Future-proofed foreign property acquisitions in Thailand
Foreign property structures differ a lot and it is the best investment advice to look for independent legal assistance in the complex acquisition process. Ask us for a consultancy offer for your property investment.
How to acquire a villa or undeveloped land in Thailand
Under Thailand’s foreigner legislation, foreign investors are not allowed to acquire legal ownership of real estate. This restriction forbids that foreigners acquire land, but generally it also prohibits to acquire actual legal ownership in a villa or other improvements of the property. Land and villa do not fall under the special legislation for a condominium development. Other exemptions under the laws typically do not apply for residential housing investments or are just hypothetical.
Under current legislation, a leasehold investment is not possible – although it is still merchandised as such. However, a so-called lease is under the laws of Thailand not more than an unprotected tenants agreement with a bundle of disadvantages which result in a high-risk profile if no special legal structures are implemented.
Under Thailand’s laws, it is perfectly legal to set-up a Thai limited company to acquire and hold the land. Such company does not need to have additional business activities and can be set-up with the sole intention to act as land holding entity. However, the foreigner is not allowed to hold the majority shareholding in such company and, also, needs at least the same number of Thai than foreign shareholders.
Under the Royal Decree 630 and the following RD 630 regulations, alternative acquisition structures are possible to avoid the taxation of the salesprofit legally and to put the foreign investor in a more beneficial situation. These structure might be available till the end of 2017 only and, therefore, needs urgent attention of property buyers as well as Thai land owners.
The high importance of a sophisticated company structure
Compared with the purchase price of the property, the legal fees for the design and formation of the corporate structure are insignificant. An investor who avoided a long and tough negotiation process regarding the property price, but looks for a cheap company solution, prioritizes the wrong tasks.
The Co., Ltd. structure as described and proposed by the laws of Thailand is disadvantageous for the minority shareholder and even more disadvantageous for the foreigner. Such company formation is made cheap and quick but has a highly aggressive risk profile. Besides, if the investment is made solely by the foreign minority shareholder, such “consumer grade” structure is illegal and criminal under the foreigner legislation of Thailand.
To avoid a weak and illegal investment, a sophisticated corporate structure has to be designed. This requires a company with a dedicated protection structure against the Thai majority shareholder. This includes detailed, tailor-made bylaws, a preference share structure and other protection mechanisms to ensure full compliance with the foreigner legislation of Thailand and the maintenance of foreign control and profit rights. (“investment grade”).
Even a property investment that is set-up fully in compliance with the law and utilizes all protection tools and modules which can be contractually agreed, can get into trouble if the Thai partner does no longer respect the law. To provide the foreigner with the ultimate protection mechanism, a “Two-Tier Structure” can be implemented, which requires an additional Thai holding company (“high-end solution”). Its purpose is to create an efficient firewall to separate the Thai participants from knowledge, control, and access to the corporation and its assets by putting the Thai shareholders on the hot seat.
It is the typical investment structure that the developer offers to sell the land and to erect a villa on that land as one package. In that case, the villa contract can be a construction agreement or a purchase agreement. The villa can be acquired by the company or directly by the foreign shareholder. The implementation of offshore companies can be advisable for tax planning purposes.
“With the Chanote in her hand, she waves you goodbye”
An apparent alternative to a solid corporate structure is the foreign property acquisition “on the name of a Thai person”. This quick and simple scheme is rather popular for cheap real estate in the North and Northeast of Thailand. Reasonable considerations for such a donation are,
- that the foreigner legislation is in these remote provinces not yet enforced, and
- that the ongoing cooperation of the Thai spouse as the land owner is anyway required to peacefully live together at that location, and
- that the investment amount is so low and insignificant, that the later total loss is not life-threatening business-wise.
As a protection mechanism of the foreign investor, in some cases, a long-term lease or usufruct is registered. Such donate-and-get-back-structures are typically void or at least not legally enforceable. Even worse, as a pretty obvious nominee structure, such lease or usufruct registration can be misused to threaten the foreigner with criminal sanctions to easily make him abandon his property investment, if he is no longer needed. In certain cases, the foreigner should even be well aware that both lease and usufruct terminate immediately on the day he passes away. Therefore, such cheap makeshift requires some kind of unlimited blind faith which is rarely justified in Thailand.
It is pretty obvious that such weak, fragile, vulnerable, even dangerous investment structure is not appropriate for a high-value villa investment in one of the preferred touristic locations on Thailand’s islands and coastal sites.
Legal support and assistance in the formation of the land holding company
PUGNATORIUS assists and supports in the customized design, the swift realization and a proper maintenance of a Thai company (Co., Ltd.) as a solid corporate structure for high-valued property investments. The law firm is well experienced with investment grade corporate structures and frequently repairs and upgrades improper and illegal companies. PUGNATORIUS has a special know-how in setting up high-end corporate solutions to protect the foreigner even against a dishonest and malicious co-shareholder.
Depending on the particular case the law firm provides match-making with Thai 51% co-investors to diligently fulfill legal and regulatory requirements and makes its broad infrastructure available to clients and business partners. Sophisticated solutions include a risk management system and the constant monitoring of regulatory and policy changes.
The company formation is typically implemented by the law firm in a comprehensive package including a property due diligence, the design and negotiation of the sale and purchase agreement and – as the case may be – construction contract, as well as the signing, closing, payment and registration of the property investment. With the aim to protect your villa in paradise.
PUGNATORIUS Ltd. advises on various property developments and has an extensive work-product archive for each type of private and commercial real estate project. The law firm developed special knowledge, know-how, and experiences regarding land and villa acquisitions through a Thai corporate structure. Secure your property in paradise.