Foreign ownership of condo units

For convenience and security reasons, condominium buildings are preferred sites for private commercial offices.

Aware of this inclination, local government officials of urban centers in the country have included as part of their business come-on to investors the availability of adequate condominium facilities in their areas.

The word “condominium” has a certain ring that projects an image of sophistication or modernity to its location.

That impression is significant for foreign investors who consider comfortable and secure premises as critical to the choice of their place of business.

Because condominiums are considered real property and our ownership rules on such property are quite strict, questions often arise on whether foreigners can purchase condominium units or need prior clearance from a government regulatory agency for that purpose.

This issue was raised before the Securities and Exchange Commission by a South Korean-registered company engaged in the business of overseas travel agency, air ticket sales, hotel reservation, car rental, real estate leasing services and other related business activities.

In 2007, the foreign company purchased from a Filipino real estate corporation two condominium units and two parking lots in one of its buildings in Metro Manila.

License

The South Korean company said it bought these properties for the use of its officers and staff who travel to and visit the Philippines, and without any intention of using them for commercial purposes.

Other than such purchase, the company claimed it has not engaged in any other business activity in the country.

The Filipino corporation advised the company that, since it is foreign-registered, it is necessary for it to apply with the SEC for a license to transact business in the Philippines before it can have the properties concerned registered in its name.

The company wanted to know whether its acquisition of condominium units and parking space constitutes doing business in the Philippines as to require a license from the SEC.

In determining whether the subject company can be considered as doing business in the country, the SEC looked to Republic Act 7042 (or Foreign Investments Act of 1991) for guidance.

The law defines the term “doing business” to include, among others, “soliciting orders, service contracts, opening offices, appointing representatives or distributors domiciled in the Philippines and any other acts that imply a continuity of commercial dealings or arrangements…”

Exceptions

To remove possible misinterpretation of the coverage of that definition, the law specifically excluded the following acts: investments in a domestic company, designation of a nominee to represent such investment, or appointment of a representative based in the Philippines to transact business in the latter’s own name and account.

These acts are considered isolated transactions that do not show any intention on the part of the foreign company to, so to speak, plant its roots in the country as part of its regular business activities.

With the definition spelled out in the law as the backdrop, the SEC cited the two tests the Supreme Court has, in earlier decisions, laid down to determine the activities of foreign companies that may be construed as “doing business” in the Philippines.

The first test is “whether the foreign corporation is continuing the body of the business or enterprise for which it was organized or whether it has substantially retired from and it and turned it over to another.

The second test is the continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works, or the exercise of some of the functions normally incident to, and in the progressive prosecution, of the purpose and object of its organization.”

Totality

According to the SEC, an essential condition in that test is “the actual performance of specific commercial activities within the territory of the Philippines for the plain reason that the Philippines has no jurisdiction over commercial acts performed in foreign territories.”

From the facts of the case and taking into consideration the two tests mentioned, the SEC held that the South Korean company’s purchase of condominium units and parking slots cannot be considered as doing or transacting business in the Philippines.

The situation will change if the company goes beyond using those properties for the exclusive use of its directors and officers during their stay in the country.

The moment the company leases those properties to its customers in conjunction with its overseas travel agency and real estate leasing service businesses, it shall be considered as doing business in the Philippines and therefore must secure the proper license for that activity.

This ruling is significant in the light of the “Korean invasion” of the country. The Koreans are practically all over the country, except in the areas in Mindanao where foreigners are easy prey for kidnap for ransom groups.

Korean-operated restaurants, stores, schools, religious sites and other businesses have become common fixtures in the urban centers.

Local government officials should take note that although Korean companies can rent residential or commercial sites, they cannot use these premises for business activities without the proper license from the SEC.

The law imposes civil and criminal liabilities for violation of this rule.

(For feedback, write to rpalabrica@inquirer. com. ph.)