SECTION 1: Market outlook
1.1 What is the outlook for US investment into your jurisdiction over the next 12 months, given the new US administration's protectionist focus?
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 Board of Investment of Thailand (BOI) promotions, important new initiatives have recently been introduced aimed at developing Thailand into a high-income 'value-based economy'. Under 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 including biotechnology and digital technology, and enabling services including research in science, technology and design. The BOI benefits offered to potential investors in these sectors will be eligible for a 10-year corporate income tax (CIT) exemption and additional incentives for one to three years, altogether lasting no more than 13 years. Additionally, Thailand also aims to establish an Aeropolis for supporting the aircraft maintenance, repair, and overhaul (MRO).
Given that many US corporations are leaders in the fields of technology, digital technology and biotechnology, they should be well placed to take advantage of such promotions.
1.2 Are there any industries in particular that you think are more likely to be affected by the US's new economic stance?
It is probably too early to assess what new policies the new US administration may adopt and their impact. As at the time of writing, our understanding is that the US Department of Commerce and the United States Trade Representative (USTR) are yet to reach a conclusion in their investigation based on Presidential Executive Order 13786. The order identified Thailand as one of 13 trading partners which had a significant trade deficit in goods with US in 2016.
SECTION 2: Approving foreign investments
2.1 Explain the foreign investment approval process and approval timetable.
Investors can apply for Thai governmental incentives/privileges for undertaking certain businesses/activities 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/electronics sectors. Under Thailand 4.0, the focus has moved to promoting high-value industries offering new technology and/or environmentally friendly activities.
The agencies charged with promoting new investment are the BOI and 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/majority of the shares in such Thai entity where the BOI permits (for example manufacturing). For other activities (including agriculture, fisheries, mining, and certain types of services) the foreign ownership limit is generally 49% of the total shares (see possible exemption for US investors in 2.4). Other available privileges vary depending on the nature of the underlying activity (activity-based incentives) and certain targeted locations (area-based incentives) but include tax privileges; non-tax privileges (permission to own land; relaxed visa/work permits quota for foreign employees) and certain investment protections.
The application process involves submitting a standard form application with supporting documents 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 meet 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 specifically approved industrial estates. Estates include IEAT managed industrial estates as well as certain industrial estates owned/managed by private developers. Non-tax incentives include permission to own land in the estate; relaxed visa/work permits for foreign technicians/families; ability to repatriate foreign currency. Tax privileges for investors operating in the Freezone include exemption from import and export duty, excise tax/VAT on machinery/raw materials. For investors looking to construct /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 are either reserved for, or undertaken by, a state-owned enterprise or are regulated by a government regulator/body appointed by virtue of specific enabling legislation and with the authority to grant concessions/licences to the private sector. For example, in the telecoms 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/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 and 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.
However, amendments to the TCA have recently been approved by the Thai National Legislative Assembly and are scheduled to become effective sometime in August or September 2017 (90 days from the date of publication of the amended TCA in the Government Gazette).
Under the amended TCA, a pre-merger approval by the Trade Competition Board (TCB) will be required for any merger that may result in a monopoly or which involves a business operator having market dominance. A post-merger notification is also required for business operators who have merged their business in a manner which may cause a significant reduction of competition in the market in accordance with criteria yet to be prescribed by the TCC.
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/certificate. The term 'foreigner', includes local Thai incorporated entities where 50% or more of the total shares are owned by non-Thais.
List 1 activities are absolutely prohibited for foreigners to engage in (for example publishing, trading in real estate, rice farming).
List 2 activities require Cabinet approval for foreigners to undertake (for example transportation, arts and culture, activities affecting the environment/natural resources).
List 3 activities include acting as an agent/ broker, wholesaling, retailing, conducting services and are deemed activities that Thais are not yet ready to compete against foreigners. Foreigners can undertake List 3 activities only where an exemption/permission has been granted.
There is however a specific and unique exception which is only available to US nationals and US owned companies under the Thai – US Treaty of Amity 1966 (Treaty). Subject to six exceptions, namely communications, transportation, fiduciary functions, banking involving depository functions, the exploitation of natural resources and land, and domestic trade in indigenous agricultural product, qualifying US-owned businesses operating in Thailand can apply for National Treatment. This broadly means that a qualifying US business will be afforded the same rights normally reserved for Thais (in other words, the restrictions in the FBA do not apply). This means qualified US nationals/qualified US entities are thereafter able to own all or a majority of the shares in the Thai entity and can engage in business on the same basis as Thai nationals, subject to a Foreign Business Certificate (FBC) being granted.
Privileges under the Treaty do not extend to permit land ownership.
SECTION 3: Investment techniques
3.1 What are the most common legal entities used for US investment in your jurisdiction?
The most common entity used by US investors to operate a 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 publicly available affidavit which states the company's registered capital and permitted objectives.
Thai law also recognises branch offices, representative/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 FBC or other exemption would be needed. A representative office or 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/private investment in state undertakings will use public-private partnerships (PPPs).
