Setting Up a Subsidiary Company in the Philippines: A Guide for Employers

Setting up a subsidiary company in the Philippines can be a strategic move for foreign investors. With its prime location, skilled workforce, and business-friendly environment, the Philippines offers a wealth of opportunities for growth and expansion. Learn more about it here. 

What is a Subsidiary Company?

In the business world, a subsidiary company is a company owned by another company, which is referred to as the parent company or holding company. The parent company directly controls and operates its subsidiaries, whereas a holding company primarily holds ownership stakes in other companies, often without direct involvement in their day-to-day operations.

A subsidiary can be partially or wholly-owned. If it’s partially-owned, then the parent or holding company owns more than 50% of the subsidiary’s stocks, giving them the controlling interest. If it’s wholly-owned, then the parent company owns and controls 100% of the stocks, which also means they have no responsibility for the minor stockholders. 

Before we further discuss setting up a subsidiary company in the Philippines, let’s first briefly outline the other options foreign nationals have if they want to open a business in the country. 

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Opening a Business in the Philippines: Options for Foreign Nationals

Foreign companies seeking to do business in the Philippines have several options when it comes to business structure: 

• Sole proprietorship
• Partnership
• Corporation

A foreign national who wants complete control over their business may be interested in opening up a sole proprietorship. However, this is often the less favoured structure because the sole proprietor is an extension of the company, which means the liabilities of the company are also the liabilities of the owner. 

If not sole proprietorship, you can open a partnership or a corporation, with the latter being the more common choice. 

The type of corporation depends on the purpose of the business. It can be a:

• Domestic corporation  (a subsidiary will be considered a domestic corporation as well)
• Branch Office
• Representative Office
• Regional Area Headquarters (RHQ)
• Regional Operating Headquarters (ROHQ)

Note that among these options, foreign companies often choose between a subsidiary or a branch office. 

Learn more about the types of business you can open and how to register them here. 

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Subsidiary Company vs Branch Office

Since two of the most common choices for foreigners who want to open a business in the Philippines are a subsidiary and branch office, let’s briefly differentiate them. 

A branch office is an extension of the company to the Philippines - not a separate business. Think of it as Company A, who, after having multiple offices in their origin country, decides to have another office in the Philippines. This way, employees and clients can meet in the physical office and carry out the same business as it does in their origin country.  

A subsidiary company, as mentioned, is a separate company. Because it’s a separate company, it can carry out another type of business, different from what the parent company does. 

In most cases, companies who want to diversify the products and services they offer choose to open a subsidiary instead of a branch office. 

Characteristics of a Subsidiary Company in the Philippines 

A subsidiary company, with more than 50% of its stocks owned by a foreigner, is considered a foreign-owned domestic corporation. Here’s a summary of its characteristics and a further explanation below. 

Ownership

As mentioned, for a company to be considered a subsidiary, more than 50% should be owned by the parent company. But, is a wholly-owned subsidiary allowed in the Philippines? 

As per the law, a subsidiary can be fully foreign-owned if it exports services or goods OR generates more than 60% of its revenue abroad as it would be considered an Export Enterprise under the Foreign Investment Act. 

Note, however, that some types of subsidiaries require a local partner.

Ownership

As mentioned, for a company to be considered a subsidiary, more than 50% should be owned by the parent company. But, is a wholly-owned subsidiary allowed in the Philippines? 

As per the law, a subsidiary can be fully foreign-owned if it exports services or goods OR generates more than 60% of its revenue abroad as it would be considered an Export Enterprise under the Foreign Investment Act. 

Note, however, that some types of subsidiaries require a local partner. 

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Entity 

A subsidiary company is a judicial entity distinct and separate from its parent company.  Likewise, as a domestic corporation, its entity is also separate from the owners or stockholders. 

Liabilities 

Considering a subsidiary company in the Philippines is a separate entity, its liabilities are not considered liabilities of the parent company and shareholders. 

Capital Requirements

A subsidiary company usually has a capital requirement of US$200,000.00. However, this can be reduced to US$100,000.00 if the company uses advanced technology as determined by the Department of Science and Technology (DOST) and directly employs 50 employees. If it’s to be considered an Export Enterprise, then the subsidiary’s capital requirement can be as little as 5,000PHP. 

However, please note that corporations need a corporate bank account, and most banks in the country require an initial deposit of at least 25,000PHP. 

