1. Forms of Business Entities
Most common forms of foreign business entities in Thailand are a private limited company a public limited company, a branch office, are presentative office, a regional office a joint venture and a consortium.
1.1 Private Limited Company
In forming a private limited company, at least three natural persons, who are not required to be Thai citizens, must act as promotors to establish a private limited company. Each promotor must hold at least one share and become a shareholder once completion of incorporation of a private limited company. The par value of share must be at least THB 5 with at least 25% paid-up. In general, there are no restrictions to the nationality of the directors except in some business activities such as inland transportation. Shares in a private limited company cannot be offered to the public.
In general, there is no minimum requirement on capital. However, if foreigners or foreign entities hold 50% or more of shares in a private limited company, such private limited company is considered as a foreign private limited company incorporated in Thailand (“foreign company”). A foreign company is required to have at least THB 2,000,000 capital.
If a foreign company operates business which is subject to the Foreign Business Act, it is required to obtain a foreign business license under the Act and needs to have fully paid-up capital of at least 25 percent of average estimated expenses for the first 3 years but not less than THB 3,000,000 for each business activity according to the list of businesses mentioned in the Foreign Business Act.
A private limited company is required to submit financial statements to the Ministry of Commerce at the end of its fiscal year and register major changes, e.g. appointment of a new director; increase and decrease of capital; amendment of a Memorandum of Association and Articles of Association.
A private limited company is recognized as a tax entity and can use its corporate registration number as its tax I.D. number. If a private limited company has an annual turnover exceeding THB 180,000, a registration as a Value Added Tax operator is needed.
1.2 Public Limited Company
At least 15 promoters are needed for incorporation of a public limited company. In general, the promotors must subscribe at least 5% of the total shares and must hold the shares for two years from the company’s incorporation date. 50% of the promotors must be residents of Thailand. The board of directors must have at least five members and half of them must reside in Thailand. Shares of a public limited company can be offered to the public under the rules of the Stock Exchange Commission, the Securities and Exchange Act and Stock Exchange of Thailand (SET). A public limited company which offers to sell shares to the public is required to have at least three independent directors and audit committee.
If 50% or more of the share of a public limited company is held by foreigners or foreign entities, such public limited company is deemed as a foreign company and is subject to the Foreign Business Act as well.
The Tax I.D card and registration as a Value Added Tax operator requirements of a Public Limited Company are similar to those of a private limited company.
1.3 Branch Office
A foreign company may establish a branch office in Thailand. A branch office is considered as the same legal entity as its head office overseas. Business activities of a branch office can be within the scope of the business objectives of its head office. There is no requirement for branch office registration in Thailand.
Since a branch office is considered as the same legal entity as its foreign head office, a branch office may be subject to certain prohibitions or restrictions under the Foreign Business Act depending on the nature of business in Thailand. Thus, a branch office may be required to obtain a foreign business license and is subject to similar capital requirements of a foreign company.
A branch office is required to obtain a taxpayer I.D. card. If a branch office has an annual turnover exceeding THB 180,000, it is also required to register as a Value Added Tax operator.
1.4 Representative Office
A foreign entity may establish a representative office in Thailand to operate specific
non-revenue-earning activities which are as follows:
- Reporting to a foreign head office on local business development and activities
- Disseminating information of new products and services of a foreign head office
- Providing advice in various fields relating to products directly sold by a foreign head office to local distributors or consumers
- Inspecting and controlling the quantity and quality of goods procured by a foreign head office
- Searching for local sources of goods or services for a foreign head office
Non-revenue-earning activities of a representative office are subject to the Foreign Business Act. Thus, the representative office must obtain a foreign business license.
Since a representative office operates non-revenue-earning activities, it is exempted from income tax. Nevertheless, it must obtain a tax I.D. card because a representative office must pay withholding tax on wages paid to employees.
1.5 Regional Office
A foreign entity may establish a regional office according to the following conditions.
