Law on Joint Ventures (1)

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PHILIPPINE LAW GOVERNINGJOINT VENTURES1

IntroductionFormation Agreement: Nature of Joint Ventures in Philippine Setting

Alternative Legal Forms in Structuring a Joint Venture Aspects which Influence Choice of Legal Form

overning Laws and LanguageFreedom to Contract! In eneral Formal or "#trinsic Validit$ of AgreementsCapacit$ of Contract PartiesIntrinsic Validit$ Language of Joint Venture Agreements

%efining Joint Ventures Scope of &usiness Activit$ Foreign Investment Act of '(('

"sta)lishing a Corporate VehicleProcedure in "sta)lishing a Corporate Vehicle%oing &usiness in the Philippines

overning Law *hat Constitutes %oing &usiness+ualifications to %o &usiness in the Philippines,egistration under FIA -('S"C ,egistration

Additional ,e.uirements"ffects of Non/Compliance with FIA 0(' ,e.uirements

S"C License for Foreign Corporations %oing &usinessS"C ,e.uirementsIssuance of License,e.uirements 1pon Issuance of S"C License"ffects of Failure to Secure S"C License to %o &usiness )$ Foreign Corporation

Incentives Availa)le to Foreign Joint Venture PartnersPreferred Areas of Investments 2&3I ,egistered and with Incentives4Non/Preferred Area Investor2Investment *ithout Incentives4Incentives of "#port Processing 5one "nterprises

,estrictions on Activities of Foreign Joint Venture PartnersFinancing Joint Ventures

Schemes ,ecogni6ed under the Act ".uit$ Limitations for 3perators of Pu)lic Franchises

1The original paper was submitted by the author to the CENTER OR INTERNATIONAL LEGAL STU!IES based in Salzburg !ustria as part of its international publication.



,easona)le ,ate of ,eturn on Investments and 3perating and 7aintenance Cost Period Covered Financing Allowed Priorit$ Pro8ectsPreference to Filipino Contractors,epa$ment Schemes

Land ,eclamation or Industrial "states,egistration with &3I Antitrust and Competition Law Preparation of Ancillar$ %ocuments

9echnolog$ 9ransfer Agreement Parties to Agreements,estrictive &usiness Clausesoverning Law %uration of Contract *arrant$uarant$ Provisions,o$alt$ Incentives

%ispute ,esolutions Ar)itration Law

Persons and 7atters Su)8ect to Ar)itrationForm of Ar)itration Agreement

Appointment of Ar)itratorsFacilities for Commercial Ar)itrationNew ;or< Convention

Impact of Changes in Law Su)se.uent to Formation%ou)le 9a#ation Agreements and Impact on Joint VentureProtection of Foreign Investors

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INTRO!UCTION

#oint $enture arrangements are fairly common media of doing business orunderta%ing pro&ects in the 'hilippines both co$ering local transactions such alarge infra(structure underta%ings in$ol$ing the resources of big corporations orstructuring partnership arrangements between foreign in$estors and their localpartners in the pursuit of local pro&ects in the 'hilippines.

)n particular the *o$ernment encourages the pursuit of constructionpro&ects and petroleum operations under &oint $enture arrangements. +nder the,ational )nternal -e$enue ode of 1 of the 'hilippines ,)- &oint $enturesformed for the purpose of engaging in petroleum operations pursuant tooperating agreements under a ser$ice contract with the *o$ernment or thoseformed for the purpose of underta%ing construction pro&ects are e3empt fromcorporate income ta3.

#oint $enture arrangements ha$e particularly been the more popularmedium when foreign participation is in$ol$ed in local pro&ects since thecontractual nature of the arrangement allows the parties fle3ibility to adopt

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special rules and procedures co$ering their situation which would otherwise beinapplicable in a straight corporate $ehicle because of the restricti$e rules of the'hilippine orporation ode and &urisprudence on 'hilippine orporate 4aw.



OR"ATION AGREE"ENT#NATURE O JOINT VENTURES IN PHILIPPINE SETTING

There is no statutory pro$ision that recognizes or go$erns directly &oint$entures although they ha$e been recognized in &urisprudence and

commonplace in commercial $entures. onse6uently &oint $enture arrangementsfall generally within the realm of the 4aw on ontracts and particularly within theapplicable pro$isions of the 4aw on 'artnership both of which are go$ernedunder the i$il ode of the 'hilippines.

Since the pre$ailing contract rule in the 'hilippines is that parties to acontract may establish such stipulations clauses terms and conditions as theymay deem con$enient pro$ided they are not contrary to laws morals goodcustoms public order or public policy1 no model &oint $enture agreements ha$ebeen published by the Securities and 73change ommission S7 8oard of)n$estments 89) or any other authority.

The pre$ailing school of thought in the 'hilippines is that a &oint $enture isa species of partnership. 8y specific statutory pro$ision when :two or morepersons bind themsel$es to contribute money property or industry to a commonfund with the intention of di$iding the profits among themsel$es: then apartnership is created by definition of law. 2 The main distinction between anordinary partnership and a &oint $enture is that the ordinary partnership isorganized for general business $enture and does not ha$e a definite term ofe3istence; whereas a &oint $enture is organized for a specific pro&ect orunderta%ing.

The 'hilippine Supreme ourt has adopted 8lac%<s definition of a &oint$enture thus= :#oint $enture is defined as an association of persons orcompanies &ointly underta%ing some commercial enterprise"generally allcontribute assets and share ris%s. )t re6uires a community of interest in theperformance of the sub&ect matter a right to direct and go$ern the policyconnected therewith and duty which may be altered by agreement to share bothin profit and losses.:

The foregoing definition of a &oint $enture essentially falls within thestatutory definition of what constitutes a partnership. 9ther reasons on why a

&oint $enture must be considered a species of partnership is that the 4aw on'artnership pro$ides that :! partnership may be constituted in any form e3ceptwhere immo$able property or real rights are contributed thereto in which case a

public instrument shall be necessary.:>

That means that no special form e$enone see%ing to establish a &oint $enture arrangement is necessary to gi$e rise toa partnership.

1 !rt. 10? i$il ode.2 !rt. 1? i$il ode.=ilos)a$an! Inc> v> uingona 22 S-! 110 1>(1>> >1 S!@ ?1 1> citing

84!A<S 4 !B @)T)9,!-C.> !rt. 11 i$il ode.

>



)n addition the 4aw on 'artnership recognizes that in the 'hilippines apartnership may either be uni$ersal or particular. 5 ! uni$ersal partnership ofprofits comprises all that the partners may ac6uire by their industry or wor%during the e3istence of the partnership.?

! particular partnership has for its ob&ect determinate things their use or

fruits or specific underta<ing or the e3ercise of a professional or $ocation.

learly therefore a &oint $enture as an underta%ing of two or more persons whocontribute money or property to a common fund with intention of di$iding theprofits from a particular pro&ect or particular underta%ing is defined by law as aparticular partnership.

Dinally the position that a &oint $enture is a species of partnership hasbeen upheld in Aur)ach v> Sanitar$ *ares 7anufacturing Corp>E where theSupreme ourt held that=

. > > The main distinction cited by most opinions incommon law &urisdiction is that the partnership contemplates a

general business with some degree of continuity while the &oint $enture is formed for the e3ecution of a single transactionand is thus of a temporary nature. . . This obser$ation is notentirely accurate in this &urisdiction since under the i$il odea partnership may be particular or uni$ersal and a particularpartnership may ha$e for its ob&ect a specific underta%ing. Itwould seem therefore that under Philippine law! a 8oint ventureis a form of partnership and should thus )e governed )$ thelaws of partnership>10

Since a &oint $enture is a species or a special type of partnership it wouldha$e the following characteristics of partnership=

a )t would ha$e a &uridical personality separate and distinctfrom that of each of the &oint($enturers. !rticle 1?E i$ilode pro$ides specifically that the partnership has a &uridicalpersonality separate and distinct from that of each of thepartners e$en in case of failure to comply with theregistration re6uirements of law. Therefore a &oint $entureas a firm can enter into contract and own properties in thefirm<s name;11

b 7ach of the co($enturers would be liable with their pri$ateproperty to the creditors of the &oint $enture beyond their

contributions to the &oint $enture;

5 !rt. 1? i$il ode.? !rt. 1E0 i$il ode. !rt. 1E i$il ode.E1E0 S-! 10 1E. !rt. 1E i$il ode.10I)id? emphasis supplied>11cf !rt. 1> i$il ode.

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c 7$en if a co($enturer transfers his interest to another thetransferee does not become a co($enturer to the others inthe &oint $enture unless all the other co($enturers consent.This is in consonance with the delectus personariumprinciple applicable to partnerships;

d *enerally the co($enturers acting on behalf of the &oint$enture are agents thereof as to bind the &oint $enture; and

e @eath retirement insol$ency ci$il interdiction or dissolutionof a co($enturer dissol$es the &oint $enture.

