Offshore Banking System Establishment Law

Policy, purpose, and intended benefits

The decree establishes that conditions conducive to an offshore banking system exist in the Philippines, including political stability, a growing economy, and adequate communication facilities.
The decree states that it is in the interest of developing countries to obtain as wide access as possible to sources of capital funds for economic development.
The decree declares that an offshore banking system based in the Philippines will benefit the country by increasing links with foreign lenders, facilitating the flow of desired investments, creating employment opportunities and expertise in international finance, and contributing to national development.
The decree states that the Philippines has the potential to develop as another financial center in Asia due to its geographical location, physical and human resources, and other positive factors.

Key definitions and who qualifies

Offshore Banking means the conduct of banking transactions in foreign currencies involving: (1) the receipt of funds from external sources and (2) the utilization of such funds as provided in the decree (Section 1(a)).
An Offshore Banking Unit means a branch, subsidiary, or affiliate of a foreign banking corporation duly authorized by the Central Bank of the Philippines to transact offshore banking business in the Philippines (Section 1(b)).
Deposits mean funds in foreign currencies accepted and held by an offshore banking unit in the regular course of business, with an obligation to return an equivalent amount to the owner, with or without interest (Section 1(c)).
A Resident includes: (1) a Philippine citizen residing therein; (2) an individual who is not a Philippine citizen but is permanently residing therein; or (3) a corporation or other juridical person organized under the law of the Philippines (Section 1(d)).
A Non-resident means an individual, corporation, or juridical person not included in the resident definition; branches, subsidiaries, affiliates, extension offices, or other units of a foreign corporation operating in the Philippines are treated as residents of the Philippines (Section 1(e)).
A Branch means a separately managed department or unit of a foreign corporation (Section 1(f)).

Offshore banking unit authorization

Only banks organized under laws other than those of the Republic of the Philippines may operate offshore banking units in the Philippines (Section 2(a)).
A local branch of a foreign bank already authorized to accept foreign currency deposits under Republic Act No. 6426 may opt to apply for offshore banking unit authority under the decree (Section 2(a)).
Upon receipt of a corresponding certificate of authority to operate as an offshore banking unit, the license to transact business under Republic Act No. 6426 is automatically withdrawn (Section 2(a)).
The Monetary Board of the Central Bank of the Philippines is authorized to issue certificates of authority to operate offshore banking units (Section 3(a)).
In issuing certificates, the Monetary Board must consider the applicant’s liquidity and solvency position, net worth and resources, management, international banking expertise, contribution to the Philippine economy, and other relevant factors such as participation in equity of local commercial banks and appropriate geographic representation (Section 3(a)).
The Central Bank may collect a fee of not less than US$20,000.00 upon issuing a certificate of authority and annually thereafter on the anniversary date of the certificate (Section 3(b)).

Required corporate undertaking

No application to operate an offshore banking unit may be considered unless the applicant first submits a sworn undertaking to the Central Bank (Section 4(a)).
The sworn undertaking must be given by the applicant’s head office or parent or holding company and must be supported by an appropriate resolution of its board of directors (Section 4(a)).
The undertaking must include commitments that the applicant will:
- Provide, on demand, the necessary specified currencies to cover the offshore unit’s liquidity needs or other shortfall (Section 4(a)(a));
- Manage the offshore banking unit soundly and with prudence (Section 4(a)(b));
- Train and continually educate a specific number of Filipinos in international banking and foreign exchange trading to reduce the number of expatriates (Section 4(a)(c));
- Provide and maintain net office funds in the offshore banking unit in the minimum amount of US$1,000,000.00 (Section 4(a)(d)); and
- Start operations of the offshore banking unit within 180 days from receipt of the certificate of authority (Section 4(a)(e)).

Supervision and permissible transactions

Offshore banking unit operations and activities must be conducted under the supervision of the Central Bank of the Philippines (Section 5).
Transactions with non-residents or with other offshore banking units are freely allowed (Section 6(a)).
The Central Bank may establish safeguards to prevent circumvention of applicable foreign exchange regulations (Section 6(a)).
Transactions with residents of the Philippines, including transactions with local commercial banks and local branches of foreign banks authorized under Republic Act No. 6426, must comply with applicable law and regulations (Section 6(a)).
The Monetary Board must promulgate rules and regulations necessary to carry out and implement the decree (Section 6(b)).

