Investing in Thailand: what is a Foreigner under the FBA?

May 24 2010 Categories: Thailand Business, Thailand Foreign Business Act No comments yet

What is the current legal definition of a Foreigner?

In this post I will discuss how the concept of “foreigner” is defined by the Thai Foreign Business Act (formerly “Alien Business Act”) as well as the changes that the Thai Government wanted to bring to this definition in December 2007. While the attempt to change the definition of the FBA definition of the term of foreigner ultimately failed the fact is that it was the second such attempt since the enforcement of the FBA and that Foreign Investor coming to Thailand should keep in mind that said matters could resurface at any time in the future.

The current version of the FBA as amended in 1999 defines a foreigner as:

“a natural person who is not of Thai nationality; or
a juristic person who is not registered in Thailand; or
a juristic person who is registered in Thailand and is either

(i) a natural person who is not of Thai nationality; or
(ii) a juristic person that is not registered in Thailand; or
(iii) a juristic person incorporated in Thailand with at least one-half of its share capital owned or contributed by a foreign natural person or juristic person.”

It does not make for an easy reading does it?

Are they matters not yet taken into account to determine if a juristic person is foreign of Thai?

In the current FBA definition, several matters are not taken into account to define a foreign juristic person such as:

other sources of funds to finance the business , e.g. a loan; or preferential rules about dividend distribution; or
preferential rules about voting rights (note however that a company that purchases land should not use preference shares); or
preferential rules about management.

To date, companies in which foreigners own a minority of the shares but have a majority of the votes still qualify as Thai companies.

Other sources of funds that finance the business are not yet in the definition but a loan agreement between a foreign shareholder and his Thai partner may serve to indicate that the Thai shareholder is a nominee.

How many attempts to modify the FBA definition of foreigners have there been?

To date there have been two and a half attempt to modify the FBA.

When was the first attempt to modify the FBA?

The foreign business community in Thailand have short memories. Everyone seems so surprised when the Government started its last attempt to modify the FBA in 2007.

They all forgot the near miss of 2000, 2001 when the Foreign Investment Committee in charge of reviewing the Act proposed to add the matters of voting rights and of managements into the definition of foreigner.

In other words, any companies controlled by foreign investors through preference shares or management would have become foreign overnight if this first amendment had gone through.

What was the second amendment all about?

The Thai Cabinet approved, in January 2007, an Amendment to the Foreign Business Act whose purpose was, among others, to modify the definition of the concept of foreigner as follows: (I underlined the proposed changes).

In the proposed second amendment a foreigner is define as :

“a natural person who is not of Thai nationality; or
a juristic person who is not registered in Thailand; or
a juristic person who is registered in Thailand and is either

(i)a natural person who is not of Thai nationality; or
(ii) a juristic person that is not registered in Thailand; or
(iii) a juristic person incorporated in Thailand with at least one-half of its share capital owned or contributed by a foreign natural person or juristic person; or
(iv) of which half or more of the total voting power are controlled or held or exercised by a foreign natural person or juristic person whether in application of the law, or of the articles of association said juristic person or through an agreement.”

We were back in 2000 but for the fact that the government did not include the additional concept of “foreign management” in its definition.

What was the half attempt to modify the FBA about?

The foreign business community not being thrilled by this new definition was due for another surprise when the National Legislative Assembly or NLA (name of the non elected parliament during the interim government that followed the Coup of 2006) not only rejected the government amendment in second reading but in addition called for a more restrictive definition of the term foreigner to close the existing loopholes by adding management control as another criterion in the definition. Suddenly, we were back in 2001.

Fortunately, as the amendment proposed by the Cabinet was already so badly perceived by the foreign community, the Government decided to freeze the process and to hand this hot potato to the next government (we were only months from the election).

What was also so important about this amendment?

While this amendment is for the time being lost in someone drawers (and not news anymore,) I still believe that it is worth to discuss it here. The new FBA amendment (if adopted) would have brought several changes including the dreaded modification to Clause 4 of the FBA.

Even if the government version had not closed all the legal loopholes foreign investors are now using it would have made things more complicated.

Of course it would still have been possible to grant certain special rights to minority foreign shareholders such as: to set up a company with preferential rules about dividend distribution in favor of the foreign shareholders, and/or to require the presence of foreign shareholders to form a quorum for meetings; and/or to require foreign shareholders to vote in favor of a resolution for the resolution to be valid; and/or to allow foreign shareholders to appoint a certain number of directors of a company.

If the amendment was not closing all loopholes why was it such a problem?

What would have been the immediate consequences of the FBA amendment if adopted?

The immediate consequence of this FBA amendment (if adopted) would have been that overnight many companies that are currently operating, as Thai companies , businesses listed under FBA List 1, List2 or List3 would have become foreign companies under the new definition. This would have applied whether the voting rights of the foreign shareholder were granted through preference shares; or shareholder agreements; or through a proxy (Power of Attorney) from the Thai Shareholder to the Foreign Shareholder. Of course, the FBA amendment provided dispositions to solve this problem but those dispositions were not very favorable.

What would have happen then?

Now the real problem was not the change made to the definition of foreigner but the elaborate mechanism the amendment provided to solve the problem of the foreign investors whose hands were “caught in the cookies jar”. According to the amendment all companies becoming foreign as a result of the new definition and that are (1) exercising an activity under List 1, 2 and 3 of the FBA and (2) having a dual voting structure would have had to report to the Ministry of Commerce and to apply for a FBA certificate within 1 year from the date of the enforcement of the amendment.

Furthermore, if the companies were having activities under FBA List 1 or List 2 they would be authorized to continue their businesses as foreign owned companies for only 2 years but would have to restructure themselves during this period or failing to do so be liquidated at the end of the 2 year period.

If instead the companies were operating activities under List 3 of the FBA they would have to apply for a FBA certificate within 1 year from the date of the enforcement of the amendment and would be authorized to continue their activities under List 3 as a foreign owned company.

That was not so bad was it?

Overall, the amendment did not seem so bad; but the problem was that the way out offered to foreign companies above was not applicable to companies that also have Thai shareholders that might be deemed nominees.

This was a problem because my educated guess is that at least 90% of the companies that have shareholders agreements or that use preferential votes also have Thai shareholders that might be deemed nominees.

Those companies were to be treated more harshly as they would have been required to notify the Ministry of Commerce within 90 days after the enactment of the law; and either correct the violation or dissolve their business within one year from the enactment of the law to avoid penalties under the FBA.

The way out given to companies using Thai shareholders that “might be deemed nominees” was not practicable. The only way to correct the violation would be to find a real Thai partner that would invest into the business and take the place of the Thai shareholder that “might be deemed a nominee” or to liquidate or sell the business within 1 year of the enactment of the law.

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 2009-07-21 12:25:37.

Doing Business in Thailand