Thailand - a short legal briefing

by

First Bangkok Law & Practice Ltd.

1. Legal Background

1.1 Background

Thailand is a civil law country. This means that its basic laws are to be found in written codes, similar to those found in continental Europe and dissimilar from the common law system that prevails in the USA, the United Kingdom and much of the Commonwealth. There are four basic codes in Thai law: the Civil and Commercial Code; the Civil Procedure Code; the Criminal Code and the Criminal Procedure Code. These basic codes were drafted at the beginning of the twentieth century and were influenced very much by the codes of France, Germany and Switzerland. Thailand also has specific codes that deal with specific areas of law, for example the Revenue Code. There are also Acts of Parliament, decrees, and ministerial regulations and notifications. These are all recognised sources of law. Judicial precedent is also a source of law, but it is of persuasive not binding authority.

1.2 Court system

Thailand has a mature and developed court system. There are a Civil Court and a Criminal Court. In Bangkok, these are located in separate buildings. Outside Bangkok, the provincial court would have jurisdiction over both civil and criminal matters, and would be housed in the same building. There are also specialised courts such as: the Intellectual Property and International Trade Court ("IPITC"), the Bankruptcy Court; the Labour Court and the Revenue Court. In many cases, there are two rights of appeal from the decision of the court of first instance, firstly to the Court of Appeals and then to the Supreme Court. In some cases there is only one right of appeal, direct from the court of first instance to the Supreme Court.

There are certain aspects of the Thai legal system that may appear unusual to a foreign observer. Firstly, all court proceedings are conducted in the Thai language (except in the IPITC). Oral evidence and documents in a foreign language must be translated into Thai, before they may be used in court. Civil and criminal trials are conducted by a judge or judges, sitting without a jury. Affidavits are not known in Thai law. Pre-trial disclosure of documents is not possible: disclosure of relevant documents is effected by the issue of a subpoena against the possessor of such documents, ordering him to produce them at the trial. Finally, both civil and criminal trials do not take place on consecutive days. Evidence is taken on one day or half a day at a time, and the trial will then be adjourned for 4-6 weeks ahead, for the next occasion of taking evidence. Inevitably this can lead to long delays in the trial process and the resolution of disputes.

Foreign civil court judgments are not generally recognised by the Thai courts. It will be necessary for a litigant to issue fresh proceedings in Thailand. The previous judgment obtained will be admissible in evidence in the Thai court, but a judgment will be given on the merits of the case. This contrasts with foreign arbitration awards. Thailand is a signatory to the New York Convention for the Recognition of Foreign Arbitral Awards (1958). Subject to the requirements of the Convention, foreign arbitration awards may be enforced directly in the courts of Thailand.

2. Establishing a presence in Thailand

2.1 Limited company

A private limited company in Thailand has the general characteristics of a limited company under western legal systems. It has legal personality separate from those who own or operate it. It is capable of suing and being sued in its own name. It must have a memorandum of association and articles of association. There must be seven promoters to register the memorandum of association and a minimum of seven shareholders must be maintained at all times. If the nature of the business of the company is restricted under the Foreign Business Act or other laws (see below) then foreign ownership, both in the number of shareholders and the percentage of shares owned, must be less than 50%. There must be a board of directors with at least one director. If the nature of the business is restricted under the Foreign Business Act or other laws, then there may be restrictions on the number of foreign directors and a requirement that there should be a number of foreign directors resident in Thailand. In general, there are no restrictions on the minimum paid up capital of a company. The capital must be sufficient for normal business operations. However, if the business of the company is restricted under the Foreign Business Act, then there may be requirements for minimum registered capital that must be observed. The amount of paid up capital is also relevant in relation to the number of foreign employees whose work permits are sponsored by the company (see below). The current guideline of the Labour Ministry is that a company should have at least 2 million Baht in paid up capital for each foreigner whose work permit is sponsored. As to the par value of shares, a share must have minimum par value of one Baht, there is no limit on maximum par value.

In practice, it takes around four weeks to register a company. It is not local practice to have available pre-formed shelf companies for acquisition.

