Seven considerations: The factory license
Update October 2018: The Thai government intends to cancel the five-year license extension requirements for factories. Instead, they switch to a self-declaration approach – including safety and environment matters. Registered private factory inspectors might get involved for the verification of the factory’s information.
As a highly regulated business location, Thailand has strict rules on operating a factory. The number of existing factories amounts to roughly 60,000.
Compared with western standards, the requirements to legally qualify as a factory are low. before investing in industrial estates it is advisable to take the Factory Act into consideration. In the following, the typical seven considerations are described.
1. The definition of a factory under the Thai Factory Act: A factory is defined as any premise that
- uses machinery equivalent to five horsepower or more, or
- that employs seven or more people, with or without any machine,
for manufacturing, producing, assembling, packing, repairing, maintaining, testing, improving, processing, conveying, storing or destroying anything included in the classes or types of factories presently listed in the Ministerial Regulations.
2. Group 1, 2, and 3 factories: The Factory Act in combination with ministerial regulations define the characterization of a factory in three groups, based on type, kind, and size:
- Group 1 factory does not require specific notice of license
- Group 2 factory requires a notification before the start of the operations
- Group 3 factory requires a license before the start of operations
3. Limitations by Ministerial Regulations: Additional requirements for all three groups exist by ministerial regulations regarding
- safety of work,
- environmental issues,
- specific qualification of the workers,
- restricted areas (residential, schools, hospitals, temple),
- and others.
4. The significance of zoning regulations: Generally, a factory can be set-up in industrial-zoned land outside of industrial estates (“purple zone”) or dedicated Industrial Estates. In theory, it is also possible to build a factory in the“green zone”, that means on not zoned land, but this will result in certain restrictions and limitations. The “red zone” is allowed to be used for commercial purpose, but is not authorized to be used for a factory.
5. Special permissions: There might be the possibility to get a special permission from any governmental body which releases, dispenses or in other way exempts the investor from binding laws in the given case. As a general rule, such dispense is only possible in pre-defined cases. Neither the officials nor other governmental body has the overall flexibility to override existing laws and regulations. The relevant authority might be the Subdistrict Administrative Organization (“SAO”). In theory, SAO should not issue such permission since the factory matters are governed by the Factory Act. However, in Thailand’s industry practice, another approach is not uncommon.
6. Difference between new and used factory licenses: If an existing factory building is acquired or leased, it has to be carefully checked whether it has an existing factory license and such license can be transferred to the new investor or has to be applied new from scratch. A new factory license has to be applied in case the investor erects his own factory.
Typical criteria for the factory is the size and layout of the building, supply of utilities, labor and infrastructure, proximity to customers and suppliers, the status under the zoning laws and, if applicable, under certain BOI requirements and, of course, the price tag.
7. Factory license renewals: Even if the license is not granted under any specific limitation in time, under Section 14 of the Factory Act a permit shall be valid until the last day of the fifth calendar year as from the year of commencement of the engagement in the business. The permit shall be deemed to expire on the date of issuance of a new permit or of dissolution of the factory business.
According to Section 15 Factory Act, in renewing a permit, a recipient of a permit shall file an application before the expiration of a permit. The renewal fee amounts THB 100,000. Upon such application, the applicant shall be deemed to be the recipient of a permit until a final order refusing a renewal of a permit is given. Also, the renewal requirements are easier to fulfill than a new application. There is a certain level of preservation of the status quo and right of continuance (grandfathering).
Under the factory license, the permission is often granted „to operate a business by starting up operating factory business within 360 days henceforth“. This time-frame might be rather short. The renewal provisions as mentioned below are primarily applicable to the renewal after five years. This is not directly applicable to the case that the 360-days-condition is not fulfilled. Therefore, it would be a valid legal argument that the grandfathering benefits under Section 15 Factory Act are not applicable to the 360-day extension. The law firm is regularly involved in the construction of commercial buildings and the application of construction and factory licenses.
Professional services regarding the Factory Act
PUGNATORIUS Ltd. is a Bangkok-based specialist provider of bespoke transactional legal and tax advice in the corporate and property legal and taxation industry sectors.