The Constitution and various laws reserve certain areas of activities to Philippine

citizens or to corporations that have a minimum percentage of Filipino ownership. For

example, with respect to corporations, ownership of land is limited to corporations at
least sixty per centum of whose capital is owned by Philippine citizens. If 60% of the
capital of a Philippine corporation is owned by individuals who are Philippine citizens,
then there would be no issue on whether the Philippine corporation is a Philippine
national qualified to own land. On the other hand, an issue would arise if 60% of the
capital of the Philippine corporation is owned, in turn, by another Philippine corporation
that has foreign stockholders.
If a Philippine corporation has corporate stockholders, how does one determine whether
such Philippine corporation is a Philippine national? Two tests have been employed in
the Philippines: (a) the grandfather rule; and (b) the control test.
To illustrate how these tests are applied, lets take a Philippine corporation (called
Corporation X) with the following ownership structure:
(a) non-Philippine citizens own 40% of the capital stock outstanding and entitled to vote
of Corporation X;
(b) another Philippine corporation (called Corporation Y) owns 60% of the capital stock
outstanding and entitled to vote of Corporation X.
On other hand, Corporation Y has the following ownership structure:
(a) non-Philippine citizens own 40% of the capital stock outstanding and entitled to vote
of Corporation Y;
(b) Philippine citizens own 60% of the capital stock outstanding and entitled to vote of
Corporation Y.
Lets also assume that Philippine citizens constitute at least 60% of the members of the
board of directors of each of Corporation X and Corporation Y.
If the grandfather rule is applied, Corporation X will not be deemed a Philippine national
because the grandfather rule takes into account the direct and indirect foreign equity of
foreigners in Corporation X (see SEC Opinion re: Silahis International Hotel, May 4,
1987). Applying the grandfather rule, the direct and indirect foreign equity in Corporation
X would be 64%, calculated at follows:
Direct foreign-owned equity in Corporation X

40%

Indirect foreign owned equity in Corporation X

24%

Under the above scenario, the foreigners are deemed to have a 24% indirect foreign
equity in Corporation X because foreigners own 40% of Corporation Y, which in turn
owns 60% of Corporation X (i.e., 40% multiplied by 60% equals 24%). Thus, under the
grandfather rule, Corporation X is not qualified to own land.
On the other hand, if the control test is applied, Corporation X is deemed to be a
Philippine national qualified to own land. Under the control test, Corporation X is
considered a Philippine national since at least 60% of its capital stock outstanding and
entitled to vote is held by Corporation Y, which is also considered a Philippine national
since at least 60% of its capital stock outstanding and entitled to vote is held by
Philippine citizens.