Tax treatment and incentives

Transactions of an offshore banking unit with non-residents and with other offshore banking units are subject to a 5% tax on net income from such transactions, which is in lieu of all taxes on those transactions (Section 7(a)).
Transactions of offshore banking units with local commercial banks, including local branches of foreign banks authorized to transact with offshore banking units, are subject to the same 5% tax, except that net income from such transactions specified by the Secretary of Finance, upon recommendation of the Monetary Board, is subject to the usual income tax payable by banks (Section 7(a)).
Income of non-residents from transactions with offshore banking units is exempt from any tax (Section 7(a)).
For transactions with residents (other than other offshore banking units or local commercial banks, including local branches of foreign banks authorized by the Central Bank to transact with offshore banking units), interest income from loans granted to such residents is subject only to a 10% withholding tax as final tax (Section 7(b)).

Visa and foreign personnel tax privileges

Foreign personnel may be assigned by any foreign bank to work in its offshore banking unit in the Philippines (Section 7(c)).
Foreign personnel, their spouses, and their unmarried children under 21 years of age are entitled to a multiple entry special visa valid for one year (Section 7(c)).
Entry under the visa requires submission of a certificate by a responsible officer of the foreign bank stating that the person is an employee of the foreign bank, will work exclusively for the offshore banking unit in the Philippines, and will be paid by the foreign bank in the Philippines compensation in foreign currencies (Section 7(c)).
For spouses and unmarried children, the certificate must state that they are dependents of the foreign personnel working in the offshore banking unit (Section 7(c)).
Their admission and stay are co-terminous with the validity of the multiple entry special visa (Section 7(c)).
Yearly extension requires submission to the Commission on Immigration and Deportation of a sworn certification by a responsible officer of the offshore banking unit that the authority to operate is valid and subsisting and that the personnel has been paid in the Philippines the compensation for which taxes due were withheld and paid to the Bureau of Internal Revenue (Section 7(c)).
Foreign personnel and their spouses and dependents are exempt from: payment of all fees due under immigration and alien registration laws; securing alien certificates of registration; and obtaining emigration clearance certificates and all types of clearances required by any government department or agency (Section 7(c)).
Upon final departure from the Philippines, the employer must advise the Commission on Immigration and Deportation in writing at least 5 working days prior to departure, and departing personnel must submit a tax clearance from the Bureau of Internal Revenue (Section 7(c)).

Amendments to CA 466 on alien employment

Section 22 of Commonwealth Act No. 466, as amended, is amended by adding subsection (d) on aliens employed by offshore banking units (Section 7(d)).
A 15% tax is levied, collected, and paid for each taxable year on the gross income received by every alien individual employed by offshore banking units established in the Philippines from salaries, wages, annuities, compensations, remunerations, and emoluments from such offshore banking units (Section 7(d)).
The tax rate is 15% of such gross income (Section 7(d)).

Customs privileges and local tax exemptions

Alien executives of offshore banking units enjoy privileges extended to foreigners coming to settle in the Philippines for the first time under Section 105(h) of the Tariff and Customs Code, as amended (Section 7(e)).
Offshore banking units are exempt from all forms of local licenses, fees, dues, imposts, or any other local taxes or burdens (Section 7(f)).

Effect on other laws and deposit rules

The Usury Law (Act No. 2566), the Uniform Currency Law (Republic Act No. 529), and the Deposit Insurance Law (Republic Act No. 3591, as amended) do not apply to transactions and/or deposits in offshore banking units in the Philippines (Section 8(a)).
The Secrecy of Bank Deposits Law (Republic Act No. 1405) applies to deposits in offshore banking units (Section 8(a)).

Sanctions for willful violations

Any willful violation by any bank authorized to engage in offshore banking in the Philippines of provisions of this decree, its implementing rules and regulations, or other terms and conditions of authority may be subject to administrative sanctions provided in Section 34-A of Republic Act No. 265, as amended (Section 9(a).

Repeal, modification, and effectivity rule

Any provisions of existing general or special laws inconsistent with the decree are deemed modified, amended or repealed accordingly (Section 10(a)).
The decree takes effect upon approval (Section 11(a)).