT NOTES BY ATTY. TALEON [COMMREV 2020] [4D]

vote in the election of directors, are anyway still meaning of the term "capital" openly invites alien
entitled to vote on the eight specific corporate matters domination of economic activities reserved exclusively
mentioned above. Thus, if a corporation, engaged in a to Philippine nationals. Therefore, respondents’
partially nationalized industry, issues a mixture of interpretation will ultimately result in handing over
common and preferred non-voting shares, at least 60 effective control of our national economy to foreigners
percent of the common shares and at least 60 percent in patent violation of the Constitution.”
of the preferred non-voting shares must be owned by
Filipinos. Of course, if a corporation issues only a
single class of shares, at least 60 percent of such C. SEC Memorandum Circular No. 8 series of
shares must necessarily be owned by Filipinos. In 2013, entitled, "Guidelines on Compliance with the
short, the 60-40 ownership requirement in favor of Filipino-Foreign Ownership Requirements Prescribed
Filipino citizens must apply separately to each class in the Constitution and/or Existing Laws by
of shares, whether common, preferred non-voting, Corporations Engaged in Nationalized or Partly
preferred voting or any other class of shares. This Nationalized Activities." (See attached)
uniform application of the 60-40 ownership
requirement in favor of Filipino citizens clearly After the Decision of the Supreme Court in
breathes life to the constitutional command that the Gamboa vs Teves, the SEC issued the above
ownership and operation of public utilities shall be Guidelines requiring corporations engaged in
reserved exclusively to corporations at least 60 activities subject to foreign equity restrictions to, at all
percent of whose capital is Filipino-owned. Applying times, observe the constitutional or statutory
uniformly the 60-40 ownership requirement in favor of ownership requirements. For purposes of determining
Filipino citizens to each class of shares, regardless of such compliance, the required percentage of Filipino
differences in voting rights, privileges and restrictions, equity should be applied to both (a) the total number
guarantees effective Filipino control of public utilities, of outstanding shares of stock entitled to vote in the
as mandated by the Constitution. election of directors, and (b) the total number of
outstanding shares of stock, whether or not entitled to
. Moreover, such uniform application to each class vote in the election of directors.
of shares insures that the "controlling interest" in
public utilities always lies in the hands of Filipino
citizens. This addresses and extinguishes D. Roy vs. Herbosa G.R. No. 207246 November
Pangilinan’s worry that foreigners, owning most of the 22, 2016
non-voting shares, will exercise greater control over
fundamental corporate matters requiring two-thirds or On May 20, 2013, the SEC, through respondent
majority vote of all shareholders.” Chairperson Teresita J. Herbosa, issued SEC-MC No.
8 entitled "Guidelines on Compliance with the Filipino-
2. Final Word of the Supreme Court Foreign Ownership Requirements Prescribed in the
“The Constitution expressly declares as State Constitution and/or Existing Laws by Corporations
policy the development of an economy "effectively Engaged in Nationalized and Partly Nationalized
controlled" by Filipinos. Consistent with such State Activities." It was published in the Philippine Daily
policy, the Constitution explicitly reserves the Inquirer and the Business Mirror on May 22, 2013.[13]
ownership and operation of public utilities to Section 2 of SEC-MC No. 8 provides:
Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or Section 2. All covered corporations shall, at all
corporations or associations at least 60 percent of times, observe the constitutional or statutory
whose capital with voting rights belongs to Filipinos. ownership requirement. For purposes of determining
The FIA’s implementing rules explain that "[f]or stocks compliance therewith, the required percentage of
to be deemed owned and held by Philippine citizens Filipino ownership shall be applied to BOTH (a) the
or Philippine nationals, mere legal title is not enough total number of outstanding shares of stock entitled to
to meet the required Filipino equity. Full beneficial vote in the election of directors; AND (b) the total
ownership of the stocks, coupled with appropriate number of outstanding shares of stock, whether or not
voting rights is essential." In effect, the FIA clarifies, entitled to vote in the election of directors.
reiterates and confirms the interpretation that the term
"capital" in Section 11, Article XII of the 1987 Corporations covered by special laws which provide
Constitution refers to shares with voting rights, as well specific citizenship requirements shall comply with the
as with full beneficial ownership. This is precisely provisions of said law.”
because the right to vote in the election of directors,
coupled with full beneficial ownership of stocks, On June 10, 2013, petitioner Roy, as a lawyer
translates to effective control of a corporation. and taxpayer, filed the Petition,[15] assailing the
validity of SEC-MC No. 8 for not conforming to the
Any other construction of the term "capital" in Section letter and spirit of the Gamboa Decision and
11, Article XII of the Constitution contravenes the Resolution and for having been issued by the SEC
letter and intent of the Constitution. Any other with grave abuse of discretion. Petitioner Roy seeks