#urisprudence howe$er has tended to gi$e &oint $entures specialtreatment not accorded to ordinary partnerships. 'hilippine &urisprudence hasadopted the pre$ailing rule in the +nited States that a corporation cannotordinarily enter into partnerships with other corporations or with indi$iduals. Thebasis for such prohibition on corporations is that in entering into a partnershipthe identity of the corporation is lost or merged with that of another and the

direction of the affairs is placed in other hands than those pro$ided by law of itscreation.

The doctrine is grounded on the theory that the stoc%holders of acorporation are entitled in the absence of any notice to the contrary in thearticles of incorporation to assume that their directors will conduct the corporatebusiness without sharing that duty and responsibility with others. 12

9uason v> &ola@os1 recognized in 'hilippine &urisdiction the doctrine in !nglo(!merican &urisprudence that :a corporation has no power to enter into apartnership.: ,e$ertheless 9uason recognized that a corporation may $alidlyenter into a &oint $enture agreement :where the nature of that $enture is in line

with the business authorized by its charter.:1>

!lthough 9uason does not elaborate on why a corporation may become a

co($enturer or partner in a &oint $enture arrangement it would seem that thepolicy behind the prohibition on why a corporation cannot be made a partnerdoes not apply in a &oint $enture arrangement. 8eing for a particular pro&ect orunderta%ing when the board of directors of a corporation e$aluate the ris%s andresponsibilities in$ol$ed they can more or less e3ercise their own business

&udgment is determining the e3tent by which the corporation would be in$ol$ed inthe pro&ect and the li%ely liabilities to be incurred. The situation therefore in a &oint$enture arrangement unli%e in an ordinarily partnership arrangement which maye3pose the corporation to any and $arious liabilities and ris%s which cannot be

e$aluated and anticipated by the board allows the board to fully bind thecorporation to matters essentially within the boards business appreciation andanticipation.

128 !+T)ST! T-7!T)S7 9, 'F)4)''),7 ' !-T,7-SF)' 4 !B 1E 7d. at p. .15 'hil. 10? 15>.1>I)id .uoting from *$oming/Indiana 3il as Co> v> *eston! E0 !.4.-. 10> citing

Dletcher yc. of orp. 10E2.

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The pre$ious ruling of the S7 on the matter is that a corporation cannotenter into a contract of partnership with an indi$idual or another corporation onthe premise that if a corporation enters into a partnership agreement it would bebound by the acts of the persons who are not its duly appointed and authorizedagents and officers which is entirely inconsistent with the policy of the law thatthe corporation shall mange its own affairs separately and e3clusi$ely. 15

4ater the S7 pro$ided for a clear e3ception to the foregoing ruling andallowed corporations to enter into partnership arrangement pro$ided thefollowing conditions are met=1?

a The authority to enter into a partnership relation is e3presslyconferred by the charter or the articles of incorporation of thecorporation and the nature of the business $enture to beunderta%en by the partnership is in line with the businessauthorized by the charter or articles of incorporation;

b The agreement on the articles of partnership must pro$idethat all the partners shall manage the partnership and thearticles of partnership must stipulate that all the partnersshall be &ointly and se$erally liable for all the obligations ofthe partnership;

c )f it is a foreign corporation it must obtain a license totransact business in the country in accordance with theorporation ode of the 'hilippines.

)n one opinion the S7 clarified that the conditions imposed meant thatsince the partners in a partnership of corporations are re6uired to stipulate thatall of them shall manage the partnership and they shall be &ointly and se$erallyliable for all the obligations of the partnership it necessarily followed that a

partnership of corporations should be organized as a Ggeneral partnershipH.1

4ately the S7 realizing that the second condition actually pre$ented acorporation from entering into a limited partnership which if allowed to do sowould then be more congruent with the policy that the corporation would then notbe held liable for its $enture beyond the in$estments made and determined by itsboard of directors and would therefore not be held liable beyond its in$estmentfor debts arising from the acts of the general partners reconsidered its positionand ruled that a corporation may become a limited partner in a limitedpartnership since Gthere is no e3isting 'hilippine law that e3pressly prohibits acorporation from becoming a limited partner in a partnership.H )n effect the S7

dropped the second condition imposed pre$iously.

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15S7 9pinion 22 @ecember 1?? S7 D94)9 1?0(1? at p. 2E; citing ? D47TF7- C. 9-'. 'erm. 7d. -e$. -epl. 150 Sec. 2520.

1?S7 9pinion 2 Debruary 1E0; S7 9pinion dated September 1E>. +nder Sec. 12of the , !T)9,!4 ),T7-,!4 -7I7,+7 9@7 documentary stamps of '15.00 must be affi3ed oneach pro3y.

1S7 9pinion 2 Debruary 1> JJI))) S7 K+!-T7-4C 8+447T), 1E ,o. Sept.1>.

1ES7 9pinion 1 !ugust 15 JJJ S7 K+!-T7-4C 8+447T), E ,o. 1 #une 1?.



)n the field of Ta3ation both a partnership and a &oint $enture are treatedas corporate ta3payers and both are sub&ect to corporate income ta3 e3cept thatunder the ,ational )nternal -e$enue ode of 1 :a &oint $enture or consortiumformed for the purpose of underta%ing construction pro&ects or engaging inpetroleum coal geothermal and other energy operations pursuant to anoperating or consortium agreement under a ser$ice contract with the

*o$ernment: shall not be ta3ed separately as a corporate ta3payer. 1

ALTERNATIVE LEGAL OR"S IN STRUCTURING A JOING VENTURE

'arties ha$e a $aried choice of legal forms in planning a &oint $enturearrangement and they can pursue the same through a &oint $enture corporationor by straight e6uity &oint $enture by partnership arrangement or contractual

&oint $enture. The S7 has ruled that generally a &oint $enture agreement of twocorporations need not be registered with the S7 pro$ided it will not result in theformation of a new partnership or corporation. Fowe$er should there be anintention to ac6uire a separate Ta3 )dentification ,umber T), from the 8ureauof )nternal -e$enue for the business $enture the same re6uires registration withthe S7 in order to ha$e a separate legal personality to obtain a separate T),. 20

o($enturers may pursue the &oint $enture arrangement by a pri$atecontract between them and they choose not to represent a separate firmunderta%ing the pro&ect to third parties. )n such an arrangement the relationshipof the $enturers their rights and liabilities are go$erned by the &oint $enturecontract e3ecuted between them.

76uity &oint $entures are also a$ailable in 'hilippine setting which mayco$er the formation of a new &oint $enture company with each co($enturer beingallocated proportionate shareholdings in the outstanding capital stoc% of the &oint

$enture corporation. 76uity &oint $enture may also be pursued where a co($enturer is allocated the agreed shares of stoc% in an e3isting corporation eitherfrom new issuances of the capital stoc% of the e3isting corporation or sold sharesfrom those already issued in the names of the other co($enturers.

)n e6uity &oint $entures the rights and obligations of the parties amongthemsel$es is co$ered not only in a separate &oint $enture agreement but alsoimplemented by certain pro$isions of the articles of incorporation and by(laws ofthe &oint $enture corporation.

! third type of &oint $enture arrangement is to formally operate the &oint$enture set(up as a partnership with a separate and distinct &uridical personality.

The S7 has ruled that two or more corporations may enter into a &oint$enture through a contract or agreement contractual &oint $enture if the natureof the $enture is authorized by their charters which contract need not beregistered with the S7; pro$ided howe$er that the &oint $enture will not result inthe formation of a new partnership or corporation.21

1 Sec. 228 ,)- of 1.20S7 9pinion 0 Larch 15 JJ)J S7 K+!-T7-4C 8+447T), 2 ,o. Sept. 15.21S7 9pinion 2 !pril 1E5 S7 !,,+!4 9'),)9,S 1E5 at p. E.

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)n situations where a corporate $ehicle is formed in pursuance of the &oint$enture arrangements ideally the &oint $entures should be able to fit into the$arious terms and clauses of the articles of incorporation and by(laws thecharter of the &oint $enture company the salient features of their &oint $entureagreements. )n situations where &oint $enture agreements contain pro$isions notco$ered by the charter of the &oint $enture corporation or $ice($ersa the

resolutions of issues arising therefrom shall be as follows=

a )n case of conflicts between the pro$isions of the &oint$enture agreement and the charter of the &oint $enturecorporation the pro$isions of the latter shall pre$ail;

b )n case there are pro$isions or clauses in the &oint $entureagreement not found in the charter of the &oint $enturecorporation such pro$isions and clauses remain bindingcontracts among the &oint $enture parties signatory to theagreement but do not bind the &oint $enture corporation orother parties not signatories thereto.

