Limited representations of a representative office
Section 123 of the Corporation Code allows foreign corporations to establish their presence in the Philippines provided that a license is secured from the Securities and Exchange Commission (SEC). A foreign corporation is defined as one which is formed, organized, or existing under the laws of a country other than those of the Philippines. One option that may be considered by a foreign corporation, which does not intend to operate and engage in profit-generating activities, is to establish a representative off ice (“RO”) in the Philippines.
A representative or a liaison office deals directly with the client of the parent company but does not derive income from the host country and is fully subsidized by its head office. Its activities are limited to information dissemination, and promotion as well as quality control of the products of its head off ice. From this definition, by its nature, an RO is not allowed to derive income from the Philippines.
An RO is akin to a Philippine branch off ice in the sense that it is considered as a mere extension of its head off ice in the Philippines. Moreover, although the scope of its activities is limited, similar to a branch office, a duly-licensed RO in the Philippines vests a foreign corporation with the capacity to sue before Philippine courts. As clearly provided under Section 133 of the Corporation Code, foreign corporations doing business without a license in the Philippines are not allowed to institute actions before our Courts. As confirmed by the SEC in one of its rulings, a foreign corporation that is registered with the SEC and is doing business in the Philippines as a representative off ice may bring and defend suits before Philippine courts and other government agencies in order to protect its rights and interests. Thus, a foreign corporation with an RO may file actions before our local courts to enforce its rights over a cause of action.
As enumerated above, the RO may perform certain passive acts in support of its head office/parent company. Through several rulings, the SEC had the occasion to clarify the coverage of the limited activities that an RO may perform.
Following the principle of ejusdem generis, ( which means “of the same kind”), the SEC has consistently affirmed that an RO is permitted to perform only acts akin to or resembling the same kind or class as those of information dissemination and promotion of the company’s products, or quality control for the parent company, or any other passive act that does not involve the earning of any income.
Thus, in one opinion, the SEC confirmed that a certain RO can provide technical drafting support to its parent company and can conduct research on curtain wall designs related to the parent company’s technical and consulting services. These acts were held as allowable provided that restrictions and parameters are observed, such as that the RO shall not transact or book in its records any business with the Philippine clients of the parent company, nor receive any payments from clients; it shall not charge any fees in the performance of the activities; it shall not derive any income from the Philippines; and, it shall be fully subsidized by the parent company.
On the other hand, also applying this same principle in separate opinions, the SEC declared that an RO cannot invest in shares of stocks or perform installation and warranty servicing of machines, as these proposed acts are not akin or related to the allowable activities of an RO and will involve carrying out activities that would generate income.
In another ruling, in confirming that the RO of a foreign bank is allowed to prospect, invite, assist, communicate, promote, refer, coordinate with clients for account opening purposes, the SEC provided certain guidelines:1) the RO will not transact any banking business; 2) all transactions entered into through the marketing efforts of the RO will be booked by the parent company or any transacting branch in other jurisdictions; 3) all products and services can only be sold outside the country; 4) payments for products and services shall be paid outside the Philippines, and the RO is not allowed to receive such payments; 5) any marketing of securities shall be subject to applicable Philippine laws.
In sum, an RO is only allowed to undertake non-income generating activities which, by their nature, assist in promoting and marketing its parent company. Although inherently limited in scope, this structure is utilized by foreign corporations which seek to initially explore and observe the Philippine market. These are foreign corporations which are, in layman’s terms, still “testing the waters.”
By setting up a representative off ice, the foreign corporation merely establishes its presence in the Philippines for the purpose of disseminating information to promote its products/services and to test potential viability and marketability in the Philippines. This will assist them in deciding on whether to proceed in setting up more robust operations in the Philippines, in the form of a branch or subsidiary, that will offer its products/services in full-scale to the Philippine market.
The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.