Doing Business in Thailand: Living in a state of sin

January 28 2012 Categories: Doing Business In Thailand, Thailand Business, Thailand Foreign Business Act No comments yet

“So when the woman saw that the tree was good for food, that it was pleasant to the eyes, and a tree to be desired to make one wise, she took of its fruit and ate. She also gave to her husband with her, and he ate.” (Gen3:6).

This extract of the genesis sum up the story of foreign investment in Thailand.

On the one hand Thailand is a magnet for foreign investment, on the other hand Thai legal framework make it still awfully complicated to legally invest into certain sectors, especially those listed under the foreign business act list 3, even when those sectors do not really need protection anymore.

As a result a lot of foreign investors are living in sin in breach of one law or another.

While I’m sure that there are foreign investors that have abided Thai laws at every step of their investment and while they are no statistics on the matter my educated guess is that most of foreign investors in Thailand are breaking the law in one way or another.

For example,

Representative Offices operating beyond the scope of their license

There are a limited number of purposes for which a foreign company may apply for a Representative Office foreign business license. One thing Representative Offices of foreign companies in Thailand cannot do is to accept purchase orders, make sales offers or engage in business negotiations with any person.

Now, I believe that most Representative Offices of foreign companies in Thailand have actually been set up to engage in these kind of activities and as such violating the scope of their license.

Operating businesses under FBA (List3) with companies that have Thai shareholders that may be deemed nominees

(please see my post on the Foreign Business Act for an understanding of the issues discussed)

There are thousands of foreign businessmen that are exercising activities that are still controlled under the foreign business list 3 through companies that have Thai shareholders that might be deemed nominees because they have no other alternatives to structure their investment.

Take for example a foreign investor that would like to open a pizzeria legally in Thailand. This foreign investor has three options.

(1) Firstly he may try to do it by the book, and apply for a foreign business license to operate a pizzeria under the form of a 100% foreign own company. I wish you good luck with it, because one of the requirements for obtaining a foreign business license is “know how”. But for the case where our foreign investor invented “nanotechnology pizzas” I don’t see how it could be possible to successfully pass this requirement.

(2) Secondly he may try to do a real joint venture with a local Thai partner. The local partner would own 51% of the business and the foreign partner 49%.

But in order to be a real joint venture and the Thai partner not to be deemed a nominee then the local Thai partner would have to invest his share into the business.

Now, how could a foreign investor; just arrived in Thailand; find and convinces a Thai partner to invest said 2,000,000 THB with him to open a pizzeria? I mean why should a Thai investor invest into a pizzeria with a foreign partner when he could do it all by himself in the first place?

Then, what option is left to our foreign investor?

(3) To go open his pizzeria in Singapore or Hong Kong or to do it in Thailand anyway even if it means that he will have to cut a few corners, among which using Thai shareholders that may be deemed nominees.

Working without a work permit:

(please see my post on Work Permits for an understanding of the issues discussed)

Another example is in relation to the obtaining of work permits. As explained in a previous post in a recent move the Labor Department has re-introduced the requirement of having four Thai employees in order to obtain a work permit.

Now whenever a foreign investor start a new business in Thailand there will be the investment period which may take from 1 to 6 months. During this period the investor will incorporate a company of which he will be a director, rent leased premises, and hire contractors to fit the lease premises.

He will negotiate with suppliers, and with his future customers, start to market his company and he will start to sign checks.

Now even if the foreign director does not receive a salary the fact is that he will be exercising both physical and intellectual activities. In other words he will be working as per the Labor Department definition of work.

Now the problem is that at this stage of the investment the foreign investor will not need yet to hire Thai employees. He may need one to assist him with the various formalities but he will definitively not need four Thai employees at this stage. He does not even have an office or a place of business ready.

Because he does not need four Thai employees yet or cannot employ them because the place of work is not yet ready, the foreign investor will not be able to apply for a work permit and he will be working illegally.

It would be nice if:

While I understand that there is a need for the Thai government to control and regulate foreign investment some of the current regulations are simply too unpractical or do not make sense anymore and should be reviewed in order to improve the situation of foreign investors and to avoid them to end-up willingly or not breaching the law.

The solutions could be as follows:

- create another purpose of RO that would be allowed to take or negotiate purchase orders on behalf of the head office or remove the conditions for all RO;

- Keep all the activities controlled under the FBA list 3 but submit the exercise by foreign investors of said activities to the application of a Foreign Business Certificate instead of a Foreign Business License or simplify the process for the obtaining of a Foreign Business License.

- Allow a period of one year during which the director of a company newly created may obtain a work permit without having to fulfill the four employees requirements.

Note: This post is an excerpt of Rene Philippe Dubout next book: “How to Invest Safely Into Thailand” to be published in January 2010

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 2009-08-17 06:51:07.

Doing Business in Thailand