Foreign Investments Act of 1991
⚠️ Legal Disclaimer
Educational purposes only. This content is provided for general information and educational purposes only. It does not constitute legal advice and should not be relied upon as such.
Information about RA 7042 is based on official sources but may not reflect the most recent amendments.
Professional consultation required. For specific legal concerns, transactions, or disputes, please consult a licensed attorney, relevant government agency (BIR, DHSUD, PRC, Register of Deeds), or qualified tax professional.
Accuracy disclaimer. While we strive for accuracy, laws and regulations change frequently. Information may be outdated. Always verify with official sources (Official Gazette, BIR, DHSUD, Supreme Court).
Plain-Language Summary
Republic Act No. 7042, known as the Foreign Investments Act of 1991, is the principal law governing foreign equity participation in Philippine businesses, including real estate development, brokerage, and property management. The law promotes foreign investment while protecting national interests by establishing a Foreign Investment Negative List (FINL) that specifies which industries are restricted or prohibited to foreign ownership. Understanding Foreign Equity Limits in Real Estate The Foreign Investments Act allows 100% foreign equity in most industries, but real estate-related activities have specific restrictions. Foreign nationals and foreign-owned corporations (those with more than 40% foreign equity) cannot own land in the Philippines under the 1987 Constitution. However, they can engage in real estate activities through specific legal structures. Real estate development companies can be 100% foreign-owned if they develop and sell buildings on land they lease (not own). Condominium development is open to 100% foreign ownership because condominiums are not considered land ownership—foreign buyers can own condo units, and developers can be foreign-owned. Real estate brokerage and property management services are also open to 100% foreign equity under RA 7042. However, buying and selling raw land for resale (land trading) requires at least 60% Filipino equity. Mass housing developers targeting socialized and low-cost housing must be at least 60% Filipino-owned to qualify for government incentives under the Urban Development and Housing Act. The Foreign Investment Negative List The Department of Trade and Industry (DTI) publishes the Foreign Investment Negative List every two years, listing industries where foreign ownership is limited or prohibited. The Negative List has two parts: List A (restricted by the Constitution and specific laws) and List B (restricted for national security, defense, health, and morals). For real estate, key Negative List restrictions include: (1) Private land ownership—0% foreign equity allowed (Constitutional restriction). (2) Private security agencies—0% foreign equity (List B). (3) Small and medium enterprises with paid-up capital below PHP 200,000—40% maximum foreign equity. Real estate agencies often fall under this category if they are small operations. Importantly, if a company is NOT on the Negative List, it can be 100% foreign-owned. Since real estate brokerage, property management, and condominium development are NOT on List A or List B, they can be 100% foreign-owned, subject to minimum capital requirements. Minimum Paid-Up Capital Requirements for Foreign Investors Foreign-owned companies (those with more than 40% foreign equity) must meet minimum capitalization requirements. If the company is 100% foreign-owned, the minimum paid-up capital is USD 200,000 (approximately PHP 11 million at current exchange rates). If the company involves advanced technology or employs at least 50 Filipino workers, the minimum capital is reduced to USD 100,000. For domestic market enterprises (DMEs) selling goods or services in the Philippines, the capital requirement applies. However, export enterprises (those exporting at least 60% of output) are exempt from the capital requirement regardless of size. Real estate developers selling to the Philippine market must meet the USD 200,000 capital requirement if foreign-owned. A Japanese national setting up a real estate brokerage in Manila must inject USD 200,000 to register the business with the SEC if structured as a 100% foreign-owned corporation. If the Japanese national partners with a Filipino to create a 60-40 Filipino-foreign split, the capital requirement does not apply. Compliance and Registration Requirements Foreign-owned businesses must register with the Securities and Exchange Commission (SEC) and obtain a Certificate of Registration. The SEC verifies compliance with the Foreign Investment Negative List and capital requirements before approving registration. After SEC registration, the company must register with the Bureau of Internal Revenue (BIR), local government (Mayor's Permit), and other relevant agencies (DTI, SSS, PhilHealth, Pag-IBIG). The