Thai investors in foreign companies
Legal aspects of a Thai outbound investment
Thailand’s corporate legislation allows for outbound investments. That can be accomplished in the form of an independent affiliate (foreign company), as a branch of the Thai legal entity or by a financial investment abroad from a Thai company. Typically, legal hurdles abroad are foreign ownership restrictions and restrictions to acquire land, minimum capital requirements and exchange control regulations, as well as business license limitations.
Thai outbound investments have to take into consideration its own Thai laws as well. Foreign companies who intend to enter into an equity or debt deal with Thai business partners should, therefore, take the legal and regulatory requirements and tax structuring aspects of a Thai outbound investment into consideration. This is of particular importance if the business deal allocates these tasks, responsibilities, and costs to the company abroad.
Under the Foreign Exchange Regulation Reform as of 2017, document requirements (investment explanation letter, investment evidence, audited accounts of the target, etc.), qualified company requirements, and other paperwork hurdles have been slightly relaxed. However, Thailand’s complex licensing system is not an easy playground for foreign targets of Thai investments.
#BizHumanRights: 3000+ Cambodian villagers will appeal #Thailand court decision rejecting their class action lawsuit against Mitr Phol 4 rights abuses. Govt must ensure Thai #corporations are held accountable 4 adverse impacts of their outbound investments!https://t.co/u0XCKp7M0Z pic.twitter.com/sON3QejBds
— Manushya Foundation (@ManushyaFdn) July 12, 2019
Round-tripping FDI is the process where Thai companies invest in a foreign entity intending to repatriate the funds into Thailand as an “indirect foreign direct investment”. Round tripping is mostly channeled through offshore financial or transshipping centers. In such cases, Thai companies round trip their investments to benefit from preferential treatments reserved for certain countries and their firms. This might enable investment promotion by Thailand’s BOI that is available for foreign-sourced activities only. Other purposes and intentions might apply.
Cross-border and domestic Thai tax aspects
Under Thai tax legislation, outbound income is subject to Thai taxation. This generally includes dividends from foreign companies, branch profits, capital gains, and even unrealized foreign exchange gains. However, dividends from foreign shareholdings are tax exempted under certain conditions (Royal Decree 442: 25% voting rights, six months shareholding, 15% minimum taxation in the foreign jurisdiction).
Offshore investments: It is nowadays a merely international standard to grant tax exemption on dividends from offshore investments. This general approach has certain terms and conditions which should be analyzed on a case-by-case basis. Other relevant tax aspects for outbound investments are the taxation of capital gains, the residence of foreign subsidiaries depending on the place of effective management, CFC (controlled foreign company) rules, the taxation of interests on borrowings to finance overseas investments, and other issues which require an experienced tax advisor.
Outward direct investment and lending abroad
Equity and loan investments: A Thai company is allowed to invest in an overseas business entity whose shares are held by the Thai company by not less than 10%, or to invest or lend to affiliated business entities abroad as necessary. A Thai company is allowed to lend to non-affiliated business entities abroad up to US$ 50 million per year. A Thai natural person is authorized to invest in an overseas business entity whose shares are held by that person by not less than 10% or to invest or lend to its affiliated business entities abroad as necessary.
Fund transfers for such investment or lending to business entities abroad must be in foreign currencies only, whereas fund transfers for investment or lending to business entities in Vietnam or Thailand’s neighboring countries for trade and investment in Thailand or those countries can be made in foreign currencies or in Thai Baht.
Certification: Frequently raised aspects are foreign investment authorization certificate (FIAC) respectively foreign investment approval license (FIAL), business project security license (BPSL), legal hurdles under Thailand’s foreign investment regulatory legislation, and money laundering clearance as pre-commercial regulatory steps for a joint venture or financial closing. The law firm possesses a wealth of experiences and broad knowledge to advise and assist with these matters.
Implications of the Thai Business Security Act 2015/2018
BSA: In July 2016, Thailand introduced the Business Security Act (BSA). It expands the types of assets that Thai entities can use as security for their financing. It allows a business security agreement to use a business or assets used in business including machinery and inventory as security. The Act requires a security enforcer which has to be licensed and registered with the Business Security Registration Office of the Department of Business Development (DBD). In February 2018, the list of qualified security receivers under the Business Security Act has been extended to include foreign entities.
Business security contract: Under a business security agreement, the security provider (borrower) uses certain assets as security for debt repayment, without the need to deliver these assets to the lender (security receiver). The business security contract has to be registered with the DBD (business security registration office) for a registration fee of 0.1%, 1%, or 2% but no more than THB 200,000.
Avoiding or reducing up-front costs: Whether an outbound foreign investment falls under the BSA regulations has to be examined on a case-to-case basis. The legislation is widely misunderstood and professional advice can avoid unnecessary license fees. Licensing costs are in some cases grounded on the refinancing by the investor or requirements of his consortium, although this might be explained otherwise. A mutually agreed cost allocation agreement might avoid the requirement for upfront payments of the foreign target company.
Professional advice on business dealings with Thai companies
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. The law firm advises companies abroad how
- to screen the potential Thai investor for his economic and political background, financial potential, business reliability, and identity theft,
- to structure, set-up and maintain joint-venture or other business cooperation with Thai companies, banks, and investors,
- to fulfill the documentation and reporting requirements for Thai outbounds financings and money transfers,
- to acquire the required investment licenses, permissions, and clearance papers under Thai laws,
- to participate in the BOI outbound investment promotion schemes, and
- to tax-efficiently structure the joint venture or investment venture in Thailand and abroad.
Initial professional support offer: For foreign target companies, Thai outbound investments have often an unusual and unfamiliar structure with many unknowns. For these cases, PUGNATORIUS Ltd. offers a flat consultancy fee for initial advice and due diligence based on previous experiences with successful Thai outbound foreign investments. By this, it can be assured that the particular Thai investor is real, the investment offer is legit, initial costs are inevitable, and compliance requirements can be met. If it makes sense to go ahead with the investment project, the law firm’s scope of services also includes the expected list of necessary tasks, required licenses and approvals, the general work-flow, expected timeline, and government fee calculation. Free advice on any of the aspects mentioned above is not available.
Professional support on Thai OFDI for Thai companies and foreign targets is further explained at “Thailand goes abroad: Thai outbound investment support.”