Although foreign investments are encouraged by the Thai government, foreign equity restrictions and Thai participation requirements exist for many businesses. Foreign investment is controlled by a range of legislation, cabinet policies, trade association regulations, laws and other controls. Criminal penalties potentially apply for violating some of these controls and laws. The Foreign Business Act, B.E. 2542 (FBA), is often the first obstacle a prospective foreign investor in Thailand encounters. And this makes it an excellent place to start any discussion on Thai law prohibitions on investment because the FBA illustrates and embodies so many of the difficulties that foreign investors face in Thailand
Alien business law
The FBA was enacted in 1999 and prohibits “aliens” – a carefully defined term – from owning a wide range of businesses absent certain exceptions or issuance of an “alien business license”, which is often difficult to obtain in practice.
The FBA does not impose restrictions on "aliens" over every business activity, but it is very broad, applying to about 50 types of businesses (depending upon how a “type” of business is defined). Generally speaking, for example, manufacturing is not restricted under the FBA, but for reasons that are explained below, care must be employed when applying this general "rule" to investments in Thailand. As for those business activities not restricted to "aliens" under the FBA, minimum capitalization requirements will still apply.
Complicating matters further, the FBA is also not the only law that restricts foreign ownership and participation in Thai companies. Even if the FBA does not apply, other Thai laws restricting foreign ownership and participation may apply.
In high level summary, the 50 or so businesses covered by the FBA are grouped into the following three Annexes (sometimes also called schedules):
Annex 1 prohibits alien ownership of nine categories of businesses for “special reasons”, and includes such businesses as newspaper publication, ownership of television stations, forestry, rice farming and trading in land. The FBA does not permit licenses to be issued to foreigners for ownership of businesses listed in annex 1 under any circumstances.
Annex 2 is divided into three chapters. In theory, an alien can obtain a license to own a business operating in Annex 2 with approval of the Thai Cabinet. But in practice getting such approval can be very difficult because of the political nature of the approval required.
Chapter 1 is described as “businesses involving national safety or security” and includes the manufacture, sale and maintenance of firearms, armaments and military vehicles. Domestic land, water and air transportations “including domestic aviation business” also falls within chapter 1 of Annex 2. Thailand is not unique in restricting foreign participation in these kinds of businesses.
Chapter 2 is described as ‘businesses affecting arts, culture, traditional customs and folk handicrafts” and includes, among other activities, the creation of Thai wood carvings, manufacture of Thai musical instruments.
Chapter 3 is described as “businesses affecting natural resources or the environment” and includes, among other activities mining and wood processing to make furniture and utensils. Extractive industries are often the subject of controversy and special protection, and Thailand is no exception. Because extractive industries tend to attract more than their fair share of transparency problems, investment by foreign companies in these sorts of businesses is problematic even without the FBA.
Annex 3 is described as “businesses in which Thai nationals are not yet ready to compete with aliens.” Annex 3 is probably the most controversial annex and lists 21 categories of restricted business activities, including, among others, accounting service business, engineering service business, and “other service business, unless specifically exempted by Ministry of Commerce regulations”. The Ministry of Commerce (“MOC”) interprets the term “services” very broadly. Annex 3 is supposed to be reviewed at least once annually for purposes of determining if businesses listed on that annex can be opened up for foreign investment on the grounds that Thais are now ready to compete with aliens in that business. Since its enactment in 1999, the MOC has only dropped certain securities-related services from Annex 3 (please see our article here for details).
For example, the MOC takes the position that a company is engaged in a service business if it leases property. This means, for instance, that if a manufacturing company (which is not otherwise restricted under the FBA) wants to sub-let part of its facilities to reduce its costs (not uncommon in these financially difficult times), that manufacturing company is engaged in a service activity that requires an alien business license. Similarly, the MOC takes the position that an alien company needs an alien business license to provide a guarantee. This means that a foreign owned Thai private limited company that is engaged in manufacturing (and not otherwise restricted under the FBA) cannot grant a guaranty to a lender to support a loan by the lender to the foreign parent company without first obtaining an alien business license.
What is an ‘Alien Business’? And Why Definitions Matter
Section 4 of the FBA strictly defines an alien juristic person in terms of ownership of share capital. Significantly, it does not refer in any sense to voting control of stock or management of a company. An alien is defined as follows:
(1) a non-Thai natural person;
(2) a juristic person not incorporated in the country;
(3) a juristic person incorporated in the country and being of the nature as follows:
(a) a juristic person of which one-half or more of the capital is held by persons under (1) or (2), or one-half or more of the total capital is invested by persons under (1) or (2); or
(b) a limited partnership or a registered ordinary partnership of which the managing partner or the manager is a person under (1).
(4) a juristic person incorporated in the country, of which one-half or more of the capital is held by persons under (1), (2) or (3), or a juristic person of which one-half or more of the capital is invested by persons under (1), (2) or (3).
For the purpose of this definition, a limited company’s shares of which the certificates are issued to bearer shall be considered belonging to aliens unless otherwise provided by ministerial regulations.
This definition is similar to the definition used in the FBA’s predecessor, “NEC 281”. This precise definition coupled with the broad scope of both the FBA and its predecessor, NEC 281, and the fact that Thai private limited companies can have shares with different voting rights led to the formation of what are sometimes called “preference share structures” – companies where Thai nationals own a majority of share capital, but foreigners have voting control. Although officials in prior government publicly stated that such structures were legal provided they did not involve nominee shareholding, they have become more controversial and practices surrounding the use of such structures have been more problematic over the last several years. Complicating matters further, there is no precise and agreed definition of nominee shareholding.
