Foreign Business Law

Introduction

In general, foreigners have the same rights as Thai nationals to own and operate businesses in Thailand, except where specific restrictions are imposed. These restrictions may be prescribed by Thai legislation, as a condition of a Board of Investment promotion certificate and/or by a Thai company's articles of association. This newsletter is intended to give a general overview of such restrictions and discuss the Foreign Business Law recently passed by the National Assembly.

Foreign Business Law

The most wide-ranging legislation restricting foreign participation in business activities in Thailand is National Executive Council Announcement No. 281, otherwise known as the "Alien Business Law", which has been in force since 1972. It has been replaced by the new Foreign Business Law, which has been approved by both the Senate and the House of Representatives and will become effective 90 days after it receives Royal Assent and is published in the Government Gazette.

Like the Alien Business Law, the Foreign Business Law imposes restrictions on the participation of ‘foreigners’ in three categories of businesses. However, there has been a change in the categorisation of some businesses under the new law (see "Comparisons between the Alien Business Law and the Foreign Business Law”).

Restricted businesses

The Foreign Business Law prescribes that a wide range of service businesses and commercial and industrial activities may not be carried out by `foreigners'. These categories are set out in the Annexes to the new law as follows:

Annex One: There is a total prohibition (for "special reasons") on foreigners engaging in the businesses listed in Annex One. Annex One covers a variety of businesses including newspaper publication, radio and television broadcasting, certain types of farming and trade in real property.
Annex Two: Foreigners are prohibited from engaging in certain businesses listed in Annex Two as businesses affecting national security or arts, culture, customs, local handicrafts or natural resources and the environment, except with a licence from the Minister of Commerce (the "Minister") and approval from the Cabinet. Even with such licence, a foreign company engaging in a business set out in Annex Two must be at least 40 per cent Thai owned and two-fifths of its directors must be Thai nationals. However, the 40 per cent capital restriction may be reduced to 25 per cent with the approval of the Minister and the Cabinet.
Annex Three: Foreigners are prohibited from engaging in certain businesses listed in Annex Three as they are businesses in which the Thai people are not yet prepared for competition with foreigners, except with a licence from the Director General of the Commercial Registration Department of the Ministry of Commerce (the "Director General") and approval from the Foreign Business Committee (the "Committee").

The three Annexes to the new law, listing the types of restricted businesses, are attached to this newsletter as Schedule 1.

Foreigners

For the purposes of the Foreign Business Law, a "foreigner" means:

  1. a natural person who is not a Thai national;
  2. a juristic person not registered in Thailand;
  3. a juristic person registered in Thailand of which at least 50 per cent of the share capital (or at least 50 per cent of the capital invested in it) is held by the persons set out in 1 or 2 above and if a limited partnership or a registered ordinary partnership, whose managing partner or manager is not a Thai national; or
  4. a juristic person registered in Thailand of which at least 50 per cent of the share capital (or at least 50 per cent of the capital invested in it) is held by any of the entities set out in 1, 2 or 3 above.

For the purposes of calculating the level of foreign ownership in a company, it is assumed that any bearer certificates are held by foreigners.

Licences

As noted above, a foreigner can only engage in an Annex Two business with a licence from the Minister and with Cabinet approval, or in an Annex Three business with a licence from the Director General and with Committee approval. The Foreign Business Law sets out specific time periods in which the Director General and the Minister are required to respond to applications. A response to an application for a licence must be given within 60 days. A response to an application under Annex Two may be extended by a further 60 days if deemed necessary by the Cabinet. If approved, the licence is required to be issued within 15 days of such approval. If rejected, the Minister or Director General is required to write to the applicant (within 30 days and 15 days, respectively) giving a clear explanation of why the application has not been approved. Appeal to the Minister against a rejected application is only permitted in relation to an application under Annex Three.

Issuance of a licence is subject to the satisfaction of certain eligibility requirements and may be made subject to certain conditions. These include minimum capital investment, the maintenance of a certain debt to equity ratio, the number of foreign directors that must reside in Thailand and a minimum period for maintaining the initial capital investment in Thailand. Generally, the Foreign Business Law contemplates that licences will be granted for as long as the applicant operates the licensed business, but licences can be revoked in certain circumstances.

