The 40% Foreign Ownership Rule Explained

Executive Summary

The 40% foreign ownership rule is one of the most important rules foreign investors must understand before investing in a Philippine corporation.

In simple terms, some business activities in the Philippines must remain at least 60% Filipino-owned. This means foreign investors may own only up to 40% of the corporation.

This is commonly called the “60-40 rule” or the “40% foreign ownership limit.”

However, the rule does not apply to every business. Some industries may be 100% foreign-owned. Others have lower foreign ownership limits, such as 30%, 25%, or even zero foreign ownership. The correct rule depends on the company’s actual business activity, the Constitution, special laws, the Foreign Investments Act, and the latest Foreign Investment Negative List.

For foreign investors, Filipino partners, directors, officers, and corporate secretaries, compliance with the 40% foreign ownership rule is not just a registration issue. It affects shareholding, voting rights, beneficial ownership, board seats, management control, corporate structure, and long-term compliance.

This guide explains what the 40% foreign ownership rule means, when it applies, how to structure a compliant corporation, and what mistakes to avoid.

What Is the 40% Foreign Ownership Rule?

The 40% foreign ownership rule means that foreigners may own up to 40% of a Philippine corporation engaged in certain restricted or partly nationalized activities.

The remaining 60% must be owned by Filipino citizens or qualified Philippine nationals.

This rule is often described from the Filipino ownership side as the “60-40 rule.” From the foreign investor’s side, it means the maximum foreign equity is 40%.

For example, if a corporation has 1,000 voting shares and is engaged in an activity subject to the 40% foreign ownership limit, foreign investors may generally own up to 400 shares, while Filipino shareholders must own at least 600 shares.

The purpose of this rule is to preserve Filipino ownership and control in industries considered important to national interest, public policy, or constitutional protection.

Why the 40% Rule Exists

The Philippines allows foreign investment, but certain sectors remain reserved partly or fully for Filipino citizens and Philippine nationals.

The 40% rule reflects a policy balance. It allows foreign capital and business participation while requiring Filipino majority ownership in specific industries.

This rule is rooted in constitutional and statutory restrictions. Some sectors are limited by the Constitution itself, while others are limited by special laws or the Foreign Investment Negative List.

The Foreign Investments Act defines “Philippine national” to include a domestic corporation where at least 60% of the outstanding capital stock entitled to vote is owned by Filipino citizens, subject to additional requirements when corporations own shares in another SEC-registered enterprise.

This is why investors should check not only the percentage of shares held by Filipinos, but also voting rights, board composition, beneficial ownership, and whether any corporate shareholder is itself Filipino-owned.

Does the 40% Rule Apply to All Businesses?

No.

The 40% rule does not apply to all businesses in the Philippines.

Many businesses may be fully foreign-owned if they are not included in restricted sectors. For example, certain export-oriented activities, business process outsourcing, software development, consulting, and other service businesses may be open to 100% foreign ownership, depending on the exact activity and current rules.

The 40% rule applies only when the business activity is subject to a foreign equity limit of 40%.

Other businesses may have different limits. Some may allow only 30% foreign ownership. Others may allow 25% or less. Some may prohibit foreign ownership entirely.

The current foreign investment framework is shaped by the Foreign Investments Act and the Foreign Investment Negative List. The 13th Foreign Investment Negative List was issued under Executive Order No. 113, series of 2026, and identifies activities where foreign ownership is limited by the Constitution, existing laws, or national interest considerations.

Before forming or investing in a corporation, the business activity must be reviewed carefully.

Common Businesses Affected by the 40% Foreign Ownership Limit

The 40% ownership limit often appears in sectors where the law requires Filipino majority ownership.

Examples may include certain landholding corporations, public utilities or activities treated as public utilities, operation of certain educational institutions, advertising, and other industries listed in the applicable Foreign Investment Negative List or special laws.

However, the exact classification matters. A company should not rely only on general industry labels.

For example, not every “technology company” has the same foreign ownership rule. A software development company may be treated differently from a telecommunications or payment-related business. A real estate services company may be treated differently from a landholding corporation. A media-related activity may be treated differently from ordinary digital marketing or business support services.

The legal analysis depends on what the corporation will actually do.

60-40 Rule vs. 40% Foreign Ownership Rule

The “60-40 rule” and the “40% foreign ownership rule” usually refer to the same concept, but from different perspectives.

The 60-40 rule emphasizes that at least 60% of the corporation must be owned by Filipinos or Philippine nationals.

The 40% foreign ownership rule emphasizes that foreign investors may own only up to 40%.

For a corporation engaged in a restricted activity, both ideas must be satisfied. It is not enough that Filipino shareholders appear on paper. The Filipino ownership must be genuine.

This means Filipino shareholders should have real ownership rights, voting rights, economic benefits, and control consistent with the law.

What Counts as Foreign Ownership?

Foreign ownership usually includes shares owned by foreign individuals, foreign corporations, foreign partnerships, or other non-Philippine nationals.

