A couple of friends recently told me how their very clever Philippine attorney got around the Philippine rule that non-Philippine citizens can not own real estate in the Philippines by forming a Philippine corporation. The corporation buys the property, then they use a variety of documents to avoid the 40/60 rule that limits non-citizens equity ownership to 40 percent. This all sounds very nice, but, my question to them, did their attorney discuss the Philippine Anti-Dummy Law with you?
Their question to me, what is the Anti-Dummy Law? My answer, good question. The Anti-Dummy Law is a law created to penalize those who violate foreign equity restrictions and evade nationalization laws of the Philippines. The Anti-Dummy Law prohibits dummy, or using what I call a proxy arrangement to accomplish a transaction not allowed under Philippine law.
To get around the Philippine land ownership rules for example, non-citizens may arrange for a Filipino citizen to purchase land and register the land title to the Filipino citizen’s name, but with the agreement that the whole right to the land belongs to the foreigner. In this case, the Filipino citizen is the “proxy,” thus the “dummy arrangement.” Another common approach, is to create a corporation. The problem with using a corporation to avoid the land restrictions rules, is the 40-60 ratio that applies (40% foreign ownership, 60% Filipino ownership). Therefore a variety of side agreements are used to keep control of the corporation in the hands of the foreigner.
Again, The Anti-Dummy Law prohibits an arrangement usually done by a foreigner to evade nationality restrictions. If you’re caught violating the Anti-Dummy Law, you can receive a jail sentence for up to 5-15 years or receive a hefty fine. Non-Citizens and Filipino citizens who engaged in the dummy arrangement will both be held liable.
This is only a limited overview of the broad reaching Anti- Dummy Law. If you are setting up a business or acquiring real property in the Philippines, you need to be aware of how the anti-dummy rules may be applied to the way the transaction is being structured. If you don’t want your dream business or property investment in the Philippines to turn into a legal nightmare.
Now, my friends have assured me after talking to their attorney, there is nothing to worry about. The anti- dummy rules are not being enforced. However, the law is on the books for a reason. Therefore, this does not mean that the law will be enforced in the future. Should this happen, and you run afoul of the Anti- Dummy Law, it is you, not your attorney or friends that told you that it is okay to violate Philippine law, who is on the legal hook.
