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Thailand Foreign Investment – Circumvention of Thailand’s Restrictions on Foreign Investment

Thailand Foreign Investment

Legal Risks of Nominee Shareholding in Thai Corporate Entities

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The forerunner of circumvention, the commonplace vehicle employed by renowned foreign MNCs and lesser SMEs all the same is the joint venture with local partner to form a corporate entity and to the effect of, the ‘naturalization’ of an otherwise statutorily-deemed “Alien” / “Foreigner” to become a Thai entity.

Risks of severe legal ramifications & repercussions, albeit observably dormant risks are inherent in such ‘naturalization’. Some of these risks, without limitation, are set out below, with the overarching legal insinuation that these structures effectively allow the otherwise foreign entities to avoid the attraction of most foreign business restrictions (use of such structures to hold land is also dealt with briefly below) particularly the Thai Foreign / Alien Business Act (“FBA“), and essentially – a circumvention of the law.

1. Nominee Shareholding & Circumvention of the Law

Section 36 of the Foreign / Alien Business Act B.E. 2542 (A.D. 1999):

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 so allowing the Thai nationals or juristic persons to commit this offence] be liable for a fine of THB100,000 to THB1,000,000 and/or imprisonment of up to 3 years.”

Vis-à-vis, liabilities & stipulated possible penalties for circumvention of the FBA is shouldered by the Thai nominees, the actual foreign entity(ies) utilizing the Thai nominees and responsible authorized directors, directors & senior management of the same and includes:

  • Fine of THB100,000 – THB1,000,000;
  • Imprisonment of up to 3 years; and/or
  • Termination or dissolution of business and / or the Thai private limited company.

In addition, the parties mentioned above may face the relevant sanctions under other primary legislation such as the Civil & Commercial Code, criminal sanctions under the Thai Penal Code, specific sanctions under industry-specific legislation and / or other sanctions under related ‘common’ law.

2.   Nominee Shareholding & Legal Feasibility

An especially pertinent consideration is the actual tact of nominee shareholding, especially in face of its clearly spelt out unlawfulness, and what risks the foreign investor runs vis-à-vis uncooperative nominees or a rebellion / mutiny by the local joint venture partners.

Vis-à-vis the majority shareholding exercising their inherent rights in a manner adverse to the minority foreign ownership:

  • Foreign investor may be completely barred from exercising its rights in Court, whereby a derivative suit / derivative action is the only available recourse to protect the minority foreign ownership from the Thai partners. Further, if the minority foreign ownership prevails in Court, remedies & recompense are awarded to the company and not the minority foreign ownership.
  • Vide Civil & Commercial Code, it is to be noted that derivative actions generally have the requirement that it be shown that the minority shareholder is exercising its right of action in Court for the benefit of the company and that the company and not the shareholders have suffered as a result. This could well be an issue.
  • Another method is where the ‘beneficial owner’ that is the foreign minority wishes to recall the shares from the nominees, the foreign minority may do so by virtue of law because such shares were held in ‘trust’. Thereto, while the shareholder list is evidence in Thai law, but may be contested whether the shareholder(s) so listed are the actual owners. Such contest may be evidenced by proof of the source of funds having purchased the shares, and such evidence is admissible in Court to prove the identity of the ‘beneficial owners’ [Supreme Court Judgments Nos. 10274/2551 and 6735/2548].

It is important to note that the concept of ‘trusts’ are generally not recognized and do not accord well with the Courts. It may well be that these causes of action in case of default may not be plausible nor viable to the foreign minority what with its underlying unlawfulness making it effectively prima facie conceding to a Court of Law of such underlying illegality.

3. Nominee Shareholding, Practical Difficulties & Further Circumvention

There are further practical, corporate governance and accounting difficulties which come with such a structure, for instance, accounting-wise with regards to the declaration and payment of dividends. In this example, while this may be further accommodated by tailored accounting practices, the inherent gene of circumvention may branch out to further circumvention in this and other respects, adding to the myriad of unlawful elements.

