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Five Things You Need To Know About The Philippine Anti-Dummy Law And How It Affects You

You’ve probably heard about it bandied about in a lot of news reports but have no idea what it’s about. For your illumination, and also because this is an important part of doing business in the Philippines, we’re giving you five things you need to know about the Philippine Anti-Dummy Law and how it affects you.

Some types of businesses are reserved for Filipinos, either wholly or partly. The Philippine Constitution plus various other laws impose nationality restrictions on certain enterprises operating in the Philippines.  This means that for certain types of businesses, a specific percentage of the ownership interest should be reserved for Filipino citizens or nationals. The Foreign Negative List (well-loved by lawyers and bureaucrats) provides a ready reference of the investment areas where foreign ownership is partly restricted or absolutely prohibited.

The Philippine Anti-Dummy Law prohibits “dummy” arrangements. A dummy arrangement exists when a Filipino citizen allows a foreigner to use his Filipino citizenship as a way to circumvent nationality restrictions. For example, the Constitution disallows a foreigner from owning land in the Philippines. If a foreigner asks a Filipino citizen to buy land and register the same in his own name but with the agreement that it is actually the foreigner who has a real right to the land, then the citizen is a “dummy” of the foreigner and what they have is a “dummy” arrangement.

The Philippine Anti-Dummy Law prohibits “simulation of capital stock”. This is a little more complicated. A corporation engaged in nationalized industries is normally required to submit documents proving that the percentage of shares owned by Filipino citizens in the corporation are compliant with nationality restrictions. There is “simulation of capital stock” when, contrary to said submitted documentation, the percentage of local ownership is actually below that required by law.

For example, the law provides that at least 60% of the shares in a corporation must be owned by Filipino citizens if the corporation intends to own land.  If a corporation with only 25% local ownership falsely reports that there is 60% local ownership, then it “simulates” its capital stock.

The Philippine Anti-Dummy Law prohibits foreign participation in the management of a corporation with a right, franchise or privilege reserved to Filipino citizens or Filipino corporations (Filipino corporations are corporations that are 60% owned by Filipino citizens).  This is the general rule, but there are exceptions to this prohibition for directors (to the extent of the shares owned by foreigners in the corporation) and for technical personnel.

If convicted of violating the Anti-Dummy Law, you may be imprisoned (for a period of 5 to 15 years) and steeply fined.  The citizen who allowed a reserved right to be enjoyed and the foreigner who enjoyed such right in violation of Philippine laws are both criminally liable. In the case of corporations, their directors, officers and managers will be held liable.