News

Foreign Investment Laws in Thailand

Like the proverbial phoenix, Thailand has emerged from the ashes of the currency crisis of the late 1990s to become one of Asia’s most promising economies today.

 

On 31 July 2003, Thailand completed an early settlement of its remaining obligations to the International Monetary Fund (‘IMF’) under a Stand-By Arrangement. The country’s ability to repay its debts to the IMF ahead of schedule has been attributed to Thailand’s strong macroeconomic and balance of payments performance underpinned by a sound policy framework.  

 

With a large hinterland, inexpensive and hardworking workforce, a burgeoning domestic market and a government which has made clear its strong commitment to economic liberalisation and growth, Thailand is a natural choice for the foreign investor.  

 

Thailand–Singapore Relations

Singapore and Thailand enjoy a close relationship founded on historical ties. In recent years, common strategic and economic interests have brought the two countries closer. Bilateral trade is strong and continues to grow at a firm pace.  

 

In 2002, bilateral trade registered at S$19.9bn, a growth of 6.2% from the previous year. Thailand was the seventh largest trading partner of Singapore, while Singapore was Thailand’s fourth largest, after only Japan, the United States and China. With some 40 projects worth US$314.5m approved for promotion by the Office of the Board of Investment (‘BOI’) (with investments principally in manufacturing industries such as tooling and dies, electronics and metal-stamping), Singapore was also Thailand’s second largest investor in terms of approved projects in 2002, after only Japan. This figure marked an increase of 45.9% from the year before. 

 

In February 2002, Thailand and Singapore launched the Singapore–Thailand Enhanced Economic Relationship (‘STEER’). STEER envisages close integration in the form of ‘one economy, two countries’. In August 2003, Singapore and Thailand embarked on this aspiration with the signing of several memoranda of understanding (‘MOUs’). These early arrangements sought to promote growth in trade areas such as food and agriculture, the automotive industry, tourism, transport, small and medium enterprises and the respective stock exchanges. The potential synergies from STEER are promising. 

 

Apart from bilateral relations, both countries are firm advocates of trade liberalisation and the benefits it conveys. Thailand and Singapore are firm advocates of ASEAN economic integration and are amongst the leading participants at the World Trade Organisation (‘WTO’), the Asia Pacific Economic Cooperation (‘APEC’) and the Asia Europe Meeting (‘ASEM’).  

 

Due to the perceived slowdown in the global movement towards trade liberalisation, including the recent setback at Cancun, Mexico, Thailand and Singapore have each increasingly begun to turn to bilateral Free Trade Agreements (‘FTAs’). Singapore has concluded FTAs with the United States, Australia, New Zealand and Japan, with several others on their way. Thailand on its part has concluded FTAs with China and India, with plans to begin discussions with the United States. 

 

There seems to be no better time than now to invest in Thailand. Yet, the first-time investor often perceives difficulties with local legislation and practices.  

 

For example: 

 

•       What are the applicable laws that govern foreign investments in Thailand? What kind of business can a foreign investor invest in? Are there any capital requirements for foreign investors? Which investment vehicle is best suited to the needs and objectives of the particular investor? What laws govern joint ventures?

 

•       Are there any business incentives for the foreign investor? How best can the foreign investor enjoy such incentives?

 

•       Are there exchange-control regulations in Thailand? How can profits or capital be effectively repatriated? How best should a foreign investment be structured to reduce tax exposure?

 

•       Do customs regulations apply? Are there any restrictions on the import or export of goods? What duties are payable?

 

•       Can the foreign investor own real property in Thailand? What forms of financing are available to the foreign investor?

 

•       What rights and liabilities do directors, managers and shareholders have in Thailand?

 

•       What are the applicable laws and regulations on immigration and work permits?

 

•       What are the features of the justice system, in particular, civil litigation in Thailand? How best can the foreign investor’s intellectual property rights be protected? What remedies are available if there is an infringement of these rights? Are there any competition laws in Thailand? 

 

Whilst it is not possible here to deal with each of these issues in any detail, this article aims to provide the prospective foreign investor with a basic introduction to the statutory regime governing foreign investments in Thailand. The availability of business incentives and the principal types of corporate vehicles adopted by most foreign investors are also discussed briefly. It is hoped that with this introduction, the prospective investor will appreciate the relative ease with which investments can be made in Thailand and from there, take his interest to a practical level. 

 

Statutory Regime Governing Foreign Investments

Foreign Business Act

As is the case in many Asian countries, Thai law provides restrictions on foreign ownership in various industries, including banking, insurance, transportation and commodities.  

 

The principal statute governing foreign investments in Thailand is the 1999 Foreign Business Act (‘FBA’), which repealed the 1972 National Executive Council Announcement No 281 (often known as the Alien Business Law). 

