Thailand is in competition with its neighboring countries regarding politically welcome investments from the private sector of the industrial countries. Thai policy makers are in a constant effort to balance the opportunities of new employment that may be generated and new industrial sectors that may established in the Kingdom with the concern of protecting the economy from foreign competition that it is not ready to compete with yet. Therefore, one of the principal consideration investors needs to be aware of are the restrictions on business activities that can be undertaken by foreigners in Thailand.
1. Restrictions under the Foreign Business Act
While the incorporation of the limited liability company itself is neither difficult nor time-consuming, it should be noted that, under the Thai Foreign Business Act ("FBA"), A.D. 1999, foreigners who engage in certain business sectors, including any kind of service business, require a Foreign Business License ("FBL") in order to legally operate. In fact, most business activities are restricted in this way and, eventually, only production and, under certain circumstances, export of goods are permitted freely.
Under the FBA, foreigners are the following persons:
- Natural persons not of Thai nationality.
- Juristic persons not registered in Thailand.
- Juristic persons registered in Thailand and having 50% or more of the juristic person capital shares held by natural persons not of Thailand nationality or juristic person not registered in Thailand or were invested by such. Furthermore, the bearer shares of a Public Limited Company are deemed as shares of foreigners.
- Limited Partnership and Registered Ordinary Partnership if their Managing Partner or Manager are foreigners.
The FBA distinguishes business activities in different categories (list 1, 2 and 3 in the annexure of the FBA). List 1 contains business activities that are not permitted for foreigners to operate due to special reasons (e.g. media or agriculture business). List 2 contains activities related to the national safety or security (e.g. the production of weapons and munition) or affecting arts and culture, tradition, folk handicraft or natural resource and environment. Foreigners also need an FBL if they want to be active in the sector referred to in List 3, which includes businesses in which Thai nationals are not yet ready to compete with foreigners. List 3 includes, among others, all kinds of services businesses.
If your prospective business falls under the list of restricted businesses, you have been following options to legally structure your business venture:
2. Foreign Business License
A foreign investor may apply for an FBL for the intended business operation. Various criteria will be considered by the government official before granting it, such as the advantages and disadvantages to the nation's safety and security, economic and social development, size of the enterprise, local employment, etc. Approval of a business license application is more likely when the authorities view the business as providing significant benefits for Thailand and if it promotes Thai interests.
The application process is in our experience tedious and the outcome is often unpredictable. However, in certain cases the prospects for a successful application good and are worth the effort.
While the application for the FBL is bureaucratic, the benefit is that, if an FBL has been accorded to the foreigner, the business activity is 100% legal.
The minimum capital requirements to apply for an FBL are at least 25% of the expected yearly costs of the submitted business plan. Otherwise, the minimum capital has to be 3 Million THB. Obviously, foreigners need an employment permit (in addition to the FBL), if they want to work in Thailand. To get this kind of permit the company needs paid-up capital about 2 Million THB and has to employ 4 Thai staff.
3. Representative Office
Only a notification to government authorities is required in the case of establishing a representative office in Thailand. In this case, the scope of the operations would however be limited to non-trading activities, such as:
- The business is to source goods or services in Thailand for the headquarters overseas (procurement);
- To check and control the product/service ordered by the headquarters abroad (quality and quantity control);
- To give advice to the Thai customers or agents about the goods and services sold by the headquarter in Thailand;
- To supply the information about the headquarters' products and services to the (potential) customers in Thailand;
- To report about the economic movement in Thailand to the headquarters.
The business may not generate revenue and accept purchase orders, make sales offers or engage in business negotiations with any person.
4. BOI Privileges
The Thailand Board of Investment (BOI) was established pursuant to the Investment Promotion Act, A.D. 1977, as amended) for purposes of promoting certain foreign and domestic investment that are regarded as welcome in Thailand. In addition to authorizing foreign majority ownership and control over Thai corporations, the BOI has discretionary authority to grant certain trade, taxation, employment, financial and other benefits.
BOI has set investment promotion policies as follows:
- Promote investment that helps enhance national competitiveness by encouraging R&D, innovation, value creation in the agricultural, industrial and services sectors, SMEs, fair competition and inclusive growth;
- Promote activities that are environment-friendly, save energy or use alternative energy to drive balanced and sustainable growth;
- Promote regional development (upcountry) and in particular in border provinces in Southern Thailand to help develop the local economy, which will support efforts to enhance security in the area;
- Promote Thai overseas investment to enhance the competitiveness of Thai businesses and Thailand's role in the global economy.