The foregoing rules of resolution are based on the well(establisheddoctrine under 'hilippine orporate 4aw that the articles of incorporation is abasic contract document defining the charter of the corporation. The articles ofincorporation is characterized as a contract between and among three parties=a between the State and the corporation; b between the stoc%holders and theState; and c between the corporation and its stoc%holders. 22

)n addition although the &oint $enture agreement may contain rules onmanagement and control of the &oint $enture corporation it does not authorizethe &oint($enturers as e6uity owners to o$erride the business management of

the corporate affairs of the &oint $enture corporation by its board of directors. !nystipulation therefore in the &oint $enture agreement that see%s to arrogate untothe stoc%holders thereof the management prerogati$es of its board of directorswould be null and $oid.

ASPECTS WHICH INLUENCE CHOICE O LEGAL OR"

The most important aspects in choosing the form to pursue &oint $enturearrangement would be the issues of limited liability ta3 conse6uences andlimitation of foreign e6uity is specified areas of in$estments or acti$ities.

The contractual &oint $enture has the ad$antage of limiting the e3tent ofthe arrangement between and among the &oint($enturers as in underta%ings thatre6uire pri$acy. )n addition since formal &oint $entures are ta3ed as corporateta3payer the contractual &oint $enture lessens the need to ha$e to register thepro&ect as a separate corporate ta3payer since the pri$ate arrangements shouldallow the &oint($enturers to continue reporting separately their participation in thepro&ect in their own ta3 returns. 9n the other hand the choice of pursuing a &oint$enture arrangement for underta%ing constructions pro&ects or engaging in

22overnment of the P>I> v> 7anila ,ailroad Co> 52 'hil. ? 12.



petroleum coal geothermal and other energy operations pursuant to anoperating agreement under a ser$ice contract with the *o$ernment is usuallymade because the &oint $enture itself would not be sub&ect to corporate incometa3 liabilities under the ,)-.

The use of the corporate entity to pursue the &oint $enture arrangement

allows the &oint($enturers to ta%e full ad$antage of the limited liability features ofthe corporate $ehicle especially in pro&ects and underta%ings which embodycertain ris%s. The corporate entity route also allows the &oint($enturers to ta%ead$antage of zero rate ta3ability of di$idends declared by corporations.

)n the 'hilippines the corporation has traditionally been sub&ected tohea$ier ta3ation than other forms of business organization; di$idends distributedare sub&ect to another ta3 when recei$ed by the stoc%holders. Bith the trust of*o$ernment to encourage both local and foreign in$estments in the country andto entice the use of the corporation as the $ehicle for such in$estment many ofthe pre$ious ta3 laws that tended to ma%e corporate $ehicles e3pensi$e ha$ebeen abolished. 73cept for di$idends declared by domestic corporation in fa$or

of foreign corporation2 di$idends recei$ed by indi$iduals from corporation 2> aswell as inter(corporate di$idends between domestic corporations 25 are sub&ect tozero rate of income ta3ation. There has also been an abolition of the personalholding companies ta3 and ta3 on unreasonably accumulated surplus ofcorporations.2?

4ately howe$er under the reforms embodied in the ,)- of 1 a finalta3 of 10M has been re(imposed on di$idends recei$ed by residents and citizensdeclared from corporate earnings after 1 #anuary 1E; 2 a final ta3 of 20M ondi$idends recei$ed by a nonresident alien indi$idual has been re(imposed fromcorporate earnings after 1 #anuary 1E;2E and the ta3 on improperlyaccumulated earnings has li%ewise been re(imposed.2

The pursuit of &oint $enture arrangements under a formal partnershiparrangement has the disad$antage of in$iting into the arrangement the featuresof unlimited liability for partnership debts to the &oint($enturers and also theinability to ta%e ad$antage of the zero(rate of di$idends for corporation when thepartnership declares and distributes profits. The aspect of double ta3ation loomslargely in a partnership &oint $enture arrangement since partnerships are sub&ectto the 2M net income ta3 for corporations. ,e$ertheless &oint $entures formedfor the purpose of underta%ing construction pro&ects0 and those formed toengage in petroleum operations pursuant to an operating agreement under aser$ice contract with the *o$ernment1 are e3empt from corporate ta3ation.

2Sec. 25a and b ,)- of 1.2>Sec. 21 ,)- of 1.25Sec. 2> ,)- of 1.2?73ecuti$e 9rder ,o. 1E?.2Sec. 2>82 ,)- of 1.2ESec. 25!1 ,)- of 12Sec. 2 ,)- of 1.0'res. @ecree 2 1?.1'res. @ecree 1?E2.

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GOVERNING LAW AN! LANGUAGE

Since &oint $enture arrangements are go$erned primarily by the 4aw onontracts the following rules would be rele$ant to &oint $entures.

$% ree&o' to Contra(t) In General

The 'hilippine onstitution prohibits any law impairing the obligation ofcontracts.2 The established rule is that contracting parties may establish suchstipulations clauses terms and conditions as they may deem con$enientpro$ided they are not contrary to law morals good customs public order orpublic policy.

ontracts generally are perfected by mere consent and from that momentthe parties are bound not only to the fulfillment of what has been e3presslystipulated but also to all the conse6uences which according to their nature maybe in %eeping with good faith usage and law. > #oint $enture arrangements aretherefore generally binding on the &oint($enturers in whate$er form they were

constituted.

*% or'al or E+trinsi( Vali&it, o- A.ree'ents

'hilippine laws recognize the principle that the formal or e3trinsic $alidityof contracts including a &oint $enture arrangement shall be go$erned by the lawsof the country in which they are e3ecuted.5 Therefore &oint $enturearrangements which are essentially partnership agreements are $alid inwhate$er form e3ecuted.

/% Ca0a(it, o- Contra(t Parties

The capacity of the parties to enter into a &oint $enture agreement isgenerally go$erned by their national law.? Fowe$er in case of &oint $entureagreements co$ering the alienation or encumbrance of properties both real andpersonal located in the 'hilippines the capacity of the parties is go$erned under'hilippine laws.

2Sec. 10 !rt. ))). !rt. 10? i$il ode.> !rt. 115 i$il ode.5 !rt. 1 i$il ode.? !rt. 15 i$il ode. !rt. 1? i$il ode.

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1% Intrinsi( Vali&it,

The intrinsic $alidity of a &oint $enture agreement as in all contracts ingeneral e3ecuted in the 'hilippines including consideration or cause thereof theinterpretation or constructions of its pro$isions and the nature and amount ofdamages for breach thereof are go$erned by the law $oluntarily agreed upon bythe parties. The parties to a &oint $enture arrangement can therefore $alidlystipulate which laws shall go$ern their arrangement.

Fowe$er any stipulation in the &oint $enture agreement cannot operate tooust 'hilippine courts of their &urisdiction under the law although the local courtswould still apply the laws chosen by the parties to the agreement. E

!lthough the parties to a contract including a &oint $enture arrangementsare granted liberty under 'hilippine laws to stipulate on go$erning laws includingthe laws of another country ne$ertheless 'hilippine restricti$e laws on ta3esand prohibition on foreign e6uity in some business areas or acti$ities are li%ely tobe imposed as mandatory if suit is brought before a local forum see%ing any

remedy under the &oint $enture arrangement.

2% Lan.ua.e o- Joint Venture A.ree'ents

There are li%ewise no restrictions on the language in which a document orcontract may be e3ecuted since the language does not go into the $alidity orenforceability of the agreement. ,e$ertheless it would be prudent for the partiesto draw the documents in an official language since any future suit on adocument must always be accompanied by an official transaction in the officiallanguage.

+nder Section -ule 12 of the 'hilippine -ules of ourt documentswritten in an unofficial language shall not be admitted as e$idence unlessaccompanies with a translation into 7nglish or Dilipino. +nder the 1Eonstitution of the 'hilippines the official languages are Dilipino and untilotherwise pro$ided by law 7nglish.

Lost if not practically all contracts and agreements in 'hilippine settingare drawn(up and e3ecuted in 7nglish since it is the official and dominantlanguage of commerce and the &udiciary.

!EINING JOINT VENTURES SCOPE O 3USINESS ACTIVIT4

The principal consideration in defining the scope of business to beunderta%en by &oint $enture in the 'hilippines basically de$ol$e on the issuewhen it in$ol$es foreign in$estment of restrictions on foreign e6uity and foreignmanagement and control on certain restricted areas or acti$ities.

E7olina v> %e la ,iva ? 'hil. 12 10?; Companie de Commerce v> am)urg/Ameri<a! ?'hil. 50 11.

Sec. !rt. J)I.