If a foreign corporation owns shares in a Philippine corporation, those shares are considered foreign-owned unless the foreign corporation qualifies as a Philippine national under the applicable rules.

For corporations with layered ownership, the analysis may become more technical. Regulators may look at the ownership of corporate shareholders to determine whether Filipino ownership is real.

This is why some cases require not only a direct shareholding review but also a beneficial ownership and control review.

The Control Test and Grandfather Rule

In Philippine foreign ownership compliance, two important concepts are often discussed: the control test and the grandfather rule.

The control test generally looks at whether at least 60% of the corporation’s voting shares are owned by Filipino citizens or Philippine nationals. If yes, the corporation may be treated as Filipino for certain purposes.

The grandfather rule goes deeper. It traces ownership through corporate layers to determine the ultimate nationality of shareholders, especially where there is doubt about whether Filipino ownership is genuine.

The Foreign Investments Act recognizes that where a corporation and its non-Filipino stockholders own stocks in an SEC-registered enterprise, both corporations must meet the 60% Filipino ownership requirement and board composition requirement for the corporation to be considered a Philippine national.

In simple terms, if a Filipino corporation that owns shares is itself partly foreign-owned, its ownership may need to be examined more closely depending on the facts and applicable rules.

Beneficial Ownership: Why Paper Ownership Is Not Enough

Foreign ownership compliance is not only about names in the stock and transfer book.

Regulators may also look at beneficial ownership. This means they may ask who truly owns, controls, benefits from, or influences the shares.

A structure may be risky if Filipino shareholders appear as owners on paper but the foreign investor secretly controls the votes, profits, financing, or decision-making.

This is especially important because the Philippines has strengthened beneficial ownership reporting and corporate transparency requirements. Updated beneficial ownership rules now require corporations to report information about individuals who ultimately own or control the corporation.

For investors, the lesson is simple: the ownership structure should reflect the real agreement.

The Anti-Dummy Law: Why Nominee Structures Are Risky

The Anti-Dummy Law is designed to prevent foreigners from using Filipino citizens as dummies, nominees, or fronts to evade nationality restrictions.

This is one of the biggest risks in foreign investment structuring.

If a business is subject to the 40% foreign ownership limit, the foreign investor cannot simply place the remaining 60% under Filipino names while secretly retaining full control or economic ownership.

Side agreements that give the foreign investor control over Filipino-held shares may create serious legal exposure. These may include hidden voting arrangements, automatic buyback agreements, profit transfers, loan arrangements that remove real Filipino risk, or nominee declarations that contradict the required ownership structure.

A compliant structure must respect both legal ownership and beneficial ownership.

Board Seats and Management Control

Foreign ownership limits may also affect board seats.

If a corporation is engaged in a partly nationalized activity, foreign directors may be limited in proportion to the allowed foreign ownership.

For a corporation subject to a 40% foreign ownership cap, foreign participation in the board may also need to be reviewed to ensure compliance with the Anti-Dummy Law and nationality restrictions.

Management control is also important. Even if foreign ownership is only 40%, a structure may be questioned if foreigners effectively control the corporation through voting agreements, veto rights, management contracts, or other arrangements that override Filipino control in restricted sectors.

Foreign investors may still protect their investment through proper minority rights, shareholder agreements, reserved matters, and contractual protections. However, these protections must be carefully drafted so they do not violate nationality restrictions.

How to Structure a Corporation Under the 40% Rule

A corporation subject to the 40% foreign ownership rule should be structured carefully from the beginning.

First, identify the exact business activity and confirm that the 40% limit applies. Do not assume based only on the company’s general industry.

Second, design the shareholding structure so that at least 60% of the voting shares and required economic rights belong to qualified Filipino citizens or Philippine nationals.

Third, review the board composition to ensure foreign directors do not exceed the allowed proportion.

Fourth, avoid nominee or dummy arrangements. Filipino shareholders must be genuine owners with real rights and obligations.

Fifth, prepare clear corporate documents, including Articles of Incorporation, By-Laws, shareholders’ agreements, subscription documents, board resolutions, and beneficial ownership disclosures.

Finally, monitor compliance after incorporation. Share transfers, new investors, convertible instruments, voting agreements, and restructuring may affect foreign ownership compliance.

What Foreign Investors Can Still Do Under the 40% Rule

The 40% rule does not mean foreign investors cannot participate meaningfully.

Foreign investors may own up to the allowed foreign equity. They may contribute capital, technology, expertise, systems, training, and business networks. They may negotiate minority protection rights, information rights, dividend rights, exit rights, dispute resolution mechanisms, and board participation within legal limits.

The key is to protect the investment without violating Filipino ownership and control requirements.

A well-drafted shareholders’ agreement can help balance investor protection and legal compliance.

Common Mistakes Foreign Investors Make

One common mistake is assuming all Philippine corporations can be 100% foreign-owned.