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 FOREIGN INVESTMENT ACT NOTES BY ATTY. TALEON [COMMREV 2020] [4D]

to apply the 60-40 Filipino ownership requirement x x x The dispositive portion of the Court's ruling is
separately to each class of shares of a public utility addressed not to PLDT but solely to the SEC, which
corporation, whether common, preferred nonvoting, is the administrative agency tasked to enforce the 60-
preferred voting or any other class of shares. 40 ownership requirement in favor of Filipino citizens
Petitioner Roy also questions the ruling of the SEC in Section 11, Article XII of the Constitution.
that respondent Philippine Long Distance Telephone
Company ("PLDT") is compliant with the constitutional To recall, the sole issue in the Gamboa case was:
rule on foreign ownership. He prays that the Court "whether the term 'capital' in Section 11, Article XII of
declare SEC-MC No. 8 unconstitutional and direct the the Constitution refers to the total common shares
SEC to issue new guidelines regarding the only or to the total outstanding capital stock
determination of compliance with Section 11, Article (combined total of common and non-voting preferred
XII of the Constitution in accordance with Gamboa. shares) of PLDT, a public utility."

The Court holds that the SEC did not commit The Court directly answered the Issue and
grave abuse of discretion amounting to lack or excess consistently defined the term "capital" as follows:
of jurisdiction when it issued SEC-MC No. 8. To the
contrary, the Court finds SEC-MC No. 8 to have been . x x x The term "capital" in Section 11, Article
issued in fealty to the Gamboa Decision and XII of the Constitution refers only to shares of stock
Resolution. entitled to vote in the election of directors, and thus in
the present case only to common shares, and not to
The ratio in the Gamboa Decision and Gamboa the total outstanding capital stock comprising both
Resolution: common and non voting preferred shares. x x x x

. To determine what the Court directed the SEC to Considering that common shares have voting
do - and therefore resolve whether what the SEC did rights which translate to control, as opposed to
amounted to grave abuse of discretion - the Court preferred shares which usually have no voting rights,
resorts to the decretal portion of the Gamboa the term "capital" in Section 11, Article XII of the
Decision, as this is the portion of the decision that a Constitution refers only to common shares. However,
party relies upon to determine his or her rights and if the preferred shares also have the right to vote in
duties: the election of directors, then the term "capital" shall
include such preferred shares because the right to
. WHEREFORE, we PARTLY GRANT the petition participate in the control or management of the
and rule that the term "capital" in Section II, Article XII corporation is exercised through the right to vote in
of the I987 Constitution refers only to shares of stock the election of directors. In short, the term "capital" in
entitled to vote in the election of directors, and thus in Section 11, Article XII of the Constitution refers only to
the present case only to common shares, and not to shares of stock that can vote in the election of
the total outstanding capital stock (common and non- directors.
voting preferred shares). Respondent Chairperson of
the Securities and Exchange Commission is The decretal portion of the Gamboa Decision
DIRECTED to apply this definition of the term "capital" follows the definition of the term "capital" in the body
in determining the extent of allowable foreign of the decision, to wit: "x x x we x x x rule that the
ownership in respondent Philippine Long Distance term 'capital' in Section 11, Article XII of the 1987
Telephone Company, and if there is a violation of Constitution refers only to shares of stock entitled to
Section II, Article XII of the Constitution, to impose the vote in the election of directors, and thus in the
appropriate sanctions under the law. present case only to common shares, and not to the
. total outstanding capital stock (common and non-
In turn, the Gamboa Resolution stated: voting preferred shares).

