Question: Choosing the right business structure: What are my options for business structures in Thailand? What are the requirements, benefits and drawbacks of each?
Answer: Under Thai law business entities may take the following forms:
1. Partnerships: According to the Thai Civil and Commercial Code (“CCC”) partnerships may be of two types: (i) Ordinary Partnerships and (ii) Limited Partnerships. In an ordinary partnership all the partners are jointly and severally liable for the obligations of the partnership. Ordinary partnerships may be non-registered, which for taxation purposes are treated as individuals, or registered, which for taxation purposes are treated as corporate entities. In a limited partnership there are one or more partners whose liability is limited to such amount as they may respectively undertake to contribute to the partnership, and one or more partners who are jointly and severally liable without any limit for all the obligations of the partnership.
2. Limited Companies which are of two types: (i) Private Limited Companies where shareholders enjoy limited liability of the par-value of their shares, and (ii) Public Limited Companies whose shares are owned by 15 (fifteen) or more public shareholders. Within the category of Public Limited Companies are Listed Companies which offer their shares to the public on the Stock Exchange of Thailand. Both types of public limited companies are governed by the Public Limited Companies Act.
3. Branch Offices of Foreign Companies: These are required to conform to several capital, debt and domicile among other compliance requirements as per the Foreign Business Act. The advantage enjoyed by Branch offices is that they are allowed to earn income, but liabilities must be absorbed by the Foreign Company.
4. Representative Office of Foreign Companies: Their activities are restricted to service and support roles to the foreign company and they cannot conduct business beyond this scope without permission of the Director-General, Business Development Department, who in turn acts under the approval of the Foreign Business Committee. Lastly and perhaps most importantly, they cannot receive income.
5. Regional Operating Headquarters: They render managerial, technical and support services of a broader nature than Representative offices and are eligible for tax breaks and exemptions among other incentives. Like representative offices, they cannot receive income.
A Comparison of the various forms of Juristic Entities in Thailand
- Private Limited Company
Minimum Investment Required: No Minimum investment (unless having foreign shareholding or engaging in business activities described under List 2 and 3 of the Foreign Business Act
Share Holders: 3
Activities: Unless foreign owned there is typically no restriction on the lawful business activity that may be engaged in.
Income: Can Receive income
Liability: Separate Liability
Tax Regime: Corporate Income Tax, VAT
- Partnerships
Minimum Investment Required: No Minimum investment(unless having foreign shareholding or engaging in business activities described under List 2 and 3 of the Foreign Business Act
Share Holders: 2
Activities: Unless foreign owned there is typically no restriction on the lawful business activity that may be engaged in.
Income: Can Receive income
Liability: One partner would have to bear unlimited liability in a limited partnership. All partners liable in a general partnership.
Tax Regime: Corporate Income Tax, VAT
- Branch Office
Minimum Investments Required: Minimum of 25% of the notional expenses for the 1st 3 years but no less than THB 3 million.
Share Holders: None; Wholly Owned
Activities: Restricted to those business activities for which permission was sought
Income: Can Receive income
Liability: Liability to be borne by the Foreign Company
Tax Regime: Corporate Income Tax, VAT
- Representative OfficeMinimum Investments Required: Minimum of 25% of the notional expenses for the 1st 3 years but no less than THB 3 million.Share Holders: None; Wholly OwnedActivities: Limited to 5 specific business activities:
1. Reporting on business development in Thailand
2. Product Advisory
3. Sourcing of product and services
4. Quality Control and Inspection
5. Advertisement of products and servicesIncome: Cannot receive income
Liability: Liability to be borne by the Foreign Company
Tax Regime: Not subject to corporate Income tax except for interest accrued on funds received from the head office
- Regional OfficeMinimum Investments Required: Minimum of 25% of the notional expenses for the 1st 3 years but no less than THB 3 million.Share Holders: None; Wholly OwnedActivities: Limited to 7 business activities:
1. Communication, coordination and direction, on behalf of the head office
2. Control of operations of branches and affiliates which are located in the region
3. Management Consultancy Services
4. Personnel development and Training
5. Financial management
6. Sales and Marketing, Control and Planning.
7. Research & Development and related services.Income: Cannot receive income
Liability: Liability to be borne by the Foreign Company
Tax Regime: Not subject to corporate Income tax except for interest accrued on funds received from the head office
Question: Which business structure should I choose?
Answer: The structure chosen should depend on the needs of the foreign direct investor. In most cases for SMEs, the private limited company is the most flexible structure.
Question: Do I need to incorporate a joint venture?
Answer: Technically, no. The necessity of a joint venture would be decided primarily by the commercial objective sought to be attained.
A joint venture is typically an arrangement wherein two or more parties co-operate to run a business or achieve an identified commercial objective. It may be equity based or even contractual. It may involve a long-term business in perpetuity or be created for a limited purpose such as the realization of a particular project or endeavor. It may even involve the establishment of a new and separate business vehicle or the expansion of an existing business. As a concept it is not set in stone. The characteristics of a particular joint venture are determined by the intent of the parties, the facts surrounding the alliance between the parties, and the combination of resources.
Question: What are the steps in setting up a private company in Thailand?
Answer: The incorporation of a private limited company must be commenced by at least three promoters. For a Thai majority-owned company the process can be completed within one working day, on account of the fact that business operations of Thai majority-owned companies are untrammeled by licensing requirements imposed on foreign companies operated within the Kingdom.
1. Name Reservation: The process of incorporation is initiated by reserving the name for the company with the Department of Business Development (“DBD”) of the Ministry of Commerce. Approval is granted on the basis that the selected name is not identical with or similar to names of existing companies and is in compliance with DBD regulations and guidelines.
