Seven deadly sins: The status quo of Thailand’s Foreign Business Act
IN A NUTSHELL: In previous years, foreign direct investments have frequently been structured wrong. Ask us for a review and adjustment of existing corporate structures soonest.
How to avoid the limitations of Thailand’s Foreign Business Act
Under Thailand’s foreigner legislation, foreign companies need a Foreign Business License (FBL) to carry out most business activities in Thailand. It should be noted that a Co., Ltd. with the sole purpose of distribution is free from this license requirement if it maintains a registered share capital of at least THB 100 million (retailing or wholesaling) or THB 200 million (retailing and wholesaling). The manufacturing business and any type of businesses abroad are license-free as well.
To successfully apply for a Foreign Business License, this requires that the proposed business, above other requirements,
- 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.
The outcome of such an application is typically unforeseeable. To avoid the hassle of applying for a license with an result, foreign direct investments are typically done with a corporation that qualifies as Thai company and, as a consequence, does not fall under the restrictions of the Foreign Business Act.
A corporation is qualified as foreign, if (i) it is seated outside of Thailand or (ii) it does not have a Thai majority shareholder. As a consequence, it is a typical corporate structure to have one 51% Thai shareholder and two foreign shareholders with combined 49% share capital in a Thai Co., Ltd.
The scope of flexibility under current laws
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 had 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:
- 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.
- Blank share transfer agreements are deemed by the Thai government as a strong indication for a nominee structure. They are illegal, as explained here, and should never be disclosed to the public.
- 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.
- 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.
- 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.
- 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 to a born nominee.
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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.