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The Japanese Overseas Investment Report 2017: Thailand

Narai-juku, Japan. Picturesque view of old Japanese town



SECTION 1: Market outlook

1.1 How would you summarise your jurisdiction's attitude towards the influence of Japanese corporate culture in its industries?

From the first wave of Japanese investment in the 1980s and 1990s, Japanese investors have played a significant role in developing Thailand's economy. Since 1981 Japan has been Thailand's largest investor. According to Bank of Thailand (BOT) statistics, in 2015 Japanese foreign direct investment (FDI) in Thailand amounted to $3.03 billion. The most recent figures published by the Board of Investment (BOI), the principal Thai governmental body that supports investment in Thailand, indicate that Japanese FDI from January to November 2016 amounted to THB77.14 billion ($2.2 billion). In the same period, 262 applications for BOI promotional privileges involving Japanese investors were approved amounting to 31% of the overall number of foreign applications. Japanese investment in Thailand is viewed positively and encouraged by the Thai government, which continues to recognise Japan's importance to Thailand's economy.

1.2 What is the outlook for Japanese investment into your jurisdiction over the next 12 months?

Positive, particularly in certain sectors. Official forecasts show Thailand's economy is expected to grow overall between three to four percent in 2017. In addition to existing BOI promotions, important new initiatives have just been introduced aimed at developing Thailand into a high-income value-based economy. Under a key government initiative Thailand 4.0 (January 2017) the focus is placed on innovation, technology and creativity and trade in services. These can be categorised into core technologies and enabling services. Core technologies include biotechnology and digital technology and enabling services include research in science, technology and design. The BOI benefits offered to potential investors in these sectors (yet to be announced) will include a waiver of corporate income tax for up to ten years.

Thailand aims to become a hub for manufacturing and logistics for CMLV (Cambodia, Myanmar, Laos and Vietnam). To achieve this and to support Thailand 4.0, governmental infrastructure projects valued at THB2.2 trillion are planned, including mass rapid transit systems, high speed/double track railways and upgrading existing airport and port facilities.

SECTION 2: Approving foreign investments

2.1 Explain the foreign investment approval process and approval timetable.

Investors can apply for Thai governmental incentives for undertaking certain businesses in Thailand considered important and beneficial to Thailand's economic and social development. Historically such promoted activities focused on manufacturing boosting employment which helped fuel Thailand's automobile and electronics sectors. Under Thailand 4.0, the focus is moving to encouraging high-value industries offering new technology and/or environmentally friendly activities.

The agencies charged with promoting investment are the BOI and the Industrial Estate Authority of Thailand (IEAT).

BOI privileges – to be eligible the promoted entity must be Thai (incorporated limited company, foundation or cooperative). Foreign investors can own all or majority of the shares in such Thai entity where the BOI permits (for example manufacturing). For other activities (including agriculture, fisheries, mining, certain types of services) the foreign ownership limit is 49% of the total shares. Available privileges vary depending on the nature of the underlying activity (activity based incentives) and certain targeted locations (area based incentives) but can include of tax privileges (as mentioned in 6.3 below); non-tax privileges (permission to own land and relaxed visa or work permits quota for foreign employees) and certain investment protections.

The application process involves submitting a standard form application to the BOI. Consideration takes between 40-90 working days following submission. If the project is approved, the BOI will issue a promotion certificate to the promoted investor subject to compliance with any specified conditions.

Before applying, applicants are advised to arrange a meeting with a BOI officer to discuss the proposed application. Permission to own land will usually be considered post-approval.

IEAT privileges – IEAT incentives are available for projects located in a specifically approved industrial estate. Estates include IEAT managed industrial estates as well as certain industrial estates owned and managed by private developers. Non-tax incentives include permission to own land in the estate; relaxed visa or work permits for foreign technicians and families; and the ability to repatriate foreign currency. Tax privileges for investors operating in the Freezone include exemption from import and export duty, excise tax and VAT on machinery and raw materials. For investors looking to construct or operate their own factory, IEAT can assist with requisite permits.