Board of Investments (BOI) offers incentives for foreign investors in priority sectors (manufacturing, infrastructure, renewable energy). Real estate development typically does not qualify for BOI incentives unless it involves large-scale township projects or socialized housing. However, foreign developers can apply for tax holidays, duty-free importation of capital equipment, and other incentives if their projects align with government priorities. Foreign nationals working in the Philippines for their foreign-owned companies must obtain Alien Employment Permits (AEP) from the Department of Labor and Employment (DOLE). The AEP is required for any foreign national working in the Philippines, even in foreign-owned companies. Penalties for employing foreign nationals without AEPs include fines of PHP 10,000 to PHP 100,000 per violation and deportation of the foreign worker. Common Legal Structures for Foreign Real Estate Investors Foreign investors typically use these structures: (1) Philippine Corporation with Filipino partners (60-40 split) if land ownership is required. The corporation can own land if at least 60% Filipino-owned. (2) 100% Foreign-owned Corporation for condominium development, brokerage, or property management. No Filipino partner needed, but must meet USD 200,000 capital. (3) Lease of private land for up to 50 years, renewable for another 25 years under RA 7652. Foreigners lease land and develop buildings for lease or sale. (4) Condominium ownership—foreigners can own up to 40% of the total units in a condominium project. Anti-Dummy Law Enforcement The Anti-Dummy Law (Commonwealth Act No. 108) prohibits Filipinos from acting as dummies for foreign nationals to circumvent ownership restrictions. A "dummy" arrangement is where a Filipino holds title to land for a foreigner, with an agreement that the foreigner controls and benefits from the property. The Securities and Exchange Commission and the Department of Justice actively investigate dummy corporations. Red flags include: Filipino shareholders with no financial capacity signing as majority owners, foreign nationals controlling management despite minority equity, and trust agreements or side contracts giving foreigners de facto control. Penalties for violating the Anti-Dummy Law include cancellation of the corporate registration, forfeiture of the property to the government, fines, and imprisonment for both the foreign national and the Filipino dummy. The Filipino dummy can be imprisoned for up to 5 years and fined up to PHP 10,000. The property acquired through the dummy arrangement is forfeited to the State.
Key Provisions
Section 3: Extent of Foreign Ownership Allowed
Foreign nationals and foreign-owned corporations are allowed to own up to 100% equity in Philippine businesses EXCEPT in areas listed in the Foreign Investment Negative List. For real estate activities: (1) Real estate brokerage and property management can be 100% foreign-owned. (2) Condominium development can be 100% foreign-owned (foreigners cannot own land, but can develop condominiums and sell units). (3) Land ownership is 0% foreign equity (Constitutional restriction—only Filipino citizens and corporations with at least 60% Filipino equity can own land). (4) Land trading (buying and selling land for profit) requires 60% Filipino equity. (5) Mass housing development targeting socialized housing must be 60% Filipino-owned to qualify for government incentives. The law liberalized foreign investment by establishing a negative list approach—if an industry is NOT on the list, it is 100% open to foreigners. This contrasts with the old positive list approach where only listed industries were open. As a result, most real estate services (except land ownership) are fully open to foreign investment, making the Philippines attractive for foreign real estate companies.
Section 5: Minimum Paid-Up Capital for Foreign Investors
Foreign-owned businesses (those with more than 40% foreign equity) must meet minimum capitalization: USD 200,000 (approx. PHP 11 million) for domestic market enterprises. This can be reduced to USD 100,000 if the business involves advanced technology or employs at least 50 Filipino workers. Export enterprises (60%+ of sales are exports) are exempt from the capital requirement. The capital must be PAID-UP, not just subscribed. Foreigners must actually inject the money into the corporate bank account and present proof to the SEC. For real estate businesses: A 100% foreign-owned real estate brokerage must have USD 200,000 paid-up capital. If the brokerage partners with Filipinos to achieve 60% Filipino equity, the capital requirement is waived—there is no minimum. This creates an incentive for foreigners to partner with Filipinos rather than go 100% foreign ownership. The capital requirement prevents undercapitalized foreign competitors from flooding the market. It ensures that foreign businesses have financial substance and are not shell corporations.
