Thailand’s new small company legislation
UPDATE 14-12-16: The Commerce Ministry’s Business Development Department will soon seek Cabinet approval for a new law to allow individuals to establish a company on their own, in a move that is expected eventually to formalize around 2.74 million small and medium-sized enterprises in the business system. (The Nation)
It seems to be still unclear, whether the new corporation type is reserved
- for Thai individuals or whether a Thai company with a Thai majority shareholder is allowed to set-up a small daughter company.
- for a one shareholder structure only without the option to two or more shareholders
- for one small company per shareholder.
The new legislation seems to be come into force not before 2017. Therefore, there is some time for the government to adjust the small company law to the economic needs of Thailand.
Despite the lurid headline the intentions of the Department of Business Development to allow a single person to set-up a company is in the current stage just a plan. However, it was Victor Hugo who once said that nothing is more powerful than an idea whose time has come. Therefore, the “Incorporation of a Company by a Single Shareholder Act” has a promising future. This post puts the legislation in an international context and explains, how foreigners can use the small company to make their investment structure more robust.
Thailand stands at No. 96 in World Bank’s ranking for easily starting a business. It is no big surprise that the Kingdom, fiercely competing with its neighbors in the ASEAN Economic Community for investments and wealth, is considering to avoid complex registration procedures and to ease the establishment and maintenance of small sized companies. The brain behind the idea to propose an “Incorporation of a Company by a Single Shareholder Act” (working title) is the Chulalongkorn University and field surveys show an incredibly warm welcome by (Thai) company owners and (Thai) entrepreneurs. The basic idea of such small company is, above other aspects,
- to allow a single individual or juristic person to be a promoter and file an application alone to incorporate his small company,
- to have ad-hoc shareholder’s meetings (ordinary or extraordinary) without invitation requirement and invitation period,
- to relax accounting requirements as specified in the Civil and Commercial Code, Revenue Code and Accounting Act,
- to introduce additional documentation requirements for transactions between the small company and its single shareholder,
- to avoid an obligatory audit of the financial statements, if sales volume or income do not exceed a certain threshold amount,
- the option to upgrade the small company into a Co., Ltd., and (surprisingly) the option to downgrade an existing Co., Ltd. into a small company, or to merge small companies and transfer all shares to one shareholder.
Although the proposal is not yet finalized for the consideration of the commerce minister and the Thai Cabinet, in 2015 there had been euphoric forecasts that the number of registered companies will double from 620,000 to 1.4 million within the next two years. In a statement in July 2016, the DBD announced their expectation of 1.2 million companies.
Thailand’s company law landscape
In the grand scheme of things Thailand offers, like most countries, the entrepreneur the selection between four main business vehicles: sole proprietorship (sole trader), partnership, corporation, and branch of a foreign legal entity. Sole proprietorship and partnership result in personal responsibility for the company’s liabilities. Even a limited partner becomes jointly and unlimitedly liable for all the obligations of the partnership if he interferes with the management of the partnership (Section 1088 CCC).
For foreign direct investments, the Company Limited has been traditionally the “one-size-fits-all” solution. It is the one and only appropriate company form for foreigners to manage a bar in Pattaya, to hold a villa in Phuket, to run a law firm in Bangkok, to own a rubber tree plantation in Isaan and also for a multi-national enterprise with a huge factory in the Eastern Seaboard.
The Thai small company is mainly defined in the recent local press as a legal entity with one shareholder and each shareholder is restricted to one small company only. Apart from the small company, additional shareholdings in a partnership, Co., Ltd. or PLC are allowed. The limitation to a single shareholder seems to be a unique feature which significantly reduces the flexibility and scope of application of the small company.
The small company, a full-flexed legal entity, should not be mixed up with the sole proprietorship. It allows the clear separation of business assets and private assets and the private assets are protected from the creditors and business partners – as long as there is no fraud and the bookkeeping is properly done.
Learning from the mistakes of others and benefiting from their successes: The German “Unternehmergesellschaft”
Thailand’s company laws, at least Sections 1012 – 1195 of the Civil & Commercial Code, have been strongly influenced by the German legislation for the company limited (“GmbH”) and the German partnership (“Handelsgesellschaft”, “Kommanditgesellschaft”). Therefore, it makes sense to have a look into the German small company model.
Germany enacted in 2008 the small corporation as “Unternehmergesellschaft”, abbreviated “UG” (Entrepreneurial Corporation) as a small legal entity (Mini-GmbH). The UG has to be registered at the German commercial register, obtains a standard tax number and is subject to the regular corporate tax rate.
Companies formed under the standard protocol may only have one director and not more than three shareholders while there are no such limitations in a private limited company (“GmbH”). The minimum share capital is reduced from Euro 25,000 (roughly THB 1 million) to Euro 1 (THB 40).
The UG has a simplified, unbureaucratic and inexpensive set-up procedure with short standard documents, mainly just indicating the purpose of the company, the name of the board members and the list of shareholders. There is no requirement for a notarization – the notary public just has to certify the genuineness of the signatures on the formation protocol.
