Determining A Corporation’s Nationality: The Two Tests
Submitted by Jose Parcon
In the Philippines, there are
certain businesses that require corporations to be at least 60 percent owned by
Filipinos.
And this is where the two tests in
determining corporate nationality come into play.
The two tests are: (a) the
grandfather rule; and (b) the control test.[1]
In the grandfather rule, if a
Philippine corporation “Corporation X” is 40 percent owned by foreigners and
the remaining 60 percent by another domestic corporation called “Corporation
Y.” And that “Corporation Y” is 40 percent owned by foreigner and the remaining
60 percent by Filipinos. Let us also assume that Filipinos constitute at least
60 percent of the members of the board of directors of each of the two
corporations.
In the given example, “Corporation
X” will not be deemed a Philippine national because the grandfather rule takes
into account the direct and indirect foreign equity of foreigners in “Corporation
X.”
Applying the grandfather rule, the
direct and indirect foreign equity in “Corporation X” would be 64 percent,
calculated as follows:
Direct foreign-owned equity in
Corporation X………………40%
Indirect foreign equity in
Corporation X
(40% of Corporation Y mult. by 60%
of Corporation X)……24%
64%
Thus, under the grandfather rule,
Corporation X is not qualified to engage in business when the minimum 60
percent Filipino equity is required under the law.
On the other hand, if the control
test is applied, Corporation X is deemed to be a Philippine national qualified
to engage in any business in the country that requires a 60 percent minimum
Filipino equity.
Under the control test,
Corporation X is considered a Philippine national since at least 60 percent of
its capital stock outstanding and entitled to vote is held by Corporation Y,
which is also considered a Philippine national since at least 60 percent of its
capital stock outstanding and entitled to vote is held by Philippine citizens.[2]
On the basis of the 1989
Department of Justice (DOJ) ruling, which states that, the control test
generally applies, with the grandfather rule applicable only when the 60-40
rule Filipino-alien equity is in doubt; the SEC issued several opinions doing
away with the grandfather rule.[3]
Two years after the issuance of
the 1989 DOJ Ruling, Congress enacted Foreign Investment Act of 1991, which
expressly embodied the control test.[4]
While the control test shall be
used as standard to determine the nationality of corporations, the grandfather
rule will be applied if there are questions about compliance with Filipino
ownership requirements.[5]
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