Section 8: Foreign Investment Negative List
The DTI Secretary, in consultation with the National Economic Development Authority (NEDA), publishes the Foreign Investment Negative List every two years. The Negative List has two parts: List A (industries reserved to Filipinos by mandate of the Constitution and specific laws) and List B (industries where foreign ownership is limited for reasons of national security, defense, health, morals, and protection of small and medium enterprises). For real estate: List A includes private land ownership (0% foreign equity), exploitation of natural resources, mass media, practice of licensed professions (law, medicine, engineering), and retail trade with paid-up capital below PHP 2.5 million. List B includes private security agencies, small-scale mining, manufacture of firecrackers, and enterprises with paid-up capital below PHP 200,000. Real estate brokerage is NOT on either list, so it can be 100% foreign-owned if the company meets the capital requirement. The Negative List is subject to periodic review and amendments—industries can be added or removed. For example, retail trade was partially opened to foreigners in 2000 through RA 8762, allowing foreign retailers with at least USD 2.5 million capital.
Section 9: Incentives for Foreign Investors
Foreign-owned businesses registered with the Board of Investments (BOI) under the Investment Priorities Plan (IPP) are entitled to fiscal and non-fiscal incentives: Income tax holiday for 4-6 years, exemption from customs duties on imported capital equipment, additional deduction for labor expenses, simplified customs procedures, and unrestricted use of consigned equipment. However, incentives are NOT automatic—the business must engage in a priority activity listed in the IPP. Priority activities change annually based on government economic policy. Real estate development typically does NOT qualify unless it involves: large-scale township development, socialized housing projects, green buildings with LEED certification, or disaster-resilient housing. Ordinary condominiums and subdivisions do not qualify for BOI incentives. Foreign developers seeking incentives must submit a comprehensive project proposal to the BOI, including feasibility studies, environmental impact assessments, and financial projections. If approved, the BOI issues a Certificate of Registration granting incentives for a specific period (usually 3-6 years). Non-compliance (failure to achieve milestones, false reporting) results in cancellation of incentives and penalties.
Section 12: Anti-Dummy Provisions
RA 7042 incorporates the Anti-Dummy Law (CA 108) to prevent Filipino citizens from acting as dummies or nominees for foreigners to circumvent ownership restrictions. A dummy arrangement exists when: (1) A Filipino holds legal title to property or equity, but a foreigner provides the capital and exercises control. (2) There is an agreement (written or verbal) that the Filipino will transfer the property to the foreigner or act according to the foreigner's instructions. (3) The Filipino receives compensation for serving as a nominal owner. Indicators of dummy arrangements include: Filipino shareholders with no income or assets signing as majority owners, foreign nationals holding irrevocable proxies to vote Filipino-owned shares, management contracts giving foreigners de facto control despite minority equity, and trust deeds or side letters obligating Filipinos to transfer property on demand. Penalties: Imprisonment of 5-15 years for both the foreign national and the Filipino dummy, forfeiture of the property to the government, fines, and cancellation of business registration. The SEC actively investigates suspected dummy corporations by requiring shareholders to prove the source of their capital and their active participation in the business.
Real-World Examples
Scenario 1: American Investor Sets Up 100% Foreign-Owned Real Estate Brokerage
John, a US citizen, wanted to start a real estate brokerage in Makati to cater to expats. He registered a 100% foreign-owned Philippine corporation with the SEC, injecting USD 200,000 (PHP 11 million) as paid-up capital. The SEC approved the registration since real estate brokerage is not on the Foreign Investment Negative List. John obtained a business permit from Makati City, registered with the BIR, and hired Filipino real estate brokers (licensed under RA 9646). The company operates legally, earning commissions from property sales and leases. However, John cannot personally act as a broker unless he obtains a Philippine real estate broker license (which requires Philippine residency and passing the PRC exam).
Outcome:
SUCCESSFUL COMPLIANCE. John's company operates legally as a 100% foreign-owned brokerage. The USD 200,000 capital requirement was met. John hires licensed Filipino brokers to handle transactions. Lesson: Foreigners can own real estate service businesses but cannot personally practice licensed professions without Filipino citizenship or residency.
