A foreign investor has a variety of business structures to choose from when doing business in Thailand. The type of entity an investor chooses will depend on what best suits the particular needs of that investor. Some of the legal and commercial issues to consider include the following:
- Local law restrictions: Thailand has an Alien Business Act, B.E. 2542 commonly known as the Foreign Business Act (FBA) that restricts businesses that are 50% or more foreign-owned from engaging in various scheduled businesses absent certain exceptions. Having a local entity is also often a practical necessity to address Thai work permit restrictions.
- Delegation, specialisation and local knowledge: a local “partner” (or shareholder) may have specialised knowledge of the local market and access to suppliers and customers which is not available to a foreign investor;
- Separation and legitimacy: limited liability companies help insulate liability and may provide legitimacy while partnerships are generally less useful for these purposes; and
- Tax issues: a local subsidiary can, for example, help avoid the establishment of a “permanent establishment” for tax purposes. An investor’s tax liability can vary significantly depending upon the form of the entity used for investment.
The most common business entities used in Thailand are:
- private and public limited companies;
- registered and unregistered ordinary partnerships; and
- limited partnerships.
In addition to these business entities, there are other vehicles (e.g. a franchising relationship, a contractual joint venture) that a foreign investor can consider for doing business in Thailand.
A private limited liability company is commonly used by persons desiring a more permanent business in Thailand. Up until 1 July 2008, a private limited liability company was required to have at least seven shareholders. Starting 1 July 2008, a private limited company only requires three shareholders. A limited liability company is managed by a board of directors responsible to the company’s shareholders, and there are certain statutory requirements obligating the directors to hold a board of directors meeting to pass certain resolutions, such as in connection with the company’s annual meeting of shareholders. Amendments to Thailand’s Civil and Commercial Code (CCC) also introduced other changes to the formation and governance of private limited companies in Thailand. For example, under the most recent amendments to the CCC, there are now publication and mailing requirements with respect to shareholders meetings. These requirements appear to be intended to prevent private limited companies from backdating shareholders meetings. This change has, among other things, pressed companies to call and hold shareholder meetings, particularly the required annual general shareholders meeting, in a timely fashion. Some businesses have complained that the publication requirement is overly burdensome, however, and the Department of Business Development (DBD) has proposed to amend the CCC in order to limit the application of this requirement.
A public limited liability company is an entity incorporated under the Public Limited Companies Act, B.E. 2535, and offers its shares for sale to the public. Some, but not all, public limited liability companies list their shares on the Stock Exchange of Thailand (SET). At least 15 natural persons are required as promoters of a public limited liability company.
Although limited companies provide limitations on liability, directors of limited companies can be presumptively liable for the acts of the company under several Thai laws, such as the Customs Act, Trade Competition Act and the Revenue Code. In addition, amendments to Thailand’s Securities and Exchange Act that came into force on 1 September 2008 provide more detail on the duties directors of listed companies owe to shareholders of listed companies and prevent directors from using shareholder ratification as a means to protect directors from liability for acts or omissions committed in bad faith or with gross negligence that have damaged the company.
Three forms of partnerships are permitted in Thailand, namely, an unregistered ordinary partnership, a registered ordinary partnership and a limited partnership. These three differ in the liabilities of the partners.
In an unregistered ordinary partnership, all the partners are jointly and severally liable for all of the obligations of the partnership. Since this type of partnership is not registered with the Ministry of Commerce, it is not treated as a juristic entity and each partner pays tax according to the rates applicable to that individual partner.
A registered ordinary partnership is registered with the Ministry of Commerce and is thus a juristic entity, with an identity separate from that of its individual partners. All of the partners are jointly and severally liable for all obligations of the partnership, but the liability of a partner for the obligations of the partnership ends two years after that partner leaves the partnership.
A limited partnership consists of limited and general partners. Only the general partners can be managing partners who represent and manage the limited partnership. The liability of the limited partners is limited to their respective contributions to the partnership (unless they interfere with management), but the liability of the general partners is unlimited. Generally, a limited partnership must be registered at the Registration Office in the province where its head office is located. Until registration, the limited partnership remains an ordinary partnership for legal purposes and all of the partners continue to be jointly and severally liable for the obligations of the partnership. Under recent amendments to the CCC, a limited partnership can be converted to a limited liability company.
In Thailand, joint ventures are creatures of contract. They have no legal personality. They are formed by contract between one entity (e.g. a company or a limited partnership) and another entity and exist only for a specific project or venture. In terms of tax liability, however, the Revenue Department treats joint ventures as juristic entities. Joint ventures must therefore register for a taxpayer identification card and value added tax certificate if the business of the joint venture is subject to value added tax.
A joint venture is defined in the Revenue Code as “a business or profit-seeking enterprise carried on jointly by a company or registered partnership and another company or registered or ordinary partnership or body of persons or natural persons.” That is, the work is done jointly by the joint venture and the profits are shared, on some agreed basis, by the joint venture, which profits are then distributed to the partners. The joint venture pays corporate income tax at 30% on net profits. The profits are then distributed to each of the partners. A company incorporated in Thailand or a foreign company doing business in Thailand, i.e. one that has a Thai branch office, and which shares equally with its partner in the joint venture’s distributions, is exempt from tax on the distribution. The Thai branch office, upon remitting its profits abroad to the head office, will be subject to withholding tax.
Consortiums are partnerships between two or more participants where each participant performs separate work, preferably set out in a main contract with a client or in a consortium agreement, and the participants share the fees, that is, the gross receipts, rather than profits, according to the respective work performed by each participant. The work must, therefore, be capable of being separated between the participants. A consortium is not a taxable entity under the Revenue Code. Rather, each participant in the consortium is taxed separately on its net profits. Further, each participant in a consortium (but not the consortium) must register for value added tax (if the business is subject to value added tax), obtain a taxpayer ID number (for purposes of corporate income tax) and make the appropriate tax filings.
Operating a branch office of a foreign company in Thailand is uncommon since the FBA precludes such an entity from various types of activities. A further drawback is that the branch is considered the same legal entity as the head office, so that it is not possible to obtain a tax deduction for remittances to the head office of interest and royalties, and, as to other expenses, the deductions are very restrictive. Moreover, operating a branch office tends to be more difficult because government authorities and local businesses are often unfamiliar with branch offices.
Regional operating headquarters
A Thai limited company can be established as a wholly owned subsidiary of foreigners as a Regional Operating Headquarters with the BOI privileges, Revenue Department privileges or both.