Doing Business in Thailand: Four Recommended Steps for Foreigners

Foreign Direct Investment Regulations 

Thailand has been relying heavily on foreign direct investment during the past several decades. However, it has never been an easy task for foreign individuals and corporations to legally operate in Thailand as there are numerous Thai laws that either outright prohibit or somehow restrict foreign parties from engaging in various businesses in Thailand, the most notable of which is the overarching law called the Foreign Business Act (FBA).

In a nutshell, the FBA generally prohibits foreigners including foreign-owned locally-incorporated companies from engaging in more than 40 broad categories of businesses in Thailand unless they have successfully obtained a foreign business license from the Thai government (which is hard to obtain in practice) or unless they are otherwise legally exempted from the restrictions (based on limited exemptions which are sometimes subject to controversial interpretations by the regulator). It is also possible for foreigners to be exempted from such restrictions if they have successfully obtained an approval from the Board of Investment (BOI), but the BOI only grants such approvals to qualified investments based on their criteria.  

Apart from the FBA, there are many other Thai laws which also regulate foreign direct investment in Thailand in parallel, such as, the Land Code, the Financial Institution Business Act, the Insurance Act, the Telecommunications Business Act, the Broadcasting and Television Business Act, the Land Transport Act, the Air Navigation Act, the Private Schools Act, the Tourism Business and Guides Act, etc. 

Therefore, any foreigners who are interested in investing in Thailand should carefully consider the implications of the applicable Thail laws before they establish their local presence in Thailand or acquiring a majority stake in any existing Thai businesses. 

Types of Entities Available  

Private limited companies are the most common form of legal entities for doing businesses in Thailand. Each company must have a minimum of two shareholders and at least one director. The director may or may not need to reside in Thailand, depending on the circumstances. For example, as a condition to obtain and maintain a foreign business license under the FBA, the company must always have at least one director residing in Thailand. Different businesses may be subject to different requirements.   

The Civil and Commercial Code which governs the incorporation of private limited companies in Thailand does not directly specify any minimum capital requirement. However, other Thai laws may require companies to have a particular amount of capital as a condition to maintain a permit or license. For example, companies which hire foreign employees must obtain work permits for their employees. The work permit law then requires companies to have a minimum capital of THB 2 million for each work permit quota. As another example, the FBA requires each foreign company to have at least THB 2 million capital for each non-restricted business and at least THB 3 million capital for each restricted business (as a condition for maintaining a foreign business license). The BOI also typically requires companies to maintain a certain amount of minimum capital in order to receive investment approval and legal privileges that come with it.  

Other types of entities for doing business in Thailand include ordinary partnerships, registered partnerships, limited partnerships, public limited companies, etc. But these entities are less common. 

It is also possible to register branch offices of foreign companies in Thailand. However, there are no practical benefits to do so in our opinion because, although such branch offices are technically not separate legal entities, they are nevertheless required to separately prepare books, accounts, taxes and other filings pursuant to local requirements similar to private or public companies which are established under Thai laws. On the downside, local parties in Thailand including government agencies are generally not familiar with branch offices of foreign companies. This typically leads to more paperwork and translations required when such branch offices deal with local parties. 

Another option is to register representative offices of foreign companies in Thailand. However, representative offices have a very limited scope of activities that they can legally engage in Thailand. Basically, representative offices are just ‘eyes and ears’ in Thailand of their head office outside Thailand. They cannot solicit customers, sell any goods, provide any services, enter into any commercial contracts, or otherwise generate any revenues in Thailand.   

Regardless of the type of entities chosen, each business must have a registered office address in Thailand. It is possible to register a company in Thailand with a virtual office address, but physical offices are required under certain circumstances, for example, if the company is required to be registered for value added tax (VAT) purposes.  

The main government agency responsible for company registrations, FBA compliance, and accounting requirements in Thailand is the Department of Business Development (DBD) of the Thai Ministry of Commerce. Apart from the DBD, most businesses would also need to be registered with the Revenue Department (RD) and the Social Security Office (SSO) for taxes and employment-related purposes, respectively. 

Four Recommended Steps for Foreigners to Explore 
 

1. Seeking Approval from the Board of Investment (BOI)

Foreigners which seek to open business in Thailand should first consider obtaining approval from the Board of Investment (BOI). The BOI has the authority to grant both tax and non-tax privileges to successful applicants. Tax privileges include exemption from corporate income tax, import duties on machinery, and import duties on raw materials used in the BOI-approved project. Successful applicants may enjoy these tax privileges for a number of years (3 – 15 years), depending on the circumstances. 

In addition to tax privileges, the BOI offers non-tax privileges to successful applicants including exemption from restrictions under the FBA (which would allow foreigners to operate businesses which are otherwise restricted under the FBA through a wholly-owned subsidiary), the right to own land outside industrial estate areas (which foreigners are otherwise generally not allowed), and flexible and streamlined processes for visa and work permit applications for their foreign executives and employees. Unlike tax privileges, successful applicants may rely on non-tax privileges for as long as they still operate the BOI-approved project. 

