Types of Companies. Partnerships

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1 T H A I L A N D B I O T E C H G U I D E / Forms of Doing Business Types of Companies A Thai or foreigner may engage in business in the form of a partnership, limited company, a joint venture, a branch of a foreign corporation, or a representative/regional office. Partnerships There are 3 types of partnerships and they differ principally in the liability attached to each: An unregistered ordinary partnership has partners who are all jointly liable, without any limitation on the partnership's total obligations. This type of partnership is not a legal entity and is subject to taxation as if it were an individual. While there are many advantages to using the ordinary partnership business organization, its use by foreigners is limited by the Foreign Business Act (FBA), if it engages in a business that is restricted under the FBA. An ordinary partnership owned by Americans may apply for treaty protection under the Treaty of Amity and Economic Relations. A registered ordinary partnership is a juridical entity having a separate and distinct personality from each of the partners by virtue of its registration with the Commercial Registrar. It is treated as a corporate entity for income tax purposes. Generally, the registered ordinary partnership form of business organization is not very popular, since it offers little or no apparent tax advantages and little or no protection against liability. A limited partnership is a form of registered partnership, in which there are one or more managing partners who manage the business and who are personally liable for the partnership's debts, and one or more partners who are not normally personally liable for the partnership's debts, except for their undelivered or withdrawn capital contributions. The partnership agreement, including the details of capital contribution, management and objects, must be filed with the Ministry of Commerce, in the same manner as a registered ordinary partnership. Limited partnerships are a popular form of business organization, since they provide an aspect of limited liability with fewer formalities than are required of limited companies.

2 24 T H A I L A N D B I O T E C H G U I D E / Private Limited Companies The private company is the form of business organization that is most popular with foreign businessmen, because there is flexibility, especially in joint venture situations, in formulating how the company may be controlled and managed. The company may be wholly owned by foreigners. However, in those business activities reserved for Thai nationals, foreign participation is generally allowed up to 49%. The liability of the shareholders is limited to the par value of the authorized capital. The liability of the directors, however, may be unlimited if so provided in the company's memorandum of association or the articles of incorporation. The limited company is managed by a board of directors according to the company's memorandum and by laws. Although there is no established minimum level of capitalization, the private limited company's capital must be sufficient to accomplish its objectives. All of the shares must be subscribed to, and at least 25% of the subscribed shares must be paid up. Thai corporate law has some features, which may be unfamiliar to foreign businessman. Limited companies are subject to corporate income tax at the general rate of 30%. Private limited company's shareholders must never be fewer than seven at all times. Joint Ventures The term "joint venture" refers to unregistered partnership, in which at least one of the partners is a juristic person and which carries on business whereby the parties maintain joint accounts and share profits. A significant aspect of a joint venture is that it is taxed as a juristic person at the general rate of 30%. Consortiums A consortium is similar to a joint venture, in that the parties to a limited degree act together in a business enterprise. However, unlike a joint venture, they maintain separate accounts and do not share profits. A consortium does not pay income tax as such, but the parties to the consortium pay their own taxes. Branch offices A foreign juristic person may do business in Thailand by establishing a branch office and also complying with any relevant laws relating to its business. If the branch office intends to engage in a business that is restricted under the Foreign Business Act, then it must apply for a license. If the company establishing a branch is an American company and can comply with the provisions of the Treaty of Amity and Economic Relations, the branch office may apply for a treaty protection letter from the Ministry of Commerce and thereafter engage in any business, except those excluded by the treaty. If the treaty is applicable, the American company must apply for a certificate, but need not apply for a license under the Foreign Business Act. Since a branch office is for legal purposes a part of the parent company, the parent is liable under civil and criminal law for all the acts and omissions of the branch office.

