To : Atty.
Stephen Yu
From : Marjorie C. Sabijon
Re : Corporations and Taxation Concepts
A. Distinctions Between a Subsidiary and a Branch Office of Foreign Corporations
Subsidiary
As to legal
personality and It has an entity separate and
attribution of
income:
distinct from its stockholders.
It can deal with its foreign parent
company, provided that the
transactions are at arm's length.
There would be no attribution of
the income of the subsidiary to
the foreign parent company
because of the separate entity
concept.
Creation of
permanent Generally not treated as a
Establishment:
permanent establishment of the
foreign parent company,
provided that the transactions
between them are at arm's
length.
Basis of Income
Taxation Taxable on worldwide income at
30% of its net taxable income.
taxable on its income from
sources within the Philippines at
30% of its net.
Stockholder’s extent
of liability The stockholder of a subsidiary is
liable only to the extent of his/its
subscription in such corporation.
Shares of stock of the
Branch
Merely an extension of the
foreign head office.
Because of the single entity
concept, the transactions and
income of the Philippine branch
may be attributed to the foreign
head office.
It is a permanent establishment;
hence, treated as a resident
foreign corporation subject to
Philippine income tax on net
income from sources within the
Philippines.
Taxable on its income from
sources within the Philippines at
30% of its net taxable income.
There are exempt branches (e.g.,
regional area headquarters and
representative offices) and
special branches subject to
preferential tax rates of 10%.
The foreign head office is liable
for the liabilities of the Philippine
branch; hence, the assets of the
head office may still be reached
by creditors of the Philippine
 corporation are issued to its branch.
stockholders.
No shares of stock are issued by
the Philippine branch to its head
office.

B. Representative Office

A representative office in the Philippines is foreign-owned corporation, organized and existing under
foreign laws. It cannot derive income within the Philippines and is fully financed by the foreign
corporation. Its main purpose is to deal directly with the clients of the parent company to conduct
information dissemination, setup communication centers, and market company products. It may be
used to provide customer service and support to the company and its products.

A Philippine representative office is a cost center and is not allowed to earn income in the country, thus,
exempted from 30% income tax and 12% value added tax. It is, however, subject to withholding taxes on
its income payments and compensation, and could be passed on 12% value added tax on its purchases
from VAT-registered suppliers.

To support its operations in the Philippines, it is required an initial capitalization of US$30,000.00 to be

inwardly remitted to the Philippines. It is likewise required to appoint a resident agent on whom
summons and other legal processes against the same may be served in all actions or other legal
proceedings against the Company.

C. Distinctions Between Regional or Area Headquarters and Regional Operating Headquarters