Issues Relating To Organizational Forms And Taxation THAILAND Tilleke & Gibbins International Ltd. CONTACT INFORMATION Yingyong Karnchanapayap and Sriwan Puapondh Tilleke & Gibbins International Ltd. Supalai Grand Tower, 26th Floor 1011 Rama 3 Road Chongnonsi, Yannawa Bangkok 10120, Thailand T: +66 2653 5555 yingyong.k@tillekeandgibbins.com; sriwan.p@tillekeandgibbins.com www.tillekeandgibbins.com 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (eg., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. Under Thai law, the forms of business organization are: Sole Proprietorship With a sole proprietorship, all of a proprietor s assets, business and personal, are subject to attachment or any other legal action, whether connected to the business or not. Partnership Three forms of partnership are permitted, as follows: a) An unregistered ordinary partnership is one in which all partners are jointly liable for all the obligations and debts of the partnership. Each partner must contribute money, property, or services to the partnership. It is not registered with the Ministry of Commerce (MOC) and is not a legal entity (juristic person).
b) A registered ordinary partnership is registered with the MOC, which makes it a juristic entity with a separate and distinct personality from each of the partners. All the partners are jointly and unlimitedly liable for all the obligations of the partnership. A registered ordinary partnership partner may pursue any claim of, or any right acquired by, the partnership against third persons, even if the third person did not actually participate in the transaction. c) A limited partnership is also registered with the MOC and considered a juristic entity with a separate and distinct personality from each of the partners. A limited partnership is one in which the individual liabilities of one or more partners (called limited partner ) are limited to their respective contributions, and one or more partners (called general partner ) are jointly liable without any limitation for all the obligations of the partnership. Branch Office A foreign company may establish a branch office to conduct business in Thailand. Having a branch office in Thailand, the foreign company will be exposed to civil, criminal, and tax liability if the branch office violates any law in Thailand. Limited Company A limited company is generally the form of business establishment most preferred by foreign investors because, among other things, shareholders liability is limited (to the remaining amount unpaid, if any, of the registered capital due on the shares respectively held by them). The incorporation of a limited company must be registered with the Department of Business Development of the MOC. A public limited company is a company established for the purpose of offering the sale of shares to the public. A public limited company is subject to more stringent rules and regulations compared to other forms of business organization. 2. Are there attributes of the form that you consider unique to your jurisdiction? The attributes of forms of business organization which are unique to Thailand are regional office and representative office. Regional office or representative office is technically a branch office of a foreign company which carries on permissible non-income-generating service activities on behalf of the head office in Thailand. The only distinction between a regional office and a representative office is the scope of their respective permissible activities enumerated below. Regional Office: a) To contact, coordinate, and supervise on behalf of the head office the activities of the branch office, affiliate, and/or subsidiary of the head office located in the same region as the regional office.
b) To provide services to the head office s branch office, affiliate, and/or subsidiary of the head office, such services being advisory services, management services, training and personnel development services, financial management services, marketing control and sales promotion planning, product development, and research and development services. Representative Office: a) To find sources for the purchase of goods or services in Thailand for the head office or affiliates or subsidiaries of the head office. b) To check and control the quality and quantity of goods purchased or manufactured in Thailand by the head office or affiliates or subsidiaries of the head office. c) To provide advice and assistance concerning goods of the head office or affiliates or subsidiaries of the head office sold to agents or consumers in Thailand. d) To disseminate information concerning goods or new services of the head office or affiliates or subsidiaries of the head office. e) To report on business developments in Thailand to the head office or affiliates or subsidiaries of the head office. 3. Describe the management and governance structure for each organizational form. Sole Proprietorship Sole proprietorship is managed and controlled by only one person the owner. Partnership a) With an unregistered ordinary partnership, all partners are jointly responsible for managing the partnership and are jointly and unlimitedly liable for all the obligations of the partnership. Although it is not a juristic person, it is considered a separate entity for tax purposes. b) With a registered ordinary partnership, all partners are jointly responsible for managing the partnership and are jointly and unlimitedly liable for all the obligations of the partnership. c) A limited partnership can only be managed by the partners with unlimited liability. A partner with limited liability who participates actively in the management of the partnership becomes jointly liable, without any limitation, for the partnership s obligations. Branch Office The head office must appoint at least one branch office manager to be in charge of operations in Thailand.