3 T H A I L A N D B I O T E C H G U I D E / Representative office A representative office may be established by a foreign company. Normally, a representative office is limited to acting as a buying office, carrying out market research and engaging in quality control. It may not engage in trading activities in Thailand. Representative offices require a license under the Foreign Business Act, since they are regarded as service businesses under Schedule 3 of the Act. A representative office is normally required to remit into Thailand for its operating expenditure, a total of Baht 5 million over a period of five years, with Baht 2 million being remitted within the first year. These funds may not later be remitted out. The capital may be used for normal working capital requirements, e.g. to pay operating expenditure such as salaries and office rent. Regional offices The government promotes Regional Offices in a manner similar to Representative Offices. Regional Offices supervise and control their affiliates and subsidiaries in Thailand and elsewhere in the region. They are not permitted to have income but are reimbursed for expenditure. International trade and support office A foreign company may establish an International Trade and Support office. Application is made to the Ministry of Commerce under the provisions of Schedule 3 of the Foreign Business Act. Such an office may only engage in limited activities, to collect marketing and other information and pass it to the parent company. It must not engage in income generating activities. The parent company must transfer into Thailand at least 5 million Baht as operating capital, of which at least 2 million Baht must be transferred in the first year, and at least 1 million Baht per year after that. Regional operating headquarters Foreign companies can establish a regional operating headquarters in Thailand. Attractive tax incentives are available to a regional operating headquarters. Tax concessions are offered to regional operating headquarters, for instance, 10% corporate tax will be charged, instead of the usual rate of 30%, on: (1) on its general income; (2) on net profits from royalties derived from research and development in Thailand; and (3) on interest from loans made to branches or subsidiaries. Restricted business activities The Foreign Business Act places restrictions on the businesses that may be carried on by an Alien in Thailand. The definition of ùalienû ncludes a company or partnership which has at least half its shares owned by foreigners, a foreign company or a foreign individual. Accordingly, a Thai company which has only a minority of its shares owned by foreigners is not an ùalienû for the purposes of the Act. The Act imposes restrictions on 43 categories of business activity divided into three Schedules, Schedule 1, Schedule 2 and Schedule 3 (see below). For businesses listed in Schedule 1, only minority foreign ownership is permitted and there is no right to apply for majority foreign ownership. For businesses listed in Schedule 2, minority foreign ownership is possible without permission. Up to 60% (with a possibility of applying for up to 75%) foreign ownership is possible with ministerial approval. At least 40% of the directors must be Thai nationals. For businesses listed under Schedule 3, minority foreign ownership is possible without permission. Majority foreign ownership is possible with permission of the Commercial Registration Department and approval of the Alien Business Board. To obtain approval for majority foreign ownership of a Schedule 2 or 3 business, a foreign investor will have to demonstrate that the nature of the business contributes to a number of matters, including: national safety and security; economic and social development; natural resources and energy conservation; environmental protection and consumer protection. Other matters that will be taken into account include: the size of the business; the creation of employment, the transfer of technology, and research and development. The most significant achievement of the Act is that manufacturing is now almost completely de-restricted, with the exception of a

4 26 T H A I L A N D B I O T E C H G U I D E / small number of sensitive industries or products. However, services are still generally restricted to minority foreign ownership. In addition, the Act partially de-restricts certain services, including; construction; trading; wholesaling; distribution and retailing, subject to minimum investment and other requirements. As to any activity that is listed in the three Schedules, provided foreign ownership is maintained at less than 50%, then no license is required under the Act. If the particular business activity is not restricted under any of the three Schedules or under any other law, then there are no limitations on foreign ownership. The United States - Thailand Treaty of Amity. Under this Treaty, American and Thai citizens and corporations are granted special preferential rights concerning the ownership of businesses in each otherûs countries. The foreign ownership restrictions discussed above are summarised in the table below: Business and relevant law FBA Schedule 1 businesses FBA Schedule 2 Businesses FBA Schedule 3 businesses USA - Thailand Treaty of Amity - any businesses Minority foreign ownership No permission required No permission required No permission required No permission required Majority foreign ownership Not possible With permission of the Cabinet, up to 60% and possibly up to 75% but three fifths of directors must be Thai.1 With permission of the Foreign Business Registrar, up to 100% foreign ownership no nationality requirement for directors.2 No permission required Exceptions BOI may also grant permission subject to 1 BOI may also grant permission subject to 2 Businesses excluded from the Treaty: exploitation of land or natural resources, domestic trade in indigenous agricultural products. The Australian-Thailand Free Trade Agreement (çtaftaé) contains a section that also grants preferential rights to Australian investors and companies in a number of different industries in Thailand, but subject to detailed conditions. Such rights may be greater than the rights available under the Foreign Business Act or other applicable laws (see above). Accordingly, when an Australian individual or company is considering setting up company in Thailand, it may be necessary to refer to TAFTA, to ascertain whether Australian investors have any special rights to own such a business. The enhanced rights of business ownership enjoyed by Australian investors with relevance to biotechnology sector are summarised in the table below. Previous foreign New foreign ownership Nature of business Tertiary education institutions specialising in science and technology ownership limit 49% (a service business under FBA Schedule 3) limit under TAFTA 60% but must be located outside Bangkok

