Most business activities in Thailand are prohibited or restricted for foreigners and fall within the scope of one or more laws or regulations which require special regulation or license. Foreigners are generally restricted to do business in Thailand by the 1999 Foreign Business Act (FBA). Separate laws control the foreign ownership of land as well as such activities as banking, insurance, finance and shipping.
The FBA divided various types of business into  three categories and subjected each category to different limitations with respect to foreign ownership. Businesses falling outside the FBA (unless subject to restrictions and requirements under other laws) may be operated by foreigners. The Foreign Business Act in Thailand divides businesses into three categories:
|
| |
| List 1: |
Generally those businesses listed in Category 1 are absolutely prohibited to foreigners unless there is an exemption contained in a special law or treaty. |
| |
| List 2: |
Category 2 refers to businesses owned by aliens that were in existence and actually operating prior to the enactment of the Foreign Business law. These businesses were permitted to apply for a special Alien Business license and to continue operating. Foreigners, however, are not permitted to start new businesses listed in this category unless they obtain special permission from the Minister with the approval of the Cabinet. |
| |
| List 3: |
Category 3 businesses are treated in a manner similar to those in Category Two except that the power to grant an Alien Business License to foreigners who wish to start a new business is vested with the Director General and a committee. |
| |
Exemptions are possible under the Treaty of Amity and Economic Relations between the Kingdom of Thailand and the United States of America. Also, the Board of Investment may grant exceptions for businesses covered by Lists Two and Three.
If a majority of the shares of a limited company are held by Thais (who are not deemed nominees), the company is in principle regarded as a Thai company and thus not subject to the FBA. This means that foreigners are generally allowed to participate up to 49% in a Thai company engaged in restricted businesses. Beyond that, the approval requirement must be complied with.
Restrictions on the use of Thai nominee shareholders
Foreigners are under the current FBA allowed to control majority Thai owned company and the foreigner's rights as a minority shareholder may be protected through the issue of preference shares and weighted voting rights. By using nominees and preference shares foreigners have been able to circumvent foreign ownership and business restrictions. However, the use of nominees by foreigners is and always has been illegal ( sections 36 & 37 FBA). The (previous) government announced plans to close this loophole by:
- including majority foreign voting rights as a criterion in defining a company foreign (not passed)
- a clearer definition of what constitutes a nominee (not issued)
Generally you can say that the investment structure of 51% Thai and 49% foreign is in compliance with the law as long as the Thai partners or shareholders are real investors and not nominees of the foreign investor. Currently the test 'who invested the capital' is effectively a bar on the use of Thai nationals or holding companies as nominees. Since May 25 2006 the government has been enforcing regulations (May 25 Land Office guidelines and the August 1 Business Registration Rules) preventing the use of nominees. Both regulations require the Thai shareholders in a partly foreign owned company to show the source of their funding when registering a company or when registering a transfer of land to the company. In this case the Thai shareholders or partners must submit evidence of financing used for their investment or to hold shares, including bank statements and other documents.
It may become stricter under possible future law and the definition of nominee may be expanded by adding to 'who invested the capital' the criterion 'who has majority voting rights, control and management in the company'. Companies controlled by foreigners would be deemed foreign companies and would require a foreign business license or would need to restructure the company.
The investigations by the Ministry of Commerce into the legality of the Temasek shareholding showed that it was not only the source of the funding for the qualification if a nominee was used or not, but the entire process of for example voting rights, management and control, the flow of funds from dividends paid by the company to the shareholders, and how the share purchase was financed (is the money transferred from abroad for Thai shareholders to buy shares), that will determine if there is an intention to evade the law with Thai proxy shareholders and therefore if foreign ownership restrictions were violated with nominee shareholders. As a general definition you could saty that a nominee is a Thai entity, being either a natural person or corporation, who is registered as the holder of shares in a partly foreign owned company but who does not actually invest in the company, nor has the financial means to pay up his shares, nor has a beneficial interest in the company, nor has any form of control in the company.
