Although the details of the Act are quite complicated, the basic structure is simple:
- Foreigners are prohibited from carrying on certain businesses which are specially reserved to Thai nationals (these so-called 'List 1' businesses include, for example, media ownership and certain farming activities).
- Foreigners are prohibited from carrying on other 'national interest' and similar businesses without Cabinet approval (these so-called 'List 2' businesses include, for example, weapons production, domestic transportation and domestic airlines, mining, and Thai arts and cultural activities).
- Finally (and of greatest impact in practice), foreigners are prohibited from carrying on various other businesses without official permission (these so-called 'List 3' businesses include, for example, accounting, legal and other professional services; advertising businesses; many construction and engineering services; retail and wholesale businesses, with some exemptions; hotel ownership; and other service businesses).
- The government has announced an intention to amend the Foreign Business Act. Draft proposals have been approved by the Cabinet and will now be reviewed by the Council of the State and the National Legislative Assembly, before being sent for royal endorsement and publication in the Government Gazette.
It is not clear when these changes may come into force, though it is likely to take several months. Neither is it clear what form they may finally take. The current proposals have attracted significant criticism in Thailand and overseas, and there is scope for further changes during the legislative process. In view of that uncertainty, this briefing simply summarises current proposals and the likely impact if they are implemented in this form.
Change of definition of "foreigner"
"Foreigner" is currently defined (in summary) as a foreign national, a foreign-registered company or a Thai company with majority foreign shareholding. Under the new proposals, this definition will be extended to include companies that are currently treated as Thai due to majority Thai share ownership but where foreign individuals or foreign companies have more than half of the voting rights by law, agreement or under the Articles of Association.
Impact of changes
Many foreign businesses have previously adopted such structures (modified voting rights, etc) in order to be treated as Thai whilst maintaining effective foreign control of the business. This enabled them to carry on a business in List 1, 2 or 3 without having to comply with the Foreign Business Act.
The effect of the proposed amendment will be to re-classify such companies as "foreign" and therefore to bring them within the scope of the Foreign Business Act. They will therefore become subject to all of the restrictions that apply under that Act (i.e. requirements for permissions, etc, as summarised above).
Foreigners wishing to set up a new Thai business after these changes come into force will have no choice but to comply with the amended law. This is why some media criticism has focussed on the potential deterrent effect of the changes as regards new foreign investment. There is concern that the extended scope of the Foreign Business Act will deter foreigners from investing in Thailand and will encourage them to look elsewhere. It remains to be seen whether these fears are well-founded.
However, for businesses already operating in Thailand, the draft amendments contain important reliefs. Any company which, as a result of the changes, will now fall within the scope of the Foreign Business Act, will have one year from the effective date of the Act to notify the Ministry of Commerce of that fact and to apply for a certificate according to criteria that will be set in due course. Upon receipt of that certificate:
Companies operating List 1 or List 2 businesses will be given two years in which to restructure their shareholdings or voting rights in order to ensure full compliance with the law.
Companies operating List 3 businesses will be allowed to continue to operate indefinitely, without any need to restructure, until such time as the business is finally dissolved. This "grandfathering" arrangement may mean that businesses already present in Thailand will be able to continue under corporate structures that will not be permitted to new market entrants without full compliance with the Act (i.e. application for permission, etc). However, this possibility cannot be assessed properly until further information becomes available about the proposed certification process.
There is an amnesty arrangement for people who notify certain other breaches of the existing Foreign Business Act within 90 days of the amendments coming into force, and who then remedy those breaches within one year.
Changes to 'List 3' businesses
The amendments also propose changes to the categories of business in List 3. Primarily, this is simply to remove certain businesses that are now regulated under other laws, but one very important change is to remove an exemption that previously applied to retail and wholesale businesses with capitalisation above prescribed levels. All retail and wholesale businesses will now be included in List 3, irrespective of capitalisation.
Changes to penalties
Finally, the new proposals will significantly increase the fines that may be imposed on Thais and foreigners found to be in breach of the amended Act, including directors and shareholders who connive in the commission of offences or who do not prevent the commission of offences. The maximum fine is raised to THB5 million (approx. US$ 140,000). The prescribed jail terms remain unchanged, as do the powers of the Court to close offending businesses.
As already noted, the timing and exact extent of the changes remain uncertain. This is only a short summary of current proposals and should not be treated as definitive legal advice. Herbert Smith's Bangkok office will continue to monitor the position and will be happy to advise clients who wish further information or specific advice on particular issues.