5 Common Mistakes Foreigners Make When Starting a Business in the Philippines

The Philippines is one of Southeast Asia's most promising markets for foreign investors — but its legal landscape has traps that catch even seasoned entrepreneurs off guard. After helping dozens of foreign clients set up shop here, we've seen the same mistakes come up again and again.

Here are the five most common ones — and what you should do instead.

1. Undercapitalizing Your Company

Under the Foreign Investments Act (RA 7042, as amended by RA 11647), foreign-owned domestic market enterprises must have a minimum paid-in capital of US$200,000. This isn't optional — it's a hard legal threshold.

The only exception: if your business involves advanced technology or directly employs at least 50 Filipino workers, the minimum drops to US$100,000.

Many foreign entrepreneurs assume they can start small and scale up later. But the SEC will reject your registration outright if you don't meet the capital requirement from day one. Budget accordingly.

2. Using a Filipino "Dummy" to Skirt Ownership Rules

This is the most dangerous mistake on the list. Some foreigners, eager to enter industries on the Foreign Investment Negative List (FINL), arrange for a Filipino partner to hold shares on their behalf while the foreigner secretly controls the business.

This violates the Anti-Dummy Law (Commonwealth Act No. 108, as amended by RA 7042). Penalties are severe:

• Imprisonment of 5 to 15 years
• Fines and potential forfeiture of the business
• Deportation of the foreign national
• Both the foreigner and the Filipino dummy face criminal liability

If your target industry has foreign ownership restrictions, the legal route is to structure a legitimate joint venture with a Filipino partner — with proper shareholders' agreements, transparent governance, and real Filipino equity participation.

3. Forgetting About the Alien Employment Permit (AEP)

Even if you own the company, you still need government permission to work in it. Under DOLE Department Order No. 248-24, any foreign national engaged in gainful employment in the Philippines must obtain an Alien Employment Permit (AEP).

This catches many foreign founders by surprise — they assume that owning the business exempts them from employment requirements. It doesn't. If you're drawing a salary, managing day-to-day operations, or performing work that a Filipino could do, you need an AEP.

The AEP application also requires proof that the position cannot be filled by a qualified Filipino worker, plus a valid working visa (typically a 9(g) pre-arranged employment visa).

4. Skipping Local Permits After SEC Registration

Getting your SEC Certificate of Incorporation feels like a milestone — and it is. But many foreigners stop there, not realizing that SEC registration is just the beginning of the compliance process.

After SEC, you still need:

• Barangay Business Clearance — from the local barangay where your office is located
• Mayor's Permit / Business Permit — from the city or municipal government
• BIR Registration (Form 1903) — to get your Tax Identification Number, register your books of account, and print official receipts
• SSS, PhilHealth, and Pag-IBIG registration — mandatory once you hire Filipino employees

Operating without these permits can result in fines, closure orders, and difficulty opening a corporate bank account. Many banks require a complete set of permits before they'll even schedule an appointment.

5. Ignoring Tax Obligations From Day One

Foreign-owned corporations in the Philippines are subject to the same tax rules as domestic companies under the National Internal Revenue Code (NIRC), as amended by the CREATE Act (RA 11534). This includes:

• 25% corporate income tax (or 20% for domestic corporations with net taxable income ≤ ₱5 million and total assets ≤ ₱100 million)
• 12% VAT on sales of goods and services (with some exemptions)
• Withholding tax obligations on employee salaries, professional fees, and rental payments
• Quarterly and annual income tax returns filed with the BIR

We've seen foreign companies operate for months — sometimes over a year — without filing a single tax return, assuming they can "sort it out later." They can't. The BIR imposes surcharges of 25% (or 50% for fraud), plus 12% annual interest on unpaid taxes. Back-taxes plus penalties can quickly exceed the original amount owed.

The Bottom Line

Starting a business in the Philippines as a foreigner is absolutely doable — the country actively encourages foreign investment through incentives like the CREATE Act and updated BOI investment priorities. But the legal requirements are specific and unforgiving.

The cost of getting it right from the start is always less than the cost of fixing mistakes later. If you're planning to invest in the Philippines, get proper legal advice before you commit capital.

Need help setting up your business in the Philippines? Contact TTFC Law — we guide foreign investors through every step of the process, from SEC registration to full operational compliance.