BOI incentives are available at the BOI's discretion and are divided into two categories:
a. Non-Tax Incentives
- Majority of foreign ownership,
- Land ownership and
- Expedited visas and work permits for foreign executives and technicians (and their families).
b. Tax Incentives
- Exemption or reduction of import duties on imported machinery;
- Exemption or reduction of import duties on imported materials and components;
- Exemption of corporate income taxes for three (3) to eight (8) years, with permission to carry forward losses as deductible expenses for up to five (5) years;
- Exclusion of dividends derived from promoted projects from taxable income during the corporate income tax holiday.
The BOI's incentives are subject to the discretion of the BOI and are decided on a case-by-case basis.
The BOI bases its determination on promotion privileges upon the following criteria:
- Total capital investment;
- Debt to equity ratio (3:1 for newly established projects)
- Projected number of Thai employees;
- Foreign technology transfer, technical assistance, and training;
- Environmental impact of projects; and
- Project location.
In addition to these, the BOI categorizes business activities and applies specific additional criteria to each criteria.
The BOI certificate, once it is granted, is accompanied by a list of specific conditions. If the applicant fails to meet the conditions (and remain in compliance therewith) the BOI certificate will be subject to revocation.
5. Industrial Estate
With the objective of supporting the Thai economy, the Thai government promotes since the 1980s the establishment of businesses in so-called "Industrial Estates ", which are state-managed industrial parks. Foreign investors are offered various incentives for choosing such a location for their business.
There are about 36 Industrial Estates in Thailand. The legal basis for these facilities is the "Industrial Estates Authority Act"(IEAA) from 1979. This Act defines two different kind of zones: The "General Industrial Zone "and the "I-EA-T Free Zone" (before "Export Processing Zone").
a. General Industrial Zones are areas which incentivize settlement of foreign industries which are worth to promote. Mainly they are expected bring technical know-how to Thailand. But there are no incentives related to the import or export of products. The investors rather benefit from the general facilities provided by the Industrial Estates:
- Possibility of land purchase for foreigners within the Industrial Estates, under the discretion of the IEAT.
- Easy process for work permit applications.
- Facilitation of international funds transfer.
b. The I-EA-T Free Zones mainly serve the establishment of employment and promotion of the production of export products. The state of Thailand grants significant tax breaks, which are beneficial for foreign and Thai investors.
In addition to such legal and tax benefits, also the excellent infrastructure make industrial estates a very attractive choice as a location.
6. US-Thai Amity Treaty
The US-Thai Amity Treaty of 1966 gives special rights and benefits to American citizens who wish to establish a business in Thailand. The treaty aims to provide significant advantages for US investors to run businesses in Thailand for both corporations and individuals. The FBL which is usually difficult to obtain will be granted swiftly for US-Americans, in most business areas.
In particular, the treaty grants the USA two major trade advantages:
a. American citizens and/or companies are permitted to hold majority of the shares or the whole company, branch office or representative office located in Thailand.
b. American citizens and/or companies may engage in business on the same basis as Thai companies, and are exempt from most of the restrictions of foreign investment imposed by Foreign Business Act.
It is however important to note certain exceptions, i.e. activities that are not subject to the treaty and remain reserved for Thais, such as fiduciary functions or operating in the field of banking (involving depository functions). Also land ownership remains restricted.
Comparable treaties exist with other countries, such as Australia, however they have only a very limited scope and therefore play only an insignificant role in practice.
7. Joint Venture
A company with more than 50% Thai shareholding and a majority in the number of Thai shareholders will be registered as a Thai company and will therefore not be subject to the restrictions of the FBA.
Accordingly, a very attractive and in practice very relevant option available for foreign investors is to establish a joint venture with a Thai investor.
It should be noted that under the Foreign Business Act such Thai investor needs to be a genuine investor who makes a substantial contribution to the business, using a nominee acting for the foreign investor is not permitted.
The promotion of the BOI or the use of an Industrial Estate is a good chance to realize an investment in Thailand without any Thai participation. Other benefits are the very attractive privileges such as tax benefits, to own the business as a foreigner and the opportunity to purchase land.
However, in our view, every legal opportunity should be utilized to obtain investment promotion. In this respect, it is possible to combine the promotion of BOI with, e.g., the benefits of an Industrial Estate. These different kinds of support do not exclude each other.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.