By Dezan Shira & Associates
Editor: Harry Handley
Following Thailand’s 2014 coup, there were suggestions that the incoming military-led government would implement protectionist policies that would restrict investment into the country by foreign firms. However, in the years that followed there was a significant shift in the outlook of Thailand’s leaders. Barriers were lowered and restrictions reduced in a number of industries; this resulted in over US$9 billion of inward foreign direct investment (FDI) in 2015.
Research from the Economist Intelligence Unit suggests that Thailand will continue to encourage inward investment over the next few years in order to push the economy towards high income status. This is highlighted by recent amendments made (and further amendments scheduled for 2017) to the Foreign Business Act – the predominant legislation governing foreign investment in Thailand. This article will outline the key points of the Foreign Business Act, including the recent update, and what this means for potential entrants.
Thailand’s Foreign Business Act
The Foreign Business Act was introduced in 1999, superseding the Alien Business Law (1972), and applies to all foreign businesses in Thailand. According to the Foreign Business Act, a business is considered foreign if it fits one of the following criteria:
- It is established under foreign law
- Half or more of its capital is owned by foreigners even if the company is incorporated under Thai law (as opposed to a Thai Limited Company in which a foreign party can own up to 49 percent)
- Half or more of the value of the total capital being invested by foreigners even if more than half of the capital is owned by Thai nationals (put in place to block the use of Thai nominee shareholders)
The Foreign Business Act divides industries into three categories, based on the level of restrictions placed on that industry (the full list can be found at the end of this article). List One contains “businesses that foreigners are not permitted to engage in for special reasons”. These are completely closed to foreign investment and include a range of businesses from strategic industries such as newspapers and radio stations, to businesses related to religion (e.g. making Buddha images) which are prohibited in order to protect local customs and traditions. In addition, the Foreign Business Act prohibits foreign businesses from trading in land. This is in line with Thai Land Laws, which forbid the ownership of land by foreign individuals or entities. Nevertheless, foreign companies with substantial investments benefiting the Thai economy may be given special privileges by the Board of Investment.
List Two industries are restricted, meaning that foreign companies require prior approval and the issue of a license from the Minister in the Government Gazette. Further, no less than 40 percent of shares and positions on the board of directors in these industries must be held by Thai nationals. The shareholding percentage may be reduced to 25 percent in some cases, with the authorization of the relevant ministers. List Two businesses are categorized into the following three groups:
- Group One: Businesses related to national safety or security (e.g. production of firearms)
- Group Two: Businesses affecting traditional arts and culture (e.g. production of Thai musical instruments)
- Group Three: Business affecting natural resources or the environment (e.g. rock salt mining)
Finally, List Three includes businesses in which “Thai nationals are not yet ready to compete with foreigners”. A wide range of businesses are covered by List Three, from construction to legal services. Similar to List Two, these businesses require a Foreign Business License. However, in this case the license is issued by the Director General of the Foreign Business Committee. Businesses in List Three are not required to have Thai shareholders, meaning that the company can be 100 percent foreign owned.
Although appointing Thai nominee shareholders (an unrelated third party who is registered as the holder of shares) may seem an attractive way to meet local shareholding needs without giving up decision-making power, the Foreign Business Act puts strict punishments on the table for those who attempt to disguise foreign ownership. Section 35 of the Act states that foreigners in violation of the nominee shareholding rules shall face a maximum of three years in jail or a fine of up to THB 1 million. Hence, it is advisable to avoid this situation completely and register the company correctly, either as a Thai Limited Company (maximum 49 percent foreign shareholding) or a foreign owned company, depending on the ownership structure.
The final point of note of the Foreign Business Act is the capital requirements for doing business in Thailand. Generally, the minimum registered capital required to start a business is THB 3 million. However, this can be reduced if the industry in question is being promoted by the Thai Board of Investment at the time of entry.
The Thai government is working tirelessly to promote and realize its ‘Thailand 4.0’ model through which it hopes Thailand will become a high income and extensively connected ‘smart economy’. One aspect of this strategy is attracting foreign investment into business infrastructure and service industries such as banking and financial services. Accordingly, in 2016 regulations were loosened on banking (specifically, commercial banking and representative offices of foreign banks) and insurance investments. These previously List Three industries now no longer require a Foreign Business License issued by the Director General, making it easier and quicker to enter the market. Furthermore, plans are in place to extend this waiver to all financial services and telecommunications investments in 2017.
Alongside the aforementioned amendments, the Thai Board of Investment regularly promotes specific industries and fast-tracks investment approvals. This often includes the granting of permits to own land and easing of other Foreign Business Act regulations. As such, it is essential to keep abreast of current promotional activities and directives by government agencies in order to make the most of the incentives on offer.
Prohibited and restricted businesses in Thailand
List One – Foreign Investment Prohibited
- Newspapers, radio broadcasting, and television broadcasting
- Farming, animal husbandry, forestry, and fishery businesses
- Extracting Thai herbs
- Trade of Thai antiques
- Making or casting Buddha images and alms bowls
- Trading in land
List Two – Restricted (Requires Foreign Business License and 40 percent Thai shareholders and board members)
Group One – Businesses concerning national security or safety
- Manufacturing, repair, or distribution of firearms, ammunition, etc.
- Manufacturing, repair, or distribution of armaments, ships aircraft, or military vehicles
- Manufacturing, repair, or distribution of any type of war equipment
- Domestic land transportation, water transportation, or air transportation (including domestic aviation)
Group Two – Businesses that could have an adverse effect on culture and customs
- Trading of Thai works of art or handicrafts
- Wood carving
- Silkworm rearing, manufacturing of Thai silk, silk weaving, or printing
- Manufacturing of Thai musical instruments
- Manufacturing of goldware, silverware, and other precious metal jewelry
Group Three – Businesses that could have an adverse effect on natural resources or the environment
- Manufacturing of sugar from cane
- Salt farming, including rock salt farming
- Mining of rock salt
- Mining, including stone quarrying or crushing
- Timber processing for making furniture and utilities
List Three – Restricted (Requires Foreign Business License)
- Rice milling and flour production from rice and plants
- Breeding of aquatic creatures
- Forestry from re-planting
- Production of plywood, veneer, chipboard, or hardboard
- Production of lime
- Accountancy (Need for business license may be waived in 2017)
- Legal services
- Agency or brokerage
- Retailing and wholesaling
- Hotel Operation (excluding hotel management) and tourism
- Sale of food and beverages
- Other services
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email email@example.com or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
Annual Audit and Compliance in ASEAN
For the first issue of our ASEAN Briefing Magazine, we look at the different audit and compliance regulations of five of the main economies in ASEAN. We firstly focus on the accounting standards, filing processes, and requirements for Indonesia, Malaysia, Thailand and the Philippines. We then provide similar information on Singapore, and offer a closer examination of the city-state’s generous audit exemptions for small-and-medium sized enterprises.
Human Resources in ASEAN
In this issue of ASEAN Briefing, we discuss the prevailing structure of ASEAN’s labor markets and outline key considerations regarding wages and compliance at all levels of the value chain. We highlight comparative sentiment on labor markets within the region, showcase differences in cost and compliance between markets, and provide insight on the state of statutory social insurance obligations throughout the bloc.
The Guide to Manufacturing in Indonesia
Choosing if, where, and how to establish foreign manufacturing operations in Indonesia can be a significant challenge. While the archipelago’s vast diversity may initially seem daunting, a number of options are available which will allow entry and operations to be conducted in a seamless manner. In this issue of ASEAN Briefing, we discuss Indonesia as a hub for manufacturing within Southeast Asia, and provide guidance on how to select and establish operations within the country.