Seven steps to build or buy a villa in Thailand
Foreign property acquisitions in the land of smile
Thailand’s islands and coastal regions provide the best environment for an investment in a villa with direct or indirect access to the beach. The own beach villa in Phuket, Krabi, Koh Samui, Koh Phangan, Koh Chang, Hua Hin or elsewhere should be a piece of paradise in a peaceful surrounding. A first or second home for well-off families and wealthy individuals from all over the world.
Property developers offer a comprehensive package to buy and build land and villa. The parcel itself and main components of the construction are already pre-selected and the investor has a certain degree of flexibility and decision making power to adjust the property in accordance with his needs and wishes.
There is obviously never ever a “zero risk” situation in Thailand. Right actions for the future are the best apologies for the wrong ones in the past. But it is preferable to avoid the typical rookie mistakes which are made by foreigners with high-risk tolerance.
As good as it gets: Seven steps to secure your place in paradise
#1. Purchase price: Foreign investors deem typically themselves to be fully fit to negotiate the total investment amount without the need for a local counselor. However, they have only a rough understanding of the profit margin in the Thai property markets, the adjustment screws how to get a better deal, and the right time and approach to reduce the whole investment. Without a deep market and legal knowledge, they are easy prey by giving millions of Baht away without a good reason. Structured property investments are focussed on a high return. Some details are described in our article “Rental guarantees, timeshares, and fractional ownership models“.
#2. Thai Company: To acquire land and villa through a nominee is described at “Landownership under Thailand’s incomprehensible nominee legislation“. Many problematic property investment structures have not been taken up by the government for many years. This does not mean that they are future-proved in case of more precise enforcement of existing laws.
The company formation to hold the property can be done cheap and easy, or solid and protected. There are important differences and the foreigner should be aware of the various options he has, instead of accepting a house of card dominated by unknown Thai locals without effective foreigner-protection. Details are available at “Seven steps: Company formation in Thailand“.
A leasehold structure is acceptable if the investor fully understands that Thailand has no leasehold legislation and the term stands for a rental contract only. After reading “Crazy little thing called lease“, it is obvious that additional protection is meaningful.
#3. Investment structure: A foreign property investment needs more than a standard corporation. It requires a sustainable and future-proofed investment structure. This means that the Thai Co., Ltd. has to be combined with additional elements and a solid protection package, (i) on the corporate level, (ii) on the shareholders level, and (iii) by additional contracts and arrangements.
The investment structure of foreign property acquisitions has to be reasonable compared with the total value of the investment. A high-value villa, basing on an unprotected and vulnerable structure, is same same as a bungalow on an iceberg. To neglect this aspect thoughtlessly and intoxicated by the beauty of the beach view, is costly in the long-term.
There are good reasons to avoid the villa on the company’s balance sheet. To enhance the line of defense against the total loss of investment by a usufruct or a superficies needs detailed explanations and sophisticated advice, but is essential for a future-proofed investment.
Under Thailand’s foreigner legislation, a landowning Co., Ltd. does not need to have additional business activities to avoid the allegation of a nominee structure. However, if the company owns the villa without making profits, this might be deemed taxwise as a zero-rent lease-out to the company’s director. For this, it makes no difference whether a foreigner holds a minority share or not.
#4. Due diligence: The due diligence examination is the key success factor for property acquisitions. Never take “no problem!” as an answer. Thailand is infamous for fake land documents, incorrect registrations, and illegal buildings. The seller might regularly pay T-money with respect to certain property issues to keep the officers outside of the door. It makes sense to well understand what will happen if that stops. And whether the foreigner has to fear stricter enforcement of building and environmental laws. Details on the property due diligence can be found at “Seven requirements: The prudent real estate due diligence in Thailand“. Secure your piece of paradise.
#5. Drafting and negotiation: The transaction requires some paperwork, mostly in the Thai language. Everything is negotiable – all the time. So-called industry standards should be seen as a warning sign to do it better than the average naive investor. Land purchase agreements frequently indicate a Baht amount below the informally accepted purchase price. The legal invalidity of such arrangements can result sooner or later in substantial legal problems. Also, the foreign investor is involved as partner-in-crime of a tax offense, the seller might not be within the reach of Thai legislation, but the property deems as security for retrospective tax payments, penalty interests, and fines.
#6. Signing and closing, payment and registration: The closing of the transaction is much more than an administrative task. The investor should have full control over the steps taken at the land office, even when he – as a foreigner – is not allowed to directly participate.
#7. Tax structuring: Any property investment has important tax issues. For the foreigner, the three main aspects are (i) to minimize the tax burden of the acquisition under Thai and his local legislation, (ii) to have a long-term tax planning for a later exit from his investment in the land of smile, and (iii) to avoid any tax liability for a possible non-compliance by the seller, who might live abroad when the tax officers ring the bell at the villa door.
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.”