Nominee land holding companies legal


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Nominee land holding companies in Thailand

A common sales argument from the real estate agents and the property legal consultants the recent years was that foreigners may not own land freehold, they may purchase land through a Thai limited company and have effective management and control in this company and therefore have a secure ownership. The freehold land ownership argument gererated sales, but it is and always has been well known among insiders that a Thai limited company does not and never has offered a secure method to own land. Foreigners who have set up companies to circumvent the law are very much at the mercy of the Thai government and how they will implement and enforce the law.

Thai law allows land ownership by a partly foreign owned Thai company, so long as the maximum foreign shareholding does not exceed 49%. The majority of the shares (51%) must be owned by Thai nationals and the majority of the shareholders must be Thai nationals who may not be nominees acting on behalf of the foreigner. Since July 2008 the company must have a minimum of 3 shareholders at all times (previously this was 7).

In the Land Code Act and the Foreign Business Act foreigner or 'alien' in Thai jargon is defined as:

		Section 97 of the Land Code Act: Limited companies with more than forty-nine per cent of their capital owned by foreigners or more than half of whose shareholders are foreigners
		Section 4 Foreign Business Act: Having half or more of the juristic person's capital shares held by foreigners or a juristic person having foreigners investing with a value of half or more of the total capital of the juristic parson.

Drawbacks:

Foreigners are restricted from using Thai nominee or proxy shareholders partners in the company. The use of nominees is illegal and will lead to unlawful foreign land ownership.

The foreigner will be a director of a Thai Limited company and will thus be obliged to fulfill its duty as a Director, comply with the Foreign Business Act and Alien Employement Act.

Money should pass through the company so the company will be actively trading and will not be liable for a Registrar’s application to strike off the register for being inactive.

Until the May 25 2006 guidelines and July 21 2006 Standard Practice Letter the practice of the local Land Offices in the tourist resort areas (when dealing with a land purchase by a partly foreign owned company) was to investigate only the number of shares held by the foreigner and if the majority of the shareholders were Thai nationals. The local land offices just ignored the fact that foreigners were using nominee structured front companies to buy land. To prevent the use of nominees by foreigners and circumvention of the law the Ministry of Interior and the Land Department have instructed the land offices (Land Office Instructions) to investigate the Thai shareholders and the source of the capital when a partly foreign owned company purchases land and not only the number of shares held by the foreigner. In case the purchase price is higher than the registered capital this shall mean the source of the capital used for the purchase and not only the registered capital of the company.

New regulations restricting the use of Thai nationals as nominee or proxy shareholders:

	(i)	The Land Office guidelines require the local land officers to investigate the income of every Thai shareholders by looking into their work history of what kind of work they have done and what monthly salary they earned, all of these proved by evidence (in case of a land transfer to a company with foreign shareholding or director). The Thai shareholders must be financially able to actually invest the amount of capital in the company (it can't be the cleaner from the law office setting up the company). **
	(ii)	The business registration rules preventing the use of Thai nominee shareholders. When submitting the application for registration of a partly foreign owned company for registration the Thai shareholders must submit evidences showing the source of their investment together with the business registration application (if > 40% and < 50% foreign ownership, or when the company has a foreigner managing director).
	(iii)	The planned revision of the Foreign Business Act to include voting rights and management as a criterion in defining partly foreign owned companies foreign. Juristic persons incorporated under Thai law which are deemed foreign are not allowed to own land and land owned must be disposed of by the foreigner.

** The various local Land Offices enforce Section 74 of the Land Code: 'In recording rights and legal acts by the competent authority under Section 71, the competent authority shall have the power to interrogate the parties and summon persons concerned to give oral testimony or send relevant written evidence as may be necessary and then proceed as may be appropriate under the circumstances. If there is reason to believe the recording of such rights and legal acts is in evasion of the law or there is reason to believe the purchaser is purchasing on behalf of an alien, instructions shall be asked of the Minister whose word shall be final'. Besides the recent guidelines and standard practice letter no minister has yet given clear instructions.

The foreigner will be a director of a Thai Limited company and will thus be obliged to fulfill its duty as a director. The foreigner must also comply with the FBA and as the managing director of a Thai company with the Alien Working Act.

There is no general restriction on the nationality of directors in a Thai company and foreigners are allowed to control a Thai company (certain categories of business licenses require a majority of Thai directors). A possible future problem is that in every year (as required by law in section 1152 Civil and Commercial Code) one third or the number nearest to one-third of the directors must retire from office. Future law and regulations (like the recent proposed FBA amendments) could make a foreign retiring director ineligible for re-election or ineligible for re-election as the sole director of a Thai company. Re-election would automatically make the company a foreign company, therefore the foreigner could under possible future law loose control over the company.

The foreign managing director acting on behalf of the company (like opening a company's bank account, applying for telephone lines, registering a land transfer, filing balance sheets, applying for updated company documents) may in addition to a passport be required to show a work permit issued by the Alien Employment Division of the Labour Department before any signed document will be accepted. Any document signed by the foreign director could be rejected until a work permit has been issued. For example in the Bangkok area it is not possible for a foreign director to open a bank account without a work permit. To comply with the requirements to obtain a work permit could be impossible for a foreigner director of a practically dormant company. Approved and pending amendments (May 2007) to the Alien Employment Act in Thailand will make it even more difficult for foreigners to obtain a work permit.

