Thailand’s Foreign Business Act - Will it Ever Change?

Date: Nov 2013

by Stephen Frost, Bangkok International Associates

Background The Foreign Business Act (1999) is the principal Act that regulates foreign ownership of businesses in Thailand. There is also separate industry–specific legislation that regulates foreign involvement in banking, insurance, telecommunications and other industries. American investors have special preferential rights to business ownership under the USA-Thailand Treaty of Amity (1966).

In March 2013, the Ministry of Commerce issued a regulation making changes to the categories of business activities that are regulated under the FBA. In this article, we consider those changes, the scope of the legislation and its interpretation by the Ministry of Commerce, and the likelihood of changes being made to the FBA in the light of international trade negotiations in which Thailand is currently involved.

The regulation Under the regulation, foreigners (basically meaning foreign individuals, foreign companies or majority foreign owned Thai companies) will no longer need a FBA license to operate the following service activities:

  • trading on the Agricultural Futures Exchange of Thailand
  • securities dealing
  • investment advisory services
  • securities underwriting
  • securities borrowing and lending
  • mutual fund management
  • private fund management including provident funds
  • venture capital management
  • funding for securities business
  • financial advisor
  • securities registrar
  • custodian of securities company's customers or derivatives business operator's customers
  • custodian of private fund
  • mutual fund supervisor
  • bond holders' representative
  • derivatives dealer
  • derivatives advisor
  • derivatives capital manager
  • trustee business under law on trust for transaction in capital market.

But since all these activities are still subject to licensing requirements under the Securities Exchange Commission Act, the Derivatives Act or other securities legislation, this is not a real case of liberalisation, but merely a reduction in the licensing requirements from two to one.

Review of the categories of regulated business since 1999 The 1999 Act contains a list of 43 regulated activities grouped into three schedules – the foreign ownership cap depends on the schedule in which the business is listed. Broadly speaking, around 99% of manufacturing activities are now open to 100% foreign ownership. In contrast, all service businesses are limited to 49% foreign ownership under the FBA or industry-specific legislation, unless there is a carve out on the grounds of substantial capital investment (e.g. in retailing, wholesaling or certain categories of construction) or a licence for majority foreign ownership is successfully obtained.

The USA – Thailand Treaty of Amity “Not yet ready to compete with foreigners?” American investors have special preferential rights to business ownership under the Treaty of Amity and Economic Relations, signed in 1966. Under this Treaty, American investors may own 100% of any category of business, except for seven specified areas: communications, transport, fiduciary functions, banking involving depository functions, the exploitation of land or other natural resources, or domestic trade in indigenous agricultural products. It can therefore be seen that they have preferential and more wide-ranging rights to business ownership under this Treaty, whilst all other nationalities are subject to the more onerous restrictions of the FBA.

Whilst Schedule 3 of the Foreign Business Act proclaims that the businesses it lists are those in which “Thais are not yet ready to compete”, in fact, Thais have been competing with American investors in all these sectors since 1966, thus such a declaration cannot be reconciled with preferential rights granted to one nationality only.

Problems in practice The Department of Business Development (part of the Ministry of Commerce) has since 1999, issued a number of rulings as to whether a particular business activity is caught by the FBA or not:

  • Renting of property This has been declared to be a service as defined by the FBA and thus a majority foreign owned Thai company cannot rent out property without first obtaining a FBA licence. It may be accepted that if a company is renting out property as its main business, that should be subject to the FBA. But what about other cases? Consider where a company operates two factories on the same site, but due to an economic downturn it desires to close operations in one factory and rent it out? This would be regarded as a service activity, even though it may only be a one-off or occasional transaction, rather than a principal business activity.
  • Renting of moveable property Renting of moveable property e.g. machinery or equipment or vehicles would also be considered a service for similar reasons, and similar counter comments can be made as in the previous paragraph with regard to temporary renting activities which are ancillary to a company whose main business is manufacturing or the provision of other services.
  • Providing guarantees or security, with or without consideration This too has been declared to be a service activity and subject to the FBA. Once again, there is another argument. That if the provision of a guarantee or other security is only for a one-off transaction or an occasional activity, and not its principal business, why should it be necessary to apply for a FBA licence? Consider the case where the foreign parent of a Thai subsidiary is borrowing money under a new loan, or to refinance the business, and the lending bank requires a guarantee or other security from the Thailand group company. Should this one-off transaction be regarded as a service that is caught by the FBA?

Note also that consent of the Bank of Thailand may also be required for such provision of security.

