Business Registration: The Representative Office

May 24 2010 Categories: Thailand Business, Thailand Company Registration No comments yet

The first option available to a foreign investor who wants to start a business in Thailand is to register a non-trading legal vehicle (for example Representative Office). Hereinafter we will discuss the characteristics on Non-Trading Legal Vehicles the most common of which is the Representative Office. [this post is an updated version that replace one of my first posts]

What is a Non-Trading Legal vehicle?

Put it this way, a non-trading legal vehicle is a “nonprofit” business by opposition to a commercial business like a company. Of course, the non-trading legal vehicle will have an economical role to play but it will not generate itself an income. In other words it is a legal entity that is a cost center financially supported by the head office.

The role of the non-trading entity will be to support the activity of the mother company and/or its subsidiaries or affiliates in Thailand or overseas.

How does a Non-Trading legal vehicle operate?

Because it is in essence a “nonprofit” business the non-trading entity:

(i) Cannot issue invoices for the sale of goods or services to any third parties; and

(ii) Cannot sign any commercial agreement with any third parties whether on its behalf or on behalf of the mother-company.

Are of course excepted agreements, which are necessary for the running of the non-trading entity itself such as for example lease agreement for the legal entity premises, employment agreement and so on…

What is a Representative Office?

The representative office is the most known forms of non-trading legal entity available in Thailand. Briefly it is a foreign corporation non-trading branch that will render services to the head office or to an affiliate or a group company and which scope of activities are limited to:

(1) Sourcing of goods or services in Thailand for the head office;

(2) Inspecting and controlling quality of goods which the head office purchases in Thailand;

(3) Disseminating information about new products and services of the head office;

(4) Reporting to the head office on local business development and activities;

(5) Giving advice on goods distributed by the head office to the distributors or users.

Scope and Operational Limitations

Now, the first problem when setting up a Representative Office is that the scope of the permitted activities is too restricted. In addition, the second problem is that even when acting within the scope of their intended purposes Representative Offices will be limited in their operations because they cannot as explain above:

(a) Receive purchase orders;

(b) Offers to sale;

Now those limitations are not practical at all, because companies that are supporting the cost of Representative Office expect more from their Representative Offices than simply collecting information. In practice the truth is that most of the Representative Offices I have seen registered by foreign companies in Thailand are breaching the operational limitations clause and exercising at least one or more of the prohibited activities listed under letter a, b or c.

Of course they must be a few Representative Offices which are actually exercising the activity that they have been registered for and within the limitation imparted by the law (they are always exception) but based on my experience they must be a minority.

Another example of a piece of regulation not adapted to the needs of foreign businessmen.

How to apply for a Representative Office?

Representative Offices is a controlled activity and requires the foreign applicant to apply for a Foreign Business license. While the process is still cumbersome and time consuming it is in general easier to obtain a foreign business license for a Representative Office than for a normal company

The process has even been streamlined recently with the publication by the Foreign Business Committee of new sets of guidelines for services businesses in five categories that include Representative and Regional Offices. Note that the new guidelines do not address the issue of the limitative scope of activities for Representative Offices.

Conditions to Apply For a Representative Office

In order to obtain the Representative Office Foreign Business License the mother company must commit to transfer at least 5 million baht into Thailand as working capital for the Representative Office.

A minimum of two million baht must be remitted during the first year of operation, and hereinafter at least one million baht per year must be transferred into Thailand by the head office.

The manager of the representative office must commit to prepare an annual report on activities undertaken and file this report with the Ministry of Commerce if not the office may not be permitted to carry on its activities.

Certain types of Representative Office will require the obtaining of additional licenses or permission such as:

Finance, security, and credit financier offices
Foreign bank offices
International business offices

Benefits of Doing Business under the Form of a Representative Office

One of the immediate benefits is that a Representative Office is not subjected to the work permit ratio of 1 foreign employee for four Thai Employees. Depending of the case Representative Offices may support from 2 to 5 work permits. Representative Offices that exercises activities listed above under number 3, 4 and 5 (dissemination of information, reporting on Thai market) may support up to 2 work permits. Representative Offices that are sourcing goods or inspecting good may support up to 5 work permits and a Representative Office that has sourced more than 100,000,000 THB goods from Thailand during the previous year may even exceed this limit.

Contrarily to a popular belief, while Representative Offices are not subjected to corporate income tax (because they do not generate an income) they are not exempted from the obligation to prepare accounts and financial statements and to submit said statements to the Department of Business Development.

Note: This page is an excerpt of Rene Philippe Dubout next book: “How to Safely Invest Into Thailand” to be published in December 2009

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

Originally posted 2009-10-15 00:09:26.

Doing Business in Thailand