4. Nominee Shareholding & Circumvention of Foreign Land Ownership Restrictions

Another pertinent issue to highlight is that foreign ownership of land (save for very limited exceptions) is prohibited. This restriction (enshrined under Section 97 of the legislation set out below)  is effectively avoided as the ownership of the land, being held by the subject entity, vests in a Thai entity when however in reality, the land is owned by the foreign minority.

The Act Promulgating the Land Code B.E. 2497 (A.D. 1954) as amended up till Land Code Amendment Act (No. 12) B.E. 2551 (A.D. 2008) (“LC“) prescribes liabilities & sanctions for circumvention of restrictions on the foreign ownership of land:

  • Foreign individuals are liable to fines not exceeding THB20,000 and / or terms of imprisonment not exceeding 2 years (Section 111 LC)
  • Company is liable to a fine not exceeding THB50,000 (Section 112 LC)
  • Nominees are liable to fines not exceeding THB20,000 and / or terms of imprisonment not exceeding 2 years (Section 113)
  • Land being held by subject entity shall be disposed by the nominee within the period of time specified by the Director-General of the Department of Lands which shall be not less than 180 days and not more than 1 year. The Director-General shall have the power to dispose of such land if the time limit elapses.
  • Further, there is criminal liability for the offence of furnishing false information to a competent official in view of recording a false statement in official documents – a term of imprisonment not exceeding 3 years and / or a fine not exceeding THB6,000 (Section 276 Thai Penal Code).

If the Thai company subsequently converts into a foreign company (by way of purchase of shares or otherwise) – the reconstituted company has to dispose of the land within 1 year from the date of such reconstitution.

These are just the legal risks, foreign investors have to always bear in mind the risks of the counterpart, empowered by majority shareholding, being uncooperative or rebelling. While there exists a plethora of devices where the minority retains control (vide preference shares, directorship, articles of association, etc.) – this remains a risk, especially as the foreign investor’s hands are somewhat shackled by, once again, the underlying illegality of circumvention.

N.b.   Another common way employed by foreign investors to circumvent Thai foreign land ownership restrictions is the use of back-to-back 30 year leases, with the additional ‘safety’ of an usufruct Agreement / superficie Agreement. This strategy however, is inherently unenforceable by law as an attempt to circumvent the Land Code and is therefore riddled with legal risks.

Conclusions

While the employment of such structures is conceded as being widely commonplace in Thailand, and there exists a number of facades to “minimize” risks of detection (there are claims that legal risks may be minimized too) – years of such structures being in existence with a large majority having faced little or no problem may offer some proof of the dormancy of such risks or conversely the inaction of the authorities in enforcement. Notwithstanding, and also in consideration to the minority that have faced severe legal repercussions or internal hostility – these remain inherent risks which (i) resemble a weak point in a structure that may blow up in face of challenge; and (ii) represent a form of compromise in terms of a corporation’s foundation which may be used as a bargaining chip in negotiations involving the entity with the shady gene.

 

 

For more information on the foregoing, or on Thailand-bound investments in general, please contact the author JOEL LOO SEAN EE, the Bangkok-based Senior Regional Counsel at Kelvin Chia Thailand and a member of Kelvin Chia Partnership’s Regional Practice Group at Joel.Loo@KCPartnership.com.

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This article is published to provide general information only and is not offered as specific advice on any particular matter – This information is to be taken subject to proper consultation with a lawyer.

All written material on BANGKOK LEGAL BLOG (BLB) including this post are the Copyright of Joel Loo Sean Ee. Any attempt to plagiarize or reproduce these materials in whole or in part, in verbatim or in paraphrase, or in any other form that it can be conceivable that such attempt is being made is an offense in law and will be an invitation by offenders to face charges and prosecution in a Court of Law.
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Thailand Foreign Investment – Navigating Thailand’s Foreign Investment Restrictions

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Foreign Investment in Thailand – Navigating Thailand’s Restrictions on Foreign Investment

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Establishing a Foreign Owned Corporate Entity in Thailand and Thailand Foreign Business Restrictions in a Nutshell

When prospective foreign investors walk in our door already with the presumption that there is no such thing as a fully foreign owned company in Thailand – it often strikes us as an unfounded, ill presumption.What more when fellow business consultants & even occasional legal practitioners seem to make the same sweeping assumptions. A quick visit on corporate structures in Thailand however reveals that even reputable foreign MNCs with entities in Thailand appear to favor this predisposition to “naturalize”. This brings us to briefly revisit these investment restrictions to quickly underline to readers the reasons for this tendency for foreign-controlled Thai private limited companies in Thailand, whether by direct or indirect means (such as the common 2-tier / 3-tier / like multi-tier structures).