2. Memorandum of Association: Thereafter the company Memorandum of Association (MoA) must be prepared and filed with the DBD. The MoA includes:
a. The name of the company
b. Capital to be registered
c. Promoter’s names
d. Location of the Company’s registered address
e. Business objectives
The statutory fee for registration of the MOA is 0.05% of the registered capital with THB 500 being the minimum fee and THB 25,000 being the maximum amount.
3. Statutory Meeting: Subsequent to registration of the MoA the promoters must summon a meeting of shareholders known as the statutory meeting. The usual course of business is to elect the first Board of Directors, query and approve expenses borne or advanced by the promoters for incorporation of the company, finalize shareholding proportions and the list of shareholders, adopt standard or special Articles of Association, approve dividend rates, open a corporate bank account and appoint a licensed auditor.
4. Capital Requirements: The CCC does not expressly specify the minimum capital requirements for a Thai majority owned company. However, the minimum value of each share must be THB 5. Foreign-majority owned companies must have minimum capital requirements ranging from THB 2-3 million depending on the whether the adopted business objectives fall under list 2 or 3 of the Foreign Business Act. All shares must be issued and at least 25% must be paid-up. The Board of Directors is empowered to call on the balance of the payment of the share subscription amount at any time and proportion should the company require it.
Recent DBD notifications now mandatorily require bank issued certification as proof of remittance of funds by all shareholders for companies having foreign shareholders or a registered capital in excess of THB 5 Million.
Once it has been resolved by the shareholders at the statutory meeting, the minutes recording such resolution together with official fees and the company affidavit must be filed with the DBD within 3 months of the date of the statutory meeting.
Subsequent to registration the company’s Affidavit must remain on record with the DBD; wherein Directors recognized as authorized or unauthorized with regard to their authority to sign on behalf of the company and thereby legally bind the company.
Once the above procedures have been completed and duly filed with the DBD, the company may commence business operations.
Question: What is Value Added Tax (VAT) and when do I need to register for my company?
Answer: The incidence of VAT is attracted upon the increase of the value of goods sold or services provided within the Kingdom. It is an indirect tax levied on consumption, and at every stage of production, distribution of goods or rendering of services. The difference between the cost of acquisition of goods or the provision of services and the sale price to the end consumer is the object of taxation under the current regime of VAT. It came into effect in 1992.
Persons, juristic and natural, liable to pay VAT are as follows:
1. Business operators which includes manufacturers, service providers, wholesalers, retailers, exporters of goods and persons who sell goods or provide a commercial or professional service, for consideration
2. Importers of goods
3. Agents who sell goods or render services in the course of business to operators residing outside Thailand
4. Others designated by law to be liable for VAT such as representatives of companies residing outside Thailand that regularly sell goods or services in Thailand
The Revenue Code provides a number of exceptions, the most prominent of which are:
1. Businesses with annual sales volume of less than THB 1.8 million
2. Persons exempted under the Revenue Code, or other laws and regulations
A business operator must apply for VAT registration within 30 (thirty) days from the date on which annual sales revenue exceed THB 1.8 million. Operators may also apply for VAT registration prior to commencing business regardless of the threshold sales volume. The VAT application must be filed at the local Revenue Department office where the place of business is registered.
Registered operators are required to issue tax invoices when VAT liability arises, and records must be maintained for 5 (five) years.
Question: I am a located overseas. Do I still need to pay VAT in Thailand? I thought I was exempt since tourists are exempt from VAT.
Answer: There is no exemption from VAT for buyers of goods and services located overseas. Sellers are obligated to add VAT into the price of such goods and services unless the Revenue Department specifically exempts VAT. Tourists are a different matter altogether. Tourists who purchase goods and services will usually pay VAT first and can then obtain a VAT refund before leaving Thailand.
Question: I am the director of a company here in Thailand. What are the risks for director liability?
Answer: Director Liability is an oft neglected and sensitive subject of personal risk management when it comes to running a company in Thailand.
Civil proceedings could implicate the Director of a Company as a principal respondent directly, and such director could be found personally liable for damages, in addition to costs. Companies are, however, allowed to indemnify their directors and will normally do so as long as the director acts within his authority. The shareholders of a company may also ratify acts of their directors done outside their scope of authority as well though this is discretionary.
Likewise, criminal proceedings impose liability on directors in a number of instances involving professional oversight, neglect, fraud and misfeasance. The more prominent legislations that impose criminal liability in the form of strict liability upon directors are:
1. The Act Prescribing Offences Related to Registered Partnerships, Limited Partnerships, Limited Companies, Associations, and Foundations, B.E. 2499 (1956)
2. Accounts Act, B.E. 2543 (2000)
3. Money Laundering Prevention and Suppression Act, B.E. 2542 (1999)
4. Trademark Act, B.E. 2534 (1991)
5. Bankruptcy Act, B.E. 2547 (2004)
6. Financial Institutions Act, B.E. 2551 (2008)
7. Foreign Business Act, B.E. 2542 (1999)
8. Electronic Transactions Act, B.E. 2544 (2001)
Criminal cases may result in imprisonment, or fines, or both. Defamation could also result in potentially vexatious criminal and civil proceedings that implicate directors.
Directors must exercise a duty of care as expected from a business man of ordinary prudence. They must act in good faith and are directly answerable to the company’s shareholders, and must seek their validation and approval, as evinced by the majority vote recorded at the general meetings of shareholders. They must also refrain from competing with the company’s business.
Litigation avoidance by way of ensuring vigilance, statutory compliance and seeking adequate insurance cover are the best methods to mitigate liability, both for the company as well as the director in question.
