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Thailand has emerged as a prominent regional investment hub, drawing global investors with its strategic location, robust infrastructure and resilient economy. However, successfully navigating the Thai investment landscape requires a nuanced understanding of the country’s legal framework and regulatory environment. Choosing the right legal structure at the outset is crucial for sustainable growth and effective risk management. This article explores the legal strategies investors should consider when structuring investments in Thailand, with a focus on legal vehicles, regulatory compliance and risk mitigation.

Legal vehicles for investment

Investors have several options when structuring their investments in Thailand, each offering distinct advantages and limitations. The most common form is a limited company, which provides flexibility and limits shareholder liability to the amount of unpaid share capital. A limited company is managed by a board of directors appointed by a resolution of the shareholders’ meeting. Different classes of ordinary and preferred shares are also permitted under Thai law.

However, all shares must have the same par value. Companies are also permitted to issue shares at a premium. Shareholders of a limited company are entitled to receive dividends from accumulated profits. In joint venture arrangements, the parties can incorporate terms and conditions under the joint venture agreement relevant to the administration and management of the company including share transfer restrictions, requirements for board and shareholders’ meetings, and dividend distribution mechanisms into the company’s articles of association. These provisions must be registered with the Ministry of Commerce.

A branch office can be established by a foreign company seeking to operate in Thailand without setting up a separate legal entity. While the branch office structure may offer operational simplicity, it does not provide the same level of liability protection as a limited company.

A representative office is another option, primarily used for non-revenue generating activities such as market research or liaison functions. It is prohibited from conducting commercial transactions, making it suitable for companies that are exploring market opportunities without immediate plans for business operations.

Finally, the regional operating headquarters (ROH) model is designed for multinational corporations managing regional operations. ROHs enjoy tax incentives and streamlined administrative procedures, making them attractive for companies with a significant regional presence. However, the scope of permitted activities is restricted to services provided to its head office and affiliated entities such as co-ordinating and supervising the operations of branch offices or subsidiaries located in Thailand or elsewhere in the region, as well as providing consulting and management services.

When choosing a legal vehicle for investment in Thailand, investors should also consider applicable compliance requirements. For instance, to be eligible for investment incentives provided by the Board of Investment (BOI), as discussed further below, a limited company must be established.

Foreign investment regulations

Foreign investment in Thailand is governed by the Foreign Business Act (FBA), which imposes restrictions on foreign ownership in certain sectors. Understanding these restrictions and the available licensing options is essential for compliance and strategic planning.

In general, the FBA prohibits foreign nationals and foreign companies defined as those with 50% or more foreign ownership of share capital, rather than based on control, and including companies incorporated outside Thailand from engaging in business activities specified in the schedules attached to the FBA with a foreign business licence or a foreign business certificate.

One general category of restricted business activities is “services”, which the Ministry of Commerce the government authority responsible for administering the FBA has broadly interpreted. This interpretation even includes activities such as lending, guarantees, sub-leasing, manufacturing services (e.g. electronics manufacturing services, original equipment manufacturer and original design manufacturer) and other related transactions.

For businesses seeking flexibility, the BOI offers a range of tax and non-tax incentives for business activities it promotes. BOI-promoted activities enjoy benefits such as corporate income tax exemptions, land ownership rights, exemptions from foreign majority shareholding, and streamlined processes for work permits and visas.

Although the list of promoted business activities is extensive, it is primarily focused on restructuring Thailand’s economy through technology, innovation and creativity. The BOI has representative offices in major cities across the world to provide preliminary consultations for investors, including its office in Seoul, which can be reached at seoul@boi.go.th.

A critical issue for foreign investors is the use of Thai nominees to circumvent ownership restrictions. Under the FBA, as well as the Land Code, the use of Thai nominees is strictly prohibited and subject to serious penalties.

According to recent reports, the Ministry of Commerce, together with other government authorities including the Department of Special Investigation, Revenue Department, Customs Department, Land Department, Royal Thai Police and Anti-Money Laundering Office, is actively investigating and pursuing legal action against the use of nominee structures. The Ministry of Commerce is also implementing the intelligence business analytics system, which uses big data analytics to identify companies with potential Thai nominee shareholding structures for further investigation.

Due diligence and compliance

When investing in Thailand, conducting thorough due diligence is of paramount importance in land acquisition, joint ventures and M&A, as insufficient diligence can jeopardise the success of the investment. Legal due diligence should cover corporate, accounting, tax and financial matters, as well as assets, investment, licences, material contracts, employment, intellectual property (if applicable), compliance, legal proceedings, and environmental matters (if applicable).

One of the challenges with conducting due diligence in Thailand is the absence of a centralised database for courts, land registries, land cadastral records or operating licences (except IP registrations). Land zoning or construction restrictions and requirements are also not reflected in title documents. Thus, independent searches require in-person visits to various government authorities.

In joint ventures and M&A transactions, technical issues such as licensing, shareholder agreements and employment compliance may catch new investors off guard. In land acquisition transactions, historical title records on title documents should be carefully examined to mitigate the risk of any ownership disputes.

Dispute avoidance, exit strategies

Given the limitations on foreign shareholding, foreign investors as minority shareholders – can still secure protection through mechanisms such as veto rights, appointment of board members, share transfer restrictions, deadlock resolution provisions and exit options.

Structuring exit rights in shareholder agreements provides clarity and protection for investors, facilitating a smooth transition in the event of disputes, business dissolution, or changes in ownership. Common exit options include put and call options, tag-along and drag-along rights, and rights of first refusal. Choosing the appropriate exit strategy depends on the specific needs and goals of the parties and the nature of the business.

In practice, enforcing exit rights involves careful consideration of legal, financial and relational factors relevant to the parties. For example, determining the fair value of a joint venture interest can be contentious, especially where the parties have differing opinions on the valuation methodology or market conditions. In some cases, a party may face financial constraints that prevent it from exercising its exit rights, such as insufficient liquidity to fund a buyout or an inability to secure financing.

CHANDLER MORI HAMADA LIMITED
31st and 36th Floors
Sathorn Square Office Tower
98 North Sathorn Road
Silom, Bangrak
Bangkok 10500, Thailand
Tel: +66 2 009 5000
Fax: +66 2 009 5080
Email: kritsada.a@mhm-global.com