The Foreign Business Act, B.E. 2542 (FBA), is often the first obstacle a prospective foreign investor in Thailand encounters. And this makes it an excellent place to begin our discussion of Thai law and policy since the FBA illustrates and embodies so many of the difficulties that foreign investors face in Thailand.
The FBA was enacted in 1999 and prohibits aliens a carefully defined term (more about that and the controversy this has created in subsequent posts) from owning a wide range of businesses absent certain exceptions or issuance of an alien business license, which is difficult to obtain in practice.
The FBA does not cover every business. I mention this because some seem to believe it covers every business owned by a foreigner, and I want to eliminate that misconception from the outset. The FBA is very broad, applying to about 50 types of businesses (depending upon how a type of business is defined) divided into three categories (often called annexes), but its not so broad as to cover all business activities. Generally speaking, for example, manufacturing is not restricted under the FBA. But its easy to see how the breadth of the FBA has created the misconception that it applies to any business in Thailand owned by a foreigner.
Complicating matters further, the FBA is also not the only law that restricts foreign ownership and participation in Thai companies. Even if the FBA does not apply, other Thai laws restricting foreign ownership and participation may apply. We will look at a few examples of this in future posts, but for now lets start by taking a broad brush look at the three categories (or annexes) of businesses restricted under the FBA and the rationales for these restrictions.
Annex 1 prohibits alien ownership of nine categories of businesses for special reasons, and includes such businesses as newspaper publication, ownership of television stations, forestry, rice farming and trading in land. The FBA does not permit licenses to be issued to foreigners for ownership of businesses listed in annex 1 under any circumstances.
Annex 2 is divided into three chapters. In theory, an alien can obtain a license to own a business operating in Annex 2 with approval of the Thai Cabinet. But in practice getting such approval can be very difficult because of the political nature of the approval required.
Chapter 1 is described as businesses involving national safety or security and includes the manufacture, sale and maintenance of firearms, armaments and military vehicles. Domestic land, water and air transportations including domestic aviation business also falls within chapter 1 of Annex 2. Thailand is not unique in restricting foreign participation in these kinds of businesses.
Chapter 2 is described as businesses affecting arts, culture, traditional customs and folk handicrafts and includes, among other activities, the creation of Thai wood carvings, manufacture of Thai musical instruments. I have yet to encounter a foreigner who wanted to set up a business in these areas.
Chapter 3 is described as businesses affecting natural resources or the environment and includes, among other activities mining and wood processing to make furniture and utensils. Extractive industries are often the subject of controversy and special protection, and Thailand is no exception. Because extractive industries tend to attract more than their fair share of transparency problems, investment by foreign companies in these sorts of businesses is problematic even without the FBA.
Annex 3 is described as businesses in which Thai nationals are not yet ready to compete with aliens. Annex 3 is probably the most controversial annex and lists 21 categories of restricted business activities, including, among others, accounting service business, engineering service business, and other service business, unless specifically exempted by Ministry of Commerce regulations. The Ministry of Commerce (MOC) has not specifically exempted any service businesses and the MOC interprets the term services very broadly.
For example, the MOC takes the position that a company is engaged in a service business if it leases property. This means, for instance, that if a manufacturing company (which is not otherwise restricted under the FBA) wants to sub-let part of its facilities to reduce its costs (not uncommon in these financially difficult times), that manufacturing company is engaged in a service activity that requires an alien business license. Similarly, the MOC takes the position that an alien company needs an alien business license to provide a guarantee. This means that a foreign owned Thai private limited company that is engaged in manufacturing (and not otherwise restricted under the FBA) cannot grant a guaranty in favor of the foreign parent company without first obtaining an alien business license. This can create some serious headaches when financing or restructuring the financing of a multinational company: Sorry Mr. Lender, the subsidiary that owns our largest factory in Southeast Asia cant provide a guaranty because
What is an Alien Business? And Why Definitions Matter
Section 4 of the FBA strictly defines an alien juristic person in terms of ownership of share capital. Significantly, it does not refer in any sense to voting control of stock or management of a company. An alien is defined as follows:
(1) a non-Thai natural person;
(2) a juristic person not incorporated in the country;
(3) a juristic person incorporated in the country and being of the nature as follows:
(a) a juristic person of which one-half or more of the capital is held by persons under (1) or (2), or one-half or more of the total capital is invested by persons under (1) or (2); or
(b) a limited partnership or a registered ordinary partnership of which the managing partner or the manager is a person under (1).
(4) a juristic person incorporated in the country, of which one-half or more of the capital is held by persons under (1), (2) or (3), or a juristic person of which one-half or more of the capital is invested by persons under (1), (2) or (3).
For the purpose of this definition, a limited companys shares of which the certificates are issued to bearer shall be considered belonging to aliens unless otherwise provided by ministerial regulations.
This definition is similar to the definition used in the FBAs predecessor, NEC 281 (well discuss that when we discuss the history of this law, since you cant understand the FBA without understanding its history). This precise definition coupled with the broad scope of both the FBA and its predecessor, NEC 281, and the fact that Thai private limited companies can have shares with different voting rights led to the formation of what are sometimes called preference share structures companies where Thai nationals own a majority of share capital, but foreigners have voting control. Although officials in prior government publicly stated that such structures were legal provided they did not involve nominee shareholding (fodder for a future post), they have become more controversial and practices surrounding the use of such structures have been more problematic over the last several years. In the next several posts well walk through the history of the FBA, discuss these issues and explain how they have created a problematic regulatory terrain for foreign investors.