5 T H A I L A N D B I O T E C H G U I D E / Promoted investment The Government relies on a number of instruments to support private business investment. Investment promotion by the Board of Investment (çboié) is one such instrument. The BOI operates in accordance with the powers contained in the Investment Promotion Act 1977 in order to administer a program of incentives for both Thai and foreign businessmen who wish to establish or expand suitable businesses in Thailand. In appropriate cases and in accordance with the guidelines listed below, the BOI grants special privileges to those who invest in approved projects. The BOIûs current policy is to promote life science business in Thailand through the grant of special incentives and tax privileges. Whilst the BOI provides valuable incentives, many Thai and foreign businessmen establish businesses without BOI assistance. Accordingly, investors should carefully consider the pros and cons of seeking BOI incentives before making an application. For instance, foreign investors often desire to own all or at least a majority interest in their manufacturing subsidiaries established abroad. Where such a subsidiary in Thailand seeks BOI privileges, the BOI will allow it to be majority or 100% foreign owned, subject to conditions. The most important privileges available are summarized as follows: Permission for majority foreign ownership of a promoted business which would otherwise be restricted under Schedule 2 or 3 of the Foreign Business Act; Permission for the enterprise to own land for use in the promoted business; Exemption from various taxes imposed on the business, including exemption from the requirement to withhold tax on dividends and royalty payments; Permission to remit capital, profits, interest and principal on foreign loans, royalties, fees or other obligations in foreign currency; Permission to employ foreign experts and technicians on more advantageous terms than permitted by the Ministry of Labour; Exemption from import duties for machinery imported for use in the business; Exemption from import duty, or reduction of duty on raw or essential materials used in the business; Exemption from corporate income tax for a period of 3, 5 or 8 fiscal years respectively in Zones 1, 2, and 3 (see below), depending on the size of investment or number of full time employees. An extended tax holiday may be granted to businesses located in certain provinces in Zone 3 for an additional 5 years, subject to further requirements; Dividends may be exempted from tax for a period equal to the period of exemption from corporate income tax; Exemption from tax on payments of royalties and fees for up to five years; Zone 1: Bangkok, Samut Prakan, Samut Sakhon, Pathum Thani, Nonthaburi and Nakhon Pathom Zone 2: Samut Songkhram, Ratchaburi, Kanchanaburi, Suphanburi, Ang Thong, Ayutthaya, Saraburi, Nakhon Nayok, Chachoengsao, Chon Buri, Rayong and Phuket Zone 3: The remaining 58 provinces. All Zone 3 provinces are designated as Investment Promotion Zones. Laboratory accreditation The Bureau of Laboratory Quality Standards serves as the national accreditation agency to certify health products analysis and clinical laboratories in accordance with ISO/IEC Such certification is necessary for the laboratories to perform laboratory services for the purpose of health product registration with the Food and Drug Administration (FDA). The Bureau also conducts proficiency testing and technical consultancy and training services to clinical laboratories. Permits for Doing Business Factory establishment and operating licences The Factory Act B.E (1992) stipulates regulations for factory construction and operation, factory expansion and safety requirements. The Act is enforced by the Department of Industrial Works at the Ministry of Industry.

6 28 T H A I L A N D B I O T E C H G U I D E / A factory is defined as any premise, that uses machinery equivalent to 5 horsepower or more, or that employs 7 or more workers, with or without any machine, for manufacturing, producing, assembling, packing, repairing, maintaining, testing, improving, processing, conveying, storing or destroying anything included in the classes or types of factories presently listed in the ministerial regulations. A factory may include a laboratory while workers may include researchers. Under the Factory Act B.E (1992), factories are separated into three groups according to the gravity of impact of the factory operations to the public or the environment, as follows: Group 1 - Factories that can operate immediately without prior government permission. Group 2 - Factories that require prior notification of the pertinent government authority before the business starts operations. Group 3 - Factories that require the application for a factory license before the establishment of the factory. The Factories Act also regulates the standards and procedures for control of waste, pollution and any activity that may harm the environment as a result of business operations, and necessary documentation and data which must be kept by factories to ensure compliance with the Act and its regulations. Violators of the Act are liable to fines ranging from $8,000 to $16,000 and/or prison sentences. An application to establish a factory must be submitted to the Ministry of Industry in Bangkok, or if the factory is outside Bangkok, it may be submitted to the provincial office. Full plans and details concerning the construction and proposed purpose of the factory must be submitted. Where required, an Environmental Impact Study must be submitted as well and approved before a Factory Establishment License may be granted. After the construction of the factory, the manufacturer must apply for a Factory Operating License. If on inspection it appears that the factory and its machinery conform to the Factory Establishment License, a Factory Operating License will be issued.

