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Changes ahead for foreign investors in Thailand

Background

Foreign entities are prohibited by the Foreign Business Act 1999 (FBA) from engaging in a wide range of activities in Thailand. Under the existing provisions of the FBA, a company is considered to be a foreigner unless it is registered in Thailand and Thai nationals hold more than half of the shares in the company.

Business activities which are restricted to foreigners are divided into three lists with varying degrees of prohibition.

  • List 1 activities are absolutely prohibited to foreigners. These businesses are not open to foreigners for special reasons and include activities such as media, farming or land trading.
  • List 2 activities may be undertaken by a foreigner with ministerial approval. These businesses are restricted in the interests of national security or relate to arts and culture, or environmental resources and include mining.
  • List 3 activities may be undertaken by a foreigner only if a foreign business licence is granted by the government. The activities on this list are those in which Thai nationals are not yet ready to compete with foreigners. List 3 is by far the most extensive list prohibiting most forms of business activity including wholesaling, retailing and all service businesses. Notably, manufacturing for export is not included in List 3.

Due to the cumbersome and unwieldy procedures for obtaining ministerial approval and foreign business licences, a practice has developed where foreigners use ‘Thai’ entities to invest into Thailand.

Historically, foreigners investing in Thailand have established Thai-registered companies such that, while Thai nationals hold the majority of issued shares, the majority of voting and dividend rights attach to shares held by the foreign investor. These structures are routinely used by the foreign investment community in Thailand where restrictions under the FBA prohibit majority shareholdings by foreigners or foreign business licences would be required.


The proposed amendments

On 9 January 2007, the Cabinet of the Thai government that has been in place since the military coup staged on 19 September 2006 approved in principle amendments to the FBA which significantly affect the ability of foreign investors to use the structures described above.

The amendments to the FBA that have been approved by the cabinet include:

  • the expansion of the definition of foreigner to include Thai-registered companies where foreigners (ie non-Thai nationals) control the majority of voting rights whether that control stems from the constituent documents of the company, agreements between shareholders or the law;
  • amendments to the List 3 businesses which are restricted to foreigners unless they obtain a foreign business licence. Specifically, increased restrictions will be placed on wholesaling and retailing (previously a foreign business licence was not required if minimum capital requirements were met). In addition, amendments have been made to clarify that sector-specific legislation in the securities, derivatives and banking sectors overrides the provisions of the FBA (typically, sector-specific legislation in Thailand is more restrictive than the FBA); and
  • an increase in penalties in connection with anti-avoidance provisions from between THB100,000 and THB1 million to THB500,000 and THB 5 million. The penalties for violating court orders in connection with the FBA have also been increased fivefold.

In addition to substantive amendments to the FBA, the draft approved by the Cabinet introduces a range of transitional provisions which will impact upon any organisation operating a business in Thailand under existing foreign investment structures. The transitional provisions specify that:

  • any entity in Thailand operating a restricted business that is not a foreigner at the date of enactment but which will become a foreigner once the amendments are passed must notify the Director-General of the Commercial Registration Department of the Ministry of Commerce and apply for a certificate within 12 months of the amendments coming into force;
  • entities that obtain a certificate that operate businesses restricted by ‘List 3’ will be permitted to continue operating their business;
  • entities that obtain a certificate that operate businesses restricted by ‘List 1’ or ‘List 2’ will be permitted to continue operating their business for two years from the date the amendments take effect. After the expiry of the two-year period, those entities must cease operations or restructure their voting rights so that Thai nationals hold the majority of voting rights; and
  • any person that believes they are currently in violation of the anti-avoidance provisions of the FBA, or is operating a restricted business without a licence, can notify the Director-General within 90 days of the amendments being passed. Those persons will be permitted to attempt to restructure their operations and will not be punished for the violation (unless a prosecution has already commenced).

Approval by the Cabinet is the first stage in the passage of legislation through the Thai legal system. The draft law will now be forwarded to a judicial review committee to review and recommend any drafting changes to give it efficacy. Once the final draft is settled, the bill will move to the National Legislative Assembly for debate. The bill must be passed by the National Legislative Assembly after which it will come into force once it has Royal approval.


Implications for investing in Thailand

The full impact of the amendments to the FBA (if enacted) is not yet clear. However, there will certainly be short-term and long-term ramifications for foreign investment in Thailand for new investors and existing businesses.

Significant issues facing investors in Thailand will include:

  • the availability of foreign business licences. Historically it has been difficult to obtain foreign business licences in sectors where the Ministry of Commerce has no policy to issue licences. Unless the Ministry of Commerce expands it policy to issue foreign business licences, potential investors may find themselves shut out of the market. Consideration will also need to be given to the lack of flexibility typically offered under the terms of foreign business licences. At present, the policy of the Ministry of Commerce is to issue very specific licences only and insist that foreigners re-apply each time the scope of their business operations changes – an expensive and time-consuming exercise;
  • potential divestiture of voting rights for entities operating List 2 and List 3 businesses. Organisations that have been operating businesses restricted under List 2 and List 3 may potentially be required to divest voting rights to Thai nationals.
  • the effect on businesses not regulated by the FBA. A range of investment sectors, including land, banking, telecommunications and insurance, are governed by sector-specific legislation. There has been speculation that due to the limited application of the FBA these sectors will not be affected by the proposed amendments. However, in our view, this is by no means certain. Industries subject to specific legislation restricting foreign ownership may still be caught by the FBA or may draw on the definition of ‘foreigner’ in the FBA. Accordingly, detailed consideration on a case-by-case basis will need to be given as to whether the revised definition of foreigner effects existing foreign investment structures under sector-specific legislation; and
  • confidence in the Thai government. The changes to the FBA approved by the Cabinet are the latest in a string of measures that the foreign investment community has seen as potentially damaging to the Thai economy. Subsequent to the coup on 19 September 2006 the business community has seen a gradual hardening of attitudes towards foreigners conducting business in Thailand. The recent currency controls imposed on 18 December 2006 are an example of the attitude of the current administration. Until the next democratic elections, scheduled for late 2007, existing and potential investors are faced with a potentially uncertain environment.