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$% orei.n Invest'ent A(t o- $55$

-epublic !ct 0>2 %nown as the :Doreign )n$estment !ct of 11: or :D)!<1: was enacted to promote foreign in$estments and prescribes the proceduresfor registering enterprises doing business in the 'hilippines. )t is the basic lawthat pro$ides the conditions acti$ities and procedures where foreign enterprises

may in$est and do business in the 'hilippines. )t applies to &oint $enturearrangements in the 'hilippines. 8y the negati$e list scheme the !ct simplyestablished the restricted areas and declared all other areas as open tounlimited foreign e6uity participation.

7ssentially the D)! N1 pro$ides for foreign in$estment negati$e list whichspells out the acti$ities reser$ed for 'hilippine national. 73port enterprises mayenter all acti$ities not restricted by 4ists ! and 8 of the negati$e list anddomestic enterprises with foreign e6uity may enter all acti$ities not restricted by4ists ! 8 and of the negati$e list.

The salient points of D)! <1 are the following=

a +nder the concept of a negati$e list more areas are open toforeign in$estments and in$estment policy is madetransparent and stable;

b The law redefined :e3port enterprise: to mean at least ?0Me3port from the former 0M e3port le$el.

c )t opened the domestic economy to 100M foreignin$estments e3cept for those in the negati$e lists.

d 9ne layer of bureaucracy is reduced because there is noneed for 8oard of )n$estments 89) appro$al if the in$estoris not see%ing incenti$es.

The criteria for the negati$e list are the following=

List A co$ers area of in$estment in which foreign ownership is limited bythe onstitution and nationalization laws as follows=

NO OREIGN E6UIT4 ALLOWE! =

a Lass media ownership and management; >0

b 4icensed professions li%e lawyers accountants andengineers;>1

c -etail trade;>2

d Disheries; and

e -ice and corn farming.>

>0Sec. 11 !rt. JI) onstitution.>1Sec. 1> !rt. J)I onstitution.>2-ep. !ct ,o. 11E0. -etail Trade has been liberalized under -ep. !ct ,o. E?2 otherwise

%nown as the -etail Trade 4iberalization !ct of 2000.>-ep. !ct ,o. 01E; 'res. @ecree 1>.

1



*27 OREIGN E6UIT4 ALLOWE! #

a -ecruitment agencies;>> and

b 4ocally funded public wor%s pro&ect.>5

/87 OREIGN E6UIT4 ALLOWE! #

a !d$ertising.>?

187 OREIGN E6UIT4 ALLOWE! =

a 73ploitation of natural resources and utilization ofland ownership;>

b 'ublic utilities;>E

c 7ducational institutions;>

d Dinancing companies;50

e onstruction.51

f ooperati$es;52

g 'ri$ate security agencies;5 and

h Small(scale mining.5>

+nder the -etail Trade 4iberalization !ct of 200055 the retail tradeindustry has been liberalized to accommodate foreign in$estments and foreigndirect participation. urrently foreigners are e3cluded only in retail enterpriseswith paid(up capita of less than +SO2500000.00 ategory ! which isresecured e3clusi$ely for Dilipino citizens and corporations wholly(owned byDilipino citizens.

List 3 co$ers defense(related materials which by law are licensed andregulated by the @epartment of ,ational @efense unless specifically authorizedwith substantial e3port by the Secretary of ,ational @efense. Dor e3ample >0Mforeign e6uity is allowed manufacture repair storage and/or distribution ofe3plosi$es munitions and armaments.5?

>> !rt. 2 4abor ode.>5omm. !ct ,o. 5>1; 'res. @ecree 15>; 49) ?0.>?

Sec. 11 !rt. JI) onstitution.>Sec. 2 !rt. J)) onstitution.>ESec. 11 !rt. J)) onstitution.>Sec. > !rt. J)I onstitution; 8atas 'ambansa 8lg. 22.50-ep. !cts ,os. >5?? and 5E0.51-ep. !ct ,o. 51E.52-ep. !ct ,o. ?E.5-ep. !ct ,o. 5>E.5>-ep. !ct ,o. 0?.55-ep. !ct ,o. E?2 Larch 2000.5?-ep. !ct ,o. 0>2.

1>



List 3 also includes acti$ities regulated by law because of ris%s they maypose to public health and morals. Dor e3ample dangerous drugs gamblingnightclubs bars and message clinics are not open for foreign in$estments. 5

! third area under the negati$e List 3 refers to domestic mar%etenterprises with less than +SO200000 paid in e6uity capital unless determined

by the @epartment of Science and Technology as in$ol$ing ad$ancedtechnology.

Dinally the negati$e List 3 also includes e3port enterprises using rawmaterials from depleting natural resources and with less than +SO200000 paidin e6uity capital.

The following therefore are co$ered under 4ist 8 and would be open to100M foreign e6uity in$estments=

a Lanufacture and repair of firearms and similar defense(related material with substantial e3port component and withspecific authorization from the Secretary of ,ational

@efense.b @omestic mar%et enterprises certified by the @9ST as

in$ol$ing ad$anced technology e$en if the paid(in e6uitycapital is less than +SO200000.

c 73port enterprises that use raw materials from depletingnatural resources but with paid(in capital of at least+SO200000.

List C enumerates :ade6uately(ser$ed areas.: The criteria to determine:ade6uately ser$ed :areas of economic acti$ity are the following=

a The industry is controlled by firms owned at least ?0M byDilipinos;

b )ndustry capacity is ample to meet domestic demand;

c Sufficient competition e3ists within the industry;

d )ndustry products comply with 'hilippine standards of healthand safety or in the absence of such with internationalstandards and are reasonably competiti$e 6uality withsimilar products in the same price range imported into thecountry;

e Kuantitati$e restrictions are not applied on imports of directlycompeting products;

f )ndustry leaders comply with en$ironmental rules; and

g The prices of industry products are reasonable.

5-ep. !ct ,o. 0>2.

15



The transitory Ne.ative List C has already been scrapped under73ecuti$e 9rder ,o. 1E2 which established the regular Doreign )n$estment,egati$e 4ist and too% effect last 9ctober 1>. 9here is in effect no longerNegative List C .

Esta9lis:in. a Cor0orate Ve:i(leLere in$estment by foreign entities into a &oint $enture company would be

co$ered by the rules on foreign e6uity allowance under D)! <1. The registrationof the &oint $enture company itself would be similar to the normal registrationre6uirements of the S7 on the organization formation and registration of adomestic corporation.

)n addition if aside from e6uity in$estment in the local company theforeign partners would participate in the affairs or pro&ects of the domestic &oint$enture company it would be considered doing business in the 'hilippines andwould ha$e to obtain a license to do business from the S7.

$% Pro(e&ure in Esta9lis:in. a Cor0orate Ve:i(le

!side from the D)! <1 the are orporation ode pro$isions and S7rules and regulations that must be complied with in setting(up the &oint $enturecompany.

Section 10 of our orporation ode re6uires the incorporators of acorporation to be not less than fi$e 5 natural persons ma&ority of whom must beresidents of the 'hilippines. This re6uirement is mandatory e$en to 100Mforeign(owned corporations. Since the ode pro$ides that only natural personsmust be incorporators a corporation cannot be considered an incorporator of the

corporation to be put up although said corporation may be among thesubscribers to the corporation<s capital stoc%.

The ode sets the limit to the number of directors to not less than fi$e 5nor more than fifteen 15. Section 2 of the ode moreo$er re6uires e$erydirector to own at least one 1 share of the capital stoc% of the capital stoc% ofthe corporation. Said section of the ode also re6uires ma&ority of the directors tobe residents of the 'hilippines. Fowe$er the S7 does not insist on ma&orityresidency re6uirements for directors when the domestic corporation is 100Mforeign(owned.

!lien incorporators and subscribers who are residents must furnish

pro$ide any of the following= their immigration certificate of residence specialin$estor<s resident $isa and any %ind of $isa $alid for at least one 1 year.

+nder S7 regulations an alien may be appointed/elected as treasureronly if he is a resident of the 'hilippines.

Bhen a &oint $enture company is to be registered with foreign e6uity thefollowing re6uirements are imposed by the S7=

1?



a !ll subscriptions of foreign incorporators to be fully paid. )fthey will not be fully paid the Dilipino incorporators muste3ecute an underta%ing to pay for the unpaid subscription;

b !lien subscribers must submit proof of remittance or affida$itstating the source of payment of their subscriptions;

c !lien subscribers who wish to register their in$estments withthe entral 8an% so that they can remit their earnings andcapital abroad must necessarily remit their respecti$esubscription payments through the ban%ing system andsubmit the prescribed ban% certificate of inward remittanceas proof of the remittance to the S7.

,ote that the S7 may allow the remittance to be maintained in a foreigncurrency account not con$erted into pesos so long as a letter(e3planation isgi$en to the S7 on the non(con$ersion e.g. the foreign currency will beimmediately used to buy capital e6uipment abroad.

