M E M O R A N D U M

TO:
FROM:
RE:
DATE:

In the matter of the discussion on the concepts of subsidiary,

branch, representative, ROHQ, and RHQ as related to Taxation
January 23, 2016

1.
In connection with the query on the distinction between a subsidiary (Domestic
Corporation) and a branch (office of a Foreign Corporation) in the context of Taxation,
the following is provided for your perusal:
As to its Nature
A subsidiary is an entity separate and distinct from that of its parent
company; hence its liabilities are generally not regarded as the liabilities of the
parent company. However, it can deal with its foreign parent company, provided
that the transactions are at arms length. There would be no attribution of the
income of the subsidiary to the foreign parent company because of the separate
entity concept. Interest paid by the subsidiary on a loan granted by the foreign
parent company is deductible from the subsidiarys gross income, while the
interest income paid to the foreign parent company shall be subject to the final
withholding tax.
On the other hand, a branch is merely an extension of the foreign head
office; thus its liabilities are considered liabilities of the head office. Because of
the single entity concept, the transactions and income of the Philippine branch
may be attributed to the foreign head office. Interest paid by the Philippine
branch in a loan extended by the foreign head office is not deductible from the
branchs gross income. Corollarily, the interest income of the foreign head office
is not subject to Philippine withholding tax in accordance with the treaty
provisions.
As to Taxability
While a subsidiary is subject to income tax on worldwide income, a branch
is subject to income tax only on Philippine source income. Dividends paid by a
Philippine subsidiary to non-resident shareholders are subject to 30% in general
or 15% subject to certain conditions or preferential tax treaty rates. Meanwhile,
Profits remitted by the branch to its head office are subject to branch profit
remittance tax of 15% or 10% depending on certain tax treaties; however, if
located in a special economic zone then they are tax exempt.

The Philippine subsidiary is not entitled to the allocation of overhead

expenses of its parent company. Such is not the case in a branch because
subject to certain conditions, overhead expenses of the Head Office may be
allocated to the Philippine branch office. While a subsidiary is liable to pay the
10% improperly accumulated earnings tax, a branch is not liable to pay it.
A subsidiary is liable to pay the Documentary Stamp Tax on the original
issuance of shares of stock at the rate of P2.00 for every P200.00 or fractional
part of the par value of the shares of the outstanding shares of stock. On the
other hand, a branch office is not subject to documentary stamp tax (DST) simply
because it does not issue shares of stock.
While a subsidiary is entitled to an income tax holiday under the Board of
Investments Law and the Build and Operate Transfer Law, a branch is not
entitled to an income tax holiday under the aforementioned laws. It is entitled to
income tax holiday under the PEZA law and the BCDA law.
As to the Number of Incorporators
The establishment of a subsidiary requires at least five (5) but not more
than fifteen (15) incorporators/directors (all of whom must be natural persons)
majority of whom must be residents of the Philippines. Conversely, a branch may
be set up with only one (1) person who will act as the resident agent.
As to the Deposit Requirement of Securities with SEC
Subsidiaries are not required to deposit securities with the Securities and
Exchange Commission, while a branch is required initially to deposit with the
SEC for the benefit of present and future creditors, acceptable securities with
market value equivalent to at least P100, 000.00 plus an annual additional
deposit of 2% of the amount by which the branch offices gross income exceeds
five (5) million pesos.
2.
On the concept of representative office, the following is provided for your
perusal:
A Philippine representative office established by a foreign corporation is
considered a non-resident foreign corporation not engaged in income-generating
business in the Philippines if it merely acts as a liaison office promoting the
companys products and gathering/disseminating information.
As such, it is not subject to the corporate income tax. In as much as its
operation is similar to regional or area headquarters of multinational corporations,
the representative office is also exempt from value-added tax (VAT) directly due
on the entity.
However, the technical service fees that will be remitted by the
representative office to its parent company shall be considered royalties subject
to the 30 percent corporate income tax, which should be withheld and remitted to

the Bureau of Internal Revenue (BIR) by the representative office. [BIR Ruling
No. DA (VAT-003) 036-2008, July 15, 2008].
Employees of the representative office shall also be subject to the regular
individual income tax, or the five percent to 32 percent graduated tax rate if a
resident or a non-resident alien engaged in trade or business in the Philippines,
or the 25 percent final withholding tax if classified as non-resident alien not
engaged in trade or business in the Philippines.
3.
On matters pertaining to offices such as Regional or Area Headquarters and the
Regional Operating Headquarters Office, the following is provided for your perusal:
In the NIRC and in RA No. 8756 which amended the Omnibus Investments
Code, both concepts are defined.
Regional or Area Headquarters (RHQ) shall mean an office whose purpose is to
act as an administrative branch of a multinational company engaged in
international trade which principally serves as a supervision, communications
and coordination center for its subsidiaries, branches or affiliates in the AsiaPacific Region and other foreign markets and which does not earn or derive
income in the Philippines.
Regional Operating Headquarters (ROHQ) shall mean a foreign business entity
which is allowed to derive income in the Philippines by performing qualifying
services to its affiliates, subsidiaries or branches in the Philippines, in the AsiaPacific Region and in other foreign markets. This is a branch established in the
Philippines by multinational companies which are engaged in any of the following
services: general administration and planning; business planning and
coordination; sourcing and procurement of raw materials and components;
corporate finance advisory services; marketing control and sales promotion;
training and personnel management; logistics services; research and
development services and product development; technical support and
maintenance; data processing and communication; and business development.
A regional or area headquarters shall not be subject to income tax.
Meanwhile, regional operating headquarters shall pay a tax of 10% of their
taxable income.

I hope that the abovementioned would be of great help in resolving tax issues
brought to your office.