How to determine the nationality of a corporation

The Constitution and various laws reserve certain areas of activities to Philippine citizens or to corporations that have a minimum percentage of Filipino ownership.  For example, with respect to corporations, ownership of land is limited to corporations “at least sixty per centum of whose capital is owned” by Philippine citizens.  If 60% of the capital of a Philippine corporation is owned by individuals who are Philippine citizens, then there would be no issue on whether the Philippine corporation is a Philippine national qualified to own land.  On the other hand, an issue would arise if 60% of the capital of the Philippine corporation is owned, in turn, by another Philippine corporation that has foreign stockholders.

If a Philippine corporation has corporate stockholders, how does one determine whether such Philippine corporation is a Philippine national?  Two tests have been employed in the Philippines:  (a)  the grandfather rule;  and (b)  the control test.

To illustrate how these tests are applied, let’s take a Philippine corporation (called “Corporation X”) with the following ownership structure:

(a) non-Philippine citizens own 40% of the capital stock outstanding and entitled to vote of Corporation X;

(b) another Philippine corporation (called “Corporation Y”) owns 60% of the capital stock outstanding and entitled to vote of Corporation X.

On other hand, Corporation Y has the following ownership structure:

(a) non-Philippine citizens own 40% of the capital stock outstanding and entitled to vote of Corporation Y;

(b) Philippine citizens own 60% of the capital stock outstanding and entitled to vote of Corporation Y.

Let’s also assume that Philippine citizens constitute at least 60% of the members of the board of directors of each of Corporation X and Corporation Y.

If the grandfather rule is applied, Corporation X will not be deemed a Philippine national because the grandfather rule takes into account the direct and indirect foreign equity of foreigners in Corporation X (see SEC Opinion re: Silahis International Hotel, May 4, 1987). Applying the grandfather rule, the direct and indirect foreign equity in Corporation X would be 64%, calculated at follows:

Direct foreign-owned equity in Corporation X –          40%

Indirect foreign owned equity in Corporation X –       24%

Under the above scenario, the foreigners are deemed to have a 24% indirect foreign equity in Corporation X because foreigners own 40% of Corporation Y, which in turn owns 60% of Corporation X (i.e., 40% multiplied by 60% equals 24%). Thus, under the grandfather rule, Corporation X is not qualified to own land.

On the other hand, if the control test is applied, Corporation X is deemed to be a Philippine national qualified to own land.  Under the control test, Corporation X is considered a Philippine national since at least 60% of its capital stock outstanding and entitled to vote is held by Corporation Y, which is also considered a Philippine national since at least 60% of its capital stock outstanding and entitled to vote is held by Philippine citizens.

Which of these two tests should be applied?  Watch out for a subsequent article on this topic.

(Note: This is part of a series of “How To” articles. These articles intend to give the reader a general overview of the legal aspects of doing certain things and they will not contain all details regarding the proposed action. There may be changes to applicable laws and regulations after the article is posted. You should consult your lawyer if you wish to take a particular action. See Disclaimer page for additional disclaimers.)

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