2.2 Branch office

A foreign company may establish a branch office in Thailand. The application, including, various documents from the head office must be submitted to the Commercial Registration Department. The head office must transfer to the branch a minimum of 5 million Baht as working capital during its first four years of operation, by minimum annual installments. Permission for the branch to operate may be granted for a period of up to five years and further applications to extend the initial period can be submitted. It should be borne in mind that the branch is part of the parent company and therefore the parent retains legal liability for contracts and for tortious acts done. For tax purposes, a branch is regarded as a permanent establishment, and income arising is liable to Thai tax.

2.3 Representative office

It is possible for a foreign company to establish a representative office in Thailand. Application to establish such an entity is submitted to the Department of Commercial Registration, such an entity being regarded as a service business within the meaning of Schedule 3 of the Foreign Business Act (see below). The activities of such an office must be restricted to the sourcing of goods or services in Thailand, or the gathering of marketing and other information, to be passed to the head office. A representative office must not engage in income generating activities. The parent company must transfer into Thailand at least five million Baht as working capital for the representative office, of which two million Baht must be remitted in the first year, and at least one million Baht per year after that. The manager of the representative office must prepare an annual report on activities undertaken and file this with the Ministry of Commerce, as a condition to the office being permitted to carry on its activities.

There are three types of representative offices that require licensing, i.e., finance, security and credit fancier offices; foreign bank offices; and international business offices. Certain requirements and permission from the Bank of Thailand (BOT) and the Office of the SEC must be met. There are also requirements regarding the remittance of funds into Thailand.

2.4 Regional office

It is possible for a foreign company to establish a regional office in Thailand, in order to coordinate and direct the operation of its branches and affiliates in the region, on behalf of the head office, to provide services in consulting and management, training and personnel development, financial management, marketing and sales promotion, product development, research and development. Such a regional office must not engage in revenue earning activities, make offers to sell or purchase goods or services or negotiate or enter into any business arrangements with any person in Thailand. Its expenditure must be borne by the head office. Permission must be obtained from the Director General to establish such an office.

2.5 Regional trade and investment support office

The Board of Investment (see below) has power to grant permission to establish a Regional Trade and Investment Support Office ("RTISO"). An RTISO may engage in limited activities, namely: controlling and advising affiliates; providing certain consultancy services; information services; technical services; testing product standards; exporting; wholesaling within Thailand; training activities; maintenance and repair of machinery; machinery calibration; and software design and development. There are requirements for minimum expenditure and approval of operating plans.

2.6 By virtue of an agreement

Unless there is a specific legal requirement, it is not compulsory for a foreign company to conduct its business through a Thai registered company or other entity. It may engage in business, pursuant to an agreement with a Thai party. For example, it is permissible for a foreign company to enter into an agency or distribution agreement with a Thai company, or a franchising or licensing agreement. In addition, a foreign company may simply sell its products to a Thai purchaser under a sale and purchase, or import/export agreement.

2.7 Joint Ventures

A Joint venture can be formed by two or more parties working together on a specific project or a long-term basis. A joint venture agreement need not be registered with the government as it is considered to be a private contract. Each party to a non-incorporated joint venture must separately obtain licenses that may be required to conduct the business of the venture. However, the Revenue Department considers such an unincorporated joint venture a single tax entity. Carefully structured agreements can avoid such tax treatment.

2.8 Other structures

A business may be carried on by a sole proprietor, or by a partnership. There are also public limited companies as well as private companies. In a briefing of this size, it is not possible to discuss the detailed provisions that apply to these types of business entity.

3. Foreign business restrictions

There are several laws that impact on the rights of foreigners to engage in business activities in Thailand. These are considered below.

3.1 Foreign Business Act

The Foreign Business Act (1999) came into effect on 3 March 2000. The FBA is now the principal act that deals with the rights of foreigners to own or operate businesses in Thailand. The Act places restrictions on foreign ownership or participation in 43 specified business activities divided into three Schedules. Schedule 1 businesses are prohibited to foreigners, except on a minority basis. As to Schedule 2 businesses, minority foreign ownership is possible without permission. Majority foreign ownership of up to 60% (and possibly up to 75%) is permissible with the consent of the cabinet. However, at least 40% of the directors must be Thai nationals and other conditions can also be imposed in any permit granted. As to Schedule 3 businesses, minority foreign ownership is possible without permission. Majority foreign ownership is permissible with the consent of the Commercial Registration Department and the approval of the Foreign Business Board (this is the regulatory authority set up under the FBA). Conditions can be imposed on any permit granted. The Act sets out the criteria for approval for majority foreign ownership of a Schedule 2 or 3 business and the conditions that can be imposed in a permit granted for majority foreign ownership.