3.2 What are the key requirements for establishment and operation of these legal entities?
For US nationals/US qualifying entities looking to take advantage of the Treaty, the first step is to establish a local entity which typically would take the form of a local private limited company. The incorporation process is relatively simple and straight forward. Once the local entity has been incorporated, the next step is to apply to seek privileges under the Treaty. This involves the local entity applying to the US Commercial Service at the US Embassy in Bangkok for written confirmation that the majority of the business's shares are held by US nationals/businesses, who in turn meet the US nationality requirements (see below). Upon the US Commercial Service issuing a letter confirming US nationality, the applicant can then apply to the Ministry of Commerce (MOC) for the issuance of a FBC.
Once the FBC has been granted, the local entity will need to continue to satisfy the US nationality requirements at all times. In order to satisfy US national treatment under the Treaty, the majority of the business's total shares must be held by US shareholders (individuals or US businesses) and where such shareholders are businesses, that entity must be US and the majority of that entity's shares must be majority US owned and so on at each level in the corporate chain up to the ultimate individual owners, the majority of which must be US nationals or to a US listed entity. In addition, the majority of the directors must also be either Thai or US individuals. Any failure to satisfy the US nationality treatment will result in the FBC being automatically cancelled.
Accordingly, it is vital for investors to take legal advice to ensure that the entity investment is properly structured and compliant with the nationality requirements.
SECTION 4: Dispute resolution
4.1 How effective are local courts' enforcement and dispute resolution proceedings, and what should US 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 eight to 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 (i.e. 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 enforceability.
Arbitration proceedings broadly follow the 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 US 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. US 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/officers to attend the court in person, including those based overseas. This should be borne in mind when appointing directors/officers.
4.2 Does your jurisdiction have a bilateral investment protection treaty with the US and is that commonly used by investors?
The US-Thai Treaty of Amity provides US nationals and US owned businesses operating in Thailand with fairly extensive protections on a reciprocal basis. Under the Treaty, US nationals and US owned businesses are afforded fair and equitable treatment free from arbitrary or discriminatory measures which would impair their legally acquired rights. Additionally, property is entitled to protection from arbitrary confiscation or expropriation without due process of law or without payment of just compensation in accordance with the principles of international law. There are also provisions affording equal treatment as Thai nationals with regards to intellectual property rights, as well as the fair and equitable treatment in respect of government purchase of supply contracts and the awarding of concessions.
Additionally, projects entitled to BOI promotions are entitled to specific investment protections under the investment Promotion Act BE 2520 (1977). These include guarantees and protections from expropriation, state competition, state monopoly and imposition of price controls relating to 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 provided that the underlying transaction is genuine and such transactions are supported with appropriate documentation. In the case of repatriation of loans/funds, this also involves showing evidence that the funds used to make the loan/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 US investors into the country?
The vast majority of US investors form a Thai limited company directly owned by US shareholders due to the Treaty. One of the conditions of the Treaty is that there can be no non-US business in the corporate shareholding chain. As such this makes the use of tax haven countries less attractive.
6.2 Has your jurisdiction benefitted from the recent trend of US companies pursuing inversion structures? If yes, do you believe this will be threatened under the new administration?
US companies that 'invert' do so mainly by acquiring a company in a low tax jurisdiction and then merging. No US company would invert using Thailand as a base due to Thailand's relatively high tax rate and other restrictions.
6.3 What are the applicable rates of corporate 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%.
6.4 Does the government have any tax incentive schemes in place?
Tax incentives awarded in connection with the Board of Investment (BOI) may, depending on the activity and location, include an exemption from corporate income tax for a stated period depending on various factors, 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 program designating manufacturing areas for targeted industries. These include automotive, electronic equipment, digital industry and healthcare.
Corporate income tax incentives are also available for International Headquarters, International Trading Companies and Treasury Centres. Personal income tax incentives are also available for expatriate employees.
6.5 Are there any reciprocal tax arrangements between your jurisdiction and the US? If so, how can they aid investors?
There is a comprehensive double taxation agreement in place between the US and Thailand. However, this does not provide any reduction in withholding tax on dividends, interest or royalties (with the exception of copyright royalties reduced to five percent) compared to the rates currently in force in Thailand under domestic laws. Capital gains derived by companies in the US also remain subject to tax in Thailand.
6.6 Do you think that the introduction of new rules and regulations in the US, such as the Bring Jobs Home Act, is likely to have an impact on investment into your country?
No. US investors into Thailand, in most cases, use Thailand as a low-cost jurisdiction from which to supply goods and services to the Asian market and not for export to the US. Thus, it will likely continue to be more cost effective to do so from Thailand rather that the US.
|About the author|
Peter Burke is a partner in Axis Legal and has over 20 years' experience in advising both US and international clients relating to their businesses 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 handling general commercial matters, corporate governance issues and investments in Thailand. Burke has obtained master's degrees in law from both London University and Georgetown University.
|About the author|
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 program) 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.
|About the author|
Greg Lamont is a recently retired PwC partner living in Thailand. He has over 30 years of international tax experience while based in New York and had eight years of experience in Thai taxation while working in Bangkok. His primary focus while working in Thailand was assisting US and European investors into Thailand. Lamont will continue to reside in Thailand and is available to advise investors into the country on a select basis.
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