Is a Subsidiary Considered a Public Limited Company in the Philippines?

The concept of a Public Limited Company, where business management is entrusted to directors and ownership is shared among shareholders, has not been adopted in the Philippines. Instead, the domestic corporation structure, under which subsidiaries operate, serves as the closest local equivalent. 

Advantages and Disadvantages of a Subsidiary Company in the Philippines

Setting up a subsidiary company in the Philippines has both advantages and challenges. 

Advantages

Besides the chance to diversify and expand the business and have a capital requirement of as low as P5000, setting up a subsidiary in the country also has the following advantages:

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• Separate Legal Entity: Remember that a subsidiary is a distinct and separate legal entity from the parent or holding company as well as its owners. Hence, its liabilities are its own. 
• Strategic Geographical Location: Situated in Southeast Asia, the Philippines serves as a gateway to the dynamic ASEAN market, offering access to millions of consumers.
• English Proficiency and Cultural Compatibility: The Philippines boasts a high level of English proficiency, with a large pool of skilled professionals fluent in the language. Cultural compatibility with Western countries facilitates smoother business operations and communication for foreign investors.
• Economic Stability and Growth Potential: With consistent GDP growth averaging around 6% in recent years, the Philippines showcases economic stability and resilience amid global uncertainties. 
• Skilled Workforce at Competitive Costs: The Philippines is renowned for its large, young, and educated workforce, particularly in industries like IT-BPM (Information Technology-Business Process Management), engineering, healthcare, and creative services. 

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Disadvantages

Despite its advantages, subsidiaries also face several challenges, including:

• Complicated Taxation: A subsidiary is subject to income tax on their worldwide income. On top of that, they must also pay taxes on the dividends they pay to non-resident shareholders, documentary stamp tax,  and 10% improperly accumulated earnings tax.
• Complex Registration Process: As a subsidiary is considered a domestic corporation, it’s subject to the same complex registration requirements and process. 
• Infrastructure Challenges: Despite ongoing infrastructure development projects, certain areas in the Philippines still face infrastructural limitations, such as inadequate transportation networks, power outages, and internet connectivity issues, which may affect business efficiency.
• Employment Laws Challenges: Employment laws in the Philippines, which is primarily governed by the Labor Code, may be significantly different from those of the origin country’s laws. As such, people managing the subsidiary must be well-versed in the Philippine labour regulations. 

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Legal Considerations: Setting Up a Subsidiary Company in the Philippines

A subsidiary company in the Philippines must register with the Securities and Exchange Commision (SEC) to legally conduct its business. Below are the requirements:

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• A corporate name that follows the SEC guidelines and isn't already taken.
• Articles of Incorporation that clearly state the purpose of the corporation. 
• If foreign ownership exceeds 40%, a minimum paid-up capital of US$200,000 is required, unless export-oriented. Proof of inward remittance of this amount to a Philippine bank is needed.
• List the names of shareholders, the number of shares, and the amount they're investing.
• Provide personal details of incorporators, including names, nationalities, addresses, and passport numbers. A minimum of 5 and a maximum of 15 incorporators are required, with the majority being Philippine residents.
• Appoint a Treasurer-in-Trust.
• Pay the registration fees, which include approximately 0.2% of the authorised capital stock as a filing fee, 1% for SEC legal research fees, and P210.00 for registering the subsidiary's by-laws.

On top of this, remember that a subsidiary must also register with the Bureau of Internal Revenue (BIR) to facilitate taxes and the Local Government Unit to ensure compliance with local regulations. Here’s more information on Company Registration in the Philippines. 

Likewise, they must also register with the Social Security System, PhilHealth, and Pag-IBIG to properly withhold employee contributions. Learn more about Employee Benefits and Compensation here, as well as How to Set Up Payroll in the Philippines here. 

Key Takeaways

Establishing a subsidiary company in the Philippines offers numerous advantages for foreign investors seeking to expand their business operations into the Southeast Asian market. 

A subsidiary company is a separate legal entity controlled by a parent company, allowing for independent operations while benefiting from the parent's resources and expertise. The strategic geographical location, skilled workforce, favourable business environment, and investment incentives make the Philippines an attractive destination. 

However, companies must remain mindful of regulatory compliance, cultural nuances, bureaucratic processes, and potential challenges such as infrastructure limitations and political instability.

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