- has at least one branch or affiliate in Asia, which may include Thailand; and
- is a juristic person incorporated under a foreign law and carrying on business in other countries
A regional office must operate limited activities as follows:
- to carry out duties in communicating, coordinating, and directing the operations of the branches and affiliates located in the same region
- to provide the following services on behalf of the head office
2.1 consulting and management
2.2 training and personnel development
2.3 financial management
2.4 marketing control and sales promotion planning
2.5 product development
2.6 research development
A regional office must obtain a foreign business license and is subject to the Foreign Business Act.
1.6 Joint Venture
A joint venture can be formed, when two or more parties work together on specific project or limited-time projects and share profit and loss. There are variety of joint ventures. Parties to the joint venture may enter into a joint venture agreement and establish a legal entity, i.e. a private limited company. The legal entity may be required to obtain necessary licenses to operate business in Thailand, i.e. a foreign business license. Alternatively, joint venture parties may enter into a joint venture agreement but each party may retain its own separate legal status and may be required to obtain separate licenses for its business in Thailand. A joint venture agreement is considered as a private contract. Thus, there is no legal requirement to register an agreement with the government.
A joint venture is recognized us a tax entity. Thus, a joint venture needs to file a tax return and register as a value added tax operator if the annual turnover is more than THB 180,000.
A consortium can be formed, when two or more parties work together on specific project or limited-time project. However, there are clear separations of obligations, liabilities, profit and loss between or among the consortium parties. A consortium is not a legal entity under Thai laws. Therefore, it does not need to have tax I.D. card and register as a value added tax operator. Each of the consortium party is responsible to pay tax based on profit and loss of its own entity and obtain necessary license i.e. a foreign business license separately. In general, formation of a consortium bases on a consortium agreement which does not need to register with the government.
2. Foreign Business Restrictions
In Thailand, the major law governing foreign businesses is the Foreign Business Act (the “FBA”). The FBA provides the meaning of a foreigner, types of restricted businesses, minimum capital requirements, permissions to operate restricted businesses and penalties in violating of the FBA.
2.1 Meaning of a Foreigner
Section 4 of the FBA provides the meaning of a foreigner which includes:
a natural person who is not of Thai nationality;
a juristic person not registered in Thailand;
a juristic person registered in Thailand, being of the following descriptions:
at least 50% or more of capital shares of which are held by persons under 1 or 2 or investment has been placed by the persons under 1 or 2 in the amount at least equivalent to 50% or more of the total capital thereof;
being a limited partnership or a registered ordinary partnership which the managing partner or the manager of which is the person under 1); or
a juristic person registered in Thailand with at least 50% or more of the capital shares of which are held by persons under 1, 2, and 3 or a juristic person in which investment has been placed by the persons under 1, 2 and 3 in the amount of at least equivalent to 50% or more of the total capital thereof.
2.2 FBA Restricted Business
There are three business lists under Section 8 of the FBA.
List One contains businesses absolutely prohibited for a foreigner by special reasons. There are total 9 restricted businesses in List One. The examples of List One restricted businesses are (1) press, radio broadcasting station or radio and television station business; (2) rice farming, plantation or crop growing; and (3) land trading.
List Two contains businesses prohibited for a foreigner unless a foreign can obtain a foreign business license from Minster of the Ministry of Commerce with the approval of the cabinet. List Two restricted businesses relate to national safety, security and, business having impact on arts, culture, traditions, customs, folklore handicrafts, natural resources and environment. The examples of List Two business activities are (1) production, distribution and maintenance of firearms, ammunition, gun powders and explosive; (2) production of goldware, silverware, bronzeware or lacquerware; (3) mining, including rock blasting or rock crushing.
List Three contains businesses prohibited for a foreigner unless a foreigner can obtain a foreign business license from the Director-General of Department of Business Development with the approval of the foreign business license Commission. List Three restricted businesses are the businesses that Thai nationals are not ready to compete with foreigners. There are totaling 21 businesses in this List. The examples of List Three business activities are (1) provision of accounting, legal, architectural and engineering services; (2) retail business with the minimum capital less than THB 100,000,000 or the minimum of each store in the amount lower than THB 20,000,000; (3) wholesale business with the minimum capital of each store less than THB 100,000,000; (4) hotel business, except for hotel management services; (5) other service businesses, with the exception prescribed in the Ministerial Regulation.