Exemptions

  • Investment Promotion: Foreign-owned enterprises granted promotional privileges by the Board of Investment (“BOI”) or the Industrial Estate Authority of Thailand engaging in businesses listed in Annexes Two or Three are not required to be licensed.
  • Treaties: See "The Thai-U.S. Treaty of Amity and Economic Relations" below.
  • Government Approval: The Government may as a "temporary measure" permit a foreigner to carry out any of the businesses listed in any of the Annexes. For example, such exemption may be granted to a company involved in a government-sponsored infrastructure project.

If a foreign owned business is exempted pursuant to any of the above provisions, it is required to obtain a certificate from the Director General.

Penalties

Any foreigner that engages in business in Thailand in violation of the restrictions imposed by the Foreign Business Law will be liable to imprisonment for up to three years and/or a fine of between Baht 100,000 and Baht 1,000,000. In addition, "the courts shal4 order the closure of the business ... or shall order termination of the shareholding or partnership".

The Foreign Business Law also contains anti-nominee provisions prohibiting a licensed foreigner or a Thai person acting on behalf of unlicensed foreigners, in order to enable them to operate businesses that are restricted under the new law. The penalties for breach of these provisions are as noted in the paragraph above.

In addition, if a licensed foreigner no longer fulfils the eligibility requirements or breaches the conditions of its licence, such licence may be revoked or suspended. A foreigner whose licence has been revoked or suspended and continues to engage in a restricted business will be liable to imprisonment for up to three years and/or a fine of between Baht 100,000 and Baht 1,000,000.

Comparisons Between the Alien Business Law and the Foreign Business Law

Foreign control

Under the Alien Business Law foreigners are prohibited from holding 50 per cent or more of the outstanding shares of a Thai company operating a restricted business. However, there is no specific prohibition on foreign control of a Thai company (see "Thai Majority Owned but Foreign Controlled Companies" below).

During its consideration of the draft Foreign Business Law, a Senate committee introduced an amendment that would have deemed Thai majority owned but foreign controlled companies to be foreign. This amendment was not adopted as part of the final text of the new law and therefore Thai majority owned but foreign controlled companies remain permissible.

Differences between the old and new laws

The main change introduced by the replacement of the Alien Business Law with the Foreign Business Law, is the reduction of the number of businesses reserved for Thais from 63 to 44 and a regrouping of such businesses into the three categories set out in Schedule 1. The 19 businesses that are no longer restricted are listed in Schedule 2.

Although it was expected that the Foreign Business Law would liberalise foreign ownership regulations in Thailand, the new law is in large part based upon the Alien Business Law. Schedule 3 lists the most significant differences between the Alien Business Law and the Foreign Business Law.

Transitional provisions

If a foreigner is currently operating a business that is not restricted under the Alien Business Law, but such business becomes restricted under the Foreign Business Law, the foreigner is required to apply to the Director General for a certificate within one year of the effective date of the new law. During the period prior to the receipt of the certificate the foreigner will not be in breach of the new law. On receipt of the certificate, the foreign business may continue to operate in accordance with the new law.

A foreigner licensed to operate a restricted business under the Alien Business Law prior to the effective date of the new law, will be permitted to continue operating such business pursuant to the terms of its licence until it expires.

Other Legislation

In addition to the Foreign Business Law, several other laws restrict foreign ownership in Thailand. Each of the laws restricting foreign ownership are mutually exclusive, so for example, a company with foreign shareholders owning or wishing to own land may be subject to both the Land Code and the Foreign Business Law.

Land Code 1954

Subject to certain exceptions, `aliens' may not own title to freehold land in Thailand. The definition of `alien' in the Land Code includes the following:

  • a juristic person with more than 49 per cent of its share capital being foreign owned or more than half of its shareholders being aliens: if a private company issues bearer share certificates, the shares are presumed to be held by foreigners;
  • a limited partnership or a registered ordinary partnership with more than 49 per cent of its capital being foreign owned or more than half of its partners being aliens; or
  • a juristic person with more than 49 per cent of its share capital being held by any of the entities set out above.

As the term ‘alien’ under the Land Code is defined differently to ‘foreigner’ under the Foreign Business Law, a company may be required to qualify under both definitions and therefore the more restrictive foreign shareholding limit in the Land Code will in practice apply.

