Retrenchment and Other Options in Response to the Current Economic Crisis in Thailand

The ongoing financial crisis and economic slowdown are expected to have a considerable impact on Thailand’s economy. Businesses which have experienced record levels of growth are suddenly being confronted with declining sales and a lack of working capital in a situation reminiscent to the financial crisis of 1997, and many corporations are anticipated to either downsize or shut down their Thai operations. At the same time, the crisis may present opportunities for those businesses with access to sufficient capital looking to expand their operations in Thailand via the purchase of assets or entire businesses. In deciding how to react to the crisis, both retrenching and expanding businesses will need to focus on numerous issues as highlighted by this update.

Labour Issues:

One of the first options considered by businesses looking to curtail their Thai operations is to adjust headcount. This can be addressed by offering early retirement packages or seeking voluntary resignation, however, more drastic measures include temporarily suspending operations or terminating staff due to redundancy.

  • Terminating staff due to redundancy. Terminating staff presents a host of potential issues. It is fairly expensive, may affect the morale of any remaining employees and, unless handled properly, may subject the business to a claim of unlawful or unfair termination by such terminated staff. Notice of termination must be given at least one full wage period in advance. If such a period is longer than a calendar quarter, only three months’ advance notice must be given. However, an employee may be immediately released from employment by paying him his wages up to the period of the advance notice which would otherwise be required.

Terminated staff may be entitled to some or all of the following:

  • Severance pay. Employees in Thailand are entitled to severance pay according to a formula based on their tenure of employment;
  • Payment in lieu of notice (except in cases where the employee is paid salary to the end of the notice period);
  • Salary to the date of termination of employment;
    • Payment of certain other benefits to the date of termination of employment (if any); and
    • Repatriation costs (in certain cases).

If the business has an “Employee Committee”, then termination of any committee member will require approval from the Labour Court. Any collective bargaining agreement in place should also be reviewed to determine if there are additional requirements for terminating employees.

Arranging for proper security of property, plants and equipment should also be considered when anticipating any staff termination, as disgruntled employees have been known to express their frustrations by vandalizing or stealing any remaining assets.

  • Temporarily suspending business operations. As an alternative to terminating staff, an employer might consider temporarily suspending some or all staff with the intention of bringing them back on board once conditions improve. Such employees are entitled to receive notice of the suspension and are entitled to continue receiving at least 75% of their normal wages during the suspension period.
  • Hiring outsourced workers. Businesses which intend to expand their operations during the crisis may nevertheless be reluctant to hire additional staff. As an alternative, they may be tempted to bring on temporary staff through a recruiting agency or other third party. The benefits of such an approach will need to be carefully considered, however, as the Labour Protection Act (B.E. 2541) has recently been amended to require employers to treat such outsourced workers “fairly and without discrimination” with respect to benefits and welfare.

Capitalization and Liquidity Issues:

The current financial crisis has resulted in unprecedented liquidity constraints for businesses. Although Thailand’s financial institutions have not felt the effects of the current financial crisis to the same extent as those in Europe or the U.S., consumer and business credit is becoming more difficult to access. Some businesses may need to recapitalize their Thai operations in order to be sufficiently liquid throughout the downturn. Alternatively, businesses with significant retained earnings from their Thai operations may wish to repatriate funds in order to ease any liquidity constraints of their shareholders.

  • Recapitalizing. Any intention to recapitalize existing operations via such Thai-based financial institutions will likely result in greater scrutiny by potential creditors than in the past. At a minimum, a thorough review of the company’s corporate governance history would be advisable. Recapitalizing through the issuance of new equity, on the other hand, has been simplified earlier this year through amendments to the Civil and Commercial Code. Obtaining loans from shareholders or other third parties is also permitted under Thai law.
  • Repatriating funds. There are numerous ways to repatriate funds from Thai businesses. One common method is to declare a special dividend, although in many cases this may not be the most economical option, as dividends are generally subject to withholding tax depending on the jurisdiction of the shareholder and whether or not a tax treaty with Thailand is in place. Furthermore, any such dividend would have to be made entirely out of retained earnings and subject to the creation of a “reserve fund.” Another option is to reduce the Thai entity’s capitalization, which would require the approval of a supermajority of the shareholders. Existing creditors would need to be alerted of such reduction and consideration would also need to be given to ensure that the Thai business continued to comply with any applicable minimum capitalization requirements (such as under any BOI promotion or as may be required to maintain work permits for foreigners).