Regional Office and Representative Office Copyright Lex Mundi Ltd. 2010 Regional office and representative office are strictly prohibited from accepting purchase orders or making sale offers and negotiating and entering into any business arrangement with any customer, sales agent, or other party in Thailand. The operations of these offices can be financed only by the head office. Even though their income is nil and, thus, pay no income tax, these offices still have the duty to file audited financial statements with the Thai authority annually. Limited Company A limited company is managed by a Board of Directors (consisting of at least one director) appointed by the shareholders under the control of the general meeting of shareholders. Meetings of shareholders and directors must conform to the requirements set forth under the law and/or the Articles of Association of the company. An annual general meeting of shareholders is required to be held. Public limited companies are subject to the Public Limited Company Act 1992. The Board of Directors of a public limited company must consist of at least five directors, the majority of whom must reside in Thailand. Joint Venture A joint venture may or may not be registered as a legal entity. Even if it is not registered as a legal entity, the unincorporated joint venture is treated as a juristic entity by the Revenue Department for the purposes of tax liability. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? The most important law governing foreign direct investment in business in Thailand is the Foreign Business Act 1999 (FBA), which reserves certain business activities for Thais. Under the FBA, the definition of alien includes: a) A non-thai natural person. b) A legal person not incorporated in Thailand. c) A legal person incorporated in Thailand with at least half of its company shares held by persons under the two foregoing categories, or a legal person with at least half of its total registered capital invested by such persons. d) A limited partnership or registered ordinary partnership, the managing partner or manager of which is a non-thai natural person. Basically, alien ownership in businesses which are reserved under Lists 1, 2, and 3 of the FBA is limited to 49%. Business activities indicated in List 1 of the FBA, such as farming, forestry, antiques trading, and broadcasting, are strictly closed to aliens.
Aliens wishing to exceed the ownership limit in business activities indicated in List 2 of the FBA, which involve national safety, arts and culture, natural resources, and environment, must obtain an alien business license (ABL) from the MOC with the approval of the Cabinet. Business activities indicated in List 3 of the FBA, which include professional services, construction, wholesale, retail, hotel and restaurant, and any kind of service, can be 100% owned by aliens if an ABL is granted by the Director-General of the Department of Business Development with the approval of the Foreign Business Committee. An ABL application is a time-consuming process with an unpredictable outcome and is normally granted only to the extent necessary. The alien ownership restrictions under the FBA do not apply to U.S. nationals and U.S. corporations. The Treaty of Amity and Economic Relations between the United States and Thailand allows Americans to own and operate almost all reserved businesses in Thailand except for businesses reserved under the Treaty which, among others, are land, inland transportation, and communication, provided that the MOC is notified and a certificate is applied for. There is generally no nationality or residency requirements on directors, with the exception of companies seeking permission to conduct businesses listed under List 2 of the FBA, in which case a minimum of two-fifths of the total number of directors must be Thai nationals. The same is true under special laws such as the Insurance Act, Air Navigation Act, Thai Vessel Act, Land Transport Act, and Travel Agency Business Act. For a company established under Thai-U.S. Treaty protection, a majority of its directors must be American and/or Thai nationals. In addition, for a public limited company there is a requirement that the Board of Directors consists of at least five directors, the majority of whom must reside in Thailand. 