DOJ Opinion No. 084, s. 1988

DOJ OPINION NO. 084 , s. 1988 April 26, 1988 Undersecretary Tomas Alcantara Vice-Chairman Board of Investments Industry and Investments Building 385 Gil J. Puyat Avenue Makati, Metro Manila Sir : This refers to your request for opinion on whether or not there may be an investment in real estate by a domestic corporation (the investing corporation) seventy percent (70%) of the capital stock of which is owned by another domestic corporation with at least 60%-40% Filipino-Foreign Equity, while the remaining thirty percent (30%) of the capital stock is owned by a foreign corporation. Particularly, your query is whether or not the aforesaid investing corporation would be considered "Filipino" so as to qualify it to legally purchase and hold real estate in the Philippines in the light of a previous opinion of this Office (No. 180 dated December 21, 1973) that corporations or associations at least 60% of the capital stock of which is owned by Filipinos and the remainder by foreigners, may own private lands and corporations or associations whether of citizens or of citizens and aliens, may not own, but may only hold by lease lands of the public domain. At the outset, it is noted that the abovesaid ruling still finds support from the present constitutional provisions which provide as follows: "ARTICLE XII "NATIONAL ECONOMY AND PATRIMONY "Sec. 3. Lands of the public domain are classified into agricultural, for forest or timber, mineral lands, and national parks. Agricultural lands of the public domain may be further classified by law according to the uses to which they may be devoted. Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or associations may not hold such alienable lands of the public domain except by lease. For a period not exceeding twenty-five years, renewable for not more than twenty-five years, and not to exceed one thousand hectares in area. Citizens of the Philippines may lease not more than five hundred hectares, or acquire not more than twelve hectares thereof by purchase, homestead, or grant. prcd "Taking into account the requirements of conservation, ecology, and development, and subject to the requirements of agrarian reform, the Congress shall determine by law, the size of lands of the public domain which may be acquired, developed, held or leased and the conditions therefor." "Sec. 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations or associations qualified to acquire or hold lands of the public domain." "Sec. 10. The Congress shall upon recommendation of the economic and planning agency, when the national interest dictates , reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos. "In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos. "The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities." The 60% Philippine nationality requirement is subject to increase by the Congress with respect to certain areas of investment pursuant to the aforestated provisions of the Constitution. This Department has had the occasion to rule in several opinions that it is implicit in the constitutional provisions, even if it refers merely to ownership of stock in the corporation holding the land or natural resource concession, that the nationality requirement is not satisfied unless it meets the criterion of beneficial ownership , i.e. Filipinos are the principal beneficiaries in the exploration of natural resources (Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in applying the same "the primordial consideration is situs of control, whether in a stock or non-stock corporation" (Op. No. 178, s. 1974). As stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), obviously to insure that corporations and associations allowed to acquire agricultural land or to exploit natural resources "shall be controlled by Filipinos". Accordingly, any arrangement which attempts to defeat the constitutional purpose should be eschewed (Op. No. 130, s. 1985). We are informed that in the registration of corporations with the Securities and Exchange Commission (SEC), compliance with the sixty per centum requirement is being monitored by SEC under the "Grandfather Rule" a method by which the percentage of Filipino equity in corporations engaged in nationalized and/or partly nationalized areas of activities provided for under the Constitution and other national laws is accurately computed, and the diminution if said equity prevented (SEC Memo, S. 1976). The "Grandfather Rule" is applied specifically in cases where the corporation has corporate stockholders with alien stockholdings, otherwise, if the rule is not applied, the presence of such corporate stockholders could diminish the effective control of Filipinos. prcd In one case, the SEC applied the "Grandfather Rule" to determine the effective percentage of Filipino stock ownership in a corporation (Silahis International Hotel), the capital stock of which is 68% owned by another corporation (Hotel Properties Inc.) and 31% owned by Filipino stockholders. Hotel Properties, Inc. in turn is 53% alien-owned and 47% Filipino-owned. The finding of SEC is that Silahis International Hotel is qualified to engage in a partly nationalized business because the Filipino equity is 36.57% (see letter dated May 4, 1987 of SEC Chairman Julio A. Sulit addressed to BOI). The "Grandfather Rule" was applied in the aforestated case as follows: Silahis International Hotel: Hotel Properties, Inc. 9% Filipino stockholders 1% 100% Hotel Properties, Inc. Foreign equity % Filipino equity 7% 100% Grandfather Rule Filipino equity: 47 x 69 = 32.43% 100 Add: Percentage of individual stockholdings 31.00% 64.43% Foreign equity: 53 x 69 = 36.57% 100 100.00% Applying the "Grandfather Rule" in the instant case, the result is as follows: Investing Corporation: Philippine Corporation 70% Foreign Corporation 30% Philippine Corporation Filipino equity 60% Foreign equity 40% Grandfather Rule : Foreign equity 40 x 70 = 28% 100 Add: Percentage of Foreign equity in Investing Corporation 30% 58% Total Foreign equity: Filipino equity: 60 x 70 = 42% 100 Total 100% Considering that, as shown above, the total foreign equity in the investing corporation is 58% while the Filipino equity is only 42%, in the investing corporation, subject of your query, is disqualified from investing in real estate, which is a nationalized activity, as it does not meet the 60%-40% Filipino-Foreign equity requirement under the Constitution. Please be guided accordingly. Very truly yours, (SGD.) SEDFREY A. ORDOEZ Secretary of Justice