Real estate investment in Philippines

Real estate investment in Philippines
By Ocampo, Manalo, Valdez & Lim Law Firm

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Foreign investment

Foreign investors are generally prohibited from directly owning land situated in the Philippines, as land ownership is reserved for Filipino nationals and domestic corporations and joint ventures that are deemed Filipino nationals.18 Domestic corporations and joint ventures are considered Filipino nationals where at least 60 per cent of their equity is owned by Filipino nationals. Foreign investors may, therefore, indirectly own land by investing a maximum equity of 40 per cent in domestic corporations or joint ventures. There is, likewise, a foreign ownership limitation on condominium projects in that foreign membership of a condominium corporation is limited to 40 per cent.19 Similarly, foreign investors may indirectly own condominium units through domestic corporations and joint ventures in the same way described above. Conversely, there is no foreign ownership limitation on owning buildings, provided that the land is owned by a Filipino individual or company.

As an alternative to owning land, foreign individuals and entities may lease private lands located in the Philippines for a period of 25 years, renewable for another 25 years.20 Foreign investors, however, are allowed a 50-year lease, renewable for another 25 years, over private land 'in connection with the establishment of industrial estates, factories, assembly or processing plants, agro-industrial enterprises, land development for tourism, industrial or commercial use, and other similar priority productive endeavours.'21 The latter type of long-term lease is subject to approval by the pertinent government agency. Foreign investors may likewise be accorded an income tax holiday and special tax rates, depending on, among other things, the location of their operations and their registrations with the Board of Investments and the PEZA.

Structuring the investment

As a general rule, a foreign national cannot own land in the Philippines, unless the foreign national:

inherited land through succession;22
is a former Filipino citizen;23 or
is a former Filipino citizen and has reacquired Filipino citizenship under Republic Act No. 9255 or the Citizenship Retention and Reacquisition Act of 2003.

Nonetheless, any foreign individual or corporation wishing to invest in real estate in the Philippines can do so using the following means.i Philippine corporation

Foreigners can indirectly own private land by acquiring up to 40 per cent equity in a Philippine domestic enterprise, that can either own land as a capital asset or as part of its inventory if the company is in the real estate business. This type of corporation is considered a Filipino national under Philippine law, and therefore allowed to buy and own private land.

Stockholder liability in the dealings of the corporation is limited only to the extent of the shareholder's equity in the corporation. As a general rule, the shareholder will be not be personally liable for debts of the corporation.ii Condominium corporation

Instead of directly owning private land, foreign nationals are permitted to directly purchase condominium units in condominium projects duly constituted under Republic Act No. 4726 as amended (the Condominium Act) and registered with the Housing and Land Use Regulatory Board (HLURB), provided the total foreign interest in the condominium project does not exceed the 40 per cent limit set by the Condominium Act and the Philippine Constitution. Under law, a condominium is not limited to residential use, as it can also be classified as a commercial or office building. Thus, in the construction of office buildings, it is typical to allow foreign nationals to own specific areas of a project as long as they do not exceed, in the aggregate, the 40 per cent limitation.iii Long-term lease

As an alternative to owning land, foreign nationals can enter into lease agreements covering real property. While as a general rule, private corporations may enter into lease terms of up to 25 years and renewable for another 25 years, the Investors' Lease Act, however, permits a longer-term lease by foreign investors of up to 50 years and renewable for another 25 years if the purpose of the lease is for the establishment of industrial estates, factories, processing plants, agro-industrial enterprises or commercial and tourism uses.24

The investment contemplated by the law involves equity that is duly registered with the SEC and a lease agreement that has the prior approval of the Department of Trade and Industry.

Similarly, foreign companies that are registered in Philippine government-established economic and industrial complexes, through PEZA, can enter into long-term lease agreements recognised by the Investors' Lease Act.25 Generally, these leasehold rights may also be sold, assigned or transferred, except when the buyer or assignee is a foreigner. Any limitations or conditions on use as prescribed by law will continue to be applicable.26iv Ownership of real property other than land

While there are strict nationality restrictions on land ownership, there are no such limitations applicable to foreign nationals and corporations regarding improvements or real property constructed on land. Accordingly, 100 per cent ownership over buildings, equipment and other real property situated on land can be titled in favour of a foreign national or corporation who is merely a tenant of the land. Thus, it would be perfectly valid for a foreign national to have a completely separate legal title on the real property from that of the land where such real property is located. Although it is generally accepted that the accessory follows the principal, whereby the ownership of the property (land) produces the right by accession to everything that is integrated or attached to it, whether naturally or otherwise, this rule, nonetheless allows for an exception.27

As a result, a tax declaration filed with the local assessor's office can serve as evidence of ownership over the structure and real property other than land28 by expressly indicating such buildings and equipment as owned by the foreign national.

Under these circumstances, and where the land is registered in the name of a corporation deemed as a Filipino national, the foreign owner of the building can also partake of up to 40 per cent of the allowable equity in the Philippine corporation.v REIT

An REIT is a stock corporation established principally for owning income-generating real estate assets,29 where indirect investments in real property can be made. Although designated as a 'trust' the REIT does not have the same technical meaning as a trust under existing laws and is solely used to be consistent with internationally accepted best practice.

An REIT is required to have a paid-up capital of 300 million pesos. It should also maintain its status as a public corporation as defined under Republic Act No. 9856 and should, thus, have a minimum of 1,000 public shareholders; each with at least 50 shares under their names and, in total, should own a third of the outstanding capital stock of the REIT.

Although the REIT is not subject to the minimum corporate income tax, it is, however, subject to the regular corporate income tax rate of 30 per cent.30 Declared dividends distributed as income are deemed as allowable deductions.31 In addition, unless expressly exempted by law, the sale, exchange or disposition of real property, plus any accompanying security interest to this type of corporation, will incur income tax and value added tax if the subject property is classified as an ordinary asset or capital gains tax if the property is reported as a capital asset. Noteworthy, though, is that documentary stamp taxes due on transfers to REITs and the transfer fees are generally 50 per cent less compared to ordinary transfers of real property.32

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Source:

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