Seven shortcomings: Thai-Foreign villa investments
“With the Chanote in her hand, she waves you goodbye”
Under Thailand’s foreigner legislation, non-Thai investors are not allowed to acquire legal ownership of real estate. Foreign land-ownership exists in a variety of forms and variants but is in most cases illegal and only temporary.
To invest in a house or villa located on Thailand’s islands, coastal regions, in Bangkok or elsewhere in mainland Thailand, several investment structures are on the market. Many attractive locations are in foreigner’s hands – but not always forever.
#1. On the name of the Thai partner is a no-go
The apparent opposite of 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 estates 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,
- that the ongoing cooperation of the Thai spouse as the landowner is anyway required to peacefully live together at that spot and
- that the investment amount is so low and insignificant, that a later total loss is not life-threatening business-wise.
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 coasts.
#2. The unprotected lease is too weak for a villa investment
Although the term lease is widely used, Thailand has no leasehold legal system, and, therefore, the lessee is just a plain tenant of the property. In its basic form, the foreign tenant is practically unprotected and highly vulnerable to the despotism of his Thai landlady. This requires closed-eyed trust and is not suitable for everyone.
The Thai government considered introducing leasehold legislation with the explicit intention to allow (i) the lessee to sell and transfer his lease rights, (ii) to inherit a long-term lease, and (iii) to grant an enforceable lease right for more than 30 years. Allowing leasehold would unleash demand from around the world. However, with the introduction of the Sap-Ing-Sith, additional leasehold legislation is highly unlikely..
In some property developments, it is not possible to grant the investor legal ownership. For such cases, especially holiday and retirement resorts, protected lease structures are possible, or the investor has to be careless regarding the future and no interest to leave behind a certain inheritance. Details on this at “Secured property lease structures in Thailand“.
#3. The company with a nominee structure is neither legal nor future-proofed
Under Thailand’s laws, it is perfectly legal to set-up a Thai limited company to acquire and hold the land. Such a company does not need to have additional business activities and can be set-up with the sole intention to act as a landholding entity. However, the foreigner is not allowed to hold the majority shareholding in such a company and, also, needs at least the same number of Thai than foreign shareholders.
By setting up a simple company structure, the foreigner donates 51% of his investment to the Thai shareholders. In the beginning, neither he himself nor the Thai participants might be aware of this and the Thai majority shareholders might not understand to take immediate advantage of this misconception and birth defect.
The remaining 49% participation does not give the foreigner a solid residence right in the villa for which he entirely paid. He has to fear the enforcement of the foreigner legislation which qualifies nominee structures as a criminal act. But worse, he has to worry that the Thai partner starts litigation to achieve that the corporate structure is enforced as it is written in the published documents.
#4. Even the sophisticated corporate structure needs ongoing sympathy by the Thai partners
A sophisticated corporate structure with a preference share structure, dedicated bylaws, and other features to protect the foreign minority shareholder, gives the foreigner all the rights he needs to dominate “his” company and its assets, to have the majority voting rights in the shareholders meeting, and to gain practically all dividends and even all capital gains under an exit scenario.
Such a sophisticated corporate structure helps a lot, even it is more cost-intensive. A side-effect of the complex corporate structure is that it is fully in compliance with Thailand’s foreigner legislation. Two birds are killed with one stone.
All this is water-protected in the rain, but not in a storm. The Thai majority shareholders, whoever they are, might get angry or envy enough to disrespect the law and the incorporation documents. To fight for your rights in year-long litigation at a Thai court is no fun and the foreigner has typically neither the time nor the nerves to do this.
The solution is to do it right from the start by a protected corporate structure. This might be the two-tier-structure which allows the foreigner to squeeze-out immediately any annoying and troublesome Thai shareholder. It requires a structure with two Thai companies that create a firewall between possible problems and the foreigners’ real estate.
The corporate structure is no playground for experiments. Ill-advised structures which will plague foreign investors sooner or later are
- the reverse preference share structure
- the cross-shareholding structure, and
- blank share transfer agreements.
#5. The landlord owns the villa, but it can be accounted for otherwise
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 contractual partner, buyer or house builder can be someone else than the landowning Thai company.
Thailand’s law prohibits foreigners to own land and all improvements which are inseparably linked and attached to the land. If the Thai company owns the land, it also owns the house or villa. Separation of land and villa ownership would require a superficies. This means without superficies, the foreigner does not legally own the villa, which he erected on his name in the building permit and fully paid.
However, the legal unity does not mean that land on the one side and the villa on the other side could not be treated separately under contractual arrangements and bookkeeping aspects. It is, therefore, possible that the foreigner applies for the building permit, pays the villa erection separately and, as a result, the villa will not be accounted for in the balance sheet of the landholding company.
#6. Additional protection mechanisms are possible and advisable
The minority shareholding does not grant the foreigner the right of residence in land and villa. Whether the directorship in the company enables a right to occupy the property for free, is a corporate law and tax issue. In many cases, this remains a grey area which is not a topic for the shareholders, tax authorities or others.
A long-term lease (or usufruct) agreement between the foreigner and “his” company might not only mitigate this issue. It can give the investor additional comfort and an additional safety net if the corporate structure shows weaknesses in later years.
However, such a corporate-plus-lease structure has to be properly implemented in the overall investment structure. To simply register a free lease at the land office gives the investor stones instead of bread.
Even worse, as a pretty obvious nominee structure, such lease 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. The foreigner should even be aware that the lease terminates immediately on the day he passes away. Therefore, such a cheap makeshift requires some kind of unlimited blind faith which is rarely justified in Thailand.
#7. Cross-border tax planning and asset protection make the structure complete
Tax planning strategies are not the only reason to locate foreign investments outside of Thailand. A later de-investment could be done entirely outside of Thai borders and, if properly structured, without Thai tax implications.
To transfer the whole investment to the next generation or to a third party without the need for any registration at the local land office or the company register has a value of its own. This argument should be seen under the scenario of a future change of Thailand’s foreigner and other legislation.
To move assets offshore reduces the exposure of the wealthy foreigner to greedy wives, descendants being entitled to an inheritance, and other persons who show an interest in rich foreigners. Going offshore is a reasonable solution to all these issues.
The law firm advises on property transactions in the whole of Thailand if the foreigner does not prefer to assign a near-by legal office with a local mindset on foreign investments.
- Design of a tailormade property investment structure, taking into account the particularities of the real estate, the risk appetite and cost budget of the foreign investor, the available team of Thai participants and the long-term investment strategy
- Support and assistance in setting up a corporate structure for the investment, the design of lease agreements, usufructs and superficies, and the implementation of a comprehensive and integrated protection mechanism.
- Full-Scope due diligence for the land acquisition (Details at “The real estate due diligence in Thailand“)
- Legal advice and assistance on the licenses and contracts for the erection of the villa and other improvements of the land,
- Comprehensive domestic and cross-border tax structuring and asset protection mechanisms
- Supporting activities like accounting, audit, reporting, visa, etc.
Compared with the purchase price of the property, the legal fees for the design and formation of the investment 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.
Professional service offer from Bangkok
Assignments on real estate investments are one of the core business activities with a particular competence, long-standing experience, and unique market reputation of the law firm. PUGNATORIUS Ltd. typically provides these seven services:
- Investment structures for foreign property acquisitions
- Property due diligence examination
- Leasing transactions and protected lease schemes
- Industrial estates, resorts, factories
- Hotel and hospitality projects
- Property tax structuring
- Legal opinions and property investment reviews
Details are described at “Legal services and tax planning for real estate acquisitions and property developments.”