The cabinet approved amendments to the 1999 Foreign Business Act (FBA) intended to curb the use of nominees to hold shares on behalf of foreign investors. Voting rights will be used in defining foreign ownership under a planned revision to the Foreign Business Act 1999. The amendments will apply to companies which operate under List 1 and 2, foreign companies operating in businesses listed in List 3 of the FBA will be allowed to continue their business, but will have to report their nominee status.
Update : (August 9 2007) the government withdrew its draft FBA for review and improvement. It is not known when the draft law will be resubmitted to the parliament. This will be most likely a task for the new elected government.
The nominee problem is directly related to how a company is considered a foreign company. Under present law a partnership or company limited incorporated under Thai law is deemed foreign by the number of shares held by foreigners or the foreign capital investments (
section 4 FBA). The investment structure of 51% Thai and 49% foreign could be in compliance with the law as long as the Thai partner or shareholder is a real investor and not a nominee of the foreign investor. The test (who invested the capital) is effectively a bar on the use of Thai nationals or holding companies as nominees.
The past government(s) turned a blind eye to nominee shareholding structures, however, since May 25 2006 the government has been enforcing regulations - Land Office guidelines and Business Registration Rules (August 1 2006) - preventing the use of nominees by foreigners to circumvent the Land Code or the FBA and require partly foreign owned companies to show the source of their funding. The Thai shareholders must submit evidence of financing used to hold shares, including bank statements and other documents.
Recent investigations by the Commerce Ministry and the Business Development Department into the legality of the Temasek shareholding structure and its use of nominee vehicles in the (foreign) takeover of the local telecom giant Shin Corp shows that it is not only the direct foreign shareholding or source of the funding, but the entire process, for example voting rights (management/ control) and how the share purchase was financed, that will determine if there is an intention to evade the law with nominee shareholders and therefore if foreign ownership limits are violated. The legality of a shareholding structure, irrespective the direct number of shares held by the foreigner, boils down to (1) who invested the capital, or (2) does the legal structure give reason to believe that the Thai nationals or juristic entities act as nominees or proxies for the foreigner. There is no fixed definition of 'nominee' but the indicators are; (a) management and control, (b) voting rights, (c) the flow of funds from dividends paid by the company to the shareholders and (d) how the capital was financed (is for example the money transferred from abroad for Thai shareholders to buy shares).
To deal with the nominee problem voting rights and control will be included as a main criterion in defining foreign ownership under the planned revision of the FBA. The objective of the planned revision is to give a clearer definition of 'nominees' and to clean up vagueness in law enforcement according to the principles of good governance. Companies controlled by foreigners in terms of voting rights would under the new law be classified as foreign, even if their direct shareholdings were in a minority. Companies will be allowed time to comply with the new rule by lowering and/ or restructuring their shareholdings and reduce their voting rights to below 50 percent when and if the amended FBA becomes law. It is possible to find structures to regain a form of control, however, any legal structure that is set up to hold more foreign shares or control than what is allowed by law could be considered a breach of the law. The intention of the law is to bar both direct and indirect foreign ownership in Thai companies beyond legal limits and prohibiting the use of Thai nationals or juristic entities as nominees.
The new amended FBA (the final version is still under consideration by the National Legislative Assembly) will have a direct effect for foreign controlled companies in list 1, 2 and 3. Amity treaty companies and companies granted a license under the FBA or Board of Investment will not be affected by the new rule, however these companies are foreign companies and therefore not allowed to own land.
Companies holding land and the nominee problem
A land company can't be merely a front for land ownership, but must have a business purpose (which are stated in its objectives), must keep accounts and submit financial statement yearly. The company must appear active and commence business within a year from the date of registration (start filing accounts) or the company could be removed from the Registrar for companies for being inactive (section 1237 and 1246 Civil Code). Companies holding land must be in compliance with all relevant laws and confirm to the new FBA rule when this becomes law and may need to restructure their foreign shareholding.
It has been common practice for foreigners to include Thai nationals or holding companies to keep the foreign shareholding under the 49% limit to get round the Land Code and FBA. The nominee shareholders were/ are usually offered for a fee by the law and accounting firms setting up land companies. This is illegal and these legal consultants could be held accountable. The current announced shift in law enforcement is not an unforeseen development for legal specialists as the laws prohibiting the use of nominees have always been there, though, poorly or not enforced by the previous government. These companies will under the new law and foreigner definition be deemed foreign. It remains unclear how the new foreigner definition and the announced shift in law enforcement will affect foreign companies holding land or how authorities like the Land Department will deal with the widespread use of nominee companies and in fact foreign land ownership. The Thai attitude buried deep in the official mind is still that foreigners have no right to own land.
