Company formation in Thailand – a house of cards?
When establishing a foreign direct investment in Thailand, the investor has to make structural decisions in three categories. At first, he has to decide which type of legal entity is used. As a second step, it has to be evaluated whether the business venture can utilize certain benefits granted to foreign investors. The third step deals with the design of the corporate structure.
I. The limited company
Foreign investment in Thailand typically demands a legal entity. In nearly each and every case the entity of choice should be the limited company (Co., Ltd.), which is a small Thai corporation. The big Thai corporation, i.e. the public limited company (PCL) is not suitable because it requires five or more directors and 15 or more shareholders.
A Thai “partnership” of any type exposes the foreigner to an unlimited and uncontrollable liability for any wrongdoing by the partnership or any of the partners – even in the case of a so-called Limited Partnership. A sole entrepreneurship or sole trader structure is not allowed under the foreigner legislation.
There is a very limited niche for a representative office in Thailand. This should be evaluated depending on the particular case.
Experience shows that nearly each and every foreign direct investment in Thailand is made by setting up a Co., Ltd.
II. Benefits of foreign investments in Thailand
When setting up a legal entity in Thailand, certain benefits are available, depending on the particular case. This includes
- Investment promotion by the Thailand Board of Investment (BOI),
- Protection under the U.S. Thai Treaty of Amity as of 1833, amended in 1966,
- Application for a Foreign Business License,
- Qualification as International Headquarters of International Trading Center, and
- Specific businesses which do not fall under the Foreign Business Act
Under most scenarios, the intended business can’t be done by a foreigner in Thailand. In these cases, it is a pragmatic solution to act as a Thai company with one Thai majority shareholder and two foreign shareholders with a combined share of 49%.
III. The corporate structure: Three alternatives
Although the “Company, Limited” is a one-size-fits-all solution, that does not mean that the corporate design is identical. Instead, the foreign investor, involving a Thai partner as majority shareholder in the company, has to choose between three alternatives:
1. The simple company set-up
A cheap and quick company set-up is possible if the structures and corporate design only follow the blueprint of the law. However, such legal framework is made for shareholders which determine their participations by their financial power, business influence, voting power and profit rights. If the foreigner is from the legal point of view just minority, but business-wise the driving force of the business venture, the business practice deviates from the contents of the law. Especially, the Thai 51% shareholder
- has under the law majority voting power, but should vote just as requested by the foreign shareholder,
- has under the law the majority profit rights, but the main profits should be paid out to the foreigner,
- owns under the law 51% of the company, but should transfer his shares whenever the foreigner requests,
- has under the law certain additional shareholder rights, but should not make use of them.
As a result, under a simple company structure, the Thai shareholder is challenged to act unlawfully in the business interest of the foreign investor. The structure collapses when the Thai shareholder starts to respect the laws of Thailand. Such system is qualified by the authorities as “nominee structure” and strictly prohibited by the Foreign Business Act, but in practice still tolerated by the authorities.
Typically, as the only protection mechanism, the foreign investor possesses (legally void) blank share transfer agreements, signed by the Thai shareholders. The naive thinking is to complete these forms and register them whenever a share transfer is desired.
In such cheap and easy company structure the foreign investor does not have to fear that the Thai partner acts unlawfully. Instead, his financial and business interests are in danger if the Thai partner starts to act following the laws of Thailand. The total loss of a Thailand investment is in most cases the result of lawfully acting Thai shareholders and a bad company structure, not the effect of criminal behavior.
2. The sophisticated corporate structure
Deviating from the specifications in the Civil & Commercial Code, the corporate structure can be designed in conformity with the business deal agreed between foreign investors and Thai co-shareholders. Such arrangement eliminates the divergences mentioned above. This requires detailed, tailor-made bylaws, a preference share structure and other protection mechanisms to ensure that the foreign minority shareholder obtains full control rights, voting majority in the shareholder meeting and undivided profits. To accomplish such sophisticated structure, three requirements have to be fulfilled:
- the willingness to analyze the specific demands of the shareholders,
- the expertise to know the tools and modules to modify the company structure from the blueprint of the law, and
- the acceptance of a higher time input and additional set-up costs during the company formation process.
The formation and accomplishment of such sophisticated company structure fulfill the requirements of the Foreign Business Act and other foreigner legislation in Thailand. As a result, there is no need to hide such structure from the government. The factual handling is exactly as agreed, which is just the opposite of a nominee structure.
While under the simple company structure the investor fears that his Thai partner acts lawfully, the Achilles heel and weak spot of the compound structure lies in an unlawful behavior of the Thai shareholder. The Thai participants can disparage the whole structure as void, and the investor might be required to fight for his rights in a court litigation. Also, it might be highly uncomfortable, that the Thai shareholder has direct access to all company matters, including shareholders’ meetings, insights in contracts and other internal company documents.
3. The protected two-tier structure
As a high-end solution, the Thailand investment can be set-up as a “Two-Tier Structure,” which requires an additional Thai holding company. Such sophisticated corporate design has distinct advantages which makes it preferable in the case of companies with high asset values, high protection requirements or if the investor needs the best he can get.
Under a two-tier structure, the Thai shareholder is isolated in a separate legal entity with passive business only. He has no influence or insights in the business of the operating company. This is a valuable advantage if the Thai majority shareholder drags his/her heels to block the company’s business operations by unjustified complaints and actions. Under a worst case scenario, such hazardous company can be immediately replaced by another company to efficiently squeeze-out the annoying Thai business partner.
The holding company can be set-up with a moderate registered capital amount. As a result, the Thai shareholder can easily finance his capital contribution by his own funds – and this is helpful in case of a governmental financial inspection as well.
The law firm is specialized in protected company formations which give foreign investors the most robust corporate structures available under the laws of Thailand (“investment grade”). This professional service differs substantially from the risky “Thai style” structures (“consumer grade”).