*% !oin. 3usiness in t:e P:ili00ines=

a. Governing Law

!side from direct in$estment participation discussed abo$e foreignersmay :do business: in the 'hilippines. This mode of in$estment is not a$ailable forincenti$es and is therefore go$erned by D)! <1.

b. What Constitutes Doing Business

+nder D)! <1 :doing business: in the 'hilippines is deemed to include thefollowing acts=

a Soliciting orders ser$ice contracts opening offices whetherliaisons offices or branches;

b !ppointing representati$es or distributors operating underfull control of the foreign corporation domiciled in the'hilippines or who in any calendar year stay in the countryfor a period or periods totaling 1E0 days or more;

c 'articipating in the management super$ision or control ofany domestic business firm entity or corporation in the'hilippines; and

d !ny other act or acts that imply a continuity of commercialdealings or arrangements and contemplate to that e3tentthe performance of acts and wor%s or the e3ercise of someof the functions normally incident to and in progressi$eprosecution of commercial gain or of the purpose or ob&ect ofthe business organization.

1



c. Qualifications to Do Business in the Philippines

!ny non('hilippine national or entity may do business in the 'hilippines upto 100M of its capital pro$ided=

a )t is doing business as a domestic mar%et enterprise outside

the ,egati$e 4ist;b )t is doing business as an e3port enterprise whose products

or ser$ices do not fall within 4ists ! and 8 e3cept fordefense(related acti$ities which may be appro$ed orauthorized of the ,egati$e 4ists.

d. Registration under !" #$%

're$iously foreign nationals or foreign entities see%ing to do business inthe 'hilippines e$en without incenti$es must secure a certificate of authority fromthe 89) aside from a license from the S7. The passage of D)! <1 howe$er did

away with this need for a prior 89) certificate of authority. +nder the D)! what isonly re6uired is registration with the S7.

The re6uirements of the D)! <1 from the foreign nationals who are directforeign in$estors and for those merely see%ing to do business in the 'hilippinesunder the foregoing definition are the same. D)! <1 does not ma%e a distinctionbetween direct foreign in$estors or those merely see%ing to do business in the'hilippines in its re6uirements for registration.

e. &'C Registration

Fowe$er the orporation ode re6uires certain registration compliance.

Dor foreign corporation or partnerships see%ing to do business in the 'hilippinesthe following would be re6uired=

a ertified copy of the board resolution authorizing theestablishment of an office in the 'hilippines; designating theresident agent to whom summons and other legal processesmay be ser$ed in behalf of the foreign corporation; andstipulating that in the absence of such agent or uponcessation of its business in the 'hilippines the S7 shallrecei$e any summons and legal processes as if the same ismade upon the corporation at its home office;

b Dinancial statements for the immediately preceding year atthe time of the filing of the application certified by anindependent ertified 'ublic !ccountant of the S7;

c ertified copies of !rticles of )ncorporation/'artnership withan 7nglish translation thereof in a foreign language;

d Doreign ompany )nformation Sheet

1E



!ll documents e3ecuted abroad should be authenticated by the 'hilippineembassy or consular office.

f. "dditional Re(uire)ents

The following would be re6uired for specially defined acti$ities=

a Dor enterprises wishing to engage in defense(relatedacti$ities clearance from the @epartment of ,ational@efense or 'hilippine ,ational 'olice;

b Dor small and medium sized domestic enterprises with paid(in e6uity capital less than the e6ui$alent of +SO200000.00a certificate from the @epartment of Science and Technologythat the in$estment in$ol$es ad$anced technology.

g. 'ffects of Non*Co)pliance with !" +$% Re(uire)ents

!dministrati$e sanctions which would include the impositions of fines andthe forfeitures of benefits.5E

/% SEC Li(ense -or orei.n Cor0orations !oin. 3usiness

!side from the registration re6uirements of the D)! <1 with the S7Section 125 of the orporation ode re6uires foreign corporations wishing to dobusiness in the 'hilippines to secure a license from the S7 allowing the foreigncorporation to do business in the 'hilippines.

a. &'C Re(uire)ents

The following documentary re6uirements would ha$e to be filed with theS7=

a !pplication for a license;

b ertified true copies of articles of incorporation and by(laws;

c ertificate under oath by the authorized official or officials ofthe &urisdiction of its incorporation attesting to the fact thatthe laws of the country or state of the applicant allow Dilipinocitizens and Dilipino corporations to do business therein andthat the applicant is an e3isting corporation in good standing.

)f such certificate is in a foreign language a translationthereof in 7nglish under oath of the translator shall beattached hereto;

d Statement under oath by the president or any other personauthorized by the corporation showing to the satisfaction ofthe S7 and other go$ernment agency in proper cases thatthe applicant is sol$ent and in sound financial condition and

5ESection 1> D)! N1.

1



setting forth the assets and liabilities of the corporation as ofthe date not e3ceeding one 1 year immediately prior to thefiling of the application.

b. !ssuance of License

Bhere the S7 is satisfied that the applicant has complied with all there6uirements of this ode and other special laws rules and regulations theS7 shall issue a license to the applicant to transact business in the 'hilippinesfor the purpose or purposes specified in such license. +pon the issuance of thelicense such foreign corporation may transact its business in the 'hilippines andcontinue to do so for as long as it retains its authority to act as a corporationunder the laws of the country or of its state of incorporation unless such licenseis soonest surrendered suspended or annulled in accordance with this ode orother special laws.

c. Re(uire)ents ,pon !ssuance of &'C License

i 'osting of Securities

Bithin si3ty ?0 days after the issuance of a license to transact businessin the 'hilippines the licensee shall deposit with the S7 for the benefit ofpresent and future creditors of the licensee in the 'hilippines securitiessatisfactory to the S7 consisting of bonds or other e$idences of indebtednessof the *o$ernment of the -epublic of the 'hilippines its political subdi$isions andinstrumentalities or of go$ernment owned or controlled corporations and entitiesshares of stoc% in registered enterprises as this term is defined in -ep. !ct ,o.51E? shares of stoc% in domestic corporations registered in the stoc% e3changeor any combinations of these %inds of securities in the actual $alue of'100000.00

ii Cearly -e6uirement of 'osting of !dditional Securities

Bithin ? months after each fiscal year the S7 shall re6uire the licenseeto deposit additional securities e6ui$alent in actual mar%et $alue to two percent2M of the amount by which the licensee<s gross income for that fiscal yeare3ceeds '5000000.00. The S7 shall also re6uire deposit of additionalsecurities if the actual mar%et $alue of the deposit has decreased by ten percent10M of their actual mar%et $alue at the time they were deposited.

The S7 may at its discretion release part of the additional securitiesdeposited with it if the gross income of the licensee has decreased or if the

actual mar%et $alue of the securities on deposit has increased by more than 10Mof the actual mar%et $alue of the securities when they were deposited.

The S7 may from time to time allow the licensee to substitute othersecurities for those already on deposit as long as the licensee is sol$ent.

20



iii !ppointment of -esident !gent

The appointment of a resident agent is an indispensable re6uirement tothe issuance of an S7 license. Should the foreign corporation be suedsomeone must by duly authorized to recei$e summons and other legalprocesses so that the 'hilippine courts may ac6uire &urisdiction o$er such

corporation.

d. 'ffects of ailure to &ecure &'C Licenseto Do Business b- oreign Corporation

The following are the legal effects of a foreign corporation doing businessin the 'hilippines for failing to obtain the S7 license=

i riminal liability ( Dine or imprisonment;5

ii The foreign corporation cannot sue in 'hilippine courts;?0

and

iii The foreign corporation can be sued in 'hilippinecourts.?1

INCENTIVES AVAILA3LE TO OREIGN JOINT VENTURE PARTNERS

73cept for &oint $entures formed for the purpose of underta%ingconstruction pro&ects?2 and those for formed for engaging in petroleum operationspursuant to an operating agreement under a ser$ice contract with the*o$ernment? which are e3empt from corporate ta3ation the incenti$es a$ailableto &oint $enture partners is directly lin%ed with the acti$ities to be underta%en.

)n$estment incenti$es are mainly pro$ided for under the 9mnibus)n$estment ode of 1E.?>

$% Pre-erre& Areas o- Invest'ents;3OI Re.istere& an& wit: In(entives<#

*enerally a foreign in$estor can a$ail of incenti$es if he in$ests in whatare designated as preferred areas of in$estment as designated in the )n$estment'riorities 'lan )'' a yearly pamphlet issued by the 8oard of )n$estments89).

8oo% ) of the ode classifies the preferred areas of in$estments into two=

the preferred pioneer and the preferred non/pioneer . The yearly )'' then listsdown which economic acti$ities are considered preferred pioneer and which arepreferred non(pioneer.