The primary obstacle – Foreign / Alien Business Act B.E. 2542 (A.D. 1999) (“FBA“)

1. The notorious FBA is the cornerstone legislation that appears to bar foreign owned companies to carry out business in Thailand.

2. The FBA has 3 schedules / lists – schedules which will be listed out at the end of this write-up, these schedules spell out the businesses that are caught under the FBA. Please see below, briefly, to explain their respective mechanisms briefly.

  • List 1 is an absolute ban for, inter alia, farming or animal farming, extraction of Thai herbs, radio broadcasting, newspaper or television station businesses, etc.
  • List 2 mandates 40% Thai ownership & cabinet approval for, inter alia, land, water & air transportation, mining, production of carved wood, etc.
  • List 3 mandates a foreign business license for, inter alia, forestry, operating a fishery.
  • Of especial restrictiveness, List 3 contains a catch-all provision for service businesses.

3. Anything that does not fall within these Schedules, subject to other industry laws & regulations and minimum capitalization requirements, may be fully foreign owned. Some of the businesses as listed in the Schedules also come with qualifiers, for instance, retailing – the FBA does not prevent a fully foreign owned retailer if it meets the specific minimum capitalization requirement as spelt out.

4. This includes manufacturing, import & export, to wit: any business not falling within the Schedules.

5. Commentators have commented that the definition of Alien / Foreigner under the FBA does not extend to “foreign control”, to wit: what attracts the FBA’s restrictions is foreign shareholding, and foreign control is not prima facie in contravention, suggesting that control via preference share structures and other means are not the issue, so long as:

6. There is no attempt to circumvent the FBA, which attracts severe legal repercussions for the business, the Alien / Foreigner & the Thai nominees if a Thai nominee structure is the manner of circumvention / avoidance that is being employed – despite the definition of “nominee” being rather obscure.

7. Other industry-specific restrictions include those related to banks & financial institutions ; insurance brokers ; businesses dealing with securities ; telecommunication companies ; and so forth.

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Legal Foreign Ownership of Companies / Corporations in Thailand

Moving forward:

1. Of course, the prescribed “solution” is to obtain the foreign business license for businesses under List 2 and cabinet approval for those caught under List 3. However, this may not be plausible for some, but this “solution” is the proper way forward by operation of law.

2. Foreign investors may avail of a number of exemptions, investment incentives and / or promotions that allow full or a higher ownership allowance for their local corporate entities, which are available for a wide scope of industries, such as:

3. Exemptions under various free trade agreements such as the AMITY Treaty (American-owned companies), JTEPA (Japanese-owned companies) and TAFTA (Australian-owned companies).

4. Exemptions under Board of Investment (BOI) promotions.

5. Exemptions granted by the Industrial Estate Authority of Thailand (IEAT).

6. Representative Office or Regional Office.

7. On a cursory evaluation: (i) What is the nature of the business activity? Does it fall under one of the FBA lists? (ii) If it falls within Lists 2 or 3, are there qualifying factors that the proprietor can meet? (iii) Can the foreign investor obtain a foreign / alien business license? (iv) Are there exemptions which would be applicable to the business activity and/or the proprietor’s nationality and/or the site of the local business operation and/or by virtue of other factors? (v) Would a representative office or regional office be sufficient for the proprietor’s local interests? (vi) Does the foreign investor have one or more bona fide Thai joint venture interests?

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For more information on the foregoing, please contact the author JOEL LOO SEAN EE, the Bangkok-based Senior Regional Counsel at Kelvin Chia Thailand and a member of Kelvin Chia Partnership’s Regional Practice Group at Joel.Loo@KCPartnership.com.