It is a legal requirement that the term Unternehmergesellschaft or UG is added to the company name to indicate, that the minimum share capital of a GmbH of Euro 25,000 has not been paid in yet. A UG can be upgraded later to meet the requirements for a GmbH and, as a consequence, change its name from UG to GmbH. A downgrade from a GmbH to a UG is not possible – and would not make sense business-wise.
The Mini-GmbH is not an independent new legal form: the UG is a GmbH to which only certain special provisions in the Act on German Limited Liability Companies apply. The UG is a sub-category of the German private limited company, a start-up model designed to make the formation of a private limited company easier and less risky for entrepreneurs. There are no additional requirements for foreign investors compared with a German shareholder.
International small company standards
Khun Pongpun Gearaviriyapun, director-general of the DBD, refers to the German model, but also to ten other jurisdictions which Thailand intends to take as reference and inspiration for its small company legislation. These are China, Japan, Singapore, Vietnam, U.K., USA, New Zealand, India, Canada, Netherlands, and Italy. Malaysia is known to be in a process to follow soon.
Comparing international legislation, there are a few typical characteristics which qualify a small(er) company (Source: Own research):
- A reduced minimum share capital, often combined with restrictions on profit distribution and the obligation to pay a certain percentage of its annual net profit into the reserve fund.
- A reduced number of minimum (or maximum) shareholders and directors. However, there are countless legislations which allow a big and fully flexed single shareholder corporation.
- Simplified, unbureaucratic and inexpensive set-up procedure, often resulting in standard bylaws and reduced corporate governance.
- In most legislations, there are no limitations concerning the business activities of the small company.
- Typically it is possible to upgrade the small company easily to the full flexed corporation without a complex restructuring process and tax burden.
Thailand has to prepare a handsome combination of these and other characteristics of its new company and the market will answer the question, if such package will be good enough to stimulate the economy.
Thailand’s new small company legislation – a light in the dark or dead on arrival?
As soon as a foreigner is involved, the corporate structure is getting complex (or high-risky or illegal). How could it get leaner and meaner under the new legislation? Just to allow a company with a single shareholder is certainly not worth the efforts. Substantial simplifications are needed badly, not further restrictions.
In the announcements and press reports, there is no notification that the small company legislation will come hand in hand with a more flexible foreigner legislation. Therefore, a small corporation with a foreign single shareholder would be deemed to be foreign under the Foreign Business Act and under the Land Code. All the known restrictions would apply.
While in Germany the main focus on a small company lies on a reduced share capital, this is no issue for a Thai company without foreign employees. And with respect to foreign employees, there is no indication yet that the Thai small company will offer a more economic solution for the requirement to pay in THB 2 Million per work permit fully and to employ four Thai employees with the red-tape and working space requirements involved.
The small company as a tool and module for foreign investment structures
Whether U.S. citizens can benefit under the U.S.-Thai Treaty of Amity from the new legislation, only time will tell. However, the small company can be an exciting tool and module in a broad scope of foreign direct investments into Thailand. These are just a few of investment structures which could benefit from the law change:
- It is one of the worst industry practices in Thailand to acquire real estate “in the name of the Thai spouse”. The foreign investor will feel more comfortable, if he stores in his safe-box not only the title deed of the land but also the share certificate and the blank signed share transfer instrument of the small company that owns the land, even if the Thai spouse is registered as the single shareholder. An additional layer of protection in an insecure investment structure.
- Many foreigners do business inThailand as 49% minority shareholder in a limited company. If the structure is plain and cheap, their 49% legal position is under a crisis scenario not much better than a 0% shareholding. Therefore, it is no bad idea to consider to downgrade the existing limited company to a small company which results in an even more simple set-up and lower corporate maintenance costs. The requirement that the risk appetite is endless and the emotional relationship with the shareholder secures the investment alone, is at least outside of Bangkok often met.
- One of the main disadvantages investing in real estate as a long-term tenant is, that the rent agreement does not survive the tenant if he passes away. If the co-tenant is a small company, this guarantees that the rent agreement will be valid for the full 30 year period and protects the investor against a total loss, should he pass away.
- A cheap and simple corporation in a non-low tax country is an interesting tax planning tool. The profit of the small company is not cashed out to the shareholder and has not to be taxed abroad under the worldwide income principle (the foreign CFC legislation has to be carefully observed).
- If the foreign investor has no third shareholder to set-up a Co., Ltd., he might use a small holding company as one of the three required shareholders.
- If the draft of the law remains unchanged and, therefore, the single shareholder can be a corporation, it would be an easy option for each and every limited company (whether with 51% Thai majority or not) to use such special purpose vehicle to separate business fields, risks and accounting in an own legal entity.
At the end the worst-case-scenario for Thailand: If she small company act, aka. “Incorporation of a Company by a Single Shareholder Act” is misused to aggressively discriminate foreign investors, because it gives only Thai the opportunity to avoid an audit of the financial statements and other benefits which have no relationship with the numbers of shareholders, such double standards would put Thailand in a bad light on the international level. The professors at Chulalongkorn University should be well aware that they take over a great responsibility.