There are various existing and potential future exceptions to the FBA under treaties Thailand either has or is negotiating with other countries. However, only the Treaty of Amity and Economic Relations between Thailand and the United States (Amity Treaty) provides for “national treatment” (that is, American nationals are entitled to the same rights as Thai nationals, subject to certain exceptions discussed below).
- Amity Treaty: Qualifying US businesses are currently exempt from most of the FBA’s provisions under the Amity Treaty, but the future of this exemption is somewhat uncertain. Because the Amity Treaty provides preferences to American investors, it purportedly violates Thailand’s World Trade Organisation (WTO) obligations. The WTO provided Thailand with a derogation (exemption) in respect of the Amity Treaty benefits accorded American investors, but the exemption ended on 1 January 2005. In practice, however, Amity Treaty remains in effect, and the Thai Ministry of Commerce continues to issue alien business certificates to companies that qualify under the Amity Treaty.
The US and Thailand hope to incorporate the existing benefits of the Amity Treaty – and perhaps additional benefits – into a Free Trade Agreement. There is, of course, no way to predict the outcome of such negotiations, and American businesses considering investment in Thailand should give serious thought to establishing an Amity Treaty company now rather than later.
The Amity Treaty does not allow US nationals to engage in business in communications, transport, fiduciary functions, banking involving depository functions, the exploitation or land or other natural resources (e.g. mining and domestic trade in indigenous agricultural products. The Amity Treaty also does not allow US nationals to own land in Thailand. For more information on the Amity Treaty, click here.
- Thai-Australia Free Trade Agreement (TAFTA): The TAFTA should provide qualifying Australian businesses exemptions from certain specific provisions of the FBA. For example, TAFTA should permit 60% Australian ownership of large convention and exhibition service businesses; large restaurants and large resorts and hotels; and large theme park, zoo and aquarium businesses. Early experience with TAFTA suggests that it has been somewhat helpful in lowering tariffs but has not had a significant impact in the area of investment in services.
- Japanese Thai Economic Partnership Agreement (JTEPA): JTEPA provides for, among other things, tariff reductions on various products and liberalization of trade in services in certain areas. But because JTEPA was signed even more recently than TAFTA, there is even more uncertainty over how the provisions of this treaty will actually be implemented in practice.
BOI companies & manufacturers located in IEAT estates
Companies promoted by the BOI or a manufacturer located in an industrial estate under the IEAT are often granted exemptions from the restrictions of the FBA.
Ownership of land
Absent certain exceptions, such as BOI permission, foreigners cannot own land in Thailand. The Thai Land Code imposes substantial penalties on any person who acquires land as an agent of an alien person or company. These penalties include a fine not exceeding THB 20,000, imprisonment for up to two years, or both. Foreigners can, however, own condominiums, subject to various requirements.
Other restrictions on foreigners
Thailand imposes a variety of other restrictions on foreigners and foreign-owned businesses operating in Thailand. Some of the more important restrictions include the following.
There are restrictions on the percentage of shares foreigners can own in commercial banks and the number of foreigners permitted to serve on the board of directors of commercial banks.
There are restrictions on the percentage of shares foreigners can own in insurance companies and the number of foreigners permitted to serve on the board of directors of insurance companies.
Other restricted areas
There are specific laws restricting foreigners from owning or being licensed to engage in a variety of business activities, including tour operations and the dispensing of pharmaceuticals. Even where these specific laws cover business activities restricted under the FBA, the nature of the restrictions may vary. Local counsel should be specifically asked for advice on whether restrictions apply in other areas.
Even where Thai law restricts foreign ownership, it was and is often possible for foreigners to participate in the Thai economy. For example, the FBA’s very precise definition of “alien” companies in terms of foreign majority ownership of share capital rather than voting rights or control of any kind provided and provides foreigners with commercially viable opportunities for such participation. The structures employed vary tremendously, but often involve Thai investors holding the majority of shares in multi-tiered structures.
No one knows the exact numbers, but reports from newspapers, chambers of commerce, and diplomats estimate the number of such structures in the tens of thousands. Some of the most important contributors to the Thai economy employ these structures, including many prominent multinationals. These structures have been used for decades without any serious challenge. When the Thai Parliament enacted the current FBA in 1998, some legislators suggested defining “foreign” ownership in terms of control to prevent the use of these structures, but this proposal was rejected because of fears that it would seriously affect foreign investment in Thailand in a globalising world where most countries are reducing and abandoning such restrictions.
Throughout 2007, however, the NLA considered various proposals to change the FBA’s definition of alien companies by providing that various forms of foreign control (proposals varied) would make companies that were considered Thai and therefore not subject to the FBA under the current FBA become “aliens” under an amended FBA. For more information, click here. The proposed changes to the FBA provided for retroactive application of some changes to the FBA to existing companies. Many in the foreign business community strongly opposed these proposed changes to Thai law. The EU announced that they would violate Thailand’s WTO obligations under GATTs. Thailand’s major parties uniformly opposed the proposed amendments. The proposed amendments were not enacted before the NLA was replaced by an elected parliament.
The Land Department and Ministry of Commerce previously issued regulations that complicate the use of structures that had been employed for decades to address foreign investment restrictions under Thai law. Most of these regulatory changes pertain to the registration of new companies, but officials have claimed they intend to take more proactive to identify, arrest and deport foreigners who purportedly circumventing Thai laws in this area. These existing and potential new regulations and the debate surrounding this matter generally makes for a regulatory terrain that is uncertain and changing fast. Complicating matters further, enforcement varies depending upon the locale and nature of the business activity.
.ast updated 23 April 2013