When compared with the old Alien Business Law of 1972 that it replaced, there are many important manufacturing activities that are now de-restricted. These include the manufacture of alcoholic and non-alcoholic beverages; clothing; textiles; footwear; pharmaceuticals; glassware; cement; and stationery. The FBA has also partially de-restricted certain service businesses including: construction; retailing; wholesaling and trading and distribution. In some of these cases, certain minimum investment requirements must be observed. However, most service businesses are still included under Schedule 3 of the Act, and therefore it is necessary to apply for permission for majority foreign ownership of such a business (see above).

The principles to be applied to applications for permission for majority foreign ownership of a Schedule 2 or 3 business are still being worked out in practice. However, in cases that we have dealt with during 2001, in general, most of the applications that we have submitted for majority foreign ownership of a Schedule 3 business have been successful. With regard to majority ownership of a Schedule 2 business, our experience has been less successful, and we have yet to represent a client who has been successful in obtaining permission for majority foreign ownership of a Schedule 2 business. It should also be born in mind that if a permit is granted, other conditions may be imposed in the certificate issued.

Foreign investors should also investigate the possibilities of obtaining majority foreign ownership by forming a company under the provisions of the US-Thailand Treaty of Amity, or by an application to the Board of Investment for promotional privileges (see below).

3.2 US-Thailand Treaty of Amity and Economic Relations

American citizens and corporations have preferential rights with regard to the ownership of Thai companies, under this special treaty signed between Thailand and the USA in 1968. Such rights are on the basis of reciprocity. Since the USA permits Thais to have majority ownership of a US corporation, Thailand, in general, permits US citizens and corporations to have majority ownership of a Thai company. There are exceptions to this general rule. In the areas of communications, transport, fiduciary functions, banking involving depositary functions; the exploitation of land or natural resources, domestic trade in indigenous agricultural products and the practice of a profession, each country may still apply restrictions. The Treaty does not confer any preferential rights with regard to land ownership. It is to be noted firstly, that these preferential rights do not apply to the nationals of any other country. Secondly, the granting of such preferential rights to the citizens of one country places Thailand in breach of its obligations as a signatory to the World Trade Agreement. It is therefore submitted that in the long term, such preferential rights will have to be extended to the nationals of all other countries, or abolished.

3.3 Special restrictions

Special restrictions apply to the percentage of foreign ownership permitted in particular businesses. These include: banking; finance companies; credit foncier companies; securities companies; insurance companies; and international airline and shipping lines.

3.4 No restrictions

In general, if there are no restrictions on foreign ownership of a particular business activity under the Foreign Business Act or under any other law, then majority foreign ownership of such a business is permissible.

4. Investment Promotion

4.1 Board of Investment

The Board of Investment (BOI) was established in 1960. Its current powers are set out under the Investment Promotion Act (1978). The BOI has power, exercised on a case by case basis, to grant fiscal and other promotional incentives to Thai registered companies. The incentives granted can include the following rights: majority foreign ownership; ownership of land and buildings; exemption from import duty on imported raw materials and machinery used in the promoted business; and exemption from corporate income tax for up to eight years. The rights can be granted subject to conditions, for example, that the company must have minimum paid up capital of a specified amount, or that Thais must continue to have a specified minimum shareholding in the company.

4.2 Industrial Estates Authority of Thailand

The Industrial Estates Authority of Thailand (IEAT) was set up in 1972. It owns or manages purpose built industrial estates in Thailand. It has powers to grant promotional privileges which are similar to the privileges which can granted by the BOI (see above), except that it does not have power to grant a right of majority foreign ownership of a company.