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Businesses Restricted from Full-foreign Ownership in Thailand

— excerpt from the FBA —

LIST ONE

The businesses not permitted for aliens to operate due to special reasons:

(1)

 Newspaper business, radio broadcasting or television station business

(2)

 Rice farming, farming or gardening.

(3)

 Animal farming

(4)

 Forestry and wood fabrication from natural forest

(5)

 Fishery for marine animals in Thai waters and within Thailand specific economic zones.

(6)

 Extraction of Thai herbs.

(7)

 Trading and auctioning Thai antiques or national historical objects.

(8)

 Making or casting Buddha images and monk alms bowls.

(9)

 Land trading

LIST TWO

The businesses related to the national safety or security or affecting arts and culture, tradition, folk handicraft or natural resource and environment.

Group 1: The businesses related to the national safety or security

(1)

 Production, selling, repairing and maintenance of:

(a)

firearms, ammunition, gun powder, explosives.

(b)

Accessories of firearms, ammunition, and explosive

(c)

Armaments, ships, air-crafts or military vehicles.

(d)

Equipment or components, all categories of war materials.

(2)

 Domestic land, waterway or air transportation, including domestic airline business.
Group 2 : The businesses affecting arts and culture, traditional and folk handicraft:

(1)

 Trading antiques or art objects being Thai arts and handicraft.

(2)

 Production of carved wood.

(3)

 Silkworm farming, production of Thai silk yarn, weaving Thai silk or Thai silk pattern printing.

(4)

 Production of Thai musical instruments.

(5)

 Production of goldware, silverware, nielloware, bronzeware or lacquerware.

(6)

 Production of crockery of Thai arts and culture.
Group 3: The businesses affecting natural resources or environment:

(1)

 Manufacturing sugar from sugarcane;

(2)

 Salt farming, including underground salt;

(3)

 Rock salt mining;

(4)

 Mining, including rock blasting or crushing;

(5)

 Wood fabrication for furniture and utensil production

LIST THREE

The business which Thai nationals are not yet ready to compete with foreigners:

(1)

 Rice milling and flour production from rice and farm produce

(2)

 Fishery, specifically marine animal culture.

(3)

 Forestry from forestation.

(4)

 Production of plywood, veneer board, chipboard or hardboard.

(5)

 Production of lime.

(6)

 Accounting service business.

(7)

 Legal service business.

(8)

 Architecture service business.

(9)

 Engineering service business.

(10)

 Construction, except for:

(a)

Construction rendering basic services to the public in public utilities or transport requiring special tools, machinery, technology or construction expertise having the foreigners’ minimum capital of 500 million Baht or more.

(b)

Other categories of construction as prescribed by the ministerial regulations.

(11)

 Broker or agent business, except:

(a)

Being broker or agent for underwriting securities or services connected with future trading of commodities of financing instruments or securities.

(b)

Being broker or agent for trading or procuring goods or services necessary for production or rendering services amongst affiliated enterprises.

(c)

Being broker or agent for trading, purchasing or distributing or seeking both domestic and foreign markets for selling domestically manufactured or imported goods in the manner of international business operations having the foreigners’ minimum capital 100 million Baht or more.

(d)

Being broker or agent of other category as prescribed by the ministerial regulations.

(12)

 Auction, except:

(a)

Auction in the manner of international bidding not being the auction of antiques, historical artifacts or art objects which are Thai works of arts, handicraft or antiques or having the historical value.

(b)

Other categories of auction as prescribed by the ministerial regulations.

(13)

 Internal trade connected with native products or produce not yet prohibited by law.

(14)

 Retailing all categories of goods having the total minimum capital less than 100 million Baht or having the minimum  capital of each shop less than 20 million Baht.

(15)

 Wholesaling all categories of goods having minimum capital of each shop less than million Bath.

(16)

 Advertising business.

(17)

 Hotel business, except for hotel management service

(18)

 Guided tour.

(19)

 Selling food or beverages.

(20)

 Plan cultivation and propagation business.

(21)

 Other categories of service business except that prescribed in the ministerial regulations

 — excerpt from the FBA —

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