Other service businesses of the List three have very broad meaning. Almost all of service businesses fall in the meaning of other services businesses of List Three. In addition, some manufacturing businesses in the eyes of foreigners may be deemed as service businesses under Thai laws.
2.3 Minimum Capital
According to Section 14 of the FBA, if a foreigner operates a business which does not fall in any business of List Two or List Three, the foreigner needs to have at least THB 2,000,000 capital.
If a foreigner operates a business under List Two or List Three, the foreigner needs to have the capital of at least 25 percent of average estimated expenses for first 3 years but not less than THB 3,000,000 for each business according to the business categories under List Two or List Three. The exact amount of the capital would be determined when the foreigner obtains a foreign business license from the government.
2.4 Permissions to Operate the Restricted Business
There are two types of permissions to operate the restricted businesses:
- Foreign Business License
- Foreign Business Certificate
Foreign Business License (the “FBL”)
Under Section 8 of the FBA as previously stated, a foreigner may obtain a permission to operate a business activity under List Two or List Three. For List Two businesses, a foreigner needs to obtain a FBL from the Minster of Ministry of Commerce with the approval of the cabinet. For List Three businesses, a foreigner needs to obtain the FBL from the Director-General of Department of Business Development with the approval of the foreign business license Commission.
The FBA does not mention the criterions in granting FBL. However, in practice, the government would consider (1) whether a foreign business activity competes with a business activity of a Thai entity or not (2) whether a Thai entity can operate the same activity and (3) whether a foreigner business will generate benefits to Thailand, e.g. employment of Thai people and transfer of technology to Thai people or Thai entities.
To obtain the FBL, a foreigner is required to submit an application together with supporting information and documents to the government. It takes 60 days from the acceptance date of the application for the government in granting the FBL. The government can have another 60 days for granting the FBL for List Two businesses. From our experience, the government usually requires a foreigner to make several amendments and furnish more information before accepting the application.
Foreign Business Certificate (the “FBC”)
If foreigners operate business activities subject to the FBA by virtue of the treaties to which Thailand become a party, the foreigners can obtain the FBC instead of the FBL from the governments. The examples of such treaties are the Treaty of Amity and Economic Relation between Thailand and the U.S.A., the Japan Thailand Economic Partnership Agreement (JETEPA) and the agreements under ASEAN Economic Community.
In addition to the treaties, if foreigners receive investment promotion under the Investment Promotion Act from the Board of Investment or receive written permission for the business operations for export under the law on the Industrial Estate of Thailand, the foreigners can obtain the FBC instead of the FBL as well.
In practice, obtaining the FBC is less time consuming and less complication than obtaining the FBL. The foreigners with the FBC will be free from the minimum capital requirement of THB 3,000,000 under the FBA; however, there may be a capital requirement under other relevant laws, e.g. the Investment Promotion Act.
2.5 FBA Penalties
There are several penalties under the FBA. Nonetheless, the major penalties relate to operation of restricted businesses without the FBL and FBC.
If foreigners operate the restricted business without the FBL or the FBC, the foreigner would subjected to a jail term of not more than three years or fine of from THB 100,000 to THB 1,000,000 or both. The Court may order to terminate the businesses. If the foreigner violate the Court order, they may face an additional fine of THB 10,000 to THB 50,000 per day according to Section 37 of the FBA. The directors, partners or persons with the authority to represent the juristic person, who connive at the commission of offences or do not reasonable take precaution in preventing such offences, may face a jail term of not more than three years or a fine from THB 100,000 to THB 1,000,000 or both under Section 41 of the FBA.
3. Investment Incentives
There are several investment incentives including tax and non-tax incentives. Major tax incentives, for examples, are corporate income tax holidays, a reduction of a corporate income tax, exemption from import duties on machinery or raw materials, a reduction of a personal income tax. Non-tax incentives may include right to own land, bringing in expatriates to work in Thailand regardless of normal regulations, taking out or remitting abroad money in foreign currencies and allow foreigners to hold 50% or more of the shares in certain industries.