5. Describe the extent to which management and owners are exposed to liability. Sole proprietors, partners in unregistered/registered ordinary partnerships, and unlimited liability partners in limited partnerships are unlimitedly liable for the obligations of the sole proprietorship or the partnership, as the case may be. For registered ordinary partnerships and limited partnerships, the partner s liability for the partnership s obligations ceases two years after he/she leaves the partnership. The foreign head office will be liable for the obligations of the branch office, representative office, and regional office in Thailand. Limited liability partners in limited partnerships and shareholders of limited companies are liable for their contribution in the partnership or, in limited companies, to the remaining amount unpaid, if any, of the registered capital due on the shares respectively held by them. A partner with limited liability who participates actively in the management of the partnership becomes jointly liable, without any limitation, for the partnership s obligations. Directors of a limited liability company must exercise their powers honestly and in the best interests of the shareholders and the company using the judgment of careful business persons. Directors and persons representing directors are jointly responsible for: a) Payment being made for shares by the shareholders. b) Maintenance of company books, records, and documents as prescribed by law. c) Proper distribution of dividends or interest as prescribed by law. d) Proper enforcement of resolutions of general meetings of the shareholders. Directors, acting in a fiduciary relationship with a company, must not directly or indirectly enter into a competing business or into a business dealing with the company for their own
benefit, or into a business in which they have a special interest without the consent of the shareholders and/or the Board of Directors. If they do so, they will be accountable to the company for all profits or losses. The liability of the directors of a limited company may be unlimited, if specified in the Memorandum of Association. The unlimited liability of a director terminates at the expiration of two years after the date at which a director ceased to hold office. Directors or managers of a juristic person are criminally liable only when they commit criminal offences or if they are held to be co-principal, employing person, or accessory. However, in certain cases, the law specifically imposes criminal liability on them without any criminal intent, unless the individual directors or managers can show they had no knowledge of the act or omission, or did not consent thereto. For example, directors are subject to certain penalties, including fines and possible imprisonment, if they or their companies fail to make the appropriate registrations under the Act on Offenses Concerning Registered Partnerships, Limited Partnerships, Limited Companies, Associations, and Foundations B.E. 2499 (A.D. 1956), as amended 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? i. For sole proprietorships, unregistered/registered ordinary partnerships, and limited partnerships, ownership interest is represented by the value of their respective contributions which may be money, other properties, or labor. For limited companies, ownership interest is represented by the company s shares capital divided into shares, each having a minimum equal value of THB 5. ii. iii. Ownership in sole proprietorships is transferrable with the agreement of the sole proprietor. Partners in unregistered/registered ordinary partnerships and unlimited partners in limited partnerships cannot transfer their ownership without the consent of all partners (unregistered/registered ordinary partnerships are dissolved by the death, bankruptcy, or incapacity of any partner and unlimited partnerships are dissolved by the death, bankruptcy, or incapacity of any unlimited partner), unless there is an agreement providing otherwise. Limited partners in limited partnerships can transfer their ownership without the consent of the partners. Shares in limited companies can be transferred without the consent of the company or other shareholders, unless the shares were entered in a name certificate for which the company s Articles of Association provided otherwise. Sole proprietorships must have only one owner. Unregistered/registered ordinary partnerships must have at least 2 partners. Limited partnerships must have at least one limited partner and one unlimited partner. For private limited companies, three shareholders are required to be maintained at all times while the company is in operation. A public limited company is required to have at least 15 shareholders. Branch offices, representative offices, and regional offices are not separate legal entities from the foreign head office and, therefore, there is no ownership interest therein. 7. Is there a minimum capitalization?