7 T H A I L A N D B I O T E C H G U I D E / Before the construction of a factory classified under Group 3, the operator must obtain a factory license from the Department of Industrial Works, Ministry of Industry. Application for a license entails completing an official form, submitting drawings and particulars of the factory, machinery, and acceptable effluent treatment system, and attaching the documents stipulated on the form. The operator of a Group 3 factory must notify the competent authority at least 15 days before a factory test-run commences, and again 15 days before actual manufacturing operations start. The factory license is valid up to the last day of the fifth calendar year from the year of commencement and is renewable. An application for renewal of the factory license must be filed prior to the expiration of that license. Licensees must also obtain prior permission from the Ministry of Industry for any factory expansion, transfer of machinery to other sites, or transfer of factory site. Permission is likewise required in order to transfer, lease, assign, or sell a factory operation. Import and export controls There are regulations on the import and export of goods into and out of Thailand. Trade in certain items is restricted through outright prohibition, imposition of duties or licensing requirements. Import controls The Ministry of Commerce designates classes of goods that are subject to import controls, which usually take the form of permission and licensing. Although these controls are being liberalized, at present more than 50 classes of goods require import licenses from the Ministry of Commerce. These categories are frequently changed through notifications from the ministry. A license to import any of the specified items must be secured from the Ministry of Commerce. In addition to the Act imposing the above controls, a number of goods are subject to import controls under other laws. With relevance to biotechnology, these include: The import of modern drugs requires prior licensing from the Food and Drug Administration under the Ministry of Health; The Minerals Act stipulates that without appropriate permission, an importer is prohibited from importing tungsten oxide and tin ores and metallic tin in quantities exceeding two kilograms; The Cosmetic Act stipulates that for the purpose of protection of public health, any importer of controlled cosmetics must provide the name and location of the office and the place of manufacture or storage of the cosmetics, the name category, or kind of cosmetics to be imported, and the major components of the cosmetics. Biotech hardware and chemicals and live specimens for research are regulated by the Thai Customs Department. The taxes for biotech hardware and chemicals are 5 % of the total cost whereas those for live specimens are 10 % of the total cost. Hazardous and exotic organisms are quarantined by the Department of Medical Sciences, Ministry of Public Health. Export Controls The Act Controlling the Importation and Exportation of Goods authorizes the Ministry of Commerce to subject products to export control. At present, close to 50 items require such control. Certain goods require export licenses under other laws, such as seeds, trees, and leaves of tobacco. Import, export and possession of hazardous substances in Thailand The Act includes ten categories of hazardous chemicals as follows: Explosives Flammable substance Oxidizing agent and peroxide Toxic substance Substances causing diseases Radioactive substance Mutant causing substance Corrosive substance Irritating substance Other substance either chemicals or otherwise which may cause injury to the persons, animals, plants, property or environments.

8 30 T H A I L A N D B I O T E C H G U I D E / The Office of Atomic Energy for Peace is responsible for licensing the utilization of radiation sources other than X-ray machines. The responsibilities include authorization and inspection, waste management and the information exchange. Applications for importation, handling and disposal of radioactive materials shall be submitted to Office of Atomic Energy for Peace for approval according to sections 12 & 13 of the Atomic Energy for Peace Act B.E Environmental legislation Hazardous substances are classified into four groups: Category I hazardous chemicals for which the production, import, export must be in compliance with the principles and procedures promulgated. Category II hazardous chemicals for which the production, import, export or being in possession must be informed to the authorities. Category III hazardous chemicals for which the production, import, export or being in possession must be permitted. Category IV hazardous chemicals for which the production, import, export or their possession are legally forbidden. No registration is necessary for chemicals of category I while categories II and III need to be registered before manufacture and/or import. Importation, handling and disposal of radioactive materials The importation, handling and disposal of radioactive materials is strictly regulated under the Atomic Energy for Peace Act and radiation safety regulation. The Act and regulations are enforced by the Office of Atomic Energy for Peace of the Ministry of Science Technology and Environment as well as the Department of Medical Science at the Ministry of Public Health. The Office of Atomic Energy for Peace looks after the utilization of radioactive materials and other radiation sources, while the Department of Medical Science looks after X-ray machines. The Enhancement and Conservation of National Environmental Quality Act B.E (A.D 1992) is the most significant environmental legislation. The Act continues and expands the responsibilities of the National Environment Board (NEB) and created incentives for environmental promotion and preservation, prescribes penalties for polluters for the establishment of a fund for promotion and preservation of environment quality and gives the public a greater participation role in addressing environmental problems. The Act for the Cleanliness and Orderliness of the Country B.E (A.D. 1992) regulates and controls offences to the environment deemed dangerous or unsightly. The Act specifically prohibits the dumping of waste and waste by-products into bodies of water. Minister notifications and regulations issued under the Factories Act B.E (A.D. 1969) control the level of effluent discharged by factories and restrict concentration levels of chemical and/or metal pollutants to defined parameters. About the Author Rouse & Co International provides a full range of intellectual property services world-wide. We help manage patent portfolios and advise on strategies that will enable the full potential of the patents to be realized. Fabrice Mattei is a partner and has been working in Thailand in the fields of patent and biotechnology for the last 12 years.