. In any event, the SEC has expressly manifested . The Court adopted the foregoing definition of the
that it will abide by the Court's decision and defer to term "capital" in Section 11, Article XII of the 1987
the Court's definition of the term "capital" in Section II, Constitution in furtherance of "the intent and letter of
Article XII of the Constitution. Further, the SEC the Constitution that the 'State shall develop a self-
entered its special appearance in this case and reliant and independent national economy effectively
argued during the Oral Arguments, indicating its controlled by Filipinos' [because a] broad definition
submission to the Court's jurisdiction. It is clear, unjustifiably disregards who owns the all-important
therefore, that there exists no legal impediment voting stock, which necessarily equates to control of
against the proper and immediate implementation of the public utility. The Court, recognizing that the
the Court's directive to the SEC. provision is an express recognition of the sensitive
and vital position of public utilities both in the national
xxxx economy and for national security, also pronounced
that the evident purpose of the citizenship
requirement is to prevent aliens from assuming

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 FOREIGN INVESTMENT ACT NOTES BY ATTY. TALEON [COMMREV 2020] [4D]

control of public utilities, which may be inimical to the

national interest.[68] Further, the Court noted that the xxxx
foregoing interpretation is consistent with the intent of
the framers of the Constitution to place in the hands . The legal and beneficial ownership of 60
of Filipino citizens the control and management of percent of the outstanding capital stock must rest in
public utilities; and, as revealed in the deliberations of the hands of Filipinos in accordance with the
the Constitutional Commission, "capital" refers to the constitutional mandate. Full beneficial ownership of
voting stock or controlling interest of a corporation. 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is constitutionally
In this regard, it would be apropos to state that required for the State's grant of authority to operate a
since Filipinos own at least 60% of the outstanding public utility. x x x[71]
shares of stock entitled to vote directors, which is
what the Constitution precisely requires, then the Was the definition of the term "capital" in
Filipino stockholders control the corporation, i.e., they Section 11, Article XII of the 1987 Constitution
dictate corporate actions and decisions, and they declared for the first time by the Court in the Gamboa
have all the rights of ownership including, but not Decision modified in the Gamboa Resolution?
limited to, offering certain preferred shares that may
have greater economic interest to foreign investors - . The Court is convinced that it was not. The
as the need for capital for corporate pursuits (such as Gamboa Resolution consists of 51 pages (excluding
expansion), may be good for the corporation that they the dissenting opinions of Associate Justices Velasco
own. Surely, these "true owners" will not allow any and Abad). For the most part of the Gamboa
dilution of their ownership and control if such move Resolution, the Court, after reviewing SEC and DOJ
will not be beneficial to them. Opinions as well as the provisions of the FIA and its
predecessor statutes reiterated that both the Voting
The Court observed further in the Gamboa Control Test and the Beneficial Ownership Test must
Decision that reinforcing this interpretation of the term be applied to determine whether a corporation is a
"capital", as referring to interests or shares entitled to "Philippine national" and that a "Philippine national,"
vote, is the definition of a Philippine national in the as defined in the FIA and all its predecessor statutes,
Foreign Investments Act of 1991 ("FIA"), which is is "a Filipino citizen, or a domestic corporation "at
explained in the Implementing Rules and Regulations least sixty percent (60%) of the capital stock
of the FIA ("FIA-IRR"). outstanding and entitled to vote," is owned by Filipino
citizens. A domestic corporation is a "Philippine
The FIA-IRR provides: national" only if at least 60% of its voting stock is
. owned by Filipino citizens.The Court also reiterated
Compliance with the required Filipino ownership that, from the deliberations of the Constitutional
of a corporation shall be determined on the basis of Commission, it is evident that the term "capital" refers
outstanding capital stock whether fully paid or not, but to controlling interest of a corporation, and the
only such stocks which are generally entitled to vote framers of the Constitution intended public utilities to
are considered. be majority Filipino-owned and controlled.

