- Foreign branch offices and subsidiaries are two common ways foreign companies enter the Philippine market, but they differ in legal structure, tax treatment, and regulatory requirements.
- A branch office is an extension of the foreign parent company, while a subsidiary is a separate Philippine corporation with its own legal identity.
- Because tax and compliance vary, working with a trusted tax and compliance expert can help investors choose the right structure and stay compliant.
Are you considering establishing a business in the Philippines? If yes, you won’t be the first. Many investors from different countries such as Australia, the United States, United Kingdom, Canada, Singapore, and others have already opened businesses in the country.
One reason for this growing interest is the Philippines’ young and skilled workforce, along with its high proficiency in English. These advantages have made the country an attractive destination for business process outsourcing and other global industries.
With these opportunities in mind, you might be considering the type of business entity to establish before setting up operations in the country. Two of the most common options investors consider are a foreign branch office Philippines and a subsidiary.
Related Article: Benefits of Outsourcing to the Philippines
What Is a Foreign Branch Office?
A foreign branch office is essentially an extension of a foreign corporation that operates in the country. It allows the parent company to conduct business activities locally, generate revenue, and offer products or services without creating a separate legal entity.
The liabilities of this branch office will be the same as yours. For example, if the branch office encounters legal problems that require the payment of damages, your assets may be used to pay for them. It’s possible to establish a branch office with one person as long as they are a Philippine resident. The latter will serve as a resident agent (can be a juridical or natural person).
What Is a Subsidiary?
A subsidiary is a locally registered corporation that operates as a separate legal entity from its foreign parent company. Because it has its own legal personality, the parent company is generally not liable for the subsidiary’s damages, debts, or legal obligations.
Under the Revised Corporation Code of the Philippines, a corporation that is not a One Person Corporation (OPC) must have at least two (2) but not more than fifteen (15) incorporators, which may include natural persons, domestic corporations, partnerships, or foreign corporations.
Foreign corporations as incorporator will have to include the following:
- Board Resolution authorizing the corporation to invest in the Philippine company
- Secretary’s Certificate or equivalent document confirming the board resolution and identifying the authorized signatory
- Authenticated copies of the documents (apostilled or consularized, depending on the country of origin) authorizing the foreign corporation to participate as an incorporator and designate a representative to sign on its behalf
A single stockholder, who may or may not be a Philippine resident, may form a corporation called an OPC. An OPC may be organized by a natural person, trust, or estate. In the case of a trust or estate, the trustee, administrator, executor, guardian, or other person exercising fiduciary duties must act on behalf of the trust or estate.
If the single stockholder is acting in a fiduciary capacity, proof of authority to represent the trust or estate must be submitted. Foreign nationals may also register an OPC in the Philippines, subject to constitutional and statutory restrictions on foreign ownership. For example, businesses engaged in public utilities must have at least 60% Filipino ownership.
Related Article: Local Partnerships: Collaborating with Philippine Firms for Success
Key Differences Between a Foreign Branch Office and a Subsidiary
There are distinct differences between a foreign branch office in the Philippines and a domestic subsidiary. Here are some of them.
1. Taxability
Branch Office:
- A branch office incurs tax on its Philippine source of income.
- Profits a branch remit to its parent company incur a branch profit remittance tax of 15% or 10% depending on certain tax treaties. If a branch office is in a special economic zone, they get a tax exemption.
- A branch office does not incur a documentary stamp tax (DST) because it does not issue shares of stock.
- Depending on certain conditions, the overhead expenses of the Head Office may be appropriated to its Philippine branch office.
- A branch is not liable to pay the 10% improperly accumulated earnings tax.
Domestic Subsidiary:
- Incurs an income tax on worldwide income.
- Dividends that a Philippine subsidiary pays to non-resident shareholders incurs a 25% in general or 15% subject to certain conditions or preferential tax treaty rates.
- A subsidiary is liable to pay DST on the original issuance of shares of stock at the rate of ₱2.00 for every ₱200 (or fractional part) of the par value of the shares of the outstanding shares of stock.
- The Philippine subsidiary is not entitled to the allocation of overhead expenses of its parent company.
Tip: Because tax treatment differs significantly between a branch office and a subsidiary, it’s best to work with a trusted tax accountant and accounting expert to ensure proper tax planning and compliance with Philippine regulations.
