Seven deadly sins: The status quo of Thailand’s Foreign Business Act
How to avoid the limitations of Thailand’s Foreign Business Act
Under Thailand’s foreigner legislation (FBA), foreign companies need a Foreign Business License (FBL) to carry out most business activities in Thailand. Exemptions apply for
- manufacturing (excluding toll manufacturing which is deemed to be a service)
- import/export business
- distribution if the company has a registered share capital of at least THB 100 million (retailing or wholesaling) or THB 200 million (retailing and wholesaling), and
- a few other business activities, as banking and insurance business.
The requirements to successfully apply for a Foreign Business License are tough and typically out of reach. The licensing procedure takes 4 to 12 months and the outcome is uncertain, as the criteria are broad. The law requires, especially, that it
- could not be competently carried out by a majority Thai-owned company,
- is not contrary to the country’s security and stability, good morals or public order,
- is beneficial to the Thai economy, and
- is beneficial in terms of technology transfer, research, and development.
As a result, it does not make a significant difference whether the business is
- not at all permitted for foreigners to operate due to special reasons (List 1 to the FBA),
- relates to national safety or security, or affecting arts and culture, traditional and folk handicraft or natural resources and environment and, therefore, requires a cabinet approval (List 2 to the FBA), or
- needs a Foreign Business License, which is out of reach (List 3 to the FBA).
In Thailand’s industry practice, foreign direct investments on List 1, 2 or 3 are typically carried out with a corporation that qualifies as a “Thai company” and, as a consequence, does not fall under the restrictions of the Foreign Business Act. A corporation is qualified as foreign, if
- it is seated outside of Thailand, or
- it does not have a Thai majority shareholder.
As a consequence, it is the typical corporate structure to have one 51% Thai shareholder and two foreign shareholders with combined 49% share capital in a Thai Co., Ltd.
The Foreign Business Certificate
Apart from the Thai licensing procedure, foreign activities are allowed in the areas covered by license waivers. Waivers cover
- BOI promotions
- Free Trade Agreements (the practical case is the U.S. Thai Treaty of Amity)
- Industrial Estate Authority.
The eligibility of the license waiver is certified in the Foreign Business Certificate, which should be available within 30 days after the application has been filed. The FBC does not cover all the benefits linked to the FBL, especially not regarding work permit requirements.
How to avoid the disadvantages of a minority shareholding in the Thai company
The Thai legislative framework allows outsmarting the restrictions of the Foreign Business Act. The foreign investor can act business-wise as-if he would be the quasi-sole shareholder of the Thai majority Co., Ltd. He can
- either ignore the law and set-up a nominee structure where he controls the Thai shareholder. Such a nominee structure is unlawful, a criminal act, but widely practiced by risk-tolerant foreigners,
- or use a sophisticated corporate structure which allows the same result strictly in compliance with the law. Such sophisticated structure is described in the following paragraphs:
The shareholding in a corporation has three dimensions. It is at first the participation in the company’s capital. It is secondly the participation in the company’s profit (especially dividends). And it is thirdly the voting power in the shareholder’s meeting. The bylaws of the company, as well as other agreements and document, do not require to give each share the same percentage of capital, profit, and voting power.
The applicability of the Foreign Business Act depends solely on the capital contribution. Therefore, the Thai shareholder has to contribute and to hold 51% of the share capital but could have fewer profit rights and less voting power. This interpretation of the law is unchallenged and has been confirmed by the government.
Under Thailand”s company legislation it is allowed that a Thai company limited issues shares in different classes. While ordinary shares hold the same percentage of capital, profit, and voting rights, a preference share (aka. preferred share) can provide the shareholder with a fixed and guaranteed dividend but lower voting rights.
This flexibility of the Civil & Commercial Code allows granting to the Thai shareholder preference shares with a guaranteed dividend and a highly reduced voting power. As a result, the foreign shareholder can legally dominate the company.
This current legislation had been criticized in the past. In 2014, the government planned to tighten the FBA. That proposed law change have never been implemented. All the details of that topic are available here.
Seven deadly sins: Ongoing limitations of the current legislation
Although the preference share structure of foreign direct investments in Thailand is in full compliance with the law, a mixed Thai-foreign Co., Ltd. has to avoid elements that feed the suspicion of a nominee structure. When designing the corporate structure of the company, serious mistakes can be made. In the worst case, this results in a seizure of the company’s assets and criminal liability of all participants. Seven harmful practices and deadly sins are:
#1. Nominee structure: Any corporate structure which provides the Thai shareholder with voting and dividend rights which they internally agree not to exercise and utilize is illegal and under Thailand’s regulation a nominee case. A clear infringement of the foreigner legislation is a 100% ordinary share structure in which the Thai shareholder agrees to act like he would be a preference shareholder. More about such house of cards is explained here.
#2. Equity-replacing loans: Although Thailand’s company laws generally have no debt/equity ratio requirements, a foreign loan which replaces forbidden foreign shareholding, might be deemed to be forbidden as well when certain red-lines are overstepped.
#4. Reverse preference shares: Any unbalanced upgrade and enhancement of the 49% foreign shares: 49% ordinary rights are the absolute ceiling. Such additional rights are the straw that breaks the camel’s back. Worst case of such misconception is the reverse preference share structure as described here.
#5. Cross-shareholding between a group of companies to circumvent regulatory minimum shareholding requirements are deemed in all jurisdictions as problematic. If Co., Ltd. A holds 51% of Co., Ltd. B, and vice versa, the foreign 49% shareholder reshapes both corporations as 100% foreign owned. If cross-shareholding reduces Thai shareholding under 51%, the whole structure is, therefore, illegal.
#6. Circumvention agreements: While a share pledge, as well as option agreements, do not result in a non-compliance with the law, additional contractual arrangements can be easily taken as a nominee-indication by the authorities. Such high-risk tasks include proxy arrangements, dividend assignments, voting commitments, and last will forms.
#7. Lawyers as shareholders: As an obvious no-go, the legal counsel who assisted in the corporate structure should never ever be involved in the shareholding. A lawyer is easily identified as acting in the interest of foreigners and the very first target of any investigation. His professional obligation to serve the client makes him a born nominee.
In the grand scheme of things, the laws and regulations of Thailand’s foreigner legislation should never be underestimated. However, they can and should be carefully managed.
The law firm advises and assists in the compliant and foreigner-protected formation of corporate structures for foreign direct investments in Thailand. If you already committed a deadly sin, you should ask PUGNATORIUS for a swift restructuring before doomsday arrives.
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