. For stocks to be deemed owned and held by . The "Final Word" of the Gamboa Resolution put
Philippine citizens or Philippine nationals, mere legal to rest the Court's interpretation of the term "capital"
title is not enough to meet the required Filipino equity. (SEE Gamboa case)
Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, The relevant provision in the assailed SEC-MC
the voting rights of which have been assigned or No. 8 is Section 2, which provides:
transferred to aliens cannot be considered held by
Philippine citizens or Philippine nationals. Section 2. All covered corporations shall, at all
times, observe the constitutional or statutory
Echoing the FIA-IRR, the Court stated in the Gamboa ownership requirement. For purposes of determining
Decision that: compliance therewith, the required percentage of
Filipino ownership shall be applied to BOTH (a) the
. Mere legal title is insufficient to meet the 60 total number of outstanding shares of stock entitled to
percent Filipinoowned "capital" required in the vote in the election of directors; AND (b) the total
Constitution. Full beneficial ownership of 60 percent number of outstanding shares of stock, whether or not
of the outstanding capital stock, coupled with 60 entitled to vote in the election of directors.
percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding Section 2 of SEC-MC No. 8 clearly incorporates the
capital stock must rest in the hands of Filipino Voting Control Test or the controlling interest
nationals in accordance with the constitutional requirement. In fact, Section 2 goes beyond requiring
mandate. Otherwise, the corporation is "considered a 60-40 ratio in favor of Filipino nationals in the voting
as non-Philippine national[s]." stocks; it moreover requires the 60-40 percentage

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 FOREIGN INVESTMENT ACT NOTES BY ATTY. TALEON [COMMREV 2020] [4D]