For business entities which are majority-owned by Thai nationals, in general, there is no minimum capitalization requirement. For limited companies, the initial paid-up capital must be at least 25% of the registered capital. However, a minimum capitalization requirement may be imposed on certain businesses such as banking, insurance, etc. If, however, for entities regarded as alien under the FBA (for more details on the FBA definition of alien, please refer to Question 4), a minimum of Baht 2 million capital is required. A foreign company granted an ABL under the FBA must have minimum capital of Baht 3 million. 8. Is there a security that can be issued to the public? Public limited companies are allowed to offer shares for sale to the public, provided that such purpose is indicated in the company s Memorandum of Association. The offer of shares for sale to the public shall be in accordance with the law governing securities and exchange. Sole proprietorships, partnerships, branch offices, representative/regional offices, and private limited companies are not allowed to offer/issue partnership/shares to the public. 9. Can the form incur debt, or grant security for debt? Sole proprietorships, partnerships, branch offices, representative/regional offices, private limited companies, and public limited companies are allowed to incur debt or grant security for its own debt for the purpose of engaging in activities or businesses within the scope of its power and duties, or its objectives provided in its regulations, Memorandum of Association, or constitution documents. 10. What is the duration of the form? Can it be renewed? Generally, there is no statutory duration for each form of business organization. Sole proprietorships, partnerships, private limited companies, and public limited companies will continue to exist until they are dissolved in accordance with the law. However, the partners/shareholders may agree that the form of business entity shall dissolve (i) upon the occurrence of certain agreed causes, (ii) the expiration of a certain period of time, or (iii) the completion of certain undertakings. The duration of a branch office and representative/regional office shall be throughout the period of approved activities, which are generally not specified, meaning that they will continue to exist for an indefinite period until the relevant permit, license, or certificate is cancelled or terminated. 11. Describe the process, customary time period and approximate cost of establishing the form. Registration of sole proprietorships and unregistered ordinary partnerships is made at the Revenue Department, where the sole proprietor must acquire a taxpayer number. Sole proprietors/ unregistered ordinary partnerships doing certain types of business may be required to obtain a commercial registration at the MOC. The costs thereof include THB 1,000 for registration as well as transportation and counsel fees. The process takes about three to five days. Registration for a Value Added Tax (VAT) certificate may also be required if gross income is expected to exceed THB 1.8 million per year.
Registered ordinary partnerships and limited partnerships are required to be registered with the MOC. The registration fee is THB 1,000 for up to three partners. If there are more than three partners, the registration fee is THB 200 for each additional partner. Also, THB 50 is charged to receive the registration certificate. Branch offices and representative/regional offices are also required to be registered with the MOC. The government fee for a representative office and a branch office is THB 5 or THB 10 for every THB 1,000 capital, with a minimum of THB 20,000 or THB 40,000 and a maximum of THB 250,000 or THB 500,000. For registration of a private limited company, the first step is to reserve the company name; second, file a Memorandum of Association with the Registrar; and third, convene a statutory meeting. During the statutory meeting, among other things, the Articles of Association must be adopted, auditors appointed and directors elected, any pre-incorporation contracts entered into by promoters ratified, expenses incurred by promoters paid, preference shares (if any) established, and the number of ordinary shares or preference shares to be allotted and their prices fixed. The fourth step is to register the company. The company registration fee is THB 5,500 per THB 1 million registered capital, with a maximum fee of THB 275,000. If necessary documents are complete and duly signed by all promoters, directors, and shareholders, registration with MOC could be done in one day. The process of preparing documents for forming a company generally takes about two to three weeks. After the registration with the MOC, registered ordinary partnership, limited partnership, limited company will also be required to be register for a Tax ID and VAT certificate with the Revenue Department, the process, timeframe, and costs of which are the same as those set out in the registration of sole proprietorships and unregistered ordinary partnerships. If an ABL is also needed, registration will take an additional three to five months. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? There is no explicit requirement that the government be part of a project or investment vehicle. However, state monopolies/interventions do exist over transport (air, rail, and certain other kinds of transport), communications, arms manufacture, etc., whether directly by the government or indirectly by state enterprises. The Thai government may, depending on the nature of the business, such as those involving communications, radio, television, newspapers, internet service providers, defense, national security, transportation (air, rail, and some land transportation), upstream petroleum, and mineral resources activities, seek to participate in the ownership or operation of certain business entities through a public-private partnership arrangement or through the granting of licenses/concessions to private entities. In such events, the government or state enterprises are entitled to receive part of the profits arising therefrom in the form of profit/revenue sharing or concession fees, as the case may be. Some protection for foreign investors against government intervention exists. The Investment Promotion Act and the Industrial Estate Act provide that the state shall not nationalize the activities of the promoted person. However, under the FBA, the MOC can regulate the operation of certain aspects of a permit holder s business such as the ratio of capital to loans, funds brought in from overseas, the ratio of capital of Thais to that of aliens in