The government agencies, who are in charge of grating these investment incentives, are the Board of Investment (the “BOI”), the Industrial Estate Authority of Thailand (the “IEAT”) and the Revenue Department.
3.1 BOI Investment Incentives
The BOI grants both tax and non-tax incentives depending on types of business activities and locations of investment projects in the Special Economic Development Zones.
3.1.1 Conditions for Investment Incentives
In general, the investment project must fulfill the following conditions.
- The value added of the project must not be less than 20% of revenues except for certain projects;
- The project that has investment capital of THB 10,000,000 or more (excluding cost of land and working capital) must obtain ISO 9000 or ISO 14000 certification or similar international standard certification within 2 years from the full operation startup date, otherwise corporate income tax exemption will be reduced by one year;
- Modern production processes must be used;
- Use new machinery;
- Used machinery would be subjected to certain conditions;
- Adequate and efficient guideline and measurement to protect environment quality and to reduce environmental impact must be installed according to the BOI;
- Some projects must submit environmental impact assessment report, which is subject to certain requirements; and
- The minimum capital investment is THB 1,000,000 (excluding cost of land and working capital).
The above are the BOI general conditions. Each of the investment projects may be subjected to specific conditions.
3.1.2 BOI Tax Incentives
Under the BOI current investment scheme, which has been in effect since January 1, 2015, the BOI has cancelled the previous cap rule on the amount of corporate income tax so exempted for certain types of investments (the “Without Cap Industries”). (The previous cap rule is that amount of a corporate income tax so exempted must not be more than investment capital). Some of the Without Cap Industries include creative product design and development center, manufacturing airframe, airframe parts and major aircraft appliance, microelectronic design, embedded system design, embedded software, energy services, science and technology parks, software parks and R & D.
The major tax incentives can be divided into two categories, (1) Normal Tax Incentives and
(2) Merit-based Tax Incentives.
Normal Tax Incentives: The significate Normal Tax Incentives may include all or either one of the followings:
- Corporate income tax holidays from three years to eight years (with or without the Cap depending on types of industries)
- Exemption from withholding tax on dividends paid to shareholders, who are juristic persons during the tax holiday periods
- Exemption from import duty on machinery
- Exemption from import duty on raw or essential materials used in manufacturing export products
Merit-based Tax Incentives: The Merit-based Tax Incentives are additional incentives to the Normal Tax Incentives. This means that the industries, which are entitled to receive the Normal Tax Incentives, would also be eligible for the Merit-based Tax Incentives. The Merit-based Tax Incentives are as follows:
- Merit-based Tax Incentives for specific industries: Some industries may receive additional corporate income tax holidays from one to three years but not exceed eight years in total (subject to revenue and expenses conditions) if such industries have investments or expenditures on R & D, IP acquisition/licensing fees for commercializing technology developed in Thailand, advanced technology training, development of local supplier and products & packaging design.
- Merit-based Tax Incentives based on locations: Industries, which are located in rural areas of 20 provinces as specified by the BOI, may receive additional three year corporate income tax holidays but not exceed eight years in total or receive 50% reduction of corporate income tax for five years after the tax holiday is expired.
- Merit-based Tax Incentives for industries in Industrial Areas: Industries, which are located in industrial estates or promoted industrial zones, may receive additional one year corporate income tax holidays but not exceed eight years in total. This incentive is not available for industries which the BOI specifies that the industries must be located in industrial estates or promoted industrial zones.
3.1.3 BOI Non-Tax Incentives
The BOI also grants non-tax incentives, which include (1) bringing in expatriates for studying investment opportunities; (2) bringing in skill and expert expatriates to work in the investment project without the normal requirement relating to paid - up capital and ratio of expatriates versus Thai workers; (3) owning land; (4) taking out or remitting abroad money in foreign currencies; and (5) allowing foreigners to hold 50% or more of the shares in certain industries.