Condominium Act 1979

Under this Act foreigners, subject to certain conditions, may own title to condominium units in any given condominium up to a specified percentage of its total units, depending upon its location.

Commercial Banking Act 1962 and Finance, Securities and Credit Foncier Business Act 1979

These Acts require that Thai persons must hold at least 75 per cent of the total issued shares of a locally incorporated commercial bank, finance company or credit foncier company, unless an exemption from the Ministry of Finance is obtained. There is also a limit on any one holder, whether non-Thai or Thai, holding more than 5 per cent of the issued share capital of a commercial bank or more than 10 per cent of the issued share capital of a finance company or credit foncier company.

In addition, with the approval of the Bank of Thailand, foreign investors may own up to 100 per cent of the issued share capital of a commercial bank, finance company or credit foncier company for a period of 10 years. After such period the foreign investors may retain their shares, but may not purchase additional shares until they hold less than 49 per cent of the total share capital.

Casualty Insurance Act 1992 and Life Insurance Act 1992

These Acts require that Thai persons must hold at least 75 per cent of the issued share capital of locally incorporated casualty and life insurance companies.

Thai Vessels Act 1938

The Thai Vessels Act limits foreign shareholdings in a company owning Thai flagged vessels, which engages in coastal trade and international carriage, to 30 per cent and 49 per cent, respectively.

Air Navigation Act 1952

The Air Navigation Act imposes a 30 per cent foreign shareholding limit on a company owning Thai flagged aircraft. An amendment to this Act, which is expected to become effective in December 1999, will increase this limit to 49 per cent.

Consequences of breaching foreign shareholding limits

The legal implications of a breach of a foreign shareholding limit differ according to the type of restriction. For example, the articles of Thai companies often prevent the registrar registering a transfer of shares that would breach the relevant foreign ownership limit, the Commercial Banking Act provides that if the 5 per cent individual holding limit is breached the bank may not pay dividends to the shareholder and the Land Code requires the forced sale of land held in breach of foreign ownership restrictions. In addition, some of the legislation above imposes fines and/or imprisonment if the relevant restrictions are breached.

The Thai-U.S. Treaty of Amity and Economic Relations

The restrictions imposed by Foreign Business Law will not (save as discussed in “Eligibility" below) apply to foreigners whose activities fall within the scope of a treaty between the Thai Government and a foreign government. There is only one such treaty currently in effect, the Treaty of Amity and Economic Relations between the United States and the Kingdom of Thailand (the “Treaty"), signed in 1966.

Types of business covered by the Treaty

The Treaty provides that nationals and companies of either country will be accorded national treatment with respect to establishing, as well as acquiring interests in, enterprises engaging in commercial, industrial, financial and other business activities within the territories of the other party. As a result, many U.S. corporations have invoked the provisions of the Treaty to claim exemption from the Alien Business Law and are expected to continue to seek exemption from the Foreign Business Law. However, the Treaty specifically excludes enterprises engaged in communication, transportation, fiduciary functions, banking involving deposit-taking functions, the exploitation of land or other natural resources or domestic trade in indigenous agricultural products. Any U.S. person contemplating engaging in these businesses in Thailand must therefore comply with the provisions of the Foreign Business Law and/or other Thai laws governing the activity concerned. For example, U.S. persons must still comply with the provisions of the Land Code if they wish to own land in Thailand.

Eligibility

In order to be eligible for the privileges available under the Treaty, a U.S. investor must either be (a) a U.S. citizen, or (b) a U.S. corporation, provided that the majority of its shareholders are U.S. citizens or corporations.

The future of the Treaty

As part of agreements reached at the Uruguay Round of the GATT multilateral trade negotiations, Thailand must, by 1 January 2005, offer the same Most Favoured Nation status it offers to the United States, to all member-states of the World Trade Organisation (the "WTO"). Therefore, Thailand may either accord the same privileges as is offered to the United States under the Treaty to all other WTO member-states, or will have to terminate the Treaty. By its terms the Treaty may be terminated by either party on one year's notice.