 

Regulatory authorities

Apart from legislation, as a condition for the grant of promoted investments status (which status conveys incentives and privileges), the BOI while is quite liberal lately, still sometimes requires foreign investors to enter into a joint venture or partnership with a local Thai entity.  

 

Who is a foreigner?

Under the FBA, a ‘foreigner’ is defined as: 

 

(i)    a natural person who is not of Thai nationality;

 

(ii)   a juristic entity that is not registered in Thailand;

 

(iii) a juristic entity incorporated in Thailand with foreign shareholding accounting for one-half or more of the total shares capital;

 

(iv)   a limited partnership or ordinary registered partnership whose managing partner or manager is a foreigner; and

 

(v)    a juristic entity incorporated in Thailand with half or more of its shares capital owned by the juristic entity in (iii) and (iv) above. 

 

Which businesses are restricted?

The FBA categorises businesses for which foreign participation is either totally prohibited or restricted by the requirement of a Foreign Business Licence into three schedules (found at the Appendix to this note). The overriding aim of these prohibitions and restrictions appear to be effective control of foreign participation in different business activities with a view of protecting the Thai commercial community. While Schedule 1 businesses are totally prohibited from ‘foreigners’, Schedules 2 and 3 are subject to differing degrees of restriction. To ensure that these schedules are current, annual reviews of these schedules are conducted by a committee and changes proposed to the business activities contained in each schedule are recommended to the Minister for Commerce. 

 

Schedule 1 businesses are closed to foreign investors unless exempted by a special law or treaty. These are business activities which the state deems should be absolutely closed to non-Thai citizens, and not unexpectedly, include activities such as dealings in land, the mass media and exploitation of natural resources.  

 

Schedule 2 businesses are permissible only with approval of the Minister for Commerce and the Cabinet. These are businesses that impact on national security, culture or the environment. Generally, Schedule 2 businesses are those owned by foreigners which were already in operation before the FBA was enacted.  

 

Schedule 3 businesses are those in which Thai citizens are not ready to compete against foreigners, and are permissible only if the Director-General of the Commercial Registration Department grants permission and the Foreign Business Board, a committee made up of senior members of public and private agencies, approves. In practice, the Commercial Registration Department does not grant a licence unless it takes the view that local entities are unable to provide a competent alternative.  

 

How to apply for a Foreign Business Licence?

To obtain a Foreign Business Licence in Schedules 2 and 3, the foreign investor applies to the Minister for Commerce and the Director-General of the Department of Business Development respectively. From the date the application is first made, there are strict timelines within which decisions have to be made and the Foreign Business Licences issued if approved. If the application is denied, there are also strict timelines within which the reason for the rejection must be given to the applicant. An appeal can be made to the Minister for Commerce against a rejection of an application for a Schedule 3 Foreign Business Licence.  

 

The Ministry for Commerce frequently appends conditions to the grant of a Foreign Business License. Such conditions may include a minimum capital investment of 3m baht for a certain period of time. Foreign investors can participate in businesses outside the three schedules in the FBA if a minimum capital investment of 2m baht (or more, depending on the relevant ministerial regulations) is satisfied. No minimum capital requirement is enforced for reinvestments.  

 

Lifespan of the Foreign Business Licence

It appears that once issued, the Foreign Business Licence will not expire unless the foreign investor ceases operations of the approved business, or the licence is revoked.  

 

Exemptions from FBA

There are exceptions to the licensing regime imposed by the FBA. For example, a foreign investor may be able to gain exemption from the licensing regime provided: 

 

(a)  It obtains BOI promotion status. Other than the typical administrative and reporting duties generally imposed on all companies, BOI-promoted foreign investments or businesses are not required to obtain the Foreign Business Licence in order to participate in a business otherwise restricted. The BOI normally grants promoted status to foreign investors only if they are in a joint venture with a local Thai entity.

 

(b)   It qualifies as a promoted investor under some other legislation, such as the Industrial Estate Authority of Thailand Act.

 

(c)   It is American or an American-owned entity which has been registered under the Treaty of Amity and Economic Relations between Thailand and the United States (‘AER’). The principal effect of the AER — a product of the close political ties between the two countries during the Vietnam conflict — is that equal (or ‘national’) treatment is granted by each country to the citizens of the other. To enjoy national treatment pursuant to the AER, American citizens or entities must apply to the Ministry of Commerce for a Treaty Protection Letter. It must be proved to the satisfaction of the Ministry that the majority of the shareholders or partners of the entity are American citizens, or that the entity was incorporated in the United States. Obviously, various businesses such as communications, transportation and finance, are excluded from the AER. Further, the right to participate in otherwise-restricted businesses is separate from other rights necessary to operate such businesses effectively, for example, the right to a visa or work permit.  