2.2 Are there any investment restrictions in specially regulated sectors and is the government entitled to any special rights in these sectors?

Yes. Certain sectors including the energy, telecommunications and natural resources sectors are either reserved for, or undertaken by, a state-owned enterprise or are regulated by a government regulator or body appointed by virtue of specific enabling legislation with authority to grant concessions and licences to the private sector. For example, in the telecom sector, the National Broadcasting Commission was set up under the NRA Organization Act with responsibility for spectrum allocation as well as authority for introducing takeover and ownership restrictions in the telecom sector.

In addition to the general provisions of the FBA (see 2.4 below), which impose foreign investment restrictions in specified sectors, there are numerous other industry and sector specific laws which may or may not also include foreign ownership restrictions. Potential investors would be wise to seek advice from a locally qualified law practice regarding the existence of any applicable restrictions early in the investment decision process.

2.3 Which authority oversees competition clearance? Please give a brief overview of the merger clearance process.

The Trade Competition Commission (TCC) is authorised under the Trade Competition Act (1999) (TCA) to oversee all mergers and acquisitions in Thailand. The TCC can suspend the merger of businesses involving a Thai or foreign business operator that may result in monopoly or unfair competition in Thailand. A pre-merger notification is provided which states that a merger (whether horizontal, vertical or conglomerate) falling within certain minimum thresholds as prescribed in a notification issued by the TCC will need the approval of the TCC. To date no notification has been issued specifying the minimum thresholds or the underlying process. Consequently, no approval is currently required from the TCC. Developments are expected soon.

2.4 Are there further approval requirements that foreign investors should be aware of?

The Foreign Business Act (FBA) is the main act that determines which business activities foreigners can undertake in Thailand. The FBA categorises activities into three lists which foreigners are prohibited from undertaking or are entitled to undertake subject to first obtaining either an exemption or a licence. The term foreigner, includes local Thai incorporated entities where 50% or more of the total shares are owned by non-Thais. Joint-ventures where Thais own the majority shares are not classified as foreign and hence not subject to FBA restrictions.

List 1 activities are absolutely prohibited for foreigners to engage in (activities include publishing, trading in real estate, rice farming). List 2 activities require Cabinet approval for foreigners to undertake (activities include transportation, arts and culture and activities affecting the environment or natural resources). List 3 activities include acting as an agent or broker, wholesaling, retailing, conducting a service business and are deemed activities that Thais are not yet ready to compete against foreigners. Foreigners can undertake List 3 activities only where an exemption or permission has been granted. Available exemptions and permissions include Foreign Business License (FBL) issued by the Ministry of Commerce (MOC), US Thai Amity Treaty privileges (reserved for US nationals and entities) and BOI privileges. Limited privileges are also granted to Japanese investors under the Japan-Thailand Economic Partnership Agreement (JTEPA) which, subject to certain conditions, relaxes the shareholding requirement for qualified Japanese nationals to undertake specific types of wholesale, retail and service activities.

Foreigners are prohibited from owning 49% or more of the shares of any entity (private or public) which owns freehold interests in land located in Thailand subject to limited exceptions. Listed companies often have foreign shareholder limits.

SECTION 3: Investment techniques

3.1 What are the most common legal entities used for Japanese investment in your jurisdiction?

The most common entity used by private business in Thailand is a limited company or juristic person. A juristic person is a separate legal entity from its shareholders. In terms of structure and organisation, it is similar to companies found in Western countries. The liability of the shareholders of a private limited company is limited to the unpaid share capital of the shares held by that shareholder. The directors authorised to bind the company are listed in the publically available affidavit which states the company's registered capital and permitted objectives.

Private joint-ventures between foreign investors and local partners will normally be carried out through a juristic person and are often referred to locally as joint-ventures (JVs). JVs not conducted through a juristic person are not recognised as a legal entity but JVs organised to conduct a particular project (normally construction) may be regarded as a taxable entity under the Revenue Code.