  • Lending money Lending money is also regarded as a service activity, and indeed, the lender may also be required to obtain a license under banking legislation. But consider the case of a loan being made by a Thai subsidiary to a foreign parent, or a case where a majority foreign owned company in Thailand lends money for operating capital to a sister Thai company. Surely such occasional specific lending activities, where not a principal business activity, should be construed as being outside the FBA.
  • Carve outs for foreign retailers or manufacturers Under FBA Sch 3, certain cases of retailing, wholesaling, construction and other activities may be 100% foreign owned, provided that substantial capital is paid into the company. The general company law rule in relation to a company’s capital, is that only 25% has to be paid in, the balance is subject to a call on capital by the board of directors at any time. But the DBD has held that in the case of interpreting these carve outs under Sch 3, all of the capital must be fully paid in, before the company may be 100% foreign owned.

The interpretations above have been made in private rulings of the DBD. These are not law. They have not been tested in court. But in practice they are treated as law, when there is a strong case for saying that such services are sui generis, and that those who drafted the FBA did not contemplate that the ambit of the FBA should stretch so far, and as well as the particular arguments submitted above.

  • Inland transport Providing inland transport is specifically listed as a regulated activity under Sch 2 of the FBA. There may well be cases where a foreign manufacturer provides its own vehicles for the transportation of goods, or for the collection/delivery of parts to/from the manufacturing plant. Where such activities are subsidiary or ancillary to the main activity of manufacturing, is there not a case to hold that this would be considered an activity outside the scope of the FBA?
  • After sales repair or maintenance by manufacturers Similarly, manufacturers who provide after sales repairs or services, or a guarantee for the quality of a product, may also be accused of providing a service, thus necessitating an application for an FBA licence. A more positive and business-friendly argument, would be to hold that if these activities are ancillary to the principal activity of manufacturing, in such a case, the FBA should not apply.

Lengthy application process If it has been decided to apply for a FBA license, the process involves drafting an application, and submitting this with documents in support. It can take three months or so for a decision to be made. Part of the reason for this is that the regulatory committee only meets one a month. Further queries may be raised. Additional documents may be requested and have to be prepared. The process is too long and is not business-friendly.

Note also the rules concerning foreign ownership of land may also impact on many businesses, including manufacturing or retailing. In general, ownership of land is prohibited to foreign companies or individuals, or majority foreign owned Thai companies. There are a number of exemptions:

  • The restriction applies to ownership of land, not buildings.
  • Foreigners are not restricted from leasing land.
  • Where the Board of Investment promotes a project it can also grant permission for a majority foreign owned Thai company to own land for use in the promoted project.
  • Where the land is located in an industrial estate owned or managed by the Industrial Estates Authority of Thailand, it may also be owned by a majority foreign owned Thai company.

Current international developments Thailand, as a member of ASEAN, is committed to participation in the ASEAN Economic Community, due to come into effect in December 2015. In general terms, Thailand is committed to opening up all business activities to 70% ASEAN ownership. If this proposal is implemented, then once again it will be hard to argue that “Thailand is not ready to compete” in service activities in favour of other countries. It is also likely that there will be increased pressure from e.g. European, Chinese, Japanese or Korean investors for liberalisation of the business ownership restraints that they will still face under the FBA which their ASEAN competitors will not.

In addition, Thailand has now commenced negotiations with the European Union for an EU-Thailand Free Trade Agreement. One of the factors underlying this, is that in 2015 Thailand will lose its GSP privileges for the export of goods to the EU. It is therefore in Thailand’s interest to negotiate some form of free trade agreement with the EU before that date. The scope of negotiations will extend to many areas, including trade in goods, intellectual property protection, sustainable development, the liberalisation of rules for investment in services and investment protection. It is not clear yet what the negotiating position of the EU will be.But it is certainly likely that the European Union will want a level playing field with the United States, and therefore request during the negotiations, as a minimum, the same access for EU investors in services as that which is granted to US investors.

The future is to liberalise services Thailand’s modern industrial revolution can be traced back to the 1970s and 1980s when, in particular, the Board of Investment was set up to offer tax breaks and other incentives to encourage foreign manufacturers (and in some cases, services businesses) to set up operations in Thailand.

Surely the time has now come for Thailand to adopt a less protectionist approach to foreign participation in services, and thereby to set off a second wave of foreign investment. The net result would be the creation of employment, the transfer of expertise, and increased tax revenue for the government. The time is surely right.

© Stephen Frost, Bangkok International Associates 2013

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