2. Capitalization
Branch Office:
A branch office is a 100% foreign-owned extension of a foreign corporation. Generally, it must have a minimum assigned capital of US$200,000 if it operates as a Domestic Market Enterprise (DME). This requirement may be reduced to US$100,000 if the business uses advanced technology or employs at least 50 Filipino workers.
However, if the branch office qualifies as an Export Enterprise, meaning at least 60% of its revenue comes from foreign markets, the minimum capital requirement does not apply and the branch may register with as little as ₱5,000 assigned capital.
Domestic Subsidiary:
A subsidiary that exceeds 40% foreign equity should have a minimum paid capital of at least US$200,000 if it operates as a DME. However, if the company qualifies as an Export Enterprise —meaning at least 60% of its gross sales come from export—the minimum capital requirement does not apply, and the company may be 100% foreign-owned, subject to industry restrictions.
3. SEC Securities Deposit Requirements
Branch Office:
Within 60 days after issuance of the SEC license, the branch must deposit securities with an actual market value of at least ₱500,000. Within six (6) months after the fiscal year, the branch must deposit additional securities equivalent to 2% of the amount by which its Philippine gross income exceeds ₱5,000,000.
Additional securities are required if the market value of the deposit decreases by at least 10%. The SEC may allow a partial release of the deposit if the branch’s gross income decreases by more than 10% or the market value of the deposit increases by more than 10%.
The securities may be returned upon withdrawal from Philippine business, subject to SEC approval and confirmation of no outstanding liabilities.
Domestic Subsidiary:
Subsidiaries do not have to deposit securities with the SEC. However, in cases where the single stockholder assumes the position of the treasurer, an OPC must post a surety bond with a computation based on the authorized capital stock (ACS) as shown in the Table below.
It is subject to renewal every two (2) years or as may be required upon review of the audited financial statements.
| Authorized Capital Stock (ACS) | Surety Bond Coverage |
| ₱1 to ₱1,000,000 | ₱1,000,000 |
| ₱1,000,001 to ₱2,000,000 | ₱2,000,000 |
| ₱2,000,001 to ₱3,000,000 | ₱3,000,000 |
| ₱3,000,001 to ₱4,000,000 | ₱4,000,000 |
| ₱4,000,001 to ₱5,000,000 | ₱5,000,000 |
4. SEC Registration Requirements
Branch Office:
A branch is required to obtain a license to do business here in the Philippines with the Securities and Exchange Commission (SEC).
The branch must comply with the following financial ratios using audited financial statements of the parent company for the immediately preceding year at the time of filing of application.
Stock Branch Office
| Ratio | Formula | Benchmark Value |
| Solvency | Total Assets / Total Liabilities | 1:1 |
| Liquidity | Current Assets / Current Liabilities | 1:1 |
| Debt to Equity | Total Liabilities / Equity | 3:1 |
Non-Stock Branch Office
| Ratio | Formula | Benchmark Value |
| Solvency | Total Assets / Total Liabilities | 1:1 |
Notes:
- If Solvency Ratio is not within the Benchmark Value, the application is rejected; and
- If Liquidity Ratio and/or Debt to Equity Ratio is/are not within the Benchmark Value/s, a surety bond for ₱1 million needs to be submitted to SEC.
Within sixty (60) days after obtaining the license to operate, the branch office is required to deposit marketable securities worth at least ₱500,000 with the SEC, which may be withdrawn upon cessation of the Philippine branch’s operations.
Domestic Subsidiary:
A domestic subsidiary must be incorporated and registered with the SEC. The company must submit the required incorporation documents, including the Articles of Incorporation, By-Laws, and other SEC-required documents, and comply with the capitalization requirements under the Revised Corporation Code of the Philippines.
Unlike a branch office, a domestic subsidiary does not need to obtain a license to do business as a foreign corporation, since it is registered as a separate Philippine corporation.
Simplify Your Business Setup with Professional Tax Guidance
Setting up a branch office or subsidiary in the Philippines involves more than registration. It requires careful attention to tax obligations, regulatory compliance, and financial reporting requirements.
Working with an experienced tax accountant can help ensure your business stays compliant while optimizing its tax position. If you need guidance on structuring your Philippine operations for compliance, Manila Bookkeepers can help you navigate the process with confidence.
Get expert guidance to keep your business compliant from day one.
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