How to Open a Company in Thailand
How to Open a Company in Thailand – What is Important to Know? Thailand has significant restrictions for foreign businesses. Many types of activities require obtaining a license in accordance with the Foreign Business Act (FBA). The licensing process is complex.
Exceptions are provided for projects approved by the Thailand Board of Investment (BOI), the Industrial Estate Authority of Thailand (IEAT), as well as in cases provided for by international treaties or free trade agreements.
For example, U.S. citizens and/or companies established in the U.S. can own 100% of the capital in Thai companies.
The ideal option is to obtain BOI privileges. BOI offers various tax and non-tax incentives.
In other cases, foreigners prefer not to fall under the scope of the FBA. This is achieved by participating in a company, the controlling stake of which (at least 51%) belongs to Thai individuals or legal entities.
Thai Company: Control Strategies
For foreign investors, maintaining control in a Thai company is challenging due to the legal restrictions imposed by the Foreign Business Act (FBA). According to Article 36 of the FBA, the use of nominee Thai shareholders is strictly prohibited. Violating this law can result in severe penalties, including imprisonment for up to three years and/or fines ranging from one hundred thousand to one million baht for both the Thai nominee and the foreign shareholder.
Reports of inspections of companies allegedly using nominee shareholders frequently emerge. Information on such inspections conducted in 2023 and 2024 can be found in the Bangkok Post (for example, the publication from 18.09.2023 or the publication from 31.05.2024) and on the website of the Department of Special Investigation (DSI).
Given these restrictions, it is crucial for foreign investors to adopt legitimate strategies to ensure control over their investments while complying with Thai law. In practice, various methods are used to ensure control in the company and to circumvent the prohibition on the use of nominees.
Some of these methods are listed below:
Preference Shares Method
This method involves issuing two types of shares: ordinary and preference. It is a popular solution among foreign investors seeking to ensure control in a Thai company. The issuance of these two types of shares is provided for by Section 1108 of the Civil and Commercial Code of Thailand (CCC).
Overview of Preference Shares
Different types of shares can confer different rights to their owners, such as voting rights or the right to receive dividends.
The scope of rights associated with preference shares depends on the provisions of the company’s charter (Articles of Association). Such shares may have either greater or lesser voting rights or dividends compared to ordinary shares.
This arrangement ensures that, despite Thai shareholders holding a larger number of shares, foreign investors retain control over the company and receive a larger share of the profits.
Standard Scheme
In the standard scheme, Thai shareholders own 51% of the company’s capital, holding only preference shares, while foreign shareholders own the remaining 49% of the capital, holding only ordinary shares.
- Voting Rights: Preference shares held by Thai shareholders typically have reduced voting rights. For instance, ten preference shares might equate to one vote at the general meeting of shareholders, while each ordinary share provides one vote.
- Dividend Distribution: There can also be an uneven distribution of the company’s profits. For example, owners of preference shares might receive dividends amounting to 2% of the profit, whereas owners of ordinary shares receive 98%.
Thus, despite the larger number of shares held by Thai shareholders, foreign investors retain control over the company and receive a larger share of the profit.
Reverse Scheme
It is also possible to apply a reverse scheme where enhanced voting rights and dividends are attributed to preference shares held by foreigners. In this setup, for instance:
- Voting Rights: Each preference share might provide ten votes, while each ordinary share provides one vote.
- Dividend Distribution: Preference shares might receive a larger portion of the profits.
Legal Considerations
Once preference shares are issued, the rights attributed to them cannot be altered later, according to Section 1142 CCC. Therefore, careful planning and clear definitions in the company’s charter are crucial to ensure the preference shares meet the control and profit-sharing objectives.
Switching to the Preference Shares Scheme in an Existing Company
If a company initially issued only ordinary shares but later decides to implement a preference shares scheme, it must undertake the following steps:
- Increase Registered Capital:
- The company needs to increase its registered capital by issuing new preference shares. This involves holding an extraordinary shareholders’ meeting and amending the company’s articles of association.
- Initial Distribution of Shares:
- Initially, distribute the new preference shares equally among both foreign and Thai shareholders to maintain the current ownership ratio. This step ensures compliance with the 49% foreign and 51% Thai ownership ratio at the onset.
- Redistribution of Shares:
- After the initial distribution, redistribute both the new preference shares and the existing ordinary shares to achieve the desired control structure. This means allocating preference shares to foreign shareholders and ordinary shares to Thai shareholders, or vice versa, as per the desired scheme.