Thai Majority Owned but Foreign Controlled Companies

Thai majority ownership

A structure involving a Thai majority owned but foreign controlled company is often used by foreign investors who wish (a) to hold an interest in a Thai company where the relevant foreign shareholding limit has been reached or (b) to form a Thai subsidiary to engage in a restricted business. Provided foreign shareholders hold or have invested in less than half the share capital, it is currently accepted that vesting the voting and management control of the company in the foreign shareholders, will not of itself violate the Foreign Business Law.

Foreign control

A number of means can be used to ensure that the foreign minority shareholders have effective management and financial control of the company. These include:
  • creating different classes of shares with different voting and director appointment rights
  • preference share structures
  • shareholder agreements (including share financing arrangements and put and call options)
  • technical assistance and other contractual arrangements

Such companies may only be established as private companies, as under the Public Limited Companies Act a public company is required to issue shares with equal voting rights.

Disadvantages

Such arrangements, if properly structured, will not breach Thai law and are currently used by a large number of companies. However, particular arrangements may be open to challenge under the anti-nominee provisions of the law. There are also certain practical considerations to be taken into account. For example, it is essential for the foreign investor to find a suitable Thai partner it can work effectively with.

Thai Trust Fund

In 1997, the Thai Trust Fund Open Ended Mutual Fund Scheme (the ‘TTF’) was established as a means of permitting non-Thai investors to purchase shares in publicly listed companies. Under the TTF scheme, a listed company can procure that the TTF forms a fund which issues units representing the shares of the company. All such shares held by the fund are treated as Thai owned.

Unitholders do not receive voting rights under the TTF scheme. The TTF holds the voting rights, but will not exercise them except in the event of a vote on the delisting of the shares from the Stock Exchange of Thailand. Although this scheme does permit foreign investment where it may otherwise be prohibited, it only passes on the economic benefits of the shares and will not operate directly give foreigners management or voting control. However, by effectively reducing the number of voting shares the TTF scheme may result in enhanced voting power for the shares not in a TTF fund.

Schedule 1
Annex One

Businesses prohibited to Foreigners for special reasons
  1. Newspaper publication, radio or television broadcasting
  2. Rice farming, arable farming or orchard farming
  3. Rearing livestock
  4. Forestry and the processing of wood from forests (naturally grown)
  5. Fishery, only in relation to the catching of marine life in Thai waters and the Thai economic zone
  6. Extraction of Thai medicinal herbs
  7. Trading and auctioning of Thai antiques or antiques which are of historical value to the country
  8. Manufacture or casting of Buddha images and alms bowls
  9. Trade in real property
Annex Two
Businesses concerning national safety and security or which have an impact on arts, culture, customs, local handicrafts or natural resources and the environment

Chapter 1 - Businesses concerning national safety and security

  1. Manufacture, distribution and maintenance of:
    • firearms, ammunition, gunpowder and explosives
    • components of firearms, ammunition and explosives
    • weapons of war, ships, aircraft or military vehicles
    • accessories or components of all types of weapons of war
  2. Domestic transportation by land, water or air, including aviation businesses

Chapter 2 - Businesses which have an impact on art, culture, customs and local handicrafts

  1. Trading of old objects or artifacts which are Thai works of art or handicrafts
  2. Manufacture of wood carvings
  3. Breeding of silkworms, manufacture of Thai silk thread, Thai silk weaving or printing of patterns on Thai silk
  4. Manufacture of Thai musical instruments
  5. Manufacture of products from gold, silver, niello, bronze or lacquer
  6. Manufacture of crockery or ceramics relating to Thai art and culture

Chapter 3 - Businesses which have an impact on natural resources and the environment

  1. Production of cane sugar
  2. Salt farming, including the production of efflorescent salt
  3. Production of rock salt
  4. Mining, including stone quarrying and crushing
  5. Wood processing for the manufacture of household furnishings and utensils

Annex Three

Businesses in which Thais are not yet prepared for competition with Foreigners
  1. Rice milling and the manufacture of flour from rice and field crops
  2. Fishery, only in relation to the cultivation of marine life
  3. Forestry (plantations)
  4. Manufacture of plywood, wood veneer, chipboard or hardboard
  5. Manufacture of lime
  6. Accounting services
  7. Legal servicesArchitectural services
  8. Engineering services
  9. Construction, except:
    • the construction of things providing fundamental services to the public such as public utilities or transportation where special equipment and machinery, technology or expertise are required and where the minimum capital of foreigners is Baht five hundred million or more. other types of construction as prescribed in Ministerial Regulations Brokerage or agency businesses, except:

    • brokerages or agencies trading securities or services connected with the forward trading of agricultural commodities or financial instruments or securities brokerages or agencies providing goods and services necessary for manufacture or provision of services to an affiliate's enterprises brokerages or agencies trading, purchasing or distributing or procuring markets both domestic and foreign for the sale of goods manufactured in Thailand or imported from abroad, which involve international trade and where the minimum capital of foreigners is Baht one hundred million or more other types of brokerage or agency as prescribed in Ministerial Regulations Public auctions, except:

    • public auctions involving international bidding and which does not involve the bidding for old objects, antiques, or artifacts which are Thai works of art, handicrafts or antiques or which are of historical value to the nation other types of public auction as prescribed in Ministerial Regulations Domestic trade in indigenous agricultural products which are not prohibited by law Retail businesses trading all types of products, with a total minimum capital of less than Baht one hundred million or a minimum capital for each establishment of less than Baht twenty million

  10. Wholesale businesses trading all types of products, with a total minimum capital of less than Baht one hundred million per establishment Advertising Hotels, except hotel management services
  11. Tourism Sale of food and beverages Cultivation, reproduction and improvement of plant species Other service businesses except those prescribed in Ministerial Regulations

Schedule 2

Businesses that are no longer restricted by the Foreign Business Law
  1. Haircutting, hairdressing and beauty treatment
  2. Manufacture of beverages, alcoholic and non-alcoholic
  3. Manufacture of ice
  4. Manufacture of drugs
  5. Cold storage
  6. Manufacture of all types of matches
  7. Manufacture of garments or shoes except for export
  8. Printing presses
  9. Manufacture of products from silk, silk thread or silk cocoons
  10. Business operating under the law on service-providing establishments
  11. Photography, photographic developing and printing
  12. Laundry
  13. Tailoring and dress-making
  14. Export of all types of products
  15. Manufacture of animal feed
  16. Extraction of vegetable oil
  17. Manufacture of embroidery and knitted products including weaving, dyeing and pattern printing
  18. Manufacture of glass containers including light bulbs
  19. Manufacture of writing and printing paper

Schedule 3

Changes to the levels of restriction on businesses under the laws

More restricted (now total prohibition) Less restricted (licence required but no longer prohibited) Newly restricted (total prohibition)
  • Newspaper publication (moved from Annex B to Annex 1 )
  • Fishery (was under Annex B now divided into two categories falling under Annex 1 and Annex 3, respectively)
  • Professional services (e.g. legal, accounting, architecture) (moved from Annex A to Annex 3)
  • Building construction(moved from Annex A to Annex 3)
  • Brokerage/agency, advertising (moved from Annex A to Annex 3)
  • Hotel (moved from Annex B to Annex 3)
  • Radio and television broadcasting (unrestricted, now Annex 1 )

Main differences between the Alien Business Law and Foreign Business Law

Alien Business Law Foreign Business Law
At least one half of the shareholders, partners or members in number of any entity are required to be Thai. No such restriction.
Exempt if the company has BOI investment status. Exempt if the company has BOI investment status or a certificate from the Industrial Estate Authority of Thailand.
Aliens licensed under the act or investors in an Alien entity are prohibited from holding shares or investing in another juristic person in excess of one-third of the capital of that company or partnership. No such restriction.
No time limits included in respect of the application and approval process. Time limits set within which a decision whether or not to approve a licence or certificate must be made.
No such restriction. Businesses in Annex 2 required to be 40 per cent Thai-owned and at least two-fifths of its directors must be Thai.
Grandfather rights for existing companies whose businesses have become restricted. Such rights are granted subject to restrictions: e.g., Annex A (for two years after the effective date of ABL), Annex B and C (prohibition on the increase of production or sale in excess of 30 per cent). Grandfather rights without restriction for existing companies whose businesses become restricted. The companies shall apply for a certificate within one year of the effective date of the Foreign Business Law.

Penalties not extended to management. Penalties extended to management (i.e., directors, partners or a person authorised to act on behalf of such juristic person).
Term of licence fixed. Licence granted without a fixed term.
Businesses exempt pursuant to a treaty do not require a certificate. Certificate required.
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