Control test as applied to foreign investment

When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the grandfather rule.

In continuation of the previous article, the list below provides investment areas or activities that limit foreign ownership for reasons of security, defense, the risk to health and morals, and the protection of small and medium-scale enterprises.

Up to 40 percent of foreign equity

1. Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National Police clearance (firearms, gunpowder, dynamite, blasting supplies, ingredients used in making explosives, and telescopic sights, sniper scope, and other similar devices);

2. Manufacture and distribution of dangerous drugs;

3. Sauna and steam bathhouses, massage clinics, and other activities regulated by law because of risks posed to public health and morals, except wellness centers;

4. All forms of gambling except those covered by investment agreements with the state-run Philippine Amusement and Gaming Corp;

5. Micro and small domestic market enterprises with paid-in equity capital of less than the equivalent of USD200,000; and

6. Micro and small domestic market enterprises:

i. that involve advanced technology, or

ii. are endorsed as startup or startup enablers by state agencies, or

iii. those whose majority of direct employees were Filipinos provided that their employees should not be less than 15 and with a paid equity capital of less than the equivalent of USD100,000.

Under corporate law, the nationality of a corporation serves as the legal basis for subjecting an enterprise or its activities to the laws, the economic and fiscal powers, and the various social and financial policies of the state to which it is supposed to belong.

In Narra Nickel Mining & Development Corp. vs Redmont Consolidated Mines Corp., (G.R. 195580, 21 April 2014), the Supreme Court explained that there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule.

Under the control test, shares belonging to corporations or partnerships with at least 60 percent of the capital which is owned by Filipino citizens shall be considered as of Philippine nationality. On the other hand, under the grandfather rule, if the percentage of Filipino ownership in the corporation or partnership is less than 60 percent only the number of shares corresponding to such percentage shall be counted as Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60 percent of the capital stock or capital, respectively, which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60 percent or say, 50 percent of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

According to the case of Narra Nickel Mining, the control test is still the prevailing mode of determining whether or not a corporation is a Filipino corporation. When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the grandfather rule.

In instances where methods are employed to disable Filipinos from exercising control and reaping the economic benefits of an enterprise, the ostensible control vested by ownership of 60 percent of a corporation’s capital may be pierced. Then, the Grandfather Rule allows for a further, more exacting examination of who actually controls and benefits from holding such capital.

***

For more of Dean Nilo Divina’s legal tidbits, please visit www.divinalaw.com. For comments and questions, please send an email to [email protected]


Read more Daily Tribune stories at: https://tribune.net.ph/

Follow us on social media
Facebook: @tribunephl
Youtube: TribuneNow
Twitter: @tribunephl
Instagram: @tribunephl
TikTok: @dailytribuneofficial