Scenario 2: Chinese Developer Violates Anti-Dummy Law - Property Forfeited
Mr. Wang, a Chinese national, wanted to develop a subdivision but needed to own land. Wang found a Filipino named Pedro who agreed to serve as the majority shareholder (60%) in exchange for PHP 500,000. Wang provided all the capital (PHP 50 million) and managed the company. They signed a secret trust agreement stating Pedro would transfer the land to Wang once he obtained Filipino citizenship. The SEC received a complaint from a disgruntled employee. After investigation, the SEC found evidence of the dummy arrangement: Pedro had no capacity to contribute PHP 30 million (his supposed 60% share), Wang held an irrevocable proxy to vote Pedro's shares, and the trust agreement was discovered during an audit.
Outcome:
DUMMY ARRANGEMENT DECLARED ILLEGAL. The SEC cancelled the corporate registration and forfeited the land to the government. Pedro was prosecuted for violating the Anti-Dummy Law and sentenced to 5 years imprisonment. Wang was deported and banned from re-entering the Philippines. The PHP 50 million investment was lost. Lesson: Dummy arrangements are criminal offenses with severe penalties. Foreigners cannot use Filipino nominees to own land.
Scenario 3: Korean Investor Chooses 60-40 Partnership to Avoid Capital Requirement
Ms. Kim, a Korean national, wanted to start a property management company in BGC. She learned that a 100% foreign-owned company requires USD 200,000 capital, which she did not have. Instead, Kim partnered with a Filipino friend, structuring the company as 60% Filipino (friend) and 40% Korean (Kim). They each contributed proportionally: Filipino partner PHP 3 million (60%), Kim PHP 2 million (40%). Total capital: PHP 5 million. Since the company is majority Filipino-owned, it is NOT subject to the USD 200,000 capital requirement. The SEC approved the registration, and the company operates successfully. Kim and her partner have a clear shareholders agreement defining roles, profit-sharing, and exit provisions.
Outcome:
LEGAL AND PRACTICAL SOLUTION. By partnering with a Filipino, Kim avoided the USD 200,000 requirement while maintaining substantial equity (40%) and active management. The partnership is genuine—both parties contributed capital and participate in management. Lesson: Foreign investors can avoid high capital requirements by forming genuine partnerships with Filipinos, provided the arrangement is not a dummy setup.
Frequently Asked Questions (1)
Q: Can foreign corporation own 40% of Philippine real estate company?
No. Real estate development companies limited to 40% foreign ownership by RA 7042. Foreign corporation can own UP TO 40%, not exactly 40%. Must maintain 60%+ Filipino ownership (voting + equity). Violation = loss of land ownership rights.
Landmark Cases (2)
Narra Nickel, a Philippine corporation, claimed it was Filipino-owned and entitled to a mining permit. The government discovered that 60% of Narra Nickel's shares were held by a Filipino corporation, but that Filipino corporation was itself majority-owned by a foreign mining company. The government denied the permit, arguing Narra Nickel was foreign-controlled.
Key Ruling:
Relevance: Critical for foreign investors: You cannot bypass ownership restrictions by creating layers of Filipino corporations. The government will trace ownership to the ultimate foreign controller. This case established strict enforcement of nationality requirements.
A shareholder of PLDT challenged the company's compliance with the 60-40 Filipino-foreign ownership requirement for public utilities. PLDT claimed it was 60% Filipino-owned, but the shareholder alleged that many "Filipino" shareholders were actually foreign-controlled investment funds and corporations. The case tested the grandfather rule for determining corporate nationality.
Key Ruling:
Relevance: Landmark case establishing that the government will pierce the corporate veil to determine true ownership. Applies to any restricted industry, including land ownership. Ensures that nationality requirements are not circumvented through corporate structures.
Official Sources & References
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Educational purposes only. This content is provided for general information and educational purposes only. It does not constitute legal advice and should not be relied upon as such.
Information about RA 7042 is based on official sources but may not reflect the most recent amendments.
Professional consultation required. For specific legal concerns, transactions, or disputes, please consult a licensed attorney, relevant government agency (BIR, DHSUD, PRC, Register of Deeds), or qualified tax professional.
Accuracy disclaimer. While we strive for accuracy, laws and regulations change frequently. Information may be outdated. Always verify with official sources (Official Gazette, BIR, DHSUD, Supreme Court).