3.1.4 Investment Incentives under Special Economic Development Zones (the “SEZs”)
The Thai government has established the SEZs in the specific areas of five provinces, which locate near the neighboring countries, Myanmar, Laos, Cambodia and Malaysia. The purposes of the SEZs are to ease investors in distributing their products to the neighboring countries and to use unskilled-workers from such countries. The government also grants attractive both tax and non-tax incentive packages for the investments in the SEZs.
Currently, the first five SEZs are located in specific areas of five provinces, Tak (near Myanmar), Trat (near Cambodia) Mukdahan (near Laos), Sa Kaeo (near Cambodia) and Songkhla (near Malaysia). The government plans to spend up to THB 10.5 billion to develop infrastructure for these SEZs. The other five SEZs would be later developed in the areas of other five provinces, Chiang Rai, Nong Khai, Nakhorn Phanom, Kanchanaburi and Narathiwat provinces.
The BOI is also the government agency, who is in charge of granting the investment incentives under the SEZs.
SEZs Tax Incentives:
The tax incentives can be divided in two categories, (1) tax incentives for the Targeted Industries and (2) tax incentives for BOI-normal-Industries.
(1) Tax incentives for the Targeted Industries
The Targeted Industries are (1) certain types of agriculture and agricultural products; (2) ceramics products (except earthenware and ceramic tiles); (3) certain types of textile and garment; (4) manufacture of furniture or parts; (5) manufacture of gems and jewelry or parts including raw materials and prototype; (6) manufacture of medical device or parts; (7) certain types of automotive, machinery and parts; (8) certain types of electronic and electrical appliances; (9) certain types of chemical, paper and plastics; (10) manufacture of medicine; (11) container yards, inland container depots (ICD), distribution center and international distribution center (IDC); (12) industrial zones, industrial estates, Gem Jewelry industrial zones and Logistic parks; and (13) certain types of businesses that support tourism. The tax incentives for the Targeted Industries are as follows:
- Eight-year corporate income tax holiday (the tax amount so exempted will be capped by the investment capital)
- Five-year corporate income tax reduction of 50% from the date of expiration of the tax holiday period
- Double deduction of costs of transportation, electricity and water supply for 10 years from the date in which revenue is generated
- Deduction of 25% of investment cost on the installation or constructing of facilities used from the date in which revenue is generated
- Exemption from import duty of machinery, raw and essential materials
To receive these tax incentives, investors must invest in the Targeted Industries in correspondence with the specific SEZs locations as specified in the SEZs regulations.
(2) Tax Incentives for the BOI-Normal-Industries
- If industries are not the Targeted Industries but they are BOI eligible industries, investors can receive the followings incentives:
- Another three year corporate income tax holiday from the normal BOI corporate income tax holiday but in total not exceed eight years (the tax amount so exempted will be capped by the investment capital)
- If investors have already received eight years corporate income tax holiday under BOI normal incentives, the investors are entitled to receive 50% corporate income tax reduction after the tax holiday is expired for additional five year period.
- The other incentives are the same as those of the Targeted Industries
Non-tax incentives under the SEZ are the same as the BOI non-tax incentives as previously stated in 3.1.3
Application Deadline: According to the current regulations, applications to receive the SEZs incentives must be submitted to the BOI within 2017.
3.2 IEAT Investment Incentives
A foreigner may operate business in an industrial estate area subject to the approval of the IEAT. Currently, there are 58industrial estates under the supervision of the IEAT. The IEAT significant conditions of approval are (1) whether a foreigner’s business is the targeted business of the particular industrial estate or not and (2) whether the business complies with environment requirements of the industrial estate. There are two types of industrial estates, general industrial zones and free trade zones. A foreigner, who operates a business in general industrial zones, may enjoy only non-tax incentives. While, a foreigner, who operates a business in free trade zones, may enjoy both non-tax and tax incentives. The IEAT major investment incentives are as follows:
- Owing land in industrial estates for business operation with the approval of IEAT (both in general industrial zones and free trade zones)
- Exemption of import duty, value added tax and excise tax for machinery, equipment, tools and supplies including the components thereof which are essential for the production of goods, and or materials to be used for the construction, assembly or installation of factory or building in the free trade zones, provided that they must be at such quantity as imported to Thailand and taken to the free trade zones with the approval from the IEAT
- Exemption of import duty, value added tax and excise tax for goods imported to free trade zones for use in production of goods and export the goods produced in the free trade zones with the IEAT approval;
3.3 Revenue Department Tax Incentives
Three major tax incentives grants by the Revenue Department are a corporate income tax reduction for non-BOI business activities in the SEZs, tax incentives for international headquarters and international trade offices.
