Domestic Corporation vs. Branch Office in the Philippines
The Philippines is an ideal business destination for foreign companies seeking to expand their overseas operations. With a stable outlook for the Philippine economy, coupled with low capital costs and high English proficiency among its labor force, the island nation is seen as the preferred choice for foreign companies setting up a manufacturing, processing or service enterprise. Through various Investment Promotion Agencies such as the Philippine Economic Zone Authority (PEZA), Board of Investments, Subic Bay Metropolitan Authority and many others, foreign companies may also qualify for some attractive tax perks, such as, income tax holidays, special corporate income taxes, and many other incentives.
Foreign companies that intend to do business in the Philippines may choose from establishing a domestic corporation, or a branch office. Let us compare these two options and explore their respective features.
| Consideration | Domestic Corporation | Branch Office |
|---|---|---|
| Formation | A domestic corporation may be formed by:
|
A branch office is required to designate a resident agent, to whom all summons and legal processes may be served in all actions or other legal proceedings against the corporation |
| A corporation will be issued a Certificate of Incorporation | A branch office will be issued a License to do Business in the Philippines. | |
| The corporation is required to elect its own Board of Directors and officers. | A branch office is not required to elect its own Board of Directors and officers. | |
| Risk exposure | A domestic corporation is considered a juridical entity, separate and distinct from its parent company, and therefore, yields more protection to the parent from potential liabilities. | A branch office, on the other hand, is an extension of its head office, and therefore, exposes the head office to potential liabilities as well. |
| Tax angle | A domestic corporation is taxed on its worldwide income. | A branch office is taxed on Philippine sourced income. |
| Withholding tax on corporate dividends paid to non-resident foreign corporation is 15% if the country of residence of the non-resident foreign corporation does not impose tax on dividends or allows a tax credit of at least 10% deemed to have been paid in the Philippines. Otherwise, the tax is 25%.
The withholding tax is also subject to a lower rate when there is an applicable tax treaty. |
Withholding tax on branch profit remittance is 15%.
The withholding tax is subject to a lower rate when there is an applicable tax treaty. |
|
| A corporation registered with PEZA is not exempted from dividend tax. | A branch office registered with the PEZA is exempted from branch profit remittance tax. | |
| Dividends paid to domestic corporations or resident foreign corporations are not subject to tax. | Not applicable. | |
| Deposit requirements | A domestic corporation is not required to deposit any securities | A branch office is required to deposit securities with an actual market value of at least ₱500,000. This deposit is adjusted yearly when the following occurs:
The deposit acts as a bond, which is refundable when the foreign corporation decides to withdraw its business from the Philippines |
Choosing the most appropriate form of business may not be easy and straightforward, as each option has its own advantages and disadvantages. These decisions require careful study to anticipate such implications. Please feel free to get in touch with us, so we can assist you in planning to set up your business in the Philippines