Thai law also recognises branch offices, representative and regional offices, treasury centres, partnerships and sole proprietorships. Branch offices are sometimes used to undertake government contracts. A branch office is treated as an extension of its head office which is responsible for the branch's liabilities. Further, if the activities being carried out by the branch are restricted activities (see 2.4 above), an FBL or other exemption would be needed. Representative office and regional office are both treated as non-trading offices and are not permitted to generate income. Each has limited activities which it can undertake which can make them restrictive in practice.

Large infrastructure projects and private investment in state undertakings will use Public Private Partnerships (PPP).

3.2 What are the key requirements for establishment and operation of these legal entities?

Shareholdings are usually structured to be compliant with the foreign shareholding restrictions applicable to the activities to be undertaken. For instance, foreign investors can generally own 100% of a manufacturing operation but are limited to taking minority shareholdings in other sectors. It is vital for investors to take legal advice at the outset regarding activities they plan to undertake so that their investment is properly structured and compliant.

SECTION 4: Dispute resolution

4.1 How effective are local courts' enforcement and dispute resolution proceedings, and what should Japanese investors be particularly aware of?

Court proceedings are commenced by filing a complaint in the prescribed form and paying the court fee. The complaint is then served on the defendant by a court officer. The defendant then has 15-30 days to file its response (extensions are commonly granted). The court then schedules a hearing to identify issues in dispute. The court may schedule mediation sessions between the parties. If unsuccessful, trial hearings will usually be scheduled about 8-12 months after the first hearing. On average the lower court judgment can be expected between 12-18 months from filing, however, depending on complexity and case load of the court, it can take longer. All civil court judgments are subject to appeal. Once a court judgment has become final (can no longer be appealed) enforcement proceedings can commence. Domestic judgments are enforced by filing an application to appoint a court execution officer to attach the judgment to the debtor's assets. The judgment creditor is responsible for locating the debtor's assets. Thai courts do not actively compel debtors to disclose details of assets, which can hinder from enforceability.

Arbitration proceedings broadly follow the United Nations Commission on International Trade Law (UNCITRAL) Model Law. Arbitration proceedings tend to benefit from a generally quicker procedure than court proceedings. In enforcing an arbitration award, the party seeking enforcement must petition to the court within the prescribed period. Enforcement proceedings can take about 12-18 months from filing the petition.

It is not uncommon for non-governmental commercial agreements between Japanese and local investors to be governed by Thai law but subject to arbitration outside of Thailand. Singapore and Hong Kong are common places designated for foreign arbitration due to their proximity. Thai governmental contracts will usually specify resolution through the Thai courts. Japanese investors should note that limitation periods vary depending on the type of claim from one month to ten years. This is a very technical area in Thai law and expert advice should be sought sooner rather than later.

Also proceedings, particularly labour disputes, can lead to the court requiring all directors and officers to attend the court in person, including those based overseas. This should be borne in mind when appointing directors and officers.

4.2 Does your jurisdiction have a bilateral investment protection treaty with Japan and is that commonly used by investors?

The Japan-Thailand Economic Partnership Agreement (JTEPA) 2007 is a bilateral free-trade agreement focused on reducing tariffs on products traded between the countries with additional provisions safeguarding citizen's intellectual property rights as well as protection from unfair competition. Although not linked to JTEPA, projects with BOI promotions are entitled to specific investment protections under the Board of Investment Act. These include guarantees and protections from expropriation, state competition, state monopoly and imposition of price controls relating to the promoted products.

4.3 Do local courts respect foreign judgments and are international arbitration awards enforceable?

Thailand is not party to any conventions relating to enforcing foreign court judgements. Accordingly, foreign court judgements will not be enforced by a Thai court but can be admitted for evidentiary purposes.

Thailand is a party to the Geneva Convention for the Execution of Foreign Optional Awards and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Accordingly, arbitral awards under such conventions will generally be recognised and enforceable in Thailand provided proceedings are initiated through the Administrative Court within the prescribed period.