3.3.1 Corporate Income Tax Reduction for Non-BOI Business Activities in the SEZs
If industries are not the Targeted Industries and Non-BOI industries but they are located in the SEZs, such industries may enjoy the reduction of corporate income tax from the normal rate of 20% to 10% for 10 accounting periods subject to certain conditions.
3.3.2 International Headquarters (the “IHQ”)
IHQ Conditions: The IHQ must have the following conditions in order to receive tax incentives.
- Providing support services to at least one subsidiary or affiliate abroad;
- Support services must be the services stipulated according to the IHQ regulations, g. general administrative services, business planning, business coordination, raw materials and parts procurements, R & D, technical supports, marketing and sale support, financial advisory, financial management, loan services (in THB) and other supporting services as specified by the Revenue Department;
- the subsidiary or affiliate must be the subsidiary or affiliate according to the IHQ regulations;
- must have at least THB 10 million paid up capital as at the last date of each accounting period;
- must have at least THB 15 million expenses relating to the IHQ businesses and paid to recipients in Thailand for each of its accounting period; and
- must obtain the approval for the IHQ status from the Revenue Department
IHQ Tax Incentives: The IHQ major tax incentives are as follows:
- 15% personal income tax on the income generated from the IHQ business of the expatriates, who worked for the IHQ subject to certain conditions;
- 10% corporate income tax on the profit (including royalty fee) generated from the support services to the subsidiary or affiliate in Thailand for 15 accounting periods;
- Exemption from the corporate income tax on profit (including royalty fee) generated from supporting services to the subsidiary or affiliate abroad for 15 accounting periods;
- Exemption from corporate income tax on the dividends which the IHQ receives from its subsidiaries or affiliates for 15 accounting periods;
- Exemption from the corporate income tax on the income generated from transfers of shares of IHQ’s subsidiary or affiliate located abroad for 15 accounting periods;
- Exemption from the corporate income tax (withholding tax) when the IHQ remits dividends to juristic persons abroad only on the dividends incurred from the support services; and
- Exemption from the corporate income tax (withholding tax) when the IHQ remits interests to juristic persons abroad only on the interests of the money that the IHQ borrows for the purpose of grating loan to its subsidiary or affiliate in connection with financial management service.
3.3.3 International Trade Offices (the “ITC”)
The ITC is different from the IHQ. The ITC can provide services to both its foreign subsidiaries or affiliates and other foreign entities. The ITC’s services are different from those of the IHQ. The ITC’s services mainly relate to goods.
ITC Conditions: The ITC must fulfill the following conditions in order to receive tax incentives.
- providing the services relating to international trade such as procurements of goods, storing of goods before delivery, packaging, transportation of goods, insurance, providing advice and services relating to technic and training of goods, other services as specified by the Revenue Department;
- having at least THB 10 million paid-up capital as at the last date of each accounting period;
- having at least THB 15 million expenses relating to the ITC businesses and paid to recipients in Thailand for each accounting period; and
- obtaining the approval for ITC status from the Revenue Department
ITC Tax Incentives: the major tax incentives are as follows:
- 15% personal income tax on the income generated from the ITC businesses of the expatriates, who work for ITC subject to certain conditions;
- Exemption from the corporate income tax on the profit generated from the income on procurement and sell of goods abroad, provided that the goods are not import to Thailand or import to Thailand as in transit or transshipment goods; and
- Exemption from the corporate income tax on the profit generated from the income of providing the ITC services received from foreign juristic persons for 15 accounting periods.
Disclaimer. The purpose of this article is to provide general information and shall not be deemed as legal advices. The information in this article bases on the current regulations which may be further amended by the relevant authorities. ALT shall not be responsible for any claims and damages in using the information in this article.