Foreign Ownership in Thailand

There has been a great deal of controversy in recent months about foreign ownership of companies, and particularly those owning land.

Firstly Thai Law prohibits foreigners from owning more than 49% of the shares of a Thai Company. This in itself is a bar to any foreign investment in Thailand as no one is going to put their money into an investment that they do not control. Thailand being Thailand found a pragmatic solution to this in that for the last 30 years or so, the 51% Thai shareholding has been by nominees – names on paper but with no financial interest in the company. Their voting rights were restricted and they were excluded from being Directors of the company. Essentially control remained with the investor. Major international companies applied this formula to their corporate structure and, whilst not adhering to the strict interpretation of the Law, it became common and accepted practice.

Shin Corp is a huge telecommunications company essentially owned and controlled by the family of the now ex-Prime Minister Taksin Shinawat. It was the sale of this company to the Singapore Government, and especially the fact that the deal was declared as tax-free, that opened up the debate on foreign ownership and was the beginning of the end for Mr Taksin.

The Business Development Department has reportedly concluded that the Singapore government's investment arm, Temasek Holdings, had violated the Foreign Business Act and telecom laws by controlling more than 49% in Shin Corp. But the report has remained sealed pending a broader inquiry into the use of nominee companies by foreign investors.

A survey of a dozen of the country's most prominent foreign investors, including Tesco, Holcim, Carrefour and others, showed a widespread use of multiple share classes, different voting rights, nominee structures and other techniques to bypass the 49% restriction. Thai law defines the nationality of a firm based on the nationality of its shareholders - if a majority of capital is controlled by Thais, then the company itself is considered Thai.

Secondly Thai Law prohibits foreigners from owning land.

There is an exception for someone who is prepared to invest one million Baht in specified investments for a period of at least five years who may then acquire and own in their own name up to one Rai (1,600 sq metres) of land subject to the approval of the Minister.

Apart from that foreigners may lease land. A lease can be registered at the Land Office for a period not exceeding 30 years. There are no provisions for options or renewals. However, it is contractually possible to agree an option but it cannot be registered. Therefore if there is any dispute about the renewal the matter will have to be settled in the Courts. I believe a recent Supreme Court judgement upheld a contractual option but I have yet to see the actual wording of the decision.

Again, for many years foreigners acquired the ownership of land through the Thai company structure as outlined above. This was the norm and accepted practice by lawyers and the officers at the Land Office. Was it strictly legal? No it was not, but no one objected and the procedure was well known at all levels of government.

The high profile nature of the Shin Corp case opened up the whole nature of foreign investment in Thailand to scrutiny. Those attacking Taksin Shinawat of course saw this as major ammunition for their case, but of course they had to apply the same principals to all companies from top to bottom.

Directives were sent out to the Land Offices around the country stating that where a Thai Company which had foreign shareholders was acquiring land, there should be an investigation in to the source of funds of the Thai shareholders to establish if they were legitimate investors or nominees. There was a great deal of confusion at the time about just what was required of the Thai shareholders, who was responsible for the investigation – the Land Office or the Commerce Department – and what action they should take. Consequently everything ground to a halt and virtually no registrations were taking place. By the time they had sorted out the detail the lawyers were coming up with ways to get round the new regulations. They simply had Thai companies with 100% Thai shareholders register the land and afterwards transferred 49% of the shares to the foreign owner. It probably would not stand up to scrutiny in the courts but it is again becoming “accepted practice”!

The interim government has recognised that the present situation is unsatisfactory and a review is being undertaken as to how to resolve the issue. On the one hand they understand the need of foreign companies to want to control their investment, but on the other hand do not want to make any changes that would let Shin Corp and Mr Taksin of the hook. It would be difficult to prosecute the parties involved one day and then change the law the next day to allow what they have just been found guilty of.

It has been my opinion since this whole debate started that the cost of ownership in Thailand has just gone up. It will, and is, still possible to acquire land through the Thai company structure, BUT the Thai shareholders must be legitimate. They must show that they had the funds to invest in their share either as capital or with sufficient income to support the investment. They will almost certainly need to be paid a dividend. I will deal with how this might be achieved in the next post.