Dummy Status
The Department of Justice Opinion No. 165, Series of 1984, laid down the following “significant indicators” or badges of “dummy status”.
1. That the foreign investor provides practically all the funds for the joint investment undertaken by Filipino businessmen and their foreign partner.
Control Test (Liberal Rule)
This test is straightforward and does not scrutinize further the ownership of the Filipino shareholdings. It means that if Filipino citizens own at least 60% of the corporation’s capital, all the shares of the corporation, including those owned by foreigners, shall be considered of Philippine nationality. If the Filipinos’ stake drops below 60%—say 59%—only the number of shares that corresponds to that percentage (in the example, 59%) will be considered of Filipino nationality. Whenever that company owned at least 60% by a Filipino invests in another company, say another company covered by the 60-40 ownership rule, its investment shall be treated as one made by a Filipino company. The foreign-owned portion in the investing corporation is disregarded.
Grandfather Rule
Whenever the 60-40 corporation invests in another company that is also covered by the 60-40 ownership rule, the foreign component in the cascade company is aggregated. The Grandfather Rule determines the actual Filipino ownership and control in a corporation by tracing both the direct and indirect shareholdings in the corporation.
Notes: SEC suggestion
Apply the Grandfather Rule on two levels of corporate relations for publicly-held corporations or where shares are traded in the stock exchange, and to three levels for closely held ones or those which are not traded in any stock exchange.
Which rule is the rule?
• Control Test is the standard for determining the nationality of corporations;
• Grandfather Rule applies when there are issues about conforming with the 60-40 requirement.
2. That the foreign investors undertake to provide practically all the technological support for the joint venture.
3. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.
If you’re caught violating the Anti-Dummy Law, you may be convicted for 5-15 years or receive a hefty fine. Foreigners and Filipino citizens who engaged in the dummy arrangement will both be held liable.
Foreign Ownership Test
In determining compliance with the minimum Filipino equity requirement, there are two acknowledged tests. One is the control test and the other is the grandfather rule.
3. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.
If you’re caught violating the Anti-Dummy Law, you may be convicted for 5-15 years or receive a hefty fine. Foreigners and Filipino citizens who engaged in the dummy arrangement will both be held liable.
Foreign Ownership Test
In determining compliance with the minimum Filipino equity requirement, there are two acknowledged tests. One is the control test and the other is the grandfather rule.
Control Test (Liberal Rule)
This test is straightforward and does not scrutinize further the ownership of the Filipino shareholdings. It means that if Filipino citizens own at least 60% of the corporation’s capital, all the shares of the corporation, including those owned by foreigners, shall be considered of Philippine nationality. If the Filipinos’ stake drops below 60%—say 59%—only the number of shares that corresponds to that percentage (in the example, 59%) will be considered of Filipino nationality. Whenever that company owned at least 60% by a Filipino invests in another company, say another company covered by the 60-40 ownership rule, its investment shall be treated as one made by a Filipino company. The foreign-owned portion in the investing corporation is disregarded.
Grandfather Rule
Whenever the 60-40 corporation invests in another company that is also covered by the 60-40 ownership rule, the foreign component in the cascade company is aggregated. The Grandfather Rule determines the actual Filipino ownership and control in a corporation by tracing both the direct and indirect shareholdings in the corporation.
Notes: SEC suggestion
Apply the Grandfather Rule on two levels of corporate relations for publicly-held corporations or where shares are traded in the stock exchange, and to three levels for closely held ones or those which are not traded in any stock exchange.
Which rule is the rule?
• Control Test is the standard for determining the nationality of corporations;
• Grandfather Rule applies when there are issues about conforming with the 60-40 requirement.