5. Visas and work permits

5.1 Visas

A foreigner who intends to apply for a work permit to work in Thailand and any dependants who intend to reside in Thailand with him/her, must enter Thailand under a Non Immigrant visa. This visa can be applied for at a Thai consulate or embassy abroad. Upon arrival in Thailand, a three month visa will usually be granted. Within that period, an application for a work permit should be submitted to the Labour Ministry. If the work permit has not been granted within that time, it is possible to apply for an extension of the visa for one month, on the grounds that a work permit application is pending. Further extensions can be applied for on the same grounds.

A Non Immigrant visa is the only type of visa upon which a work permit application can be based. It is not possible to apply for a Non Immigrant visa, or to change from another type of visa to a Non Immigrant visa, from within Thailand.

5.2 Work permits

The Alien Employment Act is the principal Act which sets out the restrictions that apply to foreigners working in Thailand. Amongst other things, it contains a list of categories of employment which are prohibited to foreigners. In general, every foreigner who engages in work in Thailand, whether paid or unpaid, must possess a valid work permit. An application for a work permit is submitted to the Labour Ministry. The applicant must submit various documents. These include: the applicant's passport, curriculum vitae and educational certificates; a medical certificate; three photographs of the applicant; copies of various corporate documents of the company which sponsors the application, and other documents on a case by case basis. The application should take around 4-8 weeks to be processed. The work permit issued will: name the employer for whom the applicant may work; describe the position to be held and the employment activities for which the permit is granted; and specify the location at which the activities may be performed. It will be granted for a maximum period of one year, backdated to the applicant's date of arrival in Thailand (two years in the case of foreigners employed by BOI promoted companies). Application for renewal must be made before expiry. Consent must be applied for in advance for any change in the identity of the employer, the position held and duties to be performed, and the location for the performance of the work.

6. Ownership of land and buildings by foreigners

In general, foreigners are not permitted to own land or buildings in Thailand. There are a number of exceptions to this general rule.

6.1 BOI and IEAT promoted companies

The Board of Investment and the Industrial Estates Authority of Thailand each have power to grant permission to a promoted company to own land for the purpose and duration of its business.

6.2 Condominiums

Under the Condominium Act (1979), as amended in 1999, it is possible for foreigners to own up to 49% of the condominium units in a purpose built condominium building.

6.3 Substantial investment

Under a decree passed in 1999, foreigners who invest a minimum of 40 million Baht (roughly US$900,000) in specified securities are permitted to purchase up to one rai of land (approximately 1,600 square metres) for residential purposes. The amount required to be invested is in addition to the amount required to purchase the land.

6.4 Property funds

The Securities Exchange Commission (SEC) has power to grant permission to set up a licensed property fund, in order to purchase and hold land and buildings. Such property funds may be wholly owned by foreigners, but are subject to minimum investment requirements and other requirements.

6.5 Leasing of land or buildings

There are no general limitations on the rights of foreigners to lease land or buildings. A lease may be granted for any purpose for a term of up to 30 years, and may contain an option to renew for a further 30 years. Under an Act passed in 1999, a lease for industrial or commercial purposes may be granted for a term from 30 years up to 50 years, and may also contain an option to renew the term for a further 50 years. A lease that is for a term of more than three years must be registered at the Land Department, and is subject to registration fees. A lease that is subject to registration, but is not registered, would be treated as a lease for a 3 year term only.

7. Tax

Every individual or corporate entity which receives income in Thailand must register for income tax purposes and receive a tax identification card. Individuals register for income tax and companies register for corporate income tax.

7.1 Corporate income tax

Corporate income tax is payable by companies and registered ordinary or limited partnerships. It is imposed on the net profits of a business during a tax year, after deduction of permitted depreciation and allowable expenditure. Tax is payable on the net profits arising from a business carried on. Foreign companies or partnerships are liable to pay tax on income originating in Thailand.

The corporate tax rate is 30% of net income. The tax is paid in two stages. A company must file interim accounts and an interim tax return within two months of the end of the first six months of its accounting period, and pay 50% of the tax estimated to be due. The final accounts and the year end tax return must be filed within 150 days of the close of the accounting period and the balance of the tax paid, taking into account the interim payment made half way through the accounting year.