5 !rt. 1>> orporation ode; Sec. 1> -ep. !ct .?0Sec. 1 orporation ode.?1 I)id>?2'res. @ecree 2 1?.?'res. @ecree 1?E2.?>73ecuti$e 9rder ,o. 22? the 9mnibus )n$estment ode.

21



Doreigners may in$est up to the e3tent of 100M in the economic acti$itieslisted down as preferred pioneer sub&ect only to constitutional or statutorylimitations and only up to >0M in economic acti$ities declared as preferred non/

pioneer .

)f an enterprise is not listed in the )n$estment 'riorities 'lan and foreign

e6uity shall not e#ceed >0M it must to be entitled to the incenti$es gi$en e3port50M of its production.

)f an enterprise is not listed in the )n$estment 'riorities 'lan and foreigne6uity shall e#ceed >0M it must e3port 0M of its production to be entitled to theincenti$es gi$en.

! location restriction howe$er is imposed on the enterprise in order toa$ail of certain incenti$es. Thus pro&ects locating in Letro Lanila are not entitledto income ta3 holiday and capital e6uipment incenti$es.

!mong the incenti$es granted by the ode are=

a *uarantee of in$estment repatriation in the currency in whichthe in$estment was originally made and at the e3change ratepre$ailing at the time of repatriation;

b *uarantee of remittance of earnings in the currency in whichthe in$estment was originally made and at the e3change ratepre$ailing at the time of remittance;

c Dreedom from e3propriation;

d ,o re6uisition of in$estment;

e )ncome ta3 holiday for ? years from the commercialoperation for pioneer firms and > years for non(pioneer firms;

f !dditional deduction for labor e3pense for the first 5 yearsfrom the registration of 50M of the wages corresponding tothe increment in the number of direct labor for s%illed anduns%illed wor%ers;

g Ta3 and duty e3emption on imported capital e6uipment;

h Ta3 credit on domestic capital e6uipment;

i 73emption from contractor<s ta3;

f Simplification of customs procedure;

g +nrestricted use of consigned e6uipment;h 7mployment of foreign nationals;

i Ta3 credit for ta3es and duties on raw materials;

& 73emption from ta3es and duties on imported spare parts;and

% 73emption from wharfage dues and any e3port ta3 dutyimpost and fee.

22



*% Non=Pre-erre& Area Investor ;Invest'ent Wit:out In(entives<#

're$iously before the enactment of D)! <1 because foreign e6uity in theenterprise will not e3ceed >0M the enterprise is denominated as a permittedinvestment under the 9mnibus )n$estment ode. +nder the ode the enterprise

may immediately incorporate directly with the S7 without need of prior 89)authority. Now the re.uirements of FIA B(' should )e complied with.

/% In(entives o- E+0ort Pro(essin. >one Enter0rise#

)f the &oint $enture is to be established within an e3port processing zonearea under the ode it shall ha$e the following incenti$es=

a Dacility in employment of foreign nationals;

b Da$orable ta3 treatment of merchandise within the zone;

c 7n&oy the same incenti$es as a 89)(registered pioneer

enterprise; andd 73emption from local ta3es and licenses.

)n addition under 'res. @ecree ,o. ?? the following incenti$es aree3pressly granted to locators within the e3port processing zone areas are=

a 73emption from customs duties and internal re$enue ta3esraw materials supplies and e6uipment imported within suchareas;

b !llowing net(operating loss carry(o$er for the first 5 years ofoperations;

c !llowing accelerated depreciation of fi3ed assets to not morethan twice the normal rate of depreciation;

d 73emption from e3port ta3;

e 73emption from local ta3es and licenses;

f @eduction of labor(training e3penses incurred of 1/2 the$alue of such e3penses;

g @eduction for organizational and pre(operating e3penseso$er a period of 10 years;

h *rant of ta3 credit e6ui$alent to the sales compensating andspecific ta3es and duties paid on supplies raw materials andother products purchased.

2



facility pro$iding in the process technology transfer andtraining to Dilipino nationals.

;9< Build*and*/ransfer &che)e 0B/1 ( The contractorunderta%es the construction including financing of a gi$eninfrastructure facility and its turno$er after completion to the

go$ernment agency or local go$ernment unit concernedwhich shall pay the contractor its total in$estment e3pendedon the pro&ect plus a reasonable rate of return thereon.

This arrangement may be employed in theconstruction of any infrastructure pro&ect including criticalfacilities which for security or strategic reasons must beoperated directly by the *o$ernment.

;(< Build*wn*perate 0B1 ( ! pro&ect proponent isauthorized to finance construct own operate and maintainan infrastructure or de$elopment facility from which theproponent as allowed to reco$er its total in$estmentoperating and maintenance costs plus a reasonable returnthereon by collecting tolls fees rentals and other chargesfrom facility users. +nder this scheme the proponent whichowns the assets of the facility may assign its operation andmaintenance to a facility operator.

! :facility operator: is defined as a company registeredwith the S7 which may or may not be the pro&ectproponent and which is responsible for all aspects ofoperation and maintenance of the infrastructure orde$elopment facility including but not limited to the

collection of tolls fees rentals or charges from facility users.)n case the facility re6uires a public utility franchise thefacility operator shall be Dilipino or at ?0M owned byDilipinos.

;&< Build*Lease*/ransfer 0BL/1 ( ! pro&ect proponent isauthorized to finance and construct an infrastructure orde$elopment facility and upon its completion turns it o$er tothe go$ernment agency or local go$ernment unit concernedon a lease arrangement for a fi3ed period after whichownership of the facility is automatically transferred to thego$ernment agency or local go$ernment unit concerned.

;e< Build*/ransfer*and*perate 0B/1 ( The public sectorcontracts out the building of an infrastructure facility to apri$ate entity such that the contractor builds the facility on aturn(%ey basis assuming cost o$errun delay and specifiedperformance ris%s. 9nce the facility is commissionedsatisfactorily title is transferred to the implementing agency.The pri$ate entity howe$er operates the facility on behalf ofthe implement agency under an agreement.

25



;-< Contract*"dd*and*perate 0C"1 ( The pro&ect proponentadds to an e3isting infrastructure facility which it is rentingfrom the go$ernment. )t operates the e3panded pro&ect o$eran agreed franchise period. There may or may not be atransfer arrangement in regard to the facility.

;.< Develop*perate*and*/ransfer 0D/1 ( The fa$orableconditions e3ternal to a new infrastructure pro&ect which is tobe built by a pri$ate pro&ect proponent are integrated into thearrangement by gi$ing that entity the right to de$elopad&oining property and thus en&oy some of the benefits thein$estment creates such as higher property or rent $alues.

;:< Rehabilitate*perate*and*/ransfer 0R/1 ( !n e3istingfacility is turned o$er to a pri$ate sector to refurbish operateand maintain for a franchise period at the e3piry of whichthe legal title to the facility is turned o$er to the go$ernment.The term is also used to described the purchase of an

e3isting facility from abroad importing refurbishing erectingand consuming it within the host country.

;i< Rehabilitate*wn*and*perate 0R1 ( !n e3isting facilityis turned o$er to the pri$ate sector to refurbish and operatewith no time limitation imposed on ownership. !s long as theoperator is not in $iolation of its franchise it can continue tooperate the facility in perpetuity.

*% E@uit, Li'itations -or O0erators o- Pu9li( ran(:ises

The ownership structure of the contractor of an infrastructure facilitywhose operation re6uires a public utility franchise must be in accordance with theonstitution which re6uires at least ?0M Dilipino ownership.

9riginally under the 8(9(T 4aw in the case of corporate in$estors in the89T corporation the citizenship of each stoc%holder in the corporate in$estorsshall be the basis for the computation of Dilipino e6uity in the said corporation.,ep> Act 'D has done awa$ with the citi6enship test applied to corporateinvestors in &39 corporations and its variations involving operation of pu)licfacilities 2e>g>! &33! &93! CA3! %39 and ,334.

/% Reasona9le Rate o- Return on Invest'entsan& O0eratin. an& "aintenan(e CostThe contractor operates the facility o$er a fi3ed term during which it is

allowed to charge facility users appropriate tolls fees rentals and chargessufficient to enable the contractor to reco$er its operating and maintenancee3penses and its in$estment in the pro&ect plus a reasonable rate of returnthereon.

2?



-epublic !ct 1E defines :reasonable rate of return: as the rate of returnthat reflects the pre$ailing cost of capital in the domestic and internationalmar%ets.

1% Perio& Covere&

The contractor transfers the facility to the go$ernment unit concerned atthe end of the fi3ed term which shall not e3ceed 50 years.

2% inan(in. Allowe&

Dor the construction stage the contractor may obtain financing fromforeign and/or domestic sources and/or engage the ser$ices of a foreign and/orDilipino contractor.

The financing of a foreign or foreign(controlled contractor from 'hilippinego$ernment financing institutions shall not e3ceed 20M of the total cost of theinfrastructure facility or pro&ect.

