Doing Business in Thailand

An investor that desires to buy a business in Thailand will have several options as follows:

1. Acquisition of Shares

2. Transfer of the Entire Business Assets

-          with immediate liquidation of the transferor company

-          without liquidation of the transferor company

3. Amalgamation

Amalgamation

I will start by the last option called amalgamation which is actually not very much used.

Amalgamation is the merger of two companies by forming a new company and dissolving the two merging companies (“the amalgamating companies”) into the new company (“the amalgamated company”).

To sum it up the new amalgamated company will assume all the business assets and liabilities, rights and obligations of the two merging companies by operation of law. The capital of the new company will be equivalent to the capital of the two amalgamating companies.

Transfer of the entire Business

The second option is to transfer the entire business assets from the seller company (hereinafter the “Transferor”) to the buyer company (hereinafter the “Transferee”) either with or without liquidation of the transferor company. We will not discuss the conditions applicable to the liquidation of a company here as this will be the subject of another post.

The first step will be to check in the Articles of Association of the transferor if the decision to transfer the entire business to another company can be made by the Board of Directors or if it requires the consent of the shareholders. Even if the consent of the shareholder is not requested it is better to summon a meeting of the shareholders and to get their approval, especially if the sale of the entire business triggers a subsequent liquidation of the transferor company.

There is no need to inform the creditors of such transfer and the creditors cannot interfere with the sale apart from enforcement of clauses or stipulations, if any, in contracts between the transferor and its creditors (which is why a due diligence is required).

The liabilities stay with the transferor legal entity and transferee does not assume any current or possible liability of the transferor (here again there is the issue of ongoing contract of the transferor which will be taken over by the transferee).

The transfer of any legal agreements between the transferor and third parties and the transferee will be done either by assignment or by novation. Assignment may be used if the transferor does not owe any obligations to his counterpart he can transfer the agreement to the transferee without requiring his counterpart prior approval. In such case the transferee only need to give notice to its counterpart (check however the agreements). If the transferor owes obligation to his counterpart, he shall require his counterpart consent prior to substitute the transferee to himself.  The result of novation is that the old contract is extinguished. Therefore, the transferor is discharged from liability to his creditor by the substitution of the transferee and a new contract is created.

The last issue is the transfer of employees from one company to another.

Note that the solution is the same whether under amalgamation or transfer of business. The transfer of employees from one company to the other always results in the termination of employment of the amalgamating companies’/transferor company’s employees but if all the following conditions are met:

(i) The employees grant their consent for such transfer in writing;
(ii)   The length of their service with the amalgamating/ transferor company is counted together with that of their services with the amalgamated/transferee company, and
(iii)   The benefits received from the amalgamated/ transferee company are not less favorable than those received from the amalgamating/transferor company.

If any of these conditions are not met, both an amalgamating/liquidated company will be liable to pay the severance pay depending on employees’ service years, and potentially one month’s salary in lieu of an advance notice.

Tax Issues in the case of the transfer of the entire business with or without liquidation of transferor

The parties will have to notify the Revenue Department prior to transfer as many taxes exemptions may be given under the condition however than such notification has been given (example : exemption of shareholders tax on gains, VAT exemption etc.)

The transferor company assets shall be transferred at true market value.  In that context it is recommended to have an appraisal, by an independent appraiser, of the assets to be transferred.

As to the corporate income tax, the solution will depend whether the transferor company is liquidated or not. If the transferor company is liquidated and the liquidation is registered at the ministry of commerce in the same accounting period than the transfer of assets and if all the conditions above mentioned are fulfilled 74 (1) b of the Revenue Code shall apply to the transfer of business and the eventual gains arising from the transfer shall not be include in their taxable profit income.

If the transferor company is not liquidated or the liquidation is not registered at the ministry of commerce within the same accounting period than the transfer of asset income tax shall apply on the gain derived by the transferor entity. However if the transferor has any tax losses he can used them.

Thai and foreign corporate shareholders, and individual shareholders are exempted from tax on gains resulting from entire transfer of business as per RD 341 and MR 245. Those exemptions are only given if dissolution of transferor is registered within 14 days from the special resolution to liquidate the company and if the liquidation occurs in the same accounting period as the transfer of business.

In principle, VAT applies at 7% on transfers of any assets with the exception of land and buildings. Exemption to the VAT is possible, providing that:

(a) Sale of the entire business, and

(b) Transferor and Transferee have notified the Revenue Department as explained above, and

(c) Transferor remitted its VAT certificate to the Revenue Department and,

(d) Transferor registers its dissolution and commences its liquidation in the accounting period in which the transfer is made.

(e) Notification to the Revenue Department shall be done by both the transferor and the transferee at least 15 days prior to the transfer of the entire business.

There is no reduction applicable in relation to the government fees applicable to the registration of immovable property.

As to the Special Business Tax there is an exemption but only in case of transfer of the entire business. The same apply to Stamp duties. Note that in case of transfer of entire business with immediate liquidation the transferor can be submitted to a tax audit for a period of five years following its liquidation.

Purchasing the shares of the company that owns the business

The easiest option to implement is of course to purchase the shares of the company that owns the business.

However you should not go down this road without a complete due diligence of the company you are purchasing. Indeed, as you will be taken over the company including all its obligations and liabilities.

Of course it is possible to execute an agreement together with the seller stipulating that the sellers shall held you harmless of any liabilities that occurs after the purchase of the company as a result of sellers actions. But what help will this be if the seller leaves Thailand after the transaction is completed?

Therefore my recommendation would be to choose the road of the business transfers any time when such option is available, while more complex to implement this option has the merit to avoid the buyer liability for past actions of the seller.

About the Author:

The author Rene-Philippe DUBOUT is a lawyer since 1990 when he was admitted to Geneva bar (Switzerland). He practiced as a litigator there for 10 years until he moved to Thailand in 1999. In 2002 he founded with a group of Thai lawyers Rene Philippe & Partners Ltd a local law firm that specialized in Cross Borders Investments and Real Estate. He has been lecturing in several Thai Universities and a speaker to numerous conferences and seminars. He is the author of a must read book:”How to Purchase Real Estate Offshore Safely: The Case of Thailand”.

http//:www.renephilippe.com

© Copyrights 2009 – Rene Philippe Dubout – This article may be reprinted if information about the author, the websites, and the URLs remain intact.

Originally posted 2009-09-11 06:14:37.

Related posts:

1. Buying a Business in Thailand – General Issues to Consider
2. Buying a Business In Thailand – The Due Diligence
3. Thai Corporate Documents – The Articles of Association
4. Doing Business in Thailand : How difficult can it be?
5. Doing Business In Thailand: Is it easy to be successfull?
6. Doing Business in Thailand: Living in a state of sin
7. Doing Business in Thailand: Global Corruption Barometer 2009
8. Doing Business in Thailand: Global Corruption Barometer Part 2