Bringing in foreign investors in retail trade

By ATTY. KRISANTO KARLO E. NICOLAS
LEGALLY BUSINESS

YOU have a business idea in mind; a great concept which you think will be very profitable. You have the over-all know-how to accomplish the business, and the will to succeed. You need capital and have been thinking of bringing in foreign investors to the scene. This is a common-place scenario in business nowadays.

The law defines a retail business as any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption. Before the enactment of the Retail Trade Liberalization Law however, foreigners were not allowed to engage in any form of retail trade or business. In fact, the Retail Trade Nationalization Law has a penal provision which punishes foreigners engaging in any retail business by not less than three years imprisonment and a fine.

The enactment of the Retail Trade Liberalization Law has drastically changed the climate for foreign investment in the Philippines. The law now allows foreign investors to participate in a once purely Filipino industry, albeit with certain limitations.

The limitations are rather stringent. Enterprises with paid-up capital of less than Two million five hundred thousand US dollars (US$2,500,000.00) shall be reserved exclusively for Filipino citizens and corporations wholly owned by Filipino citizens. Businesses with more than the said capital may now be partly or even wholly owned by foreigners.

While the limitation is rather restrictive, there is actually a purpose behind the law. The law seeks to preserve retail businesses to Filipinos to encourage their entrepreneurial spirit. Knowing that within the US$2.5M delimitation there would be no entry of foreign capital, Filipino businesses would be encouraged to enter into all sorts of retail businesses.

However, for entrepreneurs who need foreign capital but not to such an extent as US$2.5M to do business, the Retail Trade Liberalization is not without exception.

Sales by a manufacturer of products manufactured by him, when his capital does not exceed One hundred thousand pesos (P100,000.00), is not considered retail trade. The same is true with a farmer selling the products of his farm. Sales in restaurant operations by a hotel owner or inn-keeper, irrespective of the amount of capital, where the restaurant is incidental to the hotel business, is also exempt. Finally, sales which are limited only to products manufactured, processed or assembled by a manufacturer through a single outlet, irrespective of capitalization, are likewise outside the coverage of the Retail Trade Liberalization Law.

Where a business would fall under the four (4) exceptions, foreign equity is welcomed by the law. The wording of the last exception “sales which are limited only to products manufactured, processed or assembled by a manufacturer through a single outlet, irrespective of capitalization” in fact allows for a very broad interpretation, which can cover variably any form of business.

Therefore, if after a practical analysis, you are convinced that your business reasonably falls under the last exception, you can safely assume that you are not covered by the law and thus can invite foreigners to participate your venture.

(Atty. Krisanto Karlo Nicolas is a founding partner of Nicolas & De Vega Law Offices located at Unit 101 One Primrose Place 663 Boni Avenue, Mandaluyong City, Metro Manila. He practices corporate law, franchise law, intellectual property law and litigation. He graduated from the Ateneo de Manila School of Law with honors. You may contact him at knicolas@ndvlaw.com.)

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