ownership in the total number of outstanding shares of stocks requirement in the FIA, this will not, as it
of stock, whether voting or not. The SEC formulated does not, render it invalid meaning, it does not follow
SEC-MC No. 8 to adhere to the Court's unambiguous that the SEC will not apply this test in determining
pronouncement that "[f]ull beneficial ownership of 60 whether the shares claimed to be owned by Philippine
percent of the outstanding capital stock, coupled with nationals are Filipino, i.e., are held by them by mere
60 percent of the voting rights is required." Clearly, title or in full beneficial ownership. To be sure, the
SEC-MC No. 8 cannot be said to have been issued SEC takes its guiding lights also from the FIA and its
with grave abuse of discretion. implementing rules, the Securities Regulation Code
(Republic Act No. 8799; "SRC") and its implementing
A simple illustration involving Company X with rules.
three kinds of shares of stock, easily shows how
compliance with the requirements of SEC-MC No. 8 . The full beneficial ownership test.
will necessarily result to full and faithful compliance
with the Gamboa Decision as well as the Gamboa The minority justifies the application of the 60-40
Resolution. Filipino-foreign ownership rule separately to each
class of shares of a public utility corporation in this
. The following is the composition of the fashion:
outstanding capital stock of Company X:
x x x The words "own and control," used to qualify the
. 100 common shares minimum Filipino participation in Section 11, Article
. 100 Class A preferred shares (with right to elect XII of the Constitution, reflects the importance of
directors) Filipinos having both the ability to influence the
. 100 Class B preferred shares (without right to corporation through voting rights and economic
elect directors) benefits. In other words, full ownership up to 60% of a
public utility encompasses both control and economic
rights, both of which must stay in Filipino hands.
(1) 60% (required percentage of Filipino) applied to Filipinos, who own 60% of the controlling interest,
the total number of outstanding shares of stock must also own 60% of the economic interest in a
entitled to vote in the election of directors(60% of the public utility.
voting rights)
x x x In mixed class or dual structured corporations,
If at least a total of 120 of common shares and however, there is variance in the proportion of
Class A preferred shares (in any combination) are stockholders' controlling interest visa-vis their
owned and controlled by Filipinos, Company X is economic ownership rights. This resulting variation is
compliant with the 60% of the voting rights in favor of recognized by the Implementing Rules and
Filipinos requirement of both SEC-MC No. 8 and the Regulations (IRR) of the Securities Regulation Code,
Gamboa Decision. which defined beneficial ownership as that may exist
either through voting power and/or through
investment returns. By using and/or in defining
(2) 60% (required percentage of Filipino) applied to beneficial ownership, the IRR, in effect, recognizes a
BOTH (a) the total number of outstanding shares of possible situation where voting power is not
stock, entitled to vote in the election of directors; AND commensurate to investment power.
(b) the total number of outstanding shares of stock,
whether or not entitled to vote in the election of . The definition of "beneficial owner" or "beneficial
directors. ownership" in the Implementing Rules and
Regulations of the Securities Regulation Code ("SRC-
If at least a total of 180 shares of all the IRR") is consistent with the concept of"full beneficial
outstanding capital stock of Company X are owned ownership" in the FIA-IRR.
and controlled by Filipinos, provided that among those
180 shares, a total of 120 of the common shares and . As defined in the SRC-IRR, "beneficial owner or
Class A preferred shares (in any combination) are beneficial ownership means any person who, directly
owned and controlled by Filipinos, then Company X is or indirectly, through any contract, arrangement,
compliant with both requirements of voting rights and understanding, relationship or otherwise, has or
beneficial ownership under SEC-MC No. 8 and the shares voting power (which includes the power to
Gamboa Decision and Resolution. vote or direct the voting of such security) and/or
investment returns or power (which includes the
From the foregoing illustration, SEC-MC No. 8 simply power to dispose of, or direct the disposition of such
implemented, and is fully in accordance with, the security) x x x.
Gamboa Decision and Resolution.
The Gamboa Decision held that preferred shares
While SEC-MC No. 8 does not expressly mention the are to be factored in only if they are entitled to vote in
Beneficial Ownership Test or full beneficial ownership the election of directors. If preferred shares have no

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 FOREIGN INVESTMENT ACT NOTES BY ATTY. TALEON [COMMREV 2020] [4D]

voting rights, then they cannot elect members of the *** An export enterprise must maintain its sales to
board of directors, which wields control of the the domestic market to not more than forty percent
corporation. As to the right of non voting preferred (40%) of its total production.
shares to vote in the 8 instances enumerated in
Section 6 of the Corporation Code, the Gamboa 1. Foreign investment in export enterprises whose
Decision considered them but, in the end, did not find products and services do not fall within Lists A and B
them significant in resolving the issue of the proper of the Foreign Investment Negative List provided is
interpretation of the word "capital" in Section 11, ALLOWED up to one hundred percent (100%)
Article XII of the Constitution. ownership.

