The Thailand property law website: Thai nominees

Opinion: - February 15 2007

In the latest article in the Bangkok Post (February 15) - ' More documents sought in nominee hunt' (read Bangkok Post article), - sub Lt Khantachai Vichakkhana, the deputy director-general of the Lands Department, said it was the responsibility of the Commerce Ministry unit to determine the nationality of companies and whether illegal shareholding structures were used. In the same article Mr. Kanissorn Navanugraha, the director-general of the Department of Business Development (DBD), said the Land Department was empowered to investigate on its own whether a foreign entity used nominees.

Q - Is it the responsibility of the Commerce Ministry to determine the nationality of companies and whether illegal shareholding structures are used or the Land Department's?

A - Both the Land Department and the Commerce Ministry have their own responsibilities and rules preventing the use of nominees and have the power to investigate whether nominees are used. The previous lack of a legal definition of nominee in both departments and poor and selective law enforcement by the previous government(s) is the root of the current nominee mess. Foreigners were able to engage in restricted businesses and/ or get full property rights by using illegal nominee structures.

Since the coup the new political reality is that this military installed government wants to enforce the law and clear up the nominee problem and unlawful foreign ownership. However, it seems that both the Land Department and the Ministry of Commerce in this stage do not know what to do with the nominee problem and are awaiting a political decision on this subject and clearer rules. It is for example still not clear whether an illegal nominee was used in the Shin Corp-Temasek deal! The Commerce Ministry concluded last year that Temasek used nominees (holding vehicles) to break foreign shareholding limits in Shin Corp. The ministry forwarded the case to the police in October, however there is a clear opposition from powerful people and there is no progress in these investigations. There are even suggestions that the Commerce Ministry's report on the case had disappeared! The Department of Special Investigation may take over the case from the police (February 21 2007).

Q - What is the current situation for companies holding land using nominees?

A - The provincial Land Offices have the authority to inspect companies suspected of having illegal nominee structures. Under present rules (May 25 guidelines), if a juristic person has a foreigner as shareholder and/or director company and would like to acquire land the provincial Land Department must investigate the Thai shareholders occupation, monthly salary and source of investment funds. If it appears that a Thai is holding shares as a representative/ nominee of a foreigner then the Land Office must send a report to the Bangkok Land Department and await the order of the Minister. In practice, due to corruption, selective law enforcement and the absence of a clear definition of nominee the regulations are easy to cheat. Even if it is an obvious evasion of the law the local land officials could say they followed the official rules and did nothing wrong when they transferred land to a shell company. But that is hardly the point as there is no guarantee the company would be immune from investigation at a later date by the Ministry of Commerce or the Land Department.

The Land Offices could check on existing companies holding land following the May 25 guidelines, however currently they do not. The DBD has similar rules and could also investigate existing companies to see if they violate foreign ownership limits by using nominees. If there is the political will it is possible to clamp down on existing illegal foreign ownership structures. Currently both departments do not know what to do with the nominee mess. The decision to prosecute will need a political decision which must be based on correct principles of law enforcement and must include previous government(s)' policies. I do not see a general enforcement of the expanded nominee and foreigner definition for thousands of existing shell companies for the direct future. For the short term authorities are likely to focus on foreigners operating businesses in List 1 and 2 of the FBA and on making sure the law is followed in new cases.

Q - What will the new nominee and foreigner definition under the Foreign Business Act mean for existing companies holding land?

A - The Land Offices and the DBD exchange information for verification of the status of companies and they have already cross-checked companies holding land. The DBD knows which companies are likely shell companies for foreign land ownership.

The Land Department directed its provincial Land Offices last June to submit information on partly foreign owned or controlled companies that had purchased land or properties in their jurisdiction to the Ministry of Commerce for verification of their status. Meaning that new information from the DBD about the status of companies holding land will be exchanged with the provincial Land Offices. Currently the provincial Land Offices sends the name list of the juristic person who acquired land for checking of the percentage of shares held by a foreigner. They only cross check the number of shares held by the foreigner. If a company were to increase a foreigner shareholding by more than 49% the Land Office would be informed by the DBD. The DBD does not stipulate whether a nominee structure existed or not and no formal report of an illegal nominee structure has been made to the Land Department. If found that a company violated foreign ownership rules by using nominees the Ministry of Commerce will forward the case to the police for legal action and await a formal court ruling.

The director-general of the DBD agreed that greater co-operation with the Lands Department was needed to improve enforcement of the law. If information would be forwarded to the provincial Land Departments that a company is foreign under the amended FBA or used nominees under the expanded definition the Land Department has the right to direct the companies to sell off the land within the time limit prescribed by the Director-General which shall not be less than one hundred eighty days nor more than one year (section 94 Land Code).

Q - What would you advice shell companies?

A - The foreigner definition under the FBA applies to all companies irrespective their business objectives or if the company operates a restricted business. Companies cannot be just a front for land ownership and have a registered business purpose, even if they are in fact dormant and a front for land ownership.

Foreigners owning land should reduce their control in the company when the amended FBA becomes law to less than 50%. If a company has majority foreign control (voting rights) the company will be deemed foreign under the approved amendments in the 1999 FBA. Any change in the nationality of companies that had purchased land will be exchanged with the Land Department and majority foreign controlled companies could be ordered to sell of the land as they are foreign under the new law.

It is unclear how strict controls will be on existing companies, but foreigners should be prepared that their company and nominee shareholders could be investigated by the government. They must comply with the law as any normal company. At least they should follow the 'Suggestions for legal practices Company Limited' from the website of the Ministry of Commerce. Again the company cannot simply be a front for foreign land ownership and must be considered operating a business. 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.

Q - Something else, sub Lt Khantachai said that reforms and tighter enforcement of existing land laws were unlikely to result in a slowdown in the property market. Is this not a bit strange?

A - Since the May 25 regulations and other legal changes and negative news thereafter the property market on Samui got a serious blow and the price of land has since drastically dropped. Real estate speculation on Samui has gone. But he is right that reforms and tighter law enforcement of existing laws were unlikely to result in a slowdown in the national property market, as foreigners buying through shell companies is only a very small percentage of the total property market. And foreigners can still legally lease land for 30 years and own condominiums.

Overall the housing market is expected to slowdown this year, according to a leading property-assessment agency (Agency for Real Estate Affairs - February 2007).