Philippines Launches FIST Act to Protect Banks and Financial Institutions
On February 16, 2021, the Philippines government issued the Financial Institutions Strategic Transfer (FIST) Act to facilitate banks and financial institutions (FIs) to dispose of their non-performing assets (NPAs) and non-performing loans (NPLs) through transfers to FIST Corporations (FISTC).
The FIST Act is among the government’s priority legislation to strengthen the financial sector and enable banks and financial institutions to extend credit to more sectors and thus stimulating much-needed economic growth. FISTC are asset management firms similar to special purpose vehicles and have been given the power to collect, dispose of, manage, and operate NPAs acquired from FIs under the FIST Act.
In addition, the transfer of NPAs from FIs to a FISTC will be exempt from value-added tax (VAT), withholding tax, stamp tax, and capital gains tax. There are also various incentives available for corporations, such as reduced rates for applicable fees.
To be entitled to the privileges of the FIST Act, the FISTC must be a stock corporation and cannot be incorporated as a one-person corporation. Applications for the establishment and registration of FISTC must be done through the Securities and Exchange Commission (SEC) within 36 months from when the Act is in effect (February 17, 2021).
The powers of a FISTC include:
- Invest or acquire NPAs;
- In the case of NPLs, restructure debt and other restructuring activities;
- Improve or renovate NPAs acquired from FIs;
- Issue Investment Unit Instruments (IUIs);
- Guarantee credit;
- Debt settlements involving NPLs;
- Issue instruments of indebtedness for operational costs; and
- Engage the services of third-party asset management companies for the collection and receipt of debts, among others.
The minimum required capital to form a FISTC is PHP500 million (US$10.2 million), and if the FISTC acquires land, then at least 60 percent of its outstanding capital stock must be held by Filipino citizens. Moreover, the FISTC must have a minimum subscribed capital stock valued at PHP125 million (US$2.5 million), and a minimum paid-up capital of PHP31,250,000 (US$641,000).
Issuance of IUI
Eligible buyers can acquire IUIs issued by the FISTC for the minimum amount of PHP10 million (US$205,000). An IUI is a debt instrument, or participation certificate, or similar instrument, issued by a FISTC and subscribed by qualified buyers, such as banks or insurance companies, among others.
The IUI is used for the purpose of acquiring, managing, and disposing of the NPAs acquired from FIs.
Tax incentives and privileges
There are various tax incentives and privileges for the transfer of NPAs from FIs to a FISTC. These are:
- Exemption from capital gains tax;
- Exemption from documentary stamp tax;
- Exemption from creditable withholding tax on transfers of ordinary assets;
- Exemption from VAT; and
Reduced applicable fees of 50 percent for the following;
- Registration and transfer fees on the transfer of real estate mortgage and security interest to and from the FISTC;
- Filing fees for foreclosure proceedings; and
- Land registration fees.
All sales or transfer of NPIs from an FI to a FISTC shall be entitled to the aforementioned privileges for two years from the effective date of the FIST Act.
In the case of acquisitions of NPLs by a FITSC, the FISTC is eligible for exemption on income tax on net interest income, mortgage registration fees, and documentary stamp tax.
Any persons who benefit from the tax exemptions when not entitled thereto will be subject to penalties ranging from PHP100,000 (US$2,052) to PHP2 million (US$41,054), or imprisonment of not less than six years and no more than 12 years.
Further, the offender must refund double the amount of tax incentives they received in addition to 12 percent interest per year.