PLEASE note of the following pronouncements of a. Note that the latest Foreign Investment
the Supreme Court where it held that: Negative List ( 11th FINL) was promulgated by
President Duterte on October 29, 2018 by virtue of
The pronouncement of the Court in the Gamboa Executive Order 65 (will attach the full FINL)
Resolution - the constitutional requirement to apply
uniformly and across the board to all classes of ***SUMMARY: List A
shares, regardless of nomenclature and category,
comprising the capital of a corporation[107] - is clearly i. No Foreign Equity
an OBITER DICTUM that cannot override the Court's
unequivocal definition of the term "capital" in both the 1. Mass media, except recording and internet
Gamboa Decision and Resolution. business
2. Practice of professions, including radiologic and x-
Nowhere in the discussion of the definition of the ray technology, law, criminology, and marine deck
term "capital" in Section 11, Article XII of the 1987 officers and marine engine officers Subject to the
Constitution in the Gamboa Decision did the Court Annex on Professions indicating professions where
mention the 60% Filipino equity requirement to be foreigners are allowed to practice in the Philippines
applied to each class of shares. The definition of subject to reciprocity and where corporate practice is
"Philippine national" in the FIA and expounded in its allowed; and
IRR, which the Court adopted in its interpretation of 3. Foreigners may teach at higher education levels if
the term "capital", does not support such application. subject being taught is not a professional subject
In fact, even the Final Word of the Gamboa (included in a government board or bar examination).
Resolution does not even intimate or suggest the 4. Retail trade enterprises with paid-up capital of less
need for a clarification or re-interpretation. than US$2.5 million
5. Cooperatives
. To revisit or even clarify the unequivocal definition 6. Organization and operation of private detective,
of the term "capital" as referring "only to shares of watchmen or security guards agencies
stock entitled to vote in the election of directors" and 7. Small-scale mining
apply the 60% Filipino ownership requirement to each 8. Utilization of marine resources in archipelagic
class of share is effectively and unwarrantedly waters, territorial sea, and exclusive economic zone
amending or changing the Gamboa Decision and as well as small-scale utilization of natural resources
Resolution. The Gamboa Decision and Resolution in rivers, lakes, bays, and lagoons
Doctrine did NOT make any definitive ruling that the 9. Ownership, operation, and management of cockpits
60% Filipino ownership requirement was intended to 10. Manufacture, repair, stockpiling, and/or
apply to each class of share. distribution of nuclear weapons
11. Manufacture, repair, stockpiling, and/or
III. Scope distribution of biological, chemical, and radiological
The Foreign Investment Act shall not apply to weapons and anti-personnel mines
banking and other financial institutions which are 12. Manufacture of firecrackers and other pyrotechnic
governed and regulated by the General Banking Act devices
and other laws under the supervision of the Central
Bank.
. ii. Up to 25% Foreign Equity
IV. Domestic Market Enterprise vs. Export Enterprise
1.Private recruitment, whether for local or overseas
A. An export enterprise shall mean an enterprise employment
wherein a manufacturer, processor or service 2. Contracts for the construction of defense-related
(including tourism) enterprise exports sixty percent structures
(60%) or more of its output, or wherein a trader
purchases products domestically and exports sixty iii. Up to 30% Foreign Equity
percent (60%) or more of such purchases.
1. Advertising

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 FOREIGN INVESTMENT ACT NOTES BY ATTY. TALEON [COMMREV 2020] [4D]

iv. Up to 40% Foreign Equity 2. Manufacture, repair, storage, and/or distribution of