Even the more complex nominee structures, like the chain shareholdings across different levels of shell companies with a foreign investor holding minority stakes across several shell companies are generally set up to keep the foreign shareholding under the 49% limit and have the intention to bypass the law for the 'operating company', therefore illegal. If investigated under present law (this would require a political decision), the foreign shareholding could be classified as exceeding the 49% limit (despite the numbers of shares they directly hold) and the company deemed foreign. As for these share holding companies; how are these companies (under-) capitalized, what is the source of the money used to actually invest in the companies they hold shares for, who are the share holding company's shareholders, for how many companies do they hold shares, etc.. Should these share holding companies come under scrutiny by the Commercial Registration Department or Revenue Department this will have direct consequences for the companies they hold shares for.
Under present law and regulations the indication for a nominee shareholder lies primarily in the source of the capital investment and the financial status of the Thai national shareholder. It seems that Thailand currently does not want to enforce or implement a stricter definition of nominee, however, this could change under a new government policy.
Company and business registration rules
Until the Business Registration Rules in August 2006 the Department of Business Development did not investigate the Thai shareholders when they registered a new limited company with foreign participation. To prevent circumvention of the law by foreigners the Department of Business Development (August 1, 2006) issued Business Registration rules 'aimed at guarding against the problems of nominee shareholders'. According to the new rules the Thai shareholders in a partly owned company (over 40% foreign shareholding and/ or with a foreigner as managing director) must submit together with the application for registration evidence of financing used to hold shares, including bank statements and other documents. The Commercial Registration Department will examine all of those documents before giving approval. The business registration rules do not determine the status of the Thai shareholders (nominee or not), there is no guarantee that the Thai company would be immune from investigation at a later date, it must prevent the use of Thai nationals as nominees.
The Business Development Department announced plans (2006) to examine existing registered companies (not just those that bought land) with foreign shareholders to determine whether they breach the new rules or not. This has not happened.
The use of nominees by foreigners is illegal (sections 36 & 37 FBA). Present law: Section 36 Foreign Business Act; 'A Thai national or juristic person that assists a foreigner in avoiding the Foreign Business Act by means of holding shares as a nominee or being a nominal owner of the company, shall (including the foreigner allowing Thai nationals or juristic persons to do so) be liable for a fine of 100,000 to 1,000,000 Baht and/ or imprisonment of up to three years'.
Cheating the rules
To circumvent the Business Registration rules, some accounting and law offices in the tourist areas like Samui, Pattaya and Phuket (usually catering towards foreign clients only) are now setting up companies with less than 40 percent foreign shareholding participation and a Thai nominee as the managing director or set the company up as a 100% Thai owned company. After formation and registration of the company the Thai director will be replaced by the foreigner and the preference shares will be transferred to the foreigner. This structure is only put in place to circumvent the business or land office registration rules. This practice only prevents a first investigation when registering the company. It does not in any way protect the foreigner from any future checks and investigations and if there is a breach with the Foreign Business Act or the company is set up as a 'land holding company' the foreigner is liable for severe penalties.
Thai work permits for foreigners
The foreigers as a director acting on behalf of the company must comply with the the Alien Employment Act in Thailand and apply for a work permit. To apply for work permit the company must have at least 2 million Thai Baht registered capital for each work permit, if two foreigners require a work permit the registered capital will have to be 4 million Thai Baht. One may work in Thailand if one has a valid visa and a work permit and is able to perform work that does not violate the Alien Employment Act **. Foreigners who intend to work in Thailand are subject to the Alien Employment Act. Under the provisions of the Act, a foreigner cannot perform any work or service unless a work permit has been issued by the Alien Employment Division of the Labour Department and Social Welfare Ministry, unless the individual or the work performed falls within an exception to the Act. The term work is defined very broadly, i.e. working by exerting one's physical energy or employing one's knowledge, whether or not for wages or other benefits. The law does NOT define work as doing something in return for financial or any other reward.
** The previous cabinet approved (May 2007) a new Alien Employment Bill which must replace the 1978 Alien Employment Act. The main change will be that foreigners will be only allowed to work in permitted occupations, currently foreigners are not allowed to work in prohibited occupations. The draft is not resubmitted yet and is subject to changes by the Council of State and the NLA, and until the regulations specifying the allowed occupations are issued the present rules will continue to apply.
