Recently Sleuth came across a nice informative article on the FBA changes by Stephen Frost of
Have a good read and do pay a visit to Stephen's website.
On 9 January 2007, the Thai government announced its proposals to changes the Foreign Business Act, the principal Act that regulates foreign ownership of businesses in
Current legislative framework regarding foreign ownership of businesses
The Foreign Business Act is the principal Act regulating foreign ownership of businesses in
• In Schedule 1 businesses, 49% foreign ownership is permitted, and there is no machinery to obtain majority ownership.
• In Schedule 2 businesses, 49% foreign ownership is permitted, and up to 75% with Cabinet permission, but at least 40% of the directors must be Thai.
• In Schedule businesses, 49% foreign ownership is permitted, and majority ownership with a license.
The criteria for majority ownership are as follows: the business contributes to national safety and security; economic and social development; natural resources and energy conservation; environmental protection and consumer protection. Other matters that will be considered are: the size of the business; the creation of employment, the transfer of technology, and research and development.
The Board of Investment, the government agency that can award tax holidays and other investment incentives, also has power to grant permission for majority foreign ownership of a Schedule 2 or 3 business.
American investors have preferential rights to business ownership under the USA-Thailand Treaty of Amity. This gives American investors a general right to have 100% ownership of a Thai company, subject to seven specified exceptions that may still be restricted under domestic law: communications, transportation, fiduciary functions, banking involving depository functions, the exploitation of land or natural resources, domestic trade in indigenous agricultural products, and the liberal professions.
There is also special legislation that sets out the foreign business restrictions applying to specific businesses or industries. For example, banking and finance businesses, telecommunications, insurance, shipping, and airlines are all regulated under specific legislation.
Definition of alien
The existing definition of alien under the FBA, and the proposed addition (highlighted and underlined) is shown below:
(1) A natural person not of Thai nationality.
(2) A juristic person not registered in
(3) A juristic person registered in
(a) having half or more of its shares held by persons under (1) or (2), or having persons under (1) or (2) investing half or more of the total capital or a juristic person having a person under (1) or (2) having half or more than half of the total voting rights of that juristic person, either by law, the articles of association or agreement; or
(b) a limited partnership or registered ordinary partnership with a person in (1) as the managing partner or manager.
(4) A juristic person registered in Thailand with half or more of its shares held by a person under (1), (2) or (3) or with a person in (1), (2) or (3) investing half or more of its total capital.
Bearer shares are deemed to be shares of aliens, unless otherwise provided by regulations.
Thus it can be seen that the new definition of alien now includes both share ownership and voting rights. In practice, scrutiny of share ownership was limited to the first tier of ownership. Will this practice continue or will the authorities scrutinize ultimate ownership? The answer to this is not yet known. But note that the definition has not been extended to the board of directors, the nationality of directors, or the nationality of directors with signatory power.
Position of existing businesses - partial amnesty
All existing businesses subject to the FBA that are alien under the new definition on the date when the Act comes into force, must apply for a certificate within one year. On receipt of the certificate, the business may continue its activities, and:
• Schedule 3 businesses may continue to operate, until dissolved , but
• Schedule 1 and 2 businesses may operate for two years only after the effective date of the Act. After that, they must either reduce their foreign shareholdings (and voting rights) to below 50%, or apply for a license for majority ownership.
Failure to obtain a certificate, or operating the business after two years is an offence, and creates liability to the increased penalties (see below).
Amnesty for existing offences
If a person fails to comply with Secs 6, 7 or 8, or Sec 36 of the old Act, prior to the new Act coming into force, and notifies such acts within 90 days, and remedies such acts or dissolves the business within one year from the date when the new Act is in force, no penalty arises.
But this amnesty does not apply where a person has failed to comply with Secs 6, 7 or 8, or Sec 36 of the old Act, and the case is proceeding in court or is already under official enquiry.
Position of new businesses
Businesses formed after the Act comes into force, (and existing businesses that do not obtain a certificate) are subject to the following:
• the new definition of alien will apply
• increased fines for using nominees or operating a business in breach of the Act. The fine rate band changes to 500,000 - 5 million Baht and the daily fine rate band for non compliance with court orders, changes to 50,000 – 250,000 (a 500% increase in each case).
• Directors, partners or authorised persons are also subject to these penalties
• Existing prison terms are not increased
The criteria for obtaining majority ownership have not been changed. Whether their interpretation will change in practice, is not known and there have been no government announcements on this.
Anti-nominee regulations passed in 2006:
It is also relevant to point out the anti-nominee regulations issued in 2006:
All companies:
In any partly foreign-owned partnership or company where the foreign shareholders or partners own 40 - 50% of the shares, or own less than 40%, but a foreigner is an authorized director, then all Thai shareholders or partners must submit information concerning their source of finance to acquire their shareholdings, with the application to register the company. The documents submitted should identify the money for share purchase, and should include bank passbooks or statements for the previous six months, and evidence showing the source of money used for investment.
Companies owning land:
This regulation is in the form of an instruction to all Land Departments.
It applies to all companies or partnerships where there are any foreign shareholders, directors or partners:
Where it is reasonable to believe that a Thai is holding shares on behalf of a foreigner, then the Land Department may investigate their income background, current employment and salary and call for evidence on such matters. If a loan was used in connection with the purchase, evidence of the loan can be called for. If after investigation it appears that the transfer of land was intended to avoid the law, or a person is buying the land for the benefit of a foreigner, then the case may be referred to the Land Department in
Retailing and wholesaling businesses
Under the new proposals, the existing right of retailing and wholesaling businesses to be 100% foreign owned provided 100 million Baht capital is paid in, is abolished. For existing businesses, since they are listed under Schedule 3, they only have to apply for a certificate and do not have to adjust their shareholdings (see above). Note also that a specific Retailing and Wholesaling Act is planned, and these businesses may therefore face further limitations. New businesses will be subject to the new regime immediately.
Liberalisation of restricted businesses?
There has been no further liberalisation of the existing 43 businesses, except for deletion of some that are regulated under separate legislation.
Comment
It appears that policy has been dominated by the Temasek transaction: there has been no consideration of the changing economic scene and increased competition from other Asian countries, and whether partial or total de-regulation can take place of FBA-restricted or separately restricted businesses. The net effect given, when coupled with the capital reserve requirements issued in December 2006, is one of protectionism. It seems that whilst foreign manufacturers are welcome, foreign services businesses are not so welcome. Will use of nominees and avoidance devices continue? A hard question to answer - the increased penalties may deter some, but we suspect not all foreign investors. Will licenses for majority ownership be more freely granted? Once again it is difficult to answer this. The statutory criteria for majority ownership have not changed. Consideration as to whether there will be any change in their interpretation in practice, will have to wait until the Act has been in operation for a while.
3 comments:
After foreign business act we can see a lot of good changes in Thailand economy. And one of the pluses is that property prices became competitive and you can have an excellent choice of quality developments. This Thailand property offer buyers much return potential especially because Thailand is considered by many as the number one tourist destination in Asia.
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