products requiring Department of National Defense
1. Contracts for the construction and repair of locally- (DND) clearance:
funded public works, a) Guns and ammunition for warfare;
except:Infrastructure/development projects covered in b) Military ordinance and parts thereof (e.g.,
Republic Act (RA) No. 7718; and Projects which are torpedoes, depth charges, bombs, grenades,
foreign-funded or assisted and required to undergo missiles);
international competitive bidding. . c) Gunnery, bombing, and fire control systems
2. Exploration, development, and utilization of natural and components;
resources . d) Tactical aircraft (fixed and rotary-winged),
3. Ownership of private lands parts, and components thereof;
4. Operation of public utilities, except power . e) Space vehicles and component systems;
generation and the supply of electricity to the . f) Combat vessels (air, land, and naval) and
contestable market and similar businesses or services auxiliaries;
not covered by the definition of public utilities . g) Weapons repair and maintenance equipment;
5. Educational institutions other than those . h) Military communications equipment;
established by religious groups and mission boards, . I) Night vision equipment;
for foreign diplomatic personnel and their dependents . j) Stimulated coherent radiation devices,
and other foreign temporary residents, or for short- components, and accessories;
term high-level skills development that do not form . k) Armament training devices; and
part of the formal education system as defined in . l) Others as may be determined by the Secretary
Section 20 of Batas Pambansa (BP) No. 232 (1982) of the DND.
6. Culture, production, milling, processing, trading However, the manufacture or repair of these items
except retailing, of rice and corn and acquiring, by may be authorized by the Secretary of National
barter, purchase or otherwise, rice and corn and the Defense to non-Philippine nationals; provided that a
by-products thereof substantial percentage of output, as determined by
7. Contracts for the supply of materials, goods, and the said agency, is exported. Provided further that the
commodities to Government-Owned and Controlled extent of foreign equity ownership allowed shall be
Corporation (GOCC), company, agency or municipal specified in the said authority/clearance (RA No. 7042
corporation as amended by RA No. 8179).
8. Operation of deep-sea commercial fishing vessels
9. Ownership of condominium units 3. Manufacture and distribution of dangerous drugs
10. Private radio communications network (RA No. 7042 as amended by RA No. 8179)
4. Sauna and steam bathhouses, massage clinics,
List B and other like activities regulated by law because of
risks posed to public health and morals, except
i. Up to 40% Foreign Equity wellness centers
5. All forms of gambling, except those covered by
1. Manufacture, repair, storage, and/or distribution of investment agreements with Philippine Amusement
products and/or ingredients requiring Philippine and Gaming Corporation (PAGCOR)
National Police (PNP) clearance: 6. Domestic market enterprises with paid-in equity
a) Firearms (handguns to shotguns), parts of capital of less than the equivalent of US$200,000
firearms and ammunition therefor, instruments or Domestic market enterprises which involve advanced
implements used or intended to be used in the technology or employ at least fifty (50) direct
manufacture of firearms; employees with paid-in equity capital of less 5. than
b) Gunpowder; the equivalent of US$100,000
c) Dynamite;
d) Blasting supplies;
e)Ingredients used in making explosives. . b. PLEASE NOTE THAT With the issuance of
f) Telescopic sights, sniper scope, and other Executive Order No. 65, five investment
similar devices. areas/activities will now allow up to 100 percent
foreign participation.
However, the manufacture or repair of these items
may be authorized by the Chief of the PNP to non- These are the following:
Philippine nationals; provided that a substantial
percentage of output, as determined by the said 1) Internet businesses, which has been
agency, is exported. Provided further that the extent excluded from mass media;
of foreign equity ownership allowed shall be specified
in the said authority/clearance (RA No. 7042 as —The FINL adopted the definition
amended by RA No. 8179). found in DOJ Opinion 40 (s.1998), which says internet
businesses refer to internet access providers (PLDT,
Sky Broadband, etc) that merely serve as carriers for

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transmitting messages, rather than being the creator

of messages/information. The same opinion held that 4) Power generation and the supply of
internet access providers are no longer considered electricity to the contestable market, as well as similar
mass media. This is significant, as mass media is not businesses or services not covered by the definition
allowed to have any foreign equity. In a SEC opinion, of public utilities, have now been expressly
it recognizez the internet and mobile technology as recognized as exceptions to the operations of public
platforms for mass media, and therefore restricted to utilities, and not subject to the 40% foreign equity
Philippine nationals. Thus, the DOJ opinion and SEC limitation.
opinions may be viewed as referring to different
aspects of the Internet business.
B. Domestic Enterprise
. 2) Teaching at higher education levels
provided the subject being taught is not a professional 1. A domestic market enterprise shall mean an
subject (i.e., included in a government board or bar enterprise which products goods for sale, or renders
examination). services to the domestic market entirely or if exporting
a portion of its output, fails to consistency export at
— This is because generally the Practice of a least sixty percent (60%) thereof.
Profession is limited to Filipinos. However, the Annex
to the 11th Negative List provides additional details on —This means that the products of the
professions that are not restricted to Filipino citizens Corporation is for Philippine market or if it exports, it’s
and their basis under law. Pharmacy and forestry may export output is less than 60% of its production.
now be practiced by foreigners, provided that their
home countries allow Filipinos the same privilege. 2. Non-Philippine nationals may own up to one
These are in addition to the other professions that are hundred percent (100%) of domestic market
open for reciprocity found in Part A of the Annex on enterprises unless foreign ownership therein is
Professions. However, the practice of radiology and x- prohibited or limited by the Constitution, existing laws
ray technology, criminology, and law remain restricted or the 11th Foreign Investment Negative List.
to Filipinos, with marine deck officers and marine
engine officers as new additions to the list. Please take note that non-Philippine
nationals may own up to 100% of domestic
. 3) Training centers that are engaged in enterprises which are not restricted only if the paid-up
short-term high level skills development that do not capital is not less than US$200,000 or US$100,000
form part of the formal education system; as the case may be.