- Ensure the final allocation still respects the 49% foreign and 51% Thai ownership ratio but allows foreign investors to hold preference shares with greater control rights, such as enhanced voting rights or dividend preferences.
By following these steps, a company can transition to a preference shares scheme, ensuring that foreign investors secure control and favorable profit-sharing terms while maintaining compliance with Thai corporate laws and the Foreign Business Act.
Cross-Shareholding
The essence of cross-shareholding is as follows: two Thai companies mutually own 51% of each other’s shares, while the remaining 49% of shares of each company belong to foreign shareholders. Below is a typical scheme of such an ownership structure.
It should be noted that cross-shareholding can cause complexities in the taxation of dividends.
Blank Share Transfer Instrument
A blank (unfilled) share transfer instrument is signed by a Thai shareholder without specifying the date of the share transfer or the name of the new owner. This document allows the beneficiary to enter the required date at any time and specify the person to whom the shares will be transferred (usually another Thai shareholder), thereby ensuring their safety. This method is popular due to its complete invisibility in corporate documents, although it is not considered the most reliable.
Loan Secured by Share Pledge
A foreign investor provides a loan to a Thai shareholder. This loan, in turn, is secured by a pledge of shares. A loan agreement and a share pledge agreement are concluded. The share certificate is transferred to the custody of the pledge holder (foreign shareholder) until the pledgor fulfills all obligations under the loan agreement. The parties to the share pledge agreement may also agree to grant the pledge holder the authority to vote on behalf of the pledgor at shareholders’ meetings, to transfer dividend rights, to obligate to vote in a certain way, and to demand the transfer of shares to the pledgor or a third party in case of non-fulfillment of obligations by the pledgor.
Two-Tier Ownership Structure (Thai Holding)
In some cases, to enhance control over a Thai company, foreign investors may opt for a “two-tier ownership structure,” also known as a “Thai holding.” The essence of this structure involves establishing a Thai holding company that holds shares in the operating company (or companies) in Thailand.
The holding company is 51% owned by a Thai partner and 49% by a foreign investor. In such setups, holding companies typically utilize preference shares for management control. The operating company is 51% owned by the holding company, with the remaining 49% held by foreign investors directly.
Since the holding company does not engage in operational activities or require work permits for foreigners, it doesn’t need significant registered capital. The acquisition of shares in the operating company can be financed through a loan from the foreign founder (investor), with the shares acting as collateral for the loan.
This structure ensures that both companies are considered Thai entities, thus exempting them from the stipulations of the Foreign Business Act.
This approach effectively allows control over the activities of one or several subsidiaries while avoiding direct operational obligations.
A graphical diagram of this structure is presented below.
Managing a Thai Company: Key Considerations
Important Note: Each method for controlling a Thai company has its own weaknesses and vulnerabilities. Foreign investors are strongly advised to thoroughly evaluate all potential risks when structuring relationships with Thai shareholders. This is particularly critical in sensitive sectors such as real estate, tourism, hotels, trading, agriculture, and cannabis. Professional guidance is essential.
Protecting minority shareholder rights requires meticulous structuring within the framework of corporate law, primarily involving the company’s charter, and contractual law, focusing on agreements like shareholder agreements. Poorly executed strategies can have serious consequences, making tailored approaches necessary for each unique situation.
What Type of Company to Open in Thailand?
Opening a Private Limited Company (Co. Ltd.) is a popular choice for foreign investors looking to start a business in Thailand. This type of company shares similarities with legal structures in other countries, such as Pte Ltd in Singapore or GmbH in Germany. However, a key difference is that in Thailand, a Co. Ltd. cannot be founded by just one person and cannot operate with a single shareholder. As of February 7, 2023, a Co. Ltd. must have at least two shareholders, a change from the previous requirement of a minimum of three shareholders.
The choice of a Co. Ltd. is often due to its limited liability for founders (participants, shareholders), making it a less risky option for business owners. Additionally, the process of setting up and managing a Co. Ltd. is relatively straightforward.
The operations of a Co. Ltd. in Thailand are governed by Section 1096 and subsequent sections of the Civil and Commercial Code of Thailand, providing a legal framework for its functioning and regulation.
Read Details Here:
How to Register a Company in Thailand
If you have any questions about setting up a company in Thailand, Thai corporate law, or need assistance with structuring relationships with Thai shareholders, please email me or use the form below.
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