Thailand’s FDI rules for foreign investors

Foreign direct investment (FDI) via M&A continues to serve as a strategic entry point for international investors seeking to establish or expand their presence in Thailand. While the country’s robust infrastructure, strategic Asean location and competitive human capital offer an attractive commercial environment, investors must navigate a multi-layered regulatory landscape to ensure lawful and effective transactions.

This legal update outlines the key regulatory considerations and structuring options for foreign investors undertaking M&A transactions in Thailand, with a particular focus on compliance with the applicable laws in Thailand, licensing regimes and post-transaction obligations.

M&A methods

The purchasing of shares in a company and the acquisition of a business and assets are the most common investment methods in Thailand.

Purchasing shares. The share acquisition is the most common method for a company to acquire a target company. It is easier to implement, but due diligence must be conducted to identify risks in the target company. Indemnities and warranties shall be incorporated in the share purchase agreement.

The transfer of shares will be subject to stamp duty in Thailand at the rate of 0.1% of the greater of the transfer value or the par value.

Acquisition of business and assets. An acquisition of assets will be done where the acquirer does not wish to assume hidden legal and tax liabilities in the target company, as such legal and tax liabilities generally remain with the target company and are not transferred with the business or assets.

The Foreign Business Act may restrict foreign companies from directly holding a business or assets. Thus, a Thai company must be established to hold a business or assets in Thailand. Certain legal requirements must also be met.

The transfer of assets is normally subject to value-added tax, and certain transactional documents are subject to stamp duty and other fees in Thailand.

Joint venture company. A joint venture company will be set up between companies (either between a foreign company and a Thai company; between foreign companies; or between Thai companies) to operate a business in Thailand, which may require knowledge and know-how from both parties. In some cases, joint venture companies are established to comply with the requirements of the Foreign Business Act, where foreign companies wish to engage in a business restricted to foreign ownership in Thailand.

Relevant regulations

Civil and Commercial Code (CCC). The CCC plays an important role in private M&A transactions, which are becoming more active in Thailand. In some cases, it is advisable to consult with the registrar when deal structures are complex.

Foreign Business Act (FBA). The FBA is the most important regulation to consider when foreign companies conduct M&A transactions in Thailand. It restricts and prohibits foreign nationals and companies from engaging in certain business activities, including most service businesses in Thailand. Under the FBA restrictions, a “foreigner” is classified as a foreign individual, a company incorporated outside Thailand or a company incorporated in Thailand that is majority-owned by foreign individuals or foreign companies.

Therefore, in some cases, foreign companies shall not be able to hold more than 50% of shares in a Thai company.

Trade Competition Act (TCA). Since coming into force in 2018, the TCA has played an important role in M&A transactions in Thailand. Any transaction meeting the requirements under the TCA must comply with its provisions to obtain (1) pre-approval or (2) post-notification of the transactions. In short, pre-approval is required when the transaction would create a monopoly, while the post-notification is required when the transaction would result in less competition in the market.

Labour Protection Act (LPA). In share acquisition transactions, there will be no requirement to obtain prior consent from employees, as, legally speaking, the employer entity remains unchanged.

However, in the acquisition of a business or assets involving the transfer of employees, the LPA will provide that all rights, duties and privileges of the employees will be assumed by the new employer, and the transfer of employment must be consented to by the employees. In case any employee does not give consent or does not want to work for the new employer and the existing employer ceases operations, it shall be deemed that the employment contract is terminated, and such employee shall be entitled to severance pay from the existing employer.

Other regulations

If any party in the M&A transaction is a public limited company or listed company, the Public Limited Companies Act and the Securities and Exchange Act will be important regulations parties must consider. The Land Code (together with the FBA) must also be considered when companies acquire other companies holding land as assets. It is important to note M&A activities in various industries may be subject to different and specific regulations in each industry.

Exemptions and special regimes

Treaty of Amity (US investors). Under the US-Thailand Treaty of Amity and Economic Relations, US individuals and entities may hold a majority or full ownership in most sectors without a foreign business licence (FBL), subject to exclusion from certain sensitive activities such as land trading and communications.

Thailand Board of Investment (BOI). The BOI offers promotional privileges to foreign investors in targeted sectors, including:

(1) Up to 100% foreign ownership;

(2) Exemption from FBL requirements for restricted businesses; and

(3)Tax and non-tax incentives (such as import duty exemptions and corporate income tax holidays).

BOI applications are evaluated on a project basis and require a clear demonstration of technology transfer, local employment or alignment with Thailand’s development policies.

IEAT promotion. Entities operating within industrial zones administered by the Industrial Estate Authority of Thailand (IEAT) may be eligible for similar foreign ownership privileges, including land ownership rights.

Acquisition funding

In acquisition transactions, an acquirer must decide whether to fund the vehicle with debt or equity, or even a hybrid instrument that combines the characteristics of debt and equity.

Debt. The advantage of using debt is the deductibility of interest for tax purposes and the ease in repatriating the investment via repayment of the principal. On the other hand, the payment of dividends is not deductible, and returns of capital can be an onerous and time-consuming task. Thailand does not have thin capitalisation rules.

Equity. An acquirer may use equity to fund its acquisition. However, using equity funding may not be attractive since dividends are not deductible for tax purposes in Thailand and dividends cannot be distributed unless the company is profitable. A return of capital (equity) is also more difficult than repaying a loan.

Business transfer and other options

Under the Thai Revenue Code, a company may conduct an entire business transfer, under which the business and liabilities of one company will be transferred to another through a share swap. If all conditions are met, the entire business transfer will be a tax-free transaction.

Thailand also has an amalgamation process, where two companies can merge to form a new company. This transaction should be free from Thai corporate income tax, but any tax losses in either of the original companies will be lost. Both the original companies are dissolved as part of the amalgamation process.

The merger is a new concept under the CCC, and it will allow companies to have more flexibility when pursuing business acquisitions. Nonetheless, the new merger regime has not been widely adopted due to the lack of knowledge and uncertainty surrounding the related rules and regulations.

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