Clearer definition of Thai nominee shareholders and foreign firms in Thailand

Source: Opinion SamuiForSale - 14 January 2007

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 partly foreign owned company is considered a foreign company under Thai law. A partly foreign owned Thai limited company incorporated under Thai law is deemed foreign by a- the number of shares held by foreigners and b- the foreign capital investments (section 4 FBA). ) In a nominee shareholding structure the Thai shareholders are deemed to hold the shares on behalf of the foreigner (agent / principal relation under the Civil and Commercial Code), therefore legally the actual owner of the shares is the foreigner. In a nominee shareholding structure the company is not Thai (only on paper) but considered foreign and as a result the foreigner is breaking foreign ownership restrictions.

Nominee or not

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 takeover of the local telecom giant Shin Corp shows that it is not only the direct foreign shareholdings or source of the capital funding, but more complex and focuses on foreign voting rights (management/ control) and how the company capital was financed. The main questions to determine if foreign ownership limits are violated are:

  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 under the planned revision of the FBA voting rights and control will be included as a main criterion in defining a Thai company foreign. 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 for example not allowed to own land.

Companies holding land and the nominee problem

A land company can't be merely a front for land ownership and 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. 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.

Section 94 Land Code Act: 'All the land which an alien (foreigner) 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' .

Section 96 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'.