Another mistake is using Filipino nominees to hold shares without real ownership. This can create Anti-Dummy Law risk.

Some investors also focus only on the percentage of shares and forget voting rights, board seats, beneficial ownership, and management control.

Others use broad business purposes in the Articles of Incorporation without checking whether some of the listed activities are restricted.

Another common mistake is failing to review changes after incorporation. A corporation may be compliant at registration but become non-compliant after share transfers, capital increases, mergers, or new investor entry.

Risks and Penalties of Violating the 40% Rule

Violating foreign ownership rules can create serious consequences.

The corporation may face regulatory findings, rejected filings, penalties, license issues, disqualification from certain activities, or difficulty securing permits and approvals.

Contracts, licenses, and corporate acts may be questioned if the corporation was not legally qualified to engage in the activity.

There may also be exposure under the Anti-Dummy Law if Filipino shareholders are used merely as fronts for foreign control.

For investors, non-compliance can affect financing, due diligence, acquisitions, exits, and long-term business operations.

Foreign ownership compliance is not just a legal technicality. It can affect the entire investment.

Practical Examples

A foreign investor wants to invest in a landholding corporation. Since land ownership is subject to nationality restrictions, the corporation must comply with the required Filipino ownership structure. The investor should avoid any arrangement that gives the foreigner hidden beneficial ownership over Filipino-held shares.

A foreign company wants to invest in an advertising corporation. If the activity is subject to a 40% foreign ownership limit, the corporation must maintain at least 60% Filipino ownership and review board composition and control rights.

A foreign investor wants to open a software development company serving foreign clients. If the business activity is not restricted, 100% foreign ownership may be possible, subject to registration, tax, and permit requirements.

A foreign shareholder owns 40% of a restricted corporation and wants veto rights over major decisions. Some minority protections may be allowed, but the agreement must be reviewed carefully to ensure it does not transfer effective control to the foreign shareholder.

A corporation initially compliant with the 60-40 rule accepts a new foreign investor. The company must recalculate foreign equity before issuing shares to avoid exceeding the 40% limit.

Best Practices for Compliance

Corporations should conduct a foreign equity review before incorporation, investment, or share transfer.

The business purpose in the Articles of Incorporation should be checked against foreign ownership rules. If the company has multiple activities, each activity should be reviewed.

The stock and transfer book should be kept accurate and updated. Beneficial ownership disclosures should be consistent with the actual ownership structure.

Shareholders’ agreements should be reviewed by counsel to avoid provisions that may be interpreted as giving foreign investors unlawful control.

For regulated businesses, corporations should consult the relevant regulator before finalizing the structure.

FAQ

What does the 40% foreign ownership rule mean?

It means foreigners may own up to 40% of a Philippine corporation engaged in certain restricted activities, while at least 60% must be owned by Filipino citizens or Philippine nationals.

Is the 40% rule the same as the 60-40 rule?

Yes,

They usually refer to the same rule. The 60-40 rule emphasizes the required Filipino ownership, while the 40% rule emphasizes the maximum foreign ownership.

Does the 40% rule apply to all Philippine corporations?

No. It applies only to businesses subject to a 40% foreign equity limit. Many activities may be fully foreign-owned, while others may have different limits.

Can foreigners control a corporation even if they only own 40%?

In restricted industries, foreign control may be questioned if it undermines Filipino ownership and control requirements. Control arrangements must be carefully reviewed.

Are Filipino nominee shareholders allowed?

Filipino shareholders must be real owners. Using Filipino nominees or dummies to evade foreign ownership restrictions may violate the Anti-Dummy Law.

Can a foreigner be a director in a 60-40 corporation?

Foreign directors may be allowed, but their participation may be limited in proportion to the allowed foreign ownership and subject to applicable laws and corporate rules.

What is the Foreign Investment Negative List?

It is the list of business activities where foreign ownership is restricted or prohibited.

Investors should review the latest list before forming or acquiring a corporation.

What happens if a company violates foreign ownership limits?

The company may face regulatory issues, penalties, rejected filings, license problems, and possible Anti-Dummy Law exposure.

Can a foreign investor protect their minority investment?

Yes.

Foreign investors may use properly drafted shareholder protections, information rights, exit rights, and contractual safeguards, as long as these do not violate nationality restrictions.

Should investors seek legal advice before structuring a 60-40 corporation?

Yes.

Foreign ownership rules can be technical, especially when beneficial ownership, board control, voting rights, and regulated industries are involved.

Call-to-Action

The 40% foreign ownership rule is one of the most important compliance issues for foreign investors entering the Philippines.

Before forming a corporation, buying shares, or signing a shareholders’ agreement, investors should confirm whether the business activity is subject to foreign ownership limits.

A compliant structure protects the investment, reduces regulatory risk, and supports long-term operations.

For foreign investors, Filipino partners, and corporations engaged in restricted industries, early legal and compliance review can prevent costly ownership, control, and licensing problems later.