The financing from foreign sources shall not re6uire a guarantee by the*o$ernment or by go$ernment(owned or controlled corporation.

'ro&ects which would ha$e difficulty in sourcing funds may be financedpartly from direct go$ernment appropriations and/or from 9fficial @e$elopment

!ssistance 9@! funds of foreign go$ernments or institutions not e3ceeding50M of the pro&ect cost and the balance to be pro$ided by the pro&ect proponent.

% Priorit, Proje(ts

The 'hilippine ongress passed #oint -esolution ,o. 0 enumerating thefollowing national priority infrastructure pro&ects=

a Fighways including e3pressways roads bridges inter(changes tunnels and related facilities;

b -ail(based pro&ects pac%aged with commercial de$elopmentopportunities e.g. use of go$ernment facilities;

c ,on(rail based mass transit facilities na$igable inlandwaterways and related facilities;

d 'ort infrastructure li%e piers whar$es 6uays storagehandling ferry ser$ices and related facilities;

e !irports air na$igation and related facilities;

f 'ower generation distribution electrification and relatedfacilities;

g Telecommunications bac%bone networ%s terrestrial andsatellite facilities and related ser$ice facilities;

h @ams irrigation and related facilities;

i Bater supply sewerage drainage and related facilities;

2



& Tourism educational and health infra(structure;

% 4and reclamation dredging and other related de$elopmentfacilities;

l )ndustrial estates regional industrial centers and e3portprocessing zones including steel mills iron(ma%ing and

petrochemical comple3es and related infrastructure facilitiesand utilities;

m Lar%ets slaughterhouses and related facilities;

n Barehouses and posthar$est facilities;

o 'ublic fishports and fishponds including storage andprocessing facilities;

p 7n$ironmental and solid waste management(related facilitiessuch as collection e6uipment composting plantsincinerators landfill and tidal barriers among others; and

6 @e$elopment of new townsites and communities and relatedfacilities.

B% Pre-eren(e to ili0ino Contra(tors

-epublic !ct 1E raises the standards that must be met by Dilipinocontractors in order for them to be accorded preference o$er foreign contractorsbidding for 8/T and 84T contracts.

)n order to be accorded preference a Dilipino contractor is re6uired tosubmit an e6ually ad$antageous bid with the same price and technicalspecifications as that of the foreign contractor. ! Dilipino contractor will not be

accorded preference unless his bid is at par on both price and technical aspectswith that of the foreign contractor.

% Re0a,'ent S(:e'es

Dor the financing construction operation and maintenance of anyinfrastructure pro&ect underta%en pursuant to the 8(9(T 4aw the contractor shallbe entitled to a reasonable return of its in$estment and operating andmaintenance costs in accordance with its bid proposal as accepted by theconcerned contracting infrastructure agency or local go$ernment unit andincorporated in the contract<s terms and conditions.

)n the case of a 89T arrangement this repayment scheme is to beeffected by authorizing the contractor to charge and collect reasonable tolls feesrentals and charges for the use of the pro&ect facility not e3ceeding thoseproposed in the bid and incorporated in the contract.

The go$ernment infrastructure agency or local go$ernment unit concernedshall appro$e the fairness and e6uity of the tolls fees rentals and chargese3cept in case of tolls for national highways roads bridges and publicthoroughfares which shall be appro$ed by the Toll -egulatory 8oard.

2E



The imposition and collection of tools fees rentals and charges shall befor a fi3ed term as proposed in the bid and incorporated in the contract but in nocase shall this term e3ceed 50 years.

@uring the lifetime of the franchise the contractor shall underta%e thenecessary maintenance and repair of the facility in accordance with standards

prescribed in the bidding documents and in the contract. )n the case of build(and(transfer arrangement the repayment scheme is to be effected throughamortization payments by the go$ernment infrastructure agency or localgo$ernment unit concerned to the contractor according to the scheme proposedin the bid and incorporated in the contract.

-epublic !ct 1E also allows for the receipt by the pro&ect proponent ofpayment in non(monetary terms such as land sub&ect howe$er to constitutionallimitations on ownership of land.

5% Lan& Re(la'ation or In&ustrial Estates

)n the case of land reclamation or the building of industrial estates therepayment scheme may consist of the grant of a portion or percentage of thereclaimed land or industrial estate built sub&ect to the constitutional re6uirementswith respect to the ownership of lands only by Dilipino citizens.

$8% Re.istration wit: 3OI

-epublic !ct 1E pro$ides that pro&ects costing in e3cess of '1 8illionshall be registered with the 8oard of )n$estments and entitled to the incenti$espro$ided under the 9mnibus )n$estments ode.

ANTI=TRUST AN! CO"PETITION LAW

The 'hilippine onstitution pro$ides for the policy= :The State shallregulate or prohibit monopolies when the public interest so re6uires. ,ocombinations in restraint of trade or unfair competition shall be allowed.: ?? Thereare howe$er $ery few detailed legislations go$erning antitrust and unfaircompetition nor to implement the constitutional policy against restraint of trade orunfair competition.

The remaining unrepealed portions of !ct ,o. 2> 125 merely grantsthe Supreme ourt and the -egional Trial ourts concurrent &urisdiction topre$ent and restrain acts of monopolies or combinations in restraint of trade and

authorizes the Solicitor *eneral and public prosecutors to institute proceedings topre$ent and restrain such $iolations. )t also pro$ides that any person who shallbe in&ured in his business or property by any other person by reason of anythingforbidden or declared to be unlawful under the 4aw shall reco$er threefold thedamages sustained by him and the costs of suit including reasonable attorney<sfees.

The -e$ised 'enal ode of the 'hilippines penalizes=

??Sec. 1 !rt. J)).

2



a !ny person who shall enter into any contract or agreementor shall ta%e part in any conspiracy or combination in theform of a trust or otherwise in restraint of trade or commerceor to pre$ent by artificial means free competition in themar%et;

b !ny person who shall monopolize any merchandise or ob&ectof trade or commerce or shall combine with any otherperson or persons to monopolize said merchandise or ob&ectin order to alter the price thereof by spreading false rumorsor ma%ing use of any other artifice to restrain freecompetition in the mar%et;

c !ny person who being a manufacturer producers orprocessor of any merchandise or ob&ect of commerce or animporter of any merchandise or ob&ect of commerce fromany foreign country either as principal or agent wholesaleor retailer shall combine conspire or agree in any manner

with any person li%ewise engaged in the manufactureproduction processing assembling or importation or suchmerchandise or ob&ect of commerce or with any person notso similarly engaged for the purpose of ma%ing transactionspre&udicial to lawful commerce or of increasing the mar%etprice in any part of the 'hilippines.

Bhene$er any of the offenses described abo$e is committed by acorporation or association the president and each one of the directors ormanagers of said corporation or association or its agent or representati$e in the'hilippines in case of foreign corporations or associations who shall ha$e

%nowingly permitted or failed to pre$ent the commission of such offenses shallbe held liable as principals thereof.

PREPARATION O ANCILLAR4 !OCU"ENTS

Bhen a &oint $enture arrangement in$ol$es the use and transfer ofintellectual property or technology certain basic intrinsic and registrationre6uirements are mandated by 'hilippine laws.

$% Te(:nolo., Trans-er A.ree'ent

ontracts or agreements entered into by and between domesticcompanies and foreign companies and/or foreign(owned companies in$ol$ingthe= transfer of systematic %nowledge for the manufacture of a product theapplication of a process; rendering of a ser$ice management contracts; licensingof computer softwares; and the transfer assignment or licensing of all forms ofindustrial property rights including mar%eting/distributorship agreements in$ol$ingthe license to use foreign trademar%s tradenames and ser$ice mar%s and other

0



mar%s of a proprietary nature must be registered with the Technology Transfer-egistry.?

The registration with the -egistry will enable the remittance of royalty feesand similar foreign e3change obligations arising from a technology transferarrangement.

+nder entral 8an% ircular ,o. 10?2 parties to the technology transferarrangement can purchase foreign e3change from a ban% to co$er royaltyremittances only when the ban% is shown the certificate of registration with theTechnology Transfer 8oard.

*% Parties to t:e A.ree'ent

The -ules pro$ide that the term :domestic company: refers to anenterprise partnership corporation branch or other form of businessorganization formed organized chartered or e3isting under the laws of the'hilippines. The foreign company would include=

a ! foreign company or an alien enterprise or foreign firmassociation partnership corporation or any form of businessorganization not organized or e3isting under the laws of the'hilippines;

b ! foreign(owned company which refers to an enterprisepartnership corporation or any form of businessorganization formed organized chartered or e3isting underthe laws of the 'hilippines the ma&ority of the outstandingcapital of which is owned by aliens.