Work is defined very broadly in the law; 'engaging in work by exerting energy or using knowledge whether or not in consideration of wages or other benefit' (section 5 Alien Working Act). The foreign director acting on behalf of the company without a work permit could in the worst case face criminal charges and even deportation out of Thailand.

The company must be in operation and have a business purpose
The company must have a business purpose which are stated in the company objectives and which are registered at the Business Registration Department. The company must commence business within a year from the date of registration and be considered in operation as a normal company (in practice this means start filing financial statements yearly) and keep accounts in accordance with the law. Money should pass through the company so the company will be actively trading and will not be liable for a Registrar’s application to strike off the register for being inactive (section 1246 Civil and Commercial Code).

The Land Offices have cross-checked companies holding land with the Department of Business Development. The Department of Business is aware which companies are likely 'land holding companies' and are aware that these companies are not running a real business. Their current attitude and policy is to ignore these companies, though the Thai attitude, buried deep in the official mind, is that foreigners have no right to own land.

The company may not have an illegal purpose
Setting up a company with the purpose to circumvent the laws restricting foreign ownership has an illegal purpose and will in court be deemed void pursuant to sections 150 and Section 172 of the Civil Code. The company can't be set up simply to circumvent the law or as a vehicle to hold land on behalf of the foreigner.

If the company is not carrying on business and its only purpose is holding land the company could be deemed holding company on behalf of the foreigner and the Land Department has in this case the authority to force the foreigner to dispose of such land. A partly foreign owned company using nominees will be regarded as a foreign company and therefore not allowed to own land.

Section 96 of the Land Code Act; 'When it appears that any person (including a juristic person) has acquired land as the owner in place of an alien or juristic person under the provisions of Section 97 and 98, the Director-General shall have the authority to dispose of such land and the provisions of Section 94 shall apply mutatis mutandis'.

Section 94 of the Land Code Act; 'All the land which an alien has acquired unlawfully or without permission shall be disposed of by such alien within the time limit prescribed by the Director-General which shall not be less than one hundred eighty days nor more than one year. If the land is not disposed of within the time prescribed the Director-General shall have the power to dispose of it. The provisions on the forced sale of land in chapter 3 shall apply mutatis mutandis'.

Many of the local property law and accounting offices in the tourist areas of Thailand aiming their services at foreigners and suggesting loopholes in the law for the foreigner have the same interest as the real estate agents and fully depend for their income on property sales and/ or have a direct interest in the real estate market. Can you trust them? Not really. It is not using a loophole when you transfer land to a 100% Thai owned company and the next day transfer 49% or 39% of the (preference) shares to the foreigner. If the company uses nominees (currently defined in the Land Office guidelines and Business registration rules) or is not in operation and/ or set up to circumvent the law the foreigner will be violating the law and could on investigation at a later date be forced to sell the land and will be liable for severe penalties. The only reason to set up the company without a foreign shareholding is because on investigation the Thai shareholders in the company will be deemed nominee shareholders, acting on behalf of the foreigner! Registration would not be allowed.

Section 100 Land Code Act:' If a juristic person who acquired land while not within the scope of the provisions of Section 97 and 98 (meaning foreign), but later comes within their scope, the provisions of Section 95 shall apply mutatis mutandis' . This means that on investigation at a later date the foreigner must dispose of the land and section 94 of the Land Code Act shall apply.

Some advice structures that include holding companies as shareholders, Thai nationals as directors and foreigners having control via majority Thai owned companies over the Thai juristic entity that will own the property or several lease buyers having equal shares in one holding company. Despite the complicated lengths (with associated fees) some will go to suggest a way around the law, it is all doubtful if not an illegal nominee structure. You may find out that these as sound presented property investment structures are in fact illegal.

The recent land registration rules from the Land Department and Ministry of Interior must effectively prevent the use of nominee structured limited companies by foreigners for land purchase. Though, local land officials may turn a blind eye because of corruption and pressure from leading figures with a financial interest in the property market. The law is actually applied in different ways and you could say that because of corruption on a local level the law and latest regulations are not fully enforced. It is well known that several high-end officials were involved in land transactions and/or have a direct financial interest in the property market. Just look at the alleged involvement of Thai Rak Thai politicians in forest encroachment and land speculation on the Samui island or a recent Samui land scam involving government men and ranking civil servants. There are many more examples where the officials who must apply the law allow a breach of the law because they have a financial interest in the deal where land is in fact sold to foreign investors operating through a Thai company.

This latest policy change by the government is not the closing or removing of a loophole but enforcement of existing laws. Even though offered by local law and accounting firms, setting up companies with nominee shareholders to own land on behalf of foreigners is and always has been an unlawful evasion of the law. Law enforcement and procedures may change rapidly in Thailand and selective or poor law enforcement in the past is no guarantee for the future.

Samui For Sale




	Copyright 2008


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