Although the Thai government encourages foreign investment, there are restrictions on foreign ownership of businesses engaged in a wide range of business activities. The most important and well-known law restricting foreign ownership of businesses in Thailand is the Foreign Business Act (“FBA”). The FBA restricts ‘aliens, a term carefully defined by foreign ownership of shares, from engaging in over 50 categories of business activities in Thailand. The FBA’s restriction on “services” is the most controversial restriction of the FBA. Thailand’s Department of Business Development (“DBD”), contends the definition of “services” not only includes IT, consulting, engineering, and advisory services, but also includes activities that are generally not considered services, such as OEM manufacturing, etc.
To legally engage in activities restricted under the FBA, an alien company must obtain a Foreign Business License (“FBL”) or a Foreign Business Certificate (“FBC”) from the DBD. This is often easier said than done, but there are some exceptions.
More controversially, a foreign-controlled business can be structured so that it is not an alien under the FBA. The FBA defines the term “alien” in terms of foreign ownership of a majority of a company’s shares without reference to foreign ownership or control. Thai law also allows different classes of shares with different voting and economic rights. Strictly speaking, this should allow foreign-controlled companies to operate in areas restricted under FBA. The FBA, however, criminalizes the use of Thai “nominees” to make a company appear as if it is Thai owned when it is, in the views of officials, not genuinely Thai owned. Making this subject more complicated, Thai law does not recognize trusts established outside of the Thai laws governing capital markets. Without the recognition of “trusts”, it’s difficult, if not impossible, to persuasively claim that a Thai shareholder is holding shares as a nominee of a foreigner unless the Thai shareholder signs a document stating that it is holding shares as a “trustee” or “nominee” of a foreigner (yes, we have seen this). Although the definition of a “nominee” is controversial and, many argue, circular, companies have been penalized for the alleged use of nominees.
A violation of FBA is subject to severe penalties, such as imprisonment for a term of up to three years or a maximum fine of THB 1 million, or both, imposed against the company violating the FBA as well as its directors and executives. The Thai court may also order the complete cessation of the business operations of a company that violates the FBA.
Foreign Business Licenses.
The FBA restricts aliens from operating about 50 types of business, and those business activities are grouped together into three lists.
- List one includes newspaper businesses, animal farming, land trading and other activities. Aliens are prohibited from operating businesses on list one for “special reasons” and there is no approval that an alien can obtain to operate a list one business.
- List two has three groups and includes businesses related to national security and domestic land, waterway, or air transportation, including domestic airline business. The latter category is sometimes of interest to foreign companies, particularly now with the collapse of two Thai airlines. Aliens can operate a business engaged in list two activities if approved by the Minister of Commerce and the Cabinet. In practice, it is difficult to obtain such approvals.
- List three is subject to the most criticism because it is very broad. Aliens are prohibited from engaging in list three activities on the grounds that “Thai nationals are not ready to compete” with foreigners. Aliens can obtain approval from the Director-General of the Commercial Registration of the Department of Business Development and the Foreign Business Committee. Notably, list three includes “other category of service business except those prescribed by ministerial regulations”.
Approval of an application for FBL is more likely when the authorities believe the business will protect and promote Thai interests and will not compete with Thai owned businesses. The application process for an FBL is very lengthy, complex, and opaque. Typically, the DBD will not officially “accept” an application for an FBL until the DBD has reached at least a preliminary view on whether it will ultimately grant the application. Often there is an initial review of the application and supporting documents followed by requests for additional information and documents.
Foreign Business Certificates.
There are essentially two situations where FBCs are issued to permit an alien to engage in business activities restricted by the FBA.
First, if the alien is protected by a treaty that allows it to engage in activities restricted under the FBA, that alien is entitled to an FBC for business activities permitted under the appliable treaty. The most notable such treaty is the Amity Treaty between the U.S. and Thailand. The Amity Treaty provides that “Americans”, including American companies, are entitled to national treatment (i.e., the same treatment as Thai companies) in their business dealings in Thailand, except for property ownership and certain business activities, such as transportation, banking, etc. Although the requirements for establishing that a company is “American” can be cumbersome, particularly for listed companies, this is a good and relatively risk-free option for Americans genuinely American owned businesses.
Second, if a company is promoted by the Board of Investment or is operating under the law governing industrial estates (the Industrial Estate Authority Act), the company is typically entitled to a Foreign Business Certificate. But companies with FBCs granted on this basis need to be careful. The exemption from the FBA only applies to the business activities listed on the FBC. It does not provide a blanket exemption from the FBA. If a company is engaged in other activities restricted under the FBA that are not identified on the FBC, the company is likely violating the FBA.