Seven steps: Company formation in Thailand
Company formation – legally valid, in compliance with the laws, and with a protected structure
To set-up a foreign business in Thailand requires detailed planning and important structural decisions. This post describes the seven steps to start a business in Thailand successfully. The law firm offers a comprehensive business solution for a seamless and trouble-free foreign direct investment in the land of smile. Foreign investors should be aware that quick and cheap incorporations result in a house of cards, vulnerability to governmental enforcement of the foreigner legislation, as well as unprotected with respect to the Thai co-shareholders.
#1. Choice of the legal form: The limited company – and no alternative
Doing business legally as a foreigner requires to act in compliance with the civil law legislation as well as in compliance with Thailand’s foreigner legislation. As a general rule, there is no license-free foreign business in the land of smile. To act legally, a complex framework of rules and regulations have to be observed.
Foreign investments in Thailand typically demand a legal entity. From a general viewpoint, Thailand offers two corporate alternatives, two partnership alternatives, the sole entrepreneurship, and the possibility to use a foreign branch for business or non-profit activities. Experience shows that nearly each and every foreign direct investment in Thailand is made by setting up a Co., Ltd., which is a small Thai corporation. It is a one-size-fits-all solution for small, medium, and big foreign investment ventures in Thailand.
No alternatives: 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 unlimited and uncontrollable liability for any wrongdoing by the partnership or any of the partners – as a “General Partnership”, but even in the case of a “Limited Partnership” under Thai laws. 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.
#2. Benefits of foreign investments in Thailand
Special benefits: 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, an application for a Foreign Business License, which is in most cases is not a promising approach, the qualification as an International Business Center, and specific businesses which do not fall under the Foreign Business Act.
Pragmatic advice: 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%. Land owning entities have to follow different rules.
#3. The corporate structure: Three alternatives?
Structures: 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:
a. The nominee structure: A cheap and quick company set-up is possible if the structures and corporate design only follow the blueprint of the law. As a result, under such 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 a system is qualified by the authorities as a “nominee structure” and strictly prohibited by the Foreign Business Act, but in practice still tolerated by the authorities.
No protection: 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 a 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.
b. The legally compliant 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 an arrangement eliminates the divergences mentioned above.
Sophisticated structure: 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, the voting majority in the shareholder meeting and undivided profits. To accomplish such a 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 higher time input and additional set-up costs during the company formation process.
FBA requirements: The formation and accomplishment of such a 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 a 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 into contracts and other internal company documents.
c. The 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.
Four steps: To set-up the two-tier structure, the following four steps have to be done: Set-up the operating company, set-up the holding company which has to comply on certain aspects with the operating company and the two-tier structure concept, restructure both companies on the corporate side to put the two-tier structure in place and entering into the commercial and financing agreements as well as the protection package between both companies. This is a complex process where mistakes could be hardly repaired later.
Foreigner legislation: Not each and any idea to structure a Thai foreign direct investment is a good one. Even if some corporate structures had been tolerated in the past, the compliance adjustment pressure is getting bigger under Thailand’s foreigner legislation. Details are described in “Seven deadly sins: The status quo of Thailand’s Foreign Business Act“.
#4. Shareholders, directors, registered capital, work
Equity: While Thailand’s corporate and tax laws do not provide for minimal equity or a certain debt/equity ratio, a reasonable registered share capital amount of THB 200,000 is sufficient to successfully set-up the business. Typically, the capital amount is influenced by the work permit requirements. To obtain one work permit for a specific company (sponsor) an equity amount (not a persistent deposit) of THB 2 million, fully paid-up, is normally required. For more work permits, this amount has to be multiplied.
Shareholding: Given the requirement of at least three shareholders and a 51% Thai shareholding, it is reasonable to have two foreign shareholders (individuals or corporations) and one Thai shareholder. For land owning companies other requirements apply.
Directorship: The directors can be Thai or foreign individuals. A foreigner can be registered as a director without a work permit. However, the director’s duties are deemed to be work under Thailand’s foreigner legislation. As a consequence, a foreign director of a Thai company without a valid work permit has to accomplish his duties outside of Thailand only.
Work is defined as “an engagement of any profession, with or without an employer, but excluding the business operation of a licensee under the law governing foreigners’ business operation.” A work permit is not required for short-term periodic basis travels to meetings, lectures, seminars, training, exhibitions of art or culture, or to inspect work of others, a travel to Thailand to make an investment, urgent or necessary work in an emergency situation that takes no more than 15 days, and certain other cases.
#5. Tax registration, VAT registration, social security, business license
Tax registration: The company’s 13-digit incorporation number is its tax number. An additional VAT registration might be required. Employees have to be registered for social security.
Licensing: Depending on the scope of the business of the company, a business license might be required. Examples are hotel business license, e-commerce license, FDA license from the food and drug administration office, import/export license.
#6. Office address and company seal
Registered office: The company has to have an office address. Additional requirements, which might be reviewed by the authorities, are sufficient workspace for its registered employees.
#7. Accounting and audit
Company compliance and maintenance: The company needs a monthly accounting, tax filings, and yearly audit.
Seven professional service offers on corporate and investment laws
PUGNATORIUS Ltd. is the Bangkok-based specialist provider of transactional legal and tax advice on foreign investments in Thailand’s manufacturing and service industries as well as property transactions and developments. The corporate and investment laws and Thailand’s regulatory framework are the main focus of the investment law firm and fields of long-term experiences, specific know-how, and unique market reputation.
Turnkey offer: The law firm offers to foreign entrepreneurs and companies to establish a solid and sustainable legal framework and corporate structure in Thailand. Different from customary agency’s offers, the corporate and shareholding structure is fully in compliance with Thailand’s foreigner legislation, does not qualify as an illegal nominee structure, and protects the foreign shareholder to the highest extent possible.
Details on the law firm’s scope of activities regarding corporate and investment laws are described at “Legal advice and assistance on corporate and investment laws“.