Thai private limited company formation
Limited companies in Thailand have basic characteristics similar to those of Western corporations. A private limited company is formed through a process which leads to the registration of a Memorandum of Association (Articles of Incorporation) and Articles of Association (By-laws), as its constitutive documents. A Thai Limited Company can be set up relatively quickly if the paperwork is in order. The company formation process, from the reservation of a name till the certificate of incorporation of the company will under the new company formation rules completed in a few days.
The first step is the reservation of a company name. Certain names associated with the royal family, names of Ministries and other Governmental units, names with Thailand, names close to that of other companies, names against public moral, names that are misleading, are not allowed. The approved corporate name is valid for 30 days.
The Memorandum of Association has to be filed with the Commercial Registration Department (for Koh Samui this is the Suratthani Registrar of companies) and must include the name of the company that has been successfully reserved, the province where the company will be located, its business objectives, the capital to be registered, and the names of the three promoters. At least three individuals must sign the Memorandum of Association. The promoters can be foreigners and Thai nationals however, each promoter must be a shareholder of the company.
Although there are no minimum capital requirements for a Thai majority owned company, the amount of the capital should be respectable enough and adequate for the intended business operation. If a foreigner requires a work permit the company concerned must have a registered capital of not less than Baht 2 million, fully paid-up for each 1 work permit.
Once the share structure has been defined, a statutory meeting is called during which the Articles of Incorporation and Articles of Association (by-laws) are approved, the Board of Directors is elected and an auditor appointed.
The Articles of Association are the regulations of the company concerning its internal affairs such as weighted voting rights and matters requiring approval and protecting the foreign minority rights within the company through the issue of preference shares. In a later stage preferential rights may be attached to newly issued shares, in other words you have to buy the preference shares by increasing the register capital. The company's fixed share capital cannot be altered except by an alternation of the memorandum of association in one of the methods authorized by the Civil and Commercial Code.
Within three months of the date of the Statutory Meeting the director(s) must submit the application with the Registry to establish the company.
A newly established company liable for income tax must obtain a tax I.D. card and number for the company from the Revenue Department within 60 days of incorporation or the start of operations. If it is expected that its gross income will exceed 1.8 million baht per annum it must register for VAT (Value Added Tax) within 30 days of the date they reach 1,8 million baht in sales.
Read: 'duties company limited', suggestions for legal practices Company limited
Other and management
A company is managed by at least one director under the control of the General Meeting of shareholders. The director(s) is responsible for the existence and regular keeping of books and documents in accordance with the law (www.rd.go.th); actual payment of shares by the shareholders; the proper distribution of dividends of interest in accordance with the law; and proper enforcement of the resolutions of the general meetings. The director(s) is responsible for the company's annual general meetings and for the invitation to the general meeting. A first failure to call a general meeting of shareholders in accordance with the provisions of the Civil and Commercial Code, a fine of 20,000 THB will be imposed.
In every year as required by law (section 1152 Civil and Commercial Code), one third or the number nearest to one-third of the directors must retire from office. There are currently no general restrictions on the nationality of directors who control a Thai limited company in Thailand (certain business licenses require a majority of Thai directors, e.g. TAT license). Future law and regulations (e.g. FBA amendments) could make the foreign retiring director ineligible for re-election.
Directors may be criminally liable for false statements in any official documents which they have signed on behalf of the company or failure to act, such as failure to file a required report or balance sheet will be dealt with by imposition of criminal liability. In some extreme cases, a director of the company will be required to appear in court, either in person or by legal counsel. Failure to appear when summoned will result in the issuance of an arrest warrant for the director.
The general corporate tax rate in Thailand is 30% for companies with a paid up share capital of more than 5 Million Thai Baht. The government has reduced corporate tax rates to promote specific business sectors and small and medium enterprises. The tax rate for companies with a paid up share capital not more than 5 Million Thai Baht at the end of its tax year shall be taxed at rate of 15% over the first one million Thai Baht profit, 25% over the profit between one million and three million and 30% for profits over three million Thai Baht.
back to top
Copyright 2008 Samui For Sale