. 4) Adjustment companies, lending The Act and the 11th FINL provides that:
companies, financing companies and investment
houses; and, - Small and medium-sized domestic
market enterprises, with paid-in equity capital LESS
. 5) Wellness centers, which has been than the equivalent two hundred thousand US dollars
excluded in item 4 of List B. (US$200,000) are RESERVED TO PHILIPPINE
NATIONAL, Provided that if: (1) they involve
— The FINL explicitly indicated that it as an advanced technology as determined by the
exception to the 40% foreign equity requirement. Department of Science and Technology or (2) they
employ at least fifty (50) direct employees, then a
. c. Under the 11th Negative List, foreigners minimum paid-in capital of one hundred thousand US
may now have a higher equity interest in the following dollars (US$100,000.00) shall be allowed to non-
industries: Philippine nationals.

1) Private radio communications network, IV. Investment Rights of Former Natural-born Filipinos
which was increased to 40% foreign equity ownership
from 20%, and A. For the purpose of this Act, former natural born
citizens of the Philippines shall have the same
2) Subject to applicable regulatory investment rights of a Philippine citizen in:
frameworks, contracts for the construction and repair 1. Cooperatives under Republic Act No. 6938,
of locally-funded public works, which was increased to 2. Rural Banks under Republic Act No. 7353,
40% foreign equity ownership from 25%. 3. Thrift Banks and Private Development Banks
under Republic Act No. 7906, and
3) Infrastructure/development projects under 4. Financing Companies under Republic Act No.
Republic Act 7718 and foreign funded/assisted 5980.
projects that undergo international competitive bidding
are expressly indicated as not covered by the foreign B. These rights shall not extend to activities
equity restrictions. reserved by the Constitution, including

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 FOREIGN INVESTMENT ACT NOTES BY ATTY. TALEON [COMMREV 2020] [4D]

1. the exercise of profession;

2. in defense related activities under Section 8
(b) hereof Unless specifically authorized by the
Secretary of National Defense; and,
3. activities covered by Republic Act No. 1180
(Retail Trade Act). Republic Act No. 5187 (Security
Agency Act), Republic Act No. 7076 (Small Scale
Mining Act), Republic Act No. 3018. As amended
(Rice and Corn Industry Act). And P.D. 449 (Cockpits
Operation and Management)”

C. Other Rights of Natural Born Citizen Pursuant

to the Provisions of Article XII, Section 8 of the
Constitution

Any natural born citizen who has lost his

Philippine citizenship and who has the legal capacity
to enter into a contract under Philippine laws may be
a transferee of a private land up to a maximum area
of five thousand (5,000) square meters in the case of
urban land or three (3) hectares in the case of rural
land to be used by him for business or other
purposes. In the case of married couples, one of them
may avail of the privilege herein granted: Provided,
That if both shall avail of the same, the total area
acquired shall not exceed the maximum herein fixed.

In the case the transferee already owns urban or

rural land for business or other purposes, he shall still
be entitled to be a transferee of additional urban or
rural land for business or other purposes which when
added to those already owned by him shall not
exceed the maximum areas herein authorized.

. A transferee under this Act may acquire not

more than two (2) lots which should be situated in
different municipalities or cities anywhere in the
Philippines: Provided, That the total land area thereof
shall not exceed five thousand (5,000) square meters
in the case of urban land or three (3) hectares in the
case of rural land for use by him for business or other
purposes. A transferee who has already acquired
urban land shall be disqualified from acquiring rural
land and vice versa.