The BOI does not approve any investment project though. Only qualified investment projects are eligible for BOI promotion based on their current investment promotion criteria. The BOI currently promotes, among others, Bio-Circular-Green (BCG) industries, industries utilizing advanced technologies, digital and creative industries, production of electrical vehicles, and high-value service industries, etc. Therefore, foreigners wishing to operate their business in Thailand should first consider whether or not their intended business in Thailand is qualified for BOI promotion and, if so, try to apply for it. 

2. Identifying Exemptions under the Foreign Business Act (FBA)

If your intended business activities do not qualify for any promotion by the BOI, and if such business activities are considered restricted business under the Foreign Business Act (FBA), which is very likely because the FBA has an extremely broad scope and covers most business sectors, you should seek legal advice from qualified Thai lawyers on whether or not there are any legal exemptions applicable to your intended business. If there are any applicable exemptions, you would still be able to operate your intended business in Thailand through a wholly-owned subsidiary even without BOI approval. By contrast, if there isn’t any exemption available, you will need to obtain a foreign business license from the Thai regulator before operating the restricted business activities in Thailand, which is hard to obtain in practice. 

Operating restricted business activities in Thailand by relying on legal exemptions is not easy though, as the exemptions are very limited under the law. They also come with various conditions and are subject to extensive interpretations by the regulator. For example, retail business is generally restricted under the FBA. The BOI is not interested in promoting any retail business. However, there is an exemption under the FBA that allows foreigners to operate retail business in Thailand as a wholly-owned business from up to five business locations without the need to obtain a foreign business license if they bring into Thailand a minimum capital of 100 million Baht or more. However, the aforesaid exemption is subject to extensive interpretations by the regulator that you should carefully study before operating business in Thailand by relying on such exemption. For example, what does a “business location” mean in this context? And what are the differences between retail business and wholesale business from the regulator’s perspective? Consultation with qualified Thai lawyers who understand the complexity of the matter is highly recommended. 

3. Obtaining a Foreign Business License (FBL)

If your business activities are not eligible for BOI promotion and they are considered restricted activities under the FBA but there are no exemptions available, obtaining a Foreign Business License (FBL) would be legally required. Obtaining an FBL is not an easy task though, because the process is complicated, time-consuming, and requires comprehensive documentation. 

For many business sectors, an FBL is available in theory only because in practice the regulator simply refuses to issue an FBL to applicants. Even when an FBL is issued, the scope of permitted business activities is usually narrow, meaning that a new FBL is almost certainly required whenever you wish to expand your business in Thailand. 

Given the complexity and the meticulous nature of this process, consulting with a knowledgeable Thai lawyer is highly recommended to evaluate the realistic chance of obtaining an FBL and to ensure that the scope of business covered by your FBL application matches the intended business activities.

4. Establishing a Joint Venture with Thai Partners

If none of the above alternatives is feasible, the last option for foreigners to operate restricted businesses in Thailand is to form a joint venture company with genuine Thai shareholders whereby the Thai shareholders own a majority shares in the joint venture company. 

Forming a joint venture company comes with its own legal issues, especially how to protect your interests as a minority foreign shareholder, how to balance the parties’ control and economic benefits, how to maintain long-term good relationships, how to resolve any disputes, etc. A carefully drafted joint venture agreement or shareholders agreement is required to achieve the foregoing protection.

It is critically important to note here that the use of nominee Thai shareholders to hold shares in a Thai company to circumvent restrictions under the FBA is outright illegal and such practice is subject to severe criminal penalties under Thai law. The Thai authorities have been increasing their efforts to crack down the use of illegal Thai nominees during the past several years, especially in major provinces and business sectors which are popular for foreigners in Thailand (such as, real estate development, tourism businesses, etc.). Therefore, choosing the right Thai partners for your joint venture company is also important. The Thai partners must be genuine and ready to prove that they are not mere nominee shareholders of a foreign party. There are several factors that the authorities use to determine whether or not a particular Thai shareholder is an illegal nominee of a foreign shareholder.  

Overview of Thailand Taxation Regime 

Income Tax:

• Corporate Income Tax: In Thailand, the standard corporate income tax rate is 20% of the annual profit of the company.
• Personal Income Tax: For individuals including foreigners working in Thailand, progressive tax rates apply. The maximum personal income tax rate is currently 35% of the individual’s taxable income.

Value-Added Tax (VAT):

• The standard VAT rate in Thailand is currently set at 7%, with limited exemptions. 

Withholding Tax:

• Dividends: Dividends paid by companies in Thailand to shareholders (whether in Thailand or elsewhere) are generally subject to a withholding tax of 10%.
• Loan interest: Payment of loan interest is generally subject to a withholding tax rate of 15%.

The tax rates outlined above may be subject to reductions under an applicable Double Tax Agreement (DTA) between Thailand and the relevant country.