For the past five consecutive years, Japan has been the top investor in Thailand under the Foreign Business Operations Act, 1999 (FBOA). The Board of Investment (BoI) of Thailand, the governmental authority responsible for granting investment promotions, announced that Japan topped the list of foreign direct investment (FDI) source countries with a combined investment value of THB80.7 billion (USD2.4 billion) for 178 projects in 2021.
In 2021, the most invested industries were motor vehicles manufacturing, electronic components, aluminium and aluminium products, and rubber tyres and tubes. Many factors must be considered when investing in Thailand, including the form of investment, business operation restrictions, and investment privileges and incentives.
MOST COMMON ENTITY
A private limited company is the most common business entity that Japanese investors use for FDI in Thailand due to its limitation of liability and flexibility in regulating operations. For example, shareholders’ liability is limited to the unpaid share value, and governance can be freely regulated through articles of association (provided that the articles do not contradict public order or Thai laws). Investors may choose to incorporate a new company or acquire an existing entity through an M&A transaction, i.e., by share acquisition (whether a direct acquisition at the level of the Thai operating company or an indirect acquisition at the level of a holding company), an asset acquisition, or an amalgamation.
Share acquisitions are the simplest in which a buyer purchases shares in a target company to obtain and continue the business under its existing licences and assets. However, share acquisitions come with risks as the buyer also acquires all the debts and liabilities of the target and its holding companies. Regarding tax concerns, there will be capital gains taxes incurred on the seller’s side and stamp duty based on the transfer price or par value, whichever is higher.
Another method of acquiring a business in Thailand is asset acquisitions, which allow the acquiring entity to be more selective by purchasing merely some or all of the assets and liabilities of the target. However, asset acquisitions may pose some difficulties, as the transfer or application (or re-application) for permits and licences required for operations may delay the closing of the transaction, especially if the business operations of the target company are heavily regulated. Unlike share acquisitions, the consent of all employees is also required to transfer employees. Business transfers that meet the conditions required for an entire or partial hand-over scheme may be exempt from taxes in relation to the transfer.
Amalgamation is a consolidation of two or more companies where all the amalgamating companies will be dissolved and a new entity will be established. On completion, all rights and obligations of the amalgamated companies will be automatically transferred by operation of law to the new company. Thai authorities may require the amalgamating company holding a licence to apply for a licence transfer or re-apply for it. Amalgamations are not commonly used by foreign investors for M&A transactions.
Mergers, a consolidation of two or more companies where one company absorbs all other target companies’ rights and obligations, are not yet legally recognised under Thai law. However, the House of Representatives has approved the principles and is in the process of considering the detail of a bill that will amend the Civil and Commercial Code to recognise mergers.
FOREIGN INVESTOR CONCERNS
Restrictions on foreign business operations. In Thailand, foreigners are prohibited from operating restricted businesses under the FBOA unless they have obtained permission to legally conduct such activities, i.e., a foreign business licence (FBL) or foreign business certificate (FBC).
The FBOA defines foreigner as: (1) a foreign individual; (2) a juristic person not registered in Thailand; and (3) a corporate entity incorporated in Thailand having 50% or more of its share capital owned by foreign individuals or foreign juristic entities, or Thai juristic entities in which 50% or more of its share capital is owned by foreign individuals or foreign juristic entities. The percentage of foreign capital is determined according to the ratio of capital and not voting rights.
Investors need to consider whether their investment shareholding structure will trigger the definition of a foreigner under the FBOA, including whether business operations are restricted businesses for foreigners to operate. In some cases, many investors co-operate with local or strategic partners to create a Thai entity by having a Thai majority-owned shareholding structure. Thus, the entity will not be subject to the FBOA’s restrictions on foreign business operations.
It is important to be aware that a “nominee arrangement” is not permissible under the FBOA. A real investment from local partners or strategic partners is required. Although there are no clear criteria for determining whether a particular shareholding structure is a “nominee arrangement”, the Ministry of Commerce has the power to investigate any company suspected of conducting such an arrangement.
Restrictions on the right to own land. Under the Land Code, land ownership by foreigners (defined to include foreign nationals, entities incorporated under foreign laws, and Thai entities with foreign ownership of over 49% of the registered capital or having a majority of the shareholders being foreigners) is not permitted unless specific laws and regulations permit otherwise. It is important to be aware that the shareholding percentage requirement is different from that in the FBOA. The code considers the share structure at all tiers of the investment up to the ultimate beneficial shareholder level.
Thailand offers many privileges and exemptions under the FBOA and Land Code for qualified investors, regardless of nationality. These privileges and exemptions are granted: (1) under a treaty to which Thailand is a signatory; (2) from the BoI under the Investment Promotion Act, 1977 (BoI Act); (3) from the Industrial Estate Authority of Thailand (IEAT) under the IEAT Act, 1979; or (4) under the Eastern Economic Corridor Act, 2018 (EEC Act).
In these circumstances, foreigners are exempt from applying for and receiving an FBL for restricted business operations, but must notify the Ministry of Commerce. The FBC application process is less time-consuming and complicated compared to the process for FBL applications. Furthermore, approval of an FBC is not on a discretionary basis if qualifications are met.
The Japan-Thailand Economic Partnership Agreement (JTEPA) grants privileges to Japanese individuals and entities when investing in Thailand. Under the JTEPA, a company registered under Thai law having “Japanese shareholders” may enjoy custom tax privileges and may be eligible to apply for an FBC for specific business activities. In this regard, a Japanese shareholder must either be of Japanese nationality or a juristic person with the following qualifications: (1) more than 50% of its share capital is held by Japanese nationals or entities; (2) the majority of directors are Japanese; and (3) the directors who are authorised to bind the entity are Japanese.
A list of eligible activities is announced and updated by the BoI in accordance with the investment promotion policies during a given period. Each activity will be eligible for entire (both tax and non-tax) or partial (only non-tax) incentives depending on the category applied for by a company. For instance, in most cases, tax benefits are granted to manufacturing businesses or activities using high technology, while service business activities often receive non-tax privileges, e.g., immigration or foreign land ownership exemptions.
The IEAT is a governmental authority responsible for developing and establishing industrial estates, including the management of areas for industrial factories pursuant to the IEAT Act. A company operating a business in an industrial estate may enjoy tax privileges and non-tax privileges, such as the right to own land within an industrial estate area by a foreign majority-owned company, the right to hire skilled foreign workers more than the permitted number under the relevant laws, and remittance of funds outside of the country.
The EEC is an area-based development initiative under the EEC Act that grants tax and non-tax incentives similar to the IEAT to the targeted business activities operating in the EEC. Currently, the EEC consists of three eastern provinces, i.e., Chachoengsao, Chonburi and Rayong. The targeted activities include those using advanced technology essential for boosting Thailand’s competitiveness and supporting national development.
JAPANESE LAW PERSPECTIVE
In addition to the points mentioned above, Japanese investors should be aware that there is a process that certain transactions must adhere to under Japan’s Foreign Exchange and Foreign Trade Act. This process has a time limit on the submission of a report or obtaining approval from the authorities. Therefore, investors should be careful of the required processes and the timeframe.
A document prepared in Japan and submitted to Thai authorities must be notarised, legalised and consularised in Japan. It is important to list and arrange all necessary steps, including internal authorisation processes and making disclosures (for listed companies), at as early a stage as possible so the requirements are completed in a timely manner.
17/F and 36/F, Sathorn Square Office Tower
98 North Sathorn Road, Silom, Bangrak
Bangkok 10500, Thailand