Scope of Business Issues:

Businesses may be considering a range of options concerning their scope of operations in Thailand in response to the current crisis, from selling all assets and liquidating their Thai entity to expanding operations by buying assets, other lines of business or competitors at reduced prices.

  • Selling some or all of the business. Businesses desiring to wind up operations entirely will likely want to consider selling any remaining assets and paying off creditors prior to liquidation. Similarly, businesses that wish to remain in Thailand may be interested in selling only certain assets for a variety of reasons (i.e. the assets relate to an underperforming business line or the Thai entity faces liquidity constraints).

If the Thai entity intends to sell its entire business (i.e., the transfer of all assets, debts and accounts receivable) in a manner compliant with certain Revenue Department rules and the seller liquidates within the same fiscal year, then certain tax benefits are available, including:

  • Exemption from specific business tax on any revenue from sale of immovable property;
  • Any gain realised on the sale would not constitute taxable income of the seller;
  • Exemption from stamp duty on instruments employed in the transfer; and
  • Exemption from income tax for the seller’s shareholders on liquidating distributions received in excess of their investment.

Such a transfer may also be made free of VAT if the seller files the appropriate notices in time.

If the business intends to sell only certain assets, then such sale would normally be subject to income tax on any net profit. Certain assets may also be subject to VAT, specific business tax, stamp duty and withholding tax.

  • Liquidation, Bankruptcy or Reorganization. Liquidation and bankruptcy are options for businesses looking to wind up their operations in Thailand. As for those businesses looking to continue operations but unable to satisfy their creditors, then a formal reorganization is a possible solution. Since the previous financial crisis in 1997, there have been various initiatives taken to facilitate each of these processes.
    • Liquidation may be either voluntary, which requires the approval of a supermajority of shareholders through a special resolution, or involuntary, such as by an interested party or court order. A voluntary liquidation would normally be considered when the business has sufficient assets to satisfy its creditors.
    • Bankruptcy proceedings are available to businesses which have exhausted their entire share capital or where their assets are insufficient to meet liabilities. Such an option would be considered when the entity has no ability to satisfy its creditors.
    • Reorganizations have been authorized since 1998 by an amendment to the Bankruptcy Act and are carried out by the relevant Bankruptcy Court.
  • Operating without a formal business presence. Businesses which decide to wind up their formal operations in Thailand often have the intention of continuing to operate from another country or on an informal basis, such as by renting out a serviced office. Conducting business in Thailand in this manner presents risks to both the business and individual employees remaining in or visiting Thailand as follows:
    • Any revenues deemed to be generated in Thailand would be subject to taxation, even if there is no longer any formal business presence in Thailand. Furthermore, employees deemed to be working in Thailand would remain subject to income and social security withholding taxes.
    • Operating a business in this manner would likely be a violation of Thailand’s Foreign Business Act.
    • If the employees involved in the business are non-Thai nationals, a work permit will be required and this, in turn, requires the necessary immigration approval (which would not be possible without a permanent establishment in Thailand).

Businesses which no longer have a formal business presence in Thailand but which still have ongoing operations might consider entering a sub-contract relationship with a local party that can perform the services and seconding any necessary foreign employees to such company to perform the ongoing services. 

The above are just some of the larger issues businesses may be faced with during the current crisis. Every business has its own unique set of concerns, and this update is merely intended to get businesses focusing on those particular matters important to them.