Navigating business opportunities in Thailand: foreign investment

Thailand continues to be a significant market for foreign investors. In 2022, the Thai Board of Investment (BOI) approved more than 2,000 projects worth USD19.5 billion in total, much of which came from foreign direct investment (FDI).

This article explores key legal areas and highlights certain legal issues that in-house counsel should consider in structuring investments in the country. Specific areas of focus are laws and regulations related to foreign investment, likely structures that investment will adopt, available investment incentives, land ownership rights, thin capitalisation rules and prescribed debt-to-equity ratios, foreign exchange controls, and the repatriation of dividends and capital.

Choosing appropriate structure

One of the first issues that in-house counsel will likely need to consider is the legal structure that local Thai operations should take. Factors often considered include the nature of activities to be undertaken locally, underlying tax treatment, minimum investment required to implement, whether separate legal liability from the parent entity is desirable, and the ease of doing business.

The most common structure investors tend to settle on is a locally incorporated juristic entity or private limited company. Thai private limited companies are very similar to US limited liability companies or private companies in many other countries, which are owned by shareholders and managed by directors. For instance, the liability of each shareholder in a Thai juristic person is limited to the amount of shares they hold.

While a private limited company is a suitable vehicle for most types of investment, certain types of businesses – such as life and non-life insurance, and banking – must be undertaken through a public limited company. However, establishing local representative offices tends not to be popular as they are unable to earn income and restricted to undertaking very limited functions, making them unsuitable for most businesses.

Foreign business restrictions

Determining the most appropriate investment vehicle, ownership and management structure will require a detailed understanding of Thailand’s foreign investment laws, particularly the scope of the Foreign Business Act. Restrictions on activities that can be undertaken are specified in the act and apply to any individual or legal entity classified as a foreigner and looking to undertake an activi­ty that falls within one of the following lists:

• List 1: Activities designated as businesses that foreigners are not permitted to carry out for specific reasons, including land trading, agriculture, forestry, livestock farming, fishing, publishing and radio broadcasting;
• List 2: Activities relating to national security, art, culture, local customs, natural resources and the environment, which require special permission from the Ministry of Commerce (MOC), with the approval of the cabinet. These activities include undertaking domestic transportation, businesses relating to firearms, explosives, mining and the production of Thai silk; and
• List 3: Activities foreigners are prohibited from engaging in, where Thais are considered not yet ready to compete with foreigners, including retail and wholesale, as well as performing any kind of services other than those mentioned in lists 1 and 2, and acting as an agent or broker.

The term “foreigner” includes foreign incorporated entities and nationals, as well as Thai business entities where half or more of the shares are owned by non-Thai individuals or business entities. While the act does not restrict foreigners from participating in activities not in the three above-mentioned lists, foreign participation may also be regulated by other specific regulations.

Exemptions

However, foreigners may engage in activities in lists 2 and 3 after being granted permission by the director-general of the Department of Business Development at the MOC, in the form of a foreign business licence or foreign business certificate.

Foreigners may also engage in restricted activities if the minimum capital exemption has been satisfied for the activity in question, or where the Thai entity undertaking such activity has been granted BOI investment privileges relating to those activities. Foreign business licences are granted case-by-case, and are issued purely on a discretionary basis. The MOC considers various factors including whether or not the business requires special skill or expertise generally not found in Thailand, whether the proposed business competes with locals, and whether Thailand would benefit by allowing the business to operate as proposed – both in terms of furthering the country’s development, and employment as well as the transfer of technology to Thailand. If granted, the scope of the licence will be worded specifically to cater for the permitted activities.

By contrast, incentives will be granted by the BOI as a matter of course if the activity falls within one of the specified BOI-promoted categories and the applicant can satisfy the required criteria. Certain BOI incentives are exclusive to geographic zones or regions.

Further exemptions to the Foreign Business Act may be available pursuant to treaties or trade agreements between Thailand and other countries, depending on the nationality of the investor.

Property ownership

In terms of the rights of foreigners to acquire real property, foreign nationals and foreign-owned entities are entitled to own condominiums subject to certain conditions, as well as leasehold interests in land (other than agricultural land). Foreigners are generally prohibited from owning freehold land.

An important consequence of receiving BOI privileges is that the BOI, unlike the MOC, can grant permission to foreign-owned companies to also own freehold land for carrying out their promoted activities. Foreigners can also own freehold land in certain recognised industrial estates.

Thin capitalisation rules

Offering considerable flexibility in structuring the funding of the local entity through shares and loans, there are no thin capitalisation rules prescribed under Thai law.

The Foreign Business Act provides that the minimum registered capital for private limited companies defined as a foreigner must not be less than THB2 million (USD58,000) where the business is not carrying on an activity restricted by the act; or not less than THB3 million where the activity is restricted under the above-mentioned lists.

Projects awarded investment incentives from the BOI are subject to debt-to-equity (D/E) ratios, depending on the industry and size of investment, usually of 3:1. Entities granted foreign business licences from the MOC are required not to exceed a D/E ratio of 7:1. Exceeding applicable limits could result in cancellation of the underlying privileges or permission.

Structure, management issues

Thai law imposes relatively few restrictions when it comes to structuring Thai private limited companies, allowing local ventures to be financed through the issuance of shares and loans. Thai private companies can be structured with different classes of shares (ordinary and preference), having different voting rights or entitlements to dividends.

In practice, such structures are sometimes used, particularly in the case of joint venture arrangements with local partners to protect the foreign investor’s position, which is limited for the purposes of the act to holding a minority stake in the underlying entity.

Day to day management of a private Thai limited company is routinely undertaken by the board appointed by the shareholders. Unless otherwise specified in the articles of association, decisions by the board are usually made by majority vote. One particular quirk of Thai limited companies is that directors cannot appoint a proxy or alternative director to attend directors meetings on their behalf although shareholders can in relation to shareholders meeting.

Unless otherwise prescribed in the articles of association, decisions by shareholders are made by majority vote, but specific matters specified under the law require the passing of a special resolution by shareholders, which involves approval by three-quarters of the votes of the shareholders present. Matters requiring a special resolution are actions involving a change of registered capital, the issuance of new shares, amendments to the memorandum of association or the articles of association, winding-up of the entity, or approval of a merger or amalgamation.

Currency exchange control

In terms of exchange controls, there are no real restrictions on remitting foreign currency into Thailand through a recognised financial institution although, depending on the nature of the underlying remittance and status of the recipient, foreign currency may need to be converted into Thai baht within a specific time period. However, there are restrictions on remittances out of Thailand. Remitting Thai baht out is generally prohibited, and the remittance of foreign currency out of Thailand (and the purchase of foreign currency using Thai baht) requires approval from a Thai commercial bank by showing the purpose of repatriation of investment funds and the remittance in of the initial investment. Relevant supporting documents are often required.

Conclusion

To ensure that the investment is structured properly, the appointment at an early stage of reliable local counsel with a thorough knowledge of Thailand’s laws and regulations is highly recommended. The authors have seen many MoUs, heads of agreement and binding contracts signed prior to seeking advice that could not be implemented as envisaged, often resulting in commercially challenging renegotiations.