SECTION 5: Forex controls and local operations

5.1 What foreign currency or exchange restrictions should foreign investors be aware of?

Generally, there are no restrictions on the inward remittance of foreign currency into Thailand provided such foreign currency is deposited and/or sold within a specified period. Outward remittances and purchases of foreign currency generally require the approval of the Bank of Thailand, which has authorised commercial banks to approve many types of commercial transactions on its behalf. Such approvals are routinely given by local commercial banks where the transaction relates to the repayment of loans, the payment of interest or the repatriation of investment funds, dividends or profits if the underlying transaction is genuine and such transactions are supported with appropriate documentation. In the case of repatriation of loans and funds, this also involves showing evidence that the funds used to make the loan or investment were originally remitted into Thailand.

SECTION 6: Tax implications

6.1 Are there tax structures and/or favourable intermediary tax jurisdictions that are particularly useful for Japanese investors into the country?

Structures for holding investments in Thailand are usually driven by tax considerations in Japan rather than those in Thailand. Many investments are held direct from Japan to avoid double taxation, which could arise from using intermediate holding companies.

Where compatible with tax rules in Japan, intermediate jurisdictions may be introduced into the structure to achieve specific objectives. Several jurisdictions have double taxation agreements with Thailand which offer reductions in the tax rate on dividends or capital gains in certain circumstances. These include Taiwan, Singapore, Mauritius and the UAE. Hong Kong also has a double taxation agreement with Thailand and may be used as an intermediate location in view of its advantageous tax system.

6.2 What are the applicable rates of corporate income tax and withholding tax on dividends?

The statutory rate of corporate income tax is 20%. The withholding tax rate on dividends is 10%. Interest and royalties are subject to withholding tax of 15%. Capital gains paid from, or in, Thailand are also subject to withholding tax of 15%.

6.3 Does the government have any tax incentive schemes in place?

Tax incentives awarded in connection with the BOI may, depending on the activity and location, include an exemption from corporate income tax for a period of currently up to eight years, special tax deductions and import tax exemptions.

Promoted industries include research and development, intellectual property licensing and product and packaging design. The area based incentives cover industrial zones and estates; science and technology parks; low income provinces; southern Thailand border provinces and special economic zones. The BOI has also established a cluster development programme designating manufacturing areas for targeted industries. These include automotive, electronic equipment, digital industry and healthcare.

Corporate income tax incentives are also available for International Head Quarters, International Trading Companies and Treasury Centers. Personal income tax incentives are also available for expatriate employees.

6.4 Are there any reciprocal tax arrangements between Thailand and Japan? If so, how can they aid investors?

There is a comprehensive double taxation agreement in place between Japan and Thailand. However, this does not provide any reduction in withholding tax on dividends, interest or royalties compared to the rates currently in force in Thailand under domestic laws. Capital gains derived by companies in Japan also remain subject to tax in Thailand. The JTEPA aims at eliminating tariffs on more than 90% of bilateral trade within 2017.

About the author



Peter Burke

Partner, Axis Legal

Bangkok, Thailand

T: 66 2 670 0140-1

F: 66 2 670 0142

E: peter.burke@axis-legal.com

W: www.axis-legal.com

Peter Burke is a partner in Axis Legal and has over 20 years' experience advising both Japanese and international clients relating to their business in Thailand. He is recognised as a leading adviser in the fields of corporate and M&A and has experience in advising on joint-ventures, disposals, corporate restructurings and structuring foreign investments, as well as general commercial matters, corporate governance issues and investments in Thailand.

About the author



Nattha Srisomwong

Lawyer, Axis Legal

Bangkok, Thailand

T: 66 2 670 0140-1

F: 66 2 670 0142

E: nattha.srisomwong@axis-legal.com

W: www.axis-legal.com

Nattha Srisomwong is a qualified Thai lawyer and notarial services attorney who regularly advises both Thai and foreign clients on various aspects of Thai corporate and commercial laws. Srisomwong received a master's degree in business law (English language programme) from Thammasat University in 2012 and has eight years' experience of working both as an in-house counsel and with law firms. Srisomwong specialises in corporate and M&A matters including advising on foreign investment, applying for foreign business licences, advising on the availability of investment privileges from applicable agencies including the Board of Investment of Thailand and the Industrial Estate Authority of Thailand.

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