7.2 Value added tax

Value added tax (VAT) is payable on the provision of taxable services by an entity registered for VAT. The Thailand VAT system is very similar to that in the United Kingdom. The main differences are: (i) the Thailand VAT rate is a flat rate of 10%, but temporarily reduced to 7% at present; and (ii) VAT returns are filed and the VAT due is paid monthly, within the 15th day of the month following the month of assessment.

7.3 Personal income tax

Liability to tax depends on the concept of residence, and there is a liability to income tax if an individual is present in Thailand for at least 180 days or more in a tax year. Individuals and ordinary partnerships are liable to pay personal income tax in graduated rate bands of 5%-37% of net income. Tax is due on all forms of income earned in Thailand. The income liable to tax is income from all sources, less allowable expenditure and personal allowances.

7.4 Withholding tax

Withholding personal income tax must be deducted from an employee's wages paid by his employer and paid to the Revenue Department on a monthly basis. The system is similar to PAYE in the United Kingdom. Credit is given against the employee's annual tax bill for any tax earlier withheld and paid.

There are many other occasions when liability to withhold and pay tax arises, for example, on the payment of interest, rent or service fees. When a Thai company pays an invoice for services to another Thai company, 3% of the invoice amount is deducted and paid to the Revenue Department as withholding tax. The issuer of the invoice then has a tax credit for this amount, which he can utilise in his own tax return. International withholding taxes can also arise (see below).

7.5 Specific business tax

Certain types of business, including banking and pawnbroking, are not subject to value added tax, but are subject to specific business tax ("SBT"). SBT also arises on the sale of land.

7.6 International withholding tax and double taxation treaties

Foreign entities which do not engage in business in Thailand but which derive income from Thailand are liable to pay international withholding tax, subject to the terms of any double taxation treaty between Thailand and the recipient's home country. The tax is due on many types of income including: interest; dividends; capital gains; rental or hire payments and royalties. Though the liability to tax may arise, the recipient may have a tax credit for the tax deducted under the terms of a double taxation treaty between Thailand and the recipient's home country.

The tax treatment of income and the withholding taxes applicable under the Thailand-United Kingdom Double Taxation Treaty are summarised below:

Dividends	15% tax, if the payor is engaged in an industrial undertaking and the payee is a company which holds at least 25% of the voting shares of the payor; 20% tax if the payor is engaged in an industrial undertaking or if the payee controls at least 25% of the voting rights in the payor.
Capital gains	Gains arising from the alienation of immoveable property are taxed in the country in which such property is located. Gains arising from moveable property are taxed in the country in which the transferor is resident.
Royalties	5% tax for the use of copyright of literary, artistic or scientific work. 15% for other types of activities for which a royalty is paid.
Interest	No tax, if the interest is paid to the UK Government or an agency thereof or to the Bank of England. 10%, if paid to a bank or other financial institution (including an insurance company). 25%, in all other cases.
Business profits	Taxable in the country in which the enterprise is located, unless the enterprise has a permanent establishment in the other country.

8. Intellectual property

Thailand has modernised most aspects of its laws concerning patents, trademarks and intellectual property rights during the 1990s. Thailand has acceded to most of the international treaties and conventions that affect intellectual property rights. Such rights may be a breach of both civil and criminal law. As a pre-condition to the civil enforcement of patent and trademark rights, these rights must be registered with the Department of Intellectual Property (DIP). Any agreement under which intellectual property rights are licensed, must also be registered with the DIP, as a pre-condition to successful enforcement.

9. Labour law

Thailand has a number of Acts, decrees, regulations and notifications that apply to the employment of individuals. These contain provisions relating to many matters including: minimum wages; working hours; holidays; sickness; maternity leave; the issuing of Work Rules; employees' welfare and severance (redundancy) payments. There are specific regulations that deal with the liability to pay workmen's compensation for death or injury during employment, and the establishment of provident funds.

10. Social security

Liability to pay social security contributions arises for all employers with more than ten employees. The employer, the employee and the Government are liable to pay contributions to the social security fund. The fund makes payments to employees in the case of illness and retirement.