/% Restri(tive 3usiness Clauses

+nder the -ules the following clauses are not allowed in any technologytransfer arrangement in $iew of their restricti$e nature=

a lauses which restrict directly or indirectly the e3port of theproducts manufactured by the technology recipient unless

&ustified for the protection of the legitimate interest of thetechnology supplier and the technology recipient;

b -estrictions on the use of the technology supplied aftere3piration of the arrangements; pro$isions which restrict themanufacture of similar or competing products after e3piry ofthe arrangement; and pro$isions re6uiring the continuedpayment for patents and other industrial property rights aftertheir e3piration termination or in$alidation;

?Sec. 1PbQ -ule ) -ules of 'rocedures of the TT-.

1



of the technology supplier is suitable for the manufacture of the licensedproducts or for the e3tension of ser$ices pursuant to the technology transferarrangement.

B% Ro,alt,

73cept for pure trademar% licensing agreements where a ma3imum royaltyfee of 1M of net sales is allowed the -ules do not prescribe any ceiling on therate of fees due under a technology transfer arrangement. Fowe$er the rate issub&ect to e$aluation by the -egistry based on set criteria in the -ules.

% In(entives

! bonus royalty of 2M of net foreign e3change earnings can be a$ailed ofby a supplier who commits to an e3port de$elopment program to assist therecipient to penetrate the e3port mar%et for the first time.

!ISPUTE RESOLUTION

9utside of &udicial remedies parties to a &oint $enture arrangement areauthorized to submit their contro$ersies to arbitration ?E or they can pro$ide aspart of their &oint $enture arrangements that all issues and contro$ersies shall beresol$ed by arbitration through a procedure drawn out in the &oint $enturecontract. The stipulation on arbitration can $alidly pro$ide that the resolution ordecision of the board of arbitrators is $alid and final. ?

Bhen the parties to a contract ha$e a pro$ision re6uiring arbitration incase of disputes no party may see% remedy from the courts of law. Fowe$ershould a case be filed in court without ha$ing resorted to prior arbitration the

court will not dismiss the case; instead the court will refer the matter to thearbitrators.0

)n case there is a pro$ision for arbitration and one party refuses toarbitrate the other party may through a summary court proceeding enforce thearbitration pro$isions of their contract; but the court is without authority to resol$ethe issues on the merits.1

$% Ar9itration Law

The special or particular law go$erning arbitration stipulation andproceedings is -epublic !ct ,o. E? 15 formally designated as :The

!rbitration 4aw.:

a. Persons and 2atters &ub3ect to "rbitration

?E !rt. 20>2 i$il ode.? !rt. 20>> i$il ode.0&engson v> Chan E S-! 11 1.17indanao Portland Cement Corp> v> 7c%onough! 1 S-! E0E 1?.



+nder the said 4aw two and more persons or parties may submit to thearbitration of one or more arbitrators any contro$ersy e3isting between them atthe time of the submission and which may be sub&ect of an action or the partiesto any contract may in such contract agree to settle by arbitration a contro$ersythereafter arising between them.

Such submission or contract shall be $alid enforceable and irre$ocablesa$e upon such grounds as e3ist at law for the re$ocation of any contract. !lsosuch submission or contract may include 6uestions arising out of $aluationsappraisals or other contro$ersies which may be collateral incidental precedentor subse6uent to any issue between the parties.

b. or) of "rbitration "gree)ent

! contract to arbitrate a contro$ersy thereafter arising between the partiesas well as a submission to arbitrate an e3isting contro$ersy shall be in writing andsubscribed by the party sought to be charged or by his lawful agent. The ma%ingof a contract or submission for arbitration shall be deemed a consent of the

parties to the &urisdiction of the -egional Trial ourt of the pro$ince or city whereany of the parties resides to enforce such contract or submission.

c. "ppoint)ent of "rbitrators

)f in the contract for arbitration or in the submission to arbitrationpro$ision is made for a method of naming and appointing arbitrators suchmethod shall be followed; but if no method be pro$ided therein it is the -egionalTrial ourt that shall designate an arbitrator or arbitrators.

The !rbitration 4aw pro$ides specifically for the procedure of arbitration6ualification of arbitrators challenge of arbitrators hearing by arbitratorsrendering of awards and the form and contents of award confirmation of awardgrounds for $acating modifying or correcting awards and appeals procedure.

*% a(ilities -or Co''er(ial Ar9itrations

The 'hilippine hamber of ommerce and )ndustry as a ser$ice to itsmembers and in response to re6uest for assistance to pro$ide arbitration facilitiesand ser$ices to parties to a commercial dispute has adopted its own -ules ononciliation and !rbitration.

)n the construction industry The 'hilippine @omestic onstruction 8oardwas created under 'res. @ecree ,o. 1>? :to ad&udicate and settle claims and

disputes in the implementation of public construction contracts: and to :formulateand recommend rules and procedures for the ad&udication and settlements ofclaims and disputes in the implementation of contracts in pri$ate construction.:Subse6uently the 'hilippine onstruction )ndustry !rbitration ommission)! was constituted under 73ecuti$e order ,o. 100E gi$ing it original ande3clusi$e &urisdiction o$er claims and disputes arising from or connected withpublic and pri$ate constructions contracts in the 'hilippines.

>



/% New 4or Convention

)n 1?5 the 'hilippines adhered2 to the 15E +nited ,ations on$entionon the -ecognition and 7nforcement of Doreign !rbitral !wards otherwise%nown as the ,ew Cor% on$ention. The on$ention see%s to ma%e arbitralawards rendered in a foreign state enforceable in any state which is a party to

the on$ention.

I"PACT O CHANGES IN THE LAW SU3SE6UENT TO OR"ATION

The general rule under 'hilippine laws is that subse6uent changes in thelaw such as the introduction of new incenti$es or abolition of e3isting incenti$esis within the power of 4egislature to so pro$ide e$en as it affects e3istingenterprises including &oint $entures.

This rule emanates from constitutional doctrines that pro$ide that e$enwith a guarantee of non(impairment of contract obligations it does not pre$ent

changes of rights of parties to a contract only as between them and not withreference to third(parties including the State. Lore importantly Section 11 !rticle J)) of the 'hilippine onstitution pro$ides for a reser$ation clause in fa$orof the *o$ernment to re$o%e or amend e3isting grants and pri$ileges includingincenti$es granted to in$estors= :,either shall any such franchise or right begranted e3cept under the condition that it shall be sub&ect to amendmentalteration or repeal by the ongress when the common good so re6uires.:

!OU3LE TAFATION AGREE"ENTS AN! I"PACT ON THE JOINT VENTURE

!s of 20 ,o$ember 15 the 'hilippines had ta3 treaties in force with thefollowing countries= !ustralia !ustria 8elgium 8razil anada @enmar%Dinland Drance *ermany )ndonesia )taly #apan Aorea Lalaysia,etherlands ,ew ealand ,orway 'a%istan Singapore Spain SwedenThailand +nited Aingdom and the +nited States.

The ta3 treaties reduce the effects of double ta3ation and pro$ide forcertain fa$orable ta3 benefits.

Dor e3ample although under the 'hilippine ,ational )nternal -e$enueode royalty payments are sub&ect to a final 20M ta3 pursuant to the ta3 treatywith the +nited States royalties paid to a +.S. corporation are sub&ect to only

10M withholding ta3. !nother illustration under certain conditions the sale of shares of stoc% in

a domestic corporation by a Swedish corporation is ta3(e3empt. Dees paid to a#apanese corporation for the dispatch of its personnel to pro$ide technicalassistance to a domestic corporation pursuant to a technical assistanceagreement constitute :royalties: sub&ect to the 10M withholding ta3 under the -'(#apan ta3 treaty.

2Senate -esolution ,o. 1 Lay 1?5.

5



*ains to be realized by a +.S. citizen from the transfer of his shares ofstoc% in a domestic corporation are ta3able only in the +.S. The royalty fees paidto a +.S. corporation pursuant to software license agreement are sub&ect to only10M ta3 under the most(fa$ored(nation clause of the -'(+S ta3 treaty.

Dinally gains realized by a +S(based firm not doing business in the

'hilippines from all its outstanding shares of stoc% in its local subsidiary areta3able only in the +.S. under the -'(+S ta3 treaty.

PROTECTION O OREIGN INVESTORS

The following are basic guarantees under the 'hilippine onstitution asprotection to foreign in$estors=

a Dreedom from e3propriation without &ust compensation;

b -ight to remit profits capital gains and di$idends within theguideline of the entral 8an% of the 'hilippines;

c -ight to obtain foreign e3change to meet principal andinterest payments on foreign obligations.

oOo

!''7,@)J (4 !B 9, #9),T I7,T+-7S0?(22(2001

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Law on Joint Ventures (1)

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Transcript of Law on Joint Ventures (1)