Chinese investors intent on big opportunities in Thailand should first bone up on foreign ownership restrictions and transactions with Thai joint venture partners
In 2013, Chinese President Xi Jinping unveiled the Belt and Road Initiative (BRI), perhaps the most ambitious outbound infrastructure development and investment scheme that the world has ever seen.
Hailed by its supporters as a modern-day resurrection of the iconic network of trade routes that connected the East and West known as the Silk Road, the BRI has already given birth to an impressive array of infrastructure development projects in more than 150 countries in Asia, Europe, Africa, the Middle East and the Americas.
Thailand finally seems to have freed itself from the shackles of years of political instability by holding its long-awaited general election in March 2019. A series of new economic programmes announced by the Thai government have also been instrumental in bolstering the country’s standing among the foreign investment community, particularly in the eyes of Chinese investors.
Perhaps the most talked about of these growth initiatives is “Thailand 4.0”, an ambitious 20-year strategy aimed at transforming Thailand from a predominantly agrarian to a value-based economy driven by innovation, advanced technology and creativity.
Covering 13,000 square kilometres, the jewel in the crown of Thailand 4.0 is the Eastern Economic Corridor (EEC) project, located on Thailand’s eastern seaboard, which will serve as a strategic infrastructure and transportation gateway to Indochina and beyond. Dozens of global corporations, including Rolls Royce, Airbus, SAAB, Alibaba and many other big names from China have already committed to investing in EEC projects.
Another boost came in late July 2019, when Moody’s Investors Service and Fitch Ratings both raised their outlook for Thailand from stable to positive, citing the country’s large and diverse economy, its strong public and external finances, and a track record of transparent and predictable fiscal and monetary policies.
The confluence of these unconnected external events and ambitious economic growth strategies, together with China’s escalating trade tensions with the US, has ignited a frenzy of new investment in Thailand by Chinese companies. Some experts believe China may overtake Japan as the largest source of foreign investment in Thailand by 2023.
Notwithstanding this encouraging news, Chinese investors should be aware that their participation in certain business activities in Thailand may be subject to restriction, and, in some cases, prohibition.
Perhaps as a result of Thailand’s aggressive push to woo foreign investors, many Chinese investors fail to seek professional advice to answer a fundamental yet critically important question: whether foreign investment in the business they wish to carry out in Thailand is restricted; and if so, whether there are exemptions to such restrictions.
Whether or not foreign participation in a business activity or industry is subject to restriction or prohibition is determined by reference to the provisions of the Foreign Business Act of 1999 (FBA). Under the FBA, the term “foreigner” refers to a foreign individual, a foreign company, or a company incorporated in Thailand with share capital majority-owned by foreign individuals and/or foreign companies. The FBA sets out three separate schedules, each listing business activities in which foreign participation is either prohibited or restricted.
Schedule 1 of the FBA includes business activities where foreign participation is strictly prohibited, with no exceptions, such as: trading in antiques or other objects of historical value; news media (newspapers, broadcasting, and television); land trading; forestry and timber processing; and farming.
Schedule 2 of the FBA includes business activities relating to national safety or security, or which have an impact on arts, culture, local traditions, customs and folklore, handicrafts, natural resources or the environment. These may only be carried out by foreigners who possess a foreign business licence from the Ministry of Commerce, and who have the approval of the Thai Cabinet.
Schedule 3 of the FBA restricts majority foreign ownership in certain specified businesses unless they have obtained a foreign business licence from the director-general of the Department of Business Development. Schedule 3 includes accounting services, engineering services, construction services (with certain exceptions), architectural services, brokerage or agency services (with certain exceptions), sales of food and beverages, advertising services, and “other service businesses”.
In addition to the FBA, foreign ownership restrictions are peppered throughout other important pieces of Thai legislation. For example, Thailand’s Land Code generally prohibits foreigners from owning land in Thailand. Under the Banking Act, foreigners are prohibited from owning more than 25% of any bank or financial institution in Thailand without the approval of either the Bank of Thailand or the Ministry of Finance. Other legislation limits foreign ownership in the insurance, shipping and telecommunications industries.
There are a number of important exemptions to foreign ownership restrictions that Chinese investors should investigate prior to making an investment decision. The availability or otherwise of these exemptions can make or break an investment transaction.
In particular, if an investment is exempted from foreign ownership restrictions under one of the many Thailand Board of Investment promotion schemes, substantial tax and non-tax incentives may be available, including zero corporate income tax for specified periods, exemptions from import duties, and the right to own land.
Thai law does not prohibit genuine joint ventures between Thai and foreign nationals. The problem arises, however, when foreign investors attempt to circumvent the foreign ownership restrictions specified in the FBA by creating a shareholding structure that is “Thai” for the purposes of the FBA (51% held by Thais), but which is controlled by the foreign shareholder through the use of a two-tier shareholding structure that gives majority voting rights to the foreign shareholder.
In this “nominee shareholding structure”, the Thai shareholder is usually not a genuine shareholder but rather a “nominee” of the foreign shareholder used solely for the purpose of avoiding the foreign ownership restrictions.
Although nominee shareholding structures are strictly prohibited by the FBA, they are still quite common. There are several reasons why some foreign companies are willing to use them. First, they often don’t know any better and are advised that it is a standard, legal shareholding structure commonly used in Thailand.
Second, prosecutions by Thai authorities in relation to the use of nominee shareholding structures are uncommon, and when they do occur, may be seen as politically motivated. Accordingly, some foreign clients take the view that even though the nominee shareholding structure constitutes a breach of the FBA, it is a breach unlikely to come to the attention of Thai authorities, and they are prepared to accept the risks involved including fines, imprisonment and/or business cessation.
The authors strongly recommend that Chinese investors refrain from using nominee shareholding structures. Instead, investors should first determine whether or not their investment project is eligible for an exemption from the foreign ownership restrictions, in which case the participation of a Thai shareholder may not be required.
However, in the event that no exemptions are available, or if it would otherwise be advantageous to have a Thai partner, it is important for the Chinese investor to undertake a thorough investigation of the Thai partner to ensure that it has the capacity and experience necessary to carry out its obligations under a joint venture arrangement (JVA).
It is also critically important for Chinese investors to ensure that sufficient contractual protections are put in place in any dealings with a Thai partner. A number of high-profile Chinese investors have had their fingers burned by failing to adequately protect their interests with a well-designed and legally enforceable JVA.
If the Chinese investor holds less than 50% of the shares in a joint venture company, minority protection provisions must be drafted into the JVA, both at the shareholder and board of director levels, as well as devising a workable mechanism for dealing with operational and management deadlocks.
In terms of resolving disputes, arbitration appears to be the dispute resolution mechanism of choice due to cost and time considerations. Disputes referred to the Thai courts can be costly and may take several years to reach a conclusion.
There is little doubt that the Thai government’s efforts to attract Chinese investors to the kingdom through the Thailand 4.0 initiative have been successful. In the first half of 2019, Chinese companies filed applications for 81 investment projects worth THB24.28 billion (US$791 million).
Notwithstanding these statistics and the sometimes irresistible impulse to jump headfirst into a great investment opportunity, Chinese investors should take the time to carry out proper due diligence and carefully consider Thailand’s foreign ownership restrictions and other relevant investment laws before proceeding with an investment in Thailand.