 

Types of Corporate Entities

Thai law allows various types of corporate entities: 

 

•       sole proprietorships;

 

•       partnerships;

 

•       private limited companies and public limited companies;

 

•       branches of foreign corporations; and

 

•       representative or liaison offices of foreign companies. 

 

The foreign investor is advised to obtain proper legal advice before deciding on a corporate structure. A foreign investor who opts to form a sole proprietorship is unlikely to succeed in obtaining a work permit. Apart from the FBA, specific legislation may require that a particular corporate structure be in existence to undertake certain activities, such as insurance and banking. Different types of partnerships imply varying tax advantages and liabilities.  

 

Private limited companies

The foreign investor’s favourite corporate vehicle is the private limited company. This is because the Articles of Association can be altered with relative ease to provide for more safeguards to protect the interests of the minority foreign investor. Private limited companies are regulated by the Civil and Commercial Code. 

 

Not unlike its Singapore counterpart, a private limited company in Thailand founds its legal existence in the registration of a Memorandum of Association (articles of incorporation) and Articles of Association (by-laws). A board of directors manages the company and the liability of each shareholder is limited to the remaining unpaid amount, if any, of the value of their shares. The legal regime on shareholders’ meetings, the appointment of auditors, directors’ duties is also generally similar. 

 

There are, however, interesting features of a limited company under Thai law, which may sometimes present practical problems for the foreign investor. For example, Thai law requires all shares to be subscribed to, at least 25% of the subscribed shares to be paid up and at least seven shareholders for each company. Another interesting feature is the requirement that there be two consecutive shareholder meetings to pass a special resolution. Three-quarters of the first meeting and two-thirds of the second meeting must vote in favour of the resolution.  

 

Joint ventures

Foreign investors may enter into joint ventures with local Thai entities. As stated above, this is frequently done by a foreign investor seeking to gain promoted status from the BOI. It should be pointed out that one of the typical conditions attached to the grant of promoted investor status is the requirement that the foreign investor not take a majority interest in the joint venture. It is also important to note the Bank of Thailand (the central bank) may require copies of the joint venture agreements to be furnished if the foreign investor intends to repatriate profits. 

 

Business Incentives

The BOI offers very attractive business incentives for foreign investors. Business incentives are also available from other organisations such as the Industrial Estate Authority of Thailand. 

 

BOI

The BOI, a body constituted under the Office of the Prime Minister, was established by the 1977 Investment Promotion Act to encourage foreign investment by administering incentives to investors starting business activities deemed desirable by the Thai government. The members of the BOI include the Prime Minister, various Cabinet Ministers and senior government officers. Enterprises that are deemed conducive to the nation’s economic and social progress (like technology and finance investments) are promoted. The BOI maintains a transparent list of activities which it promotes and is said to be open to considering activities outside the list. Factors such as whether the prospective business activity would strengthen Thailand’s balance of payments, support domestic resource development, increase employment and encourage further industrial development are considered. 

 

Incentives come in the form of privileges from the BOI. The BOI is empowered to grant very attractive incentives, including tax benefits to both the foreign investor or joint venture entity and its shareholders, employment permits and visas for employees and their dependants, permission to the promoted entity to own real property required for the business operations, permission to remit foreign currency abroad, special exemptions from or reductions to the usual customs duties and even undertakings by the state not to nationalise the promoted entity or its assets or restrictions on government and government-related entities from importing competitive products to those produced by the promoted entity. 

 

Obviously, in return for these incentives, the BOI prescribes minimum capital and local Thai participation criteria for most promoted businesses. The investor seeking promotion from the BOI is usually given about six months to meet the BOI’s qualifying conditions. 

 

Conclusion

The undecided prospective investor should heed the Thai proverb to ‘use shrimps to bait a perch’ — a call for one to be prepared to make a small sacrifice to obtain a larger gain.  

 

The time and circumstances are ripe for more Singapore investors to venture into Thailand. STEER activities and trade missions led by IE Singapore have led to many Singapore companies including Thailand becoming a key part of their production network. Singapore investors can turn to institutions such as IE Singapore, the Singapore–Thai Chamber of Commerce and the BOI for advice, updated market information and business-matching. 

 

The Singapore automotive industry’s initiatives to provide sophisticated automotive parts to the burgeoning Thai automotive industry is a good example of a creative exploitation of complementary competencies which helps to plug Thai capability gaps while ensuring Singapore companies move up the value creation chain. The win-win effect aids both countries in competing with other emerging economies.  

 

As Prime Minister Thaksin Shinawatra said to Prime Minister Goh Chok Tong at the 8th ASEAN Summit in Phnom Penh in November 2002, ‘Singapore and Thailand can move faster and “tango” together’.  

 

Appendix A

Schedule 1

Strictly prohibited to aliens. 

 

These are ‘businesses that foreigners are not permitted to do for special reasons’: 

 

•       Newspaper undertakings and radio and television station undertakings.

 

•       Lowland farming, upland farming, or horticulture.

 

•       Raising animals.

 

•       Forestry and timber conversions from natural forests.

 

•       Fishing for aquatic animals in Thai waters and Thailand’s Exclusive Economic Zone.

 

•       Extraction of Thai medical herbs.

 

•       Trade in and auctioning of Thai ancient objects or ancient objects of national historical value.

 

•       Making or casting of Buddha images and making of monk’s bowls.

 

•       Dealing in land.  

 

Schedule 2

Prohibited to aliens unless: 

 

(1)   specific permission is granted by the Ministry of Commerce, together with;

 

(2)   a Cabinet resolution;

 

(3)   minimum of 40% of all shares are held by Thai persons or non-alien juristic entities (this may be reduced to 25% on a case-by-case basis); and

 

(4)   minimum of 40% of the directors are Thai.  

 

These are ‘businesses concerning national security or safety with an adverse effect on art and culture, customs, or native manufacture/handicrafts, or with an impact on natural resources and the environment’. 

 

Group 1: Businesses concerning national security or safety: 

 

•       Production, disposal, sale, and overhead of:  

 

(i)   Firearms,ammunition, gunpowder, and explosives.

 

(ii) Components of firearms, gunpowder, and explosives.

 

(iii)     Armaments and military vessels, aircraft, or conveyances.

 

(iv)      All kinds of war equipment or their components. 

 

•     Domestic transport by land, water, or air, inclusive of the undertaking of domestic aviation.  

 

Group 2: Businesses that could have an adverse effect on art and culture, customs and native manufacturing/handicrafts. 

 

•       Dealing in antiques or objects of art and works of art, and Thai handicrafts.

 

•       Production of wood carvings.

 

•       Raising silkworms, producing Thai silk thread and weaving, or printing patterns on Thai silk textiles.

 

•       Production of Thai musical instruments.

 

•       Production of articles of gold or silver, nielloware, nickel-bronze ware, or lacquerware.

 

•       Production of crockery and terra cotta ware that is Thai art or culture.  

 

Group 3: Businesses concerning natural resources and the environment. 

 

•       Production of sugar from sugarcane.

 

•       Salt farming inclusive of making salt from salty earth.

 

•       Making rock salt.

 

•       Mining, inclusive of stone blasting or crushing.

 

•       Timber conversions to make furniture and articles of wood.  

 

Schedule 3

Prohibited to aliens unless: 

 

(1)   permission is granted by the Director General of the Department of Commercial Registration, Ministry of Commerce, and

 

(2)   approval of the Foreign Business Board is obtained.  

 

These are ‘businesses in which Thais are not ready to compete in undertakings with aliens’: 

 

•       Rice milling and production of flour from rice and farm crops.

 

•       Fishery, limited to propagation of aquatic animals.

 

•       Forestry from replanted forests.

 

•       Production of plywood, wood veneer, chipboard, or hardboard.

 

•       Production of natural lime.

 

•       Accounting service undertakings.

 

•       Legal service undertakings.

 

•       Architectural service undertakings.

 

•       Construction, except construction of things that provide basic services, both to the public with respect to public utilities or communications and which require the use of special instruments, machinery, technology or expertise in construction and a minimum capital of the alien of at least 500m baht.

 

•       Brokerage or agency undertakings, except:  

 

(i)    Trading in securities or services concerning futures trading in agricultural commodities, financial instruments, or securities.

 

(ii)   Trading in or the procurement of goods or services needed for production by, or providing the services of, an enterprise in the same group.

 

(iii)  Trading, purchasing (for others) or distributing or finding domestic or overseas markets for selling goods made domestically or imports as an international trading business, with a minimum capital of the alien of at least 100m baht.

 

(iv)   Other lines of business stipulated in Ministerial Regulations. 

 

•       Auctioning, except:  

 

(i)    International bidding that is not bidding in antiques, ancient objects or objects of art that are Thai works of art, handicraft or ancient objects, or of national historical value.

 

(ii)   Other types of auction, as stipulated in Ministerial Regulations. 

 

•       Domestic trade concerning indigenous agricultural produce or products not prohibited by any present law.

 

•       Retail trade in all kinds of goods with an aggregated minimum capital of less than 100m baht or a minimum capital for each store of less than 20m baht.

 

•       Wholesale trade in all kinds of goods with a minimum capital for each store of less than 100m baht.

 

•       Advertising undertakings.

 

•       Hotel undertakings, except for hotel management services.

 

•       Tourism.

 

•       Sale of food or beverages.

 

•       Plant breeding and propagation, or plant improvement undertakings.

 

•       Doing other service businesses except for service businesses prescribed in Ministerial Regulations.