Companies with foreign shareholding must tread carefully
The term "foreigner", its application and various legislative interpretations were explained in our previous article.
Investigations by the Ministry of Commerce (MOC) into nominee arrangements in companies established for the purpose of owning land or operating a restricted business based on the holding of shares by Thai nationals remain ongoing.
Although a company incorporated in Thailand, in which the percentage of shares held by foreigners exceeds the legal limit may not be treated as a foreign entity under certain laws, its business may be subject to others. For example, ABC Company is established with 49.9 per cent of its shares held by a foreigner to operate a telecommunications business with the desire to hold land. Under the telecommunication law, the term "foreigner" is not defined; therefore the definition of this under the FBA may apply as a general concept. Thus, ABC has to comply with the FBA. With a structure including foreign shareholding, ABC cannot ignore either the FBA - the key legislation that determines whether a company is a foreign entity and restricted from certain businesses - or other relevant laws when carrying out intended activities. Given its foreign shareholding, ABC may be permitted to operate the telecommunications business under the telecommunications law but is not eligible to hold land because the percentage exceeds the limit under the Land Code. Hence it is clear that every relevant law - particularly those that regulate the businesses that foreigners intend to do - is a crucial element for consideration if foreigners decide to do business in Thailand.
Significantly, the absence of any compilation of laws governing foreigners' business activities and transactions, even a simple business like setting up a factory upcountry, could prove troublesome. Taking this example, the establishment of a factory upcountry requires approval from relevant local authorities for a licence to operate, otherwise the foreign business operator will be subject to punishment.
The Land Department also investigates foreign shareholding, limiting the shareholding to 49 per cent. If an investigation reveals the entity in question is foreign, all shareholders at every level will be treated as foreigners and therefore prohibited from holding land.
In contrast to the investigation of every shareholder by the Land Department, under the FBA only one shareholder level in the company tends to be analysed. If more than 50 per cent of the shares are held by foreigners, the company will be treated as a foreign entity. This has lead to use of "cross-shareholding" structures involving the establishment of two Thai companies each of which holds 51 per cent of the other, while the remaining 49 per cent is held by foreigners. So, each company appears to be a Thai entity. If the ultimate shareholding were further scrutinised, it could be seen that there are in fact no other Thai shareholders in either company. Even so, the MOC may still consider them Thai companies because the MOC normally investigates only one company, not both. Once the investigated company is proved to be a Thai company, it may, based on the MOC's interpretation, operate any restricted business. However the use of cross-shareholding structures remains a grey area.
The difficulty is that these companies, when planning to do restricted businesses, have to proceed cautiously, because the MOC has established the Bureau of Corporate Governance, to audit companies to ensure compliance with laws under the MOC's administration.
If an MOC investigation reveals an offence, the case will be dealt with by the Bureau of Law and Litigation. In the case of nominee offences, the Thai individuals or entities and foreigners consenting to the arrangement may be subject to punishment, including imprisonment for three years and/or a fine from Bt100,000-Bt1 million. Further, the court is empowered to order stoppage of assistance or support in the nominee arrangement, joint business operation or holding of shares. Any violation of the court order may also be subject to a fine from Bt10,000-Bt500,000 per day throughout the period of violation.
Before commencing any business or transaction, companies - particularly those having foreign shareholding - must not overlook the various laws that will be of concern to them.
Vunnipa Ruamrangsri is a director in Legal Compliance Services at PWC Thailand. She can be reached at [email protected].
