Advantages of Registering a Holding Company in

the Philippines
Over the past few decades, the Philippines has seen a steady growth in its economy. Many European
companies are investing in key sectors of the Philippines, like renewable energy, engineering procurement
& construction, manufacturing, and so on. Often regarded as one of the most difficult places to start a
business in, the Philippines still has a long way to go. Entrepreneurs who are willing to get a business
registration in the Philippines often come across many hindrances due to local regulations, consequently
choosing to enter the market through other mediums, like forming a holding company. One of the benefits
of forming a holding company is that the holding company itself is protected from the losses.

What is a Holding Company?

A Holding Company is a form that owns outstanding stocks and shares of other companies. The term
usually refers to a company that does not produce or manufacture goods itself but owns the shares of other
companies that produce goods and services. Holding companies reduce the risk for owners by retaining
the ownership of multiple companies.

Why register a Holding Company in the Philippines?

A holding company in the Philippines, also known as Regional Headquarters locally, can be set up only
by multinationals running operation in at least one Asia-Pacific country. While the holding company may
conduct a few operations in the Philippines, such a business entity should be mostly used for the
management and supervision of its Philippines and other Asian countries subsidiaries. For setting up a
holding company in the Philippines, a minimum initial investment of US$200,000 and remittance from its
foreign subsidiaries of at least US$50,000 per year is required. The advantages of registering a holding
company in the Philippines are as follows.

Advantages of Registering a Holding Company in the Philippines

1. Attractive Tax Policies

Once you register your holding company in the Philippines, there is a 100% exemption of corporate tax
on all earnings received from abroad, if the holding company conducts no operations in the Philippines, or
a reduced corporate tax rate of 10% if otherwise. A holding company registered in the Philippines will not
suffer taxation from local authorities and customs duties on imported equipment and cars.

2. Easy Access to Visas

The employees will have the benefit of easy access to visa due to the fewer documents requirement in
case of a holding company.

3. Low Legal Risk

A holding company is essentially just a shareholder in the organization and doesn’t run the same legal risk
as if they produced the goods and services. If you register a holding company in the Philippines, you
won’t have a direct legal responsibility that is costly in nature since yours will be a separate legal entity.

4. Ease of Formation

It is quite easy to form a holding company in the Philippines. Promoters can buy its shares in the open
market. The consent of the shareholders of the subsidiary company is not necessary. One has to secure the
approval of the Securities and Exchange Commission (SEC) in the Philippines for the same.
5. Large Capital

The financial resources of the holding and subsidiary companies can be pooled together. The company
can undertake large-scale projects to increase its profitability. Moreover, competition can be avoided
between holding and subsidiary companies if they are in the same line of business.

6. Minimum Risk

Holding companies are structured in a way that will minimize their risk, and they can also disperse assets
through its subsidiaries. So in case the company goes bankrupt or insolvent, the holding company shall
have lower risk of losing all its assets.

7. Control over Management

The parent company takes over control of a subsidiary by purchasing 51% or more of its shares and hence
has more control over the organization from a financial point of view. All the decisions taken are also
talked through with the management.

Having provided an overview of the benefits of registering a holding company in the Philippines, it is also
crucial from your side to research more on the same. Setting up a business in the Philippines can be hard,
and if you do not want to risk it, the best option is to register a holding company. However, one has to
also consider taking advice from consultants as they will have enough information and are a viable option
to help you with the same. For queries or advice on company formation in the Philippines, do contact us –
we’d be happy to help.

Categories:

Tax advantages of booking real estate in a corporation

You may have heard of people putting real estate in the name of corporations instead of their own names,
and wondered how exactly that helps them.

Fair warning, this will be a long discussion, but I will attempt to explain this in layman’s terms. Please
take note that this will be an overly simplified version for information purposes only. Consult your lawyer
for legal advice about your particular circumstances.

Before RR 6-2013
Previously, the fair market value of a share of stock not traded in the stock exchange was based on the
corporation’s book value per share.

In accounting for real estate, the asset is recorded at acquisition cost. Meaning, if you bought a piece of
land fifty years ago at P5,000.00 and put it in a corporation, the book value of that land will still be
P5,000.00 today (unless an appraisal increase was recorded). If instead of land it was a house and lot,
technically, the book value will be lower because of depreciation on the house.

What are the taxes if you want to sell the land?

Since the land is booked in the corporation (and it is possible that the corporation has no other asset other
than the land), you have a choice of either a) having the corporation selling the land or b) selling the
shares of the corporation which holds the land.

Under a), if the land is an ordinary asset of the corporation, the corporation will be subject to 12% VAT,
plus income tax which shall be based on the difference between the highest among the selling price, BIR
zonal value, and tax declaration value, and the cost (which we expect to be high since the historical cost is
so low).
If the land is a capital asset, the corporation will be subject to capital gains tax on the sale of land, which
shall be 6% of the highest among the selling price, BIR zonal value, and tax declaration value, without
taking the cost into consideration as a deduction.

[Note: You may want to revisit my previous post on the difference between an ordinary and a capital
asset.]

Under b), instead of having the corporation sell the land, you will sell the shares of the stock of the
corporation which holds the real estate (and the shares are not traded in the stock exchange).

The owner of the shares will then be subject to capital gains tax on the sale of shares not listed in the stock
exchange, which is 5% on the first P100,000.00 gain and 10% on the gain in excess of P100,000.00.

Since the tax is on the gain (meaning selling price less acquisition cost), the tax will be less compared to
capital gains tax on the sale of real estate which is based on presumed gain.

If a person has an intent of evading the payment taxes, the selling price may be understated to be just a
little over the book value of the shares, so the gain will be lower and consequently, the taxes will be lower
as well.

Plugging the tax loophole

Under RR 6-2013, the fair market value of shares not sold on the stock exchange is now determined using
the Adjusted Net Asset Method. Under this method, all assets and liabilities are adjusted to fair market
values. The value of the share shall be the adjusted asset value minus the liability.

RR 6-2013 specifically stated that the appraised value of real property at the time of sale shall be the
higher of –

1. The fair market value as determined by the Commissioner, or

2. The fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, or
3. The fair market value as determined by Independent Appraiser.

Note that based on RR 6-2008, the net capital gain is computed as selling price less acquisition cost.
Selling price was further defined as (among others) – in the case of cash sale, the selling price shall be the
total consideration per deed of sale. It was defined further that, “In case the fair market value of the
shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value
of the property received, the excess of the fair market value of the shares of stock sold, bartered or
exchanged over the amount of money and the fair market value of the property, if any, received as
consideration shall be deemed a gift subject to the donor’s tax under Sec. 100 of the Tax Code, as
amended.”

What are the implications?

Taxes make a man sad…

The effect of this regulation is to raise the fair market value of the shares while maintaining its cost. Thus,
in order to avoid donor’s tax in situations where the fair market value is higher than the selling price, the
selling price should be at least the same as the fair market value – this in turn raises the taxable net capital
gain.

Furthermore, since there is a specific mention of real property, I foresee that the evaluation of requests for
Certificates Authorizing Registration (CAR) on the sale of shares of stock of corporations with real estate
assets will be stricter.

Will this have an effect on estate tax?

Some people put their real estate assets in corporations for estate tax purposes. This is partly because it is
easier to transfer shares of stock compared to real estate.
The net estate shall be based on the fair market value of the properties at the time of death. The definition
of fair market value of shares not traded in the stock exchange for purposes of estate tax (as stated in RR
2-03) has not changed, to wit:

“In the case of shares of stocks, the fair market value shall depend on whether the shares are listed or
unlisted in the stock exchanges. Unlisted common shares are valued based on their book value while
unlisted preferred shares are valued at par value. In determining the book value of common shares,
appraisal surplus shall not be considered as well as the value assigned to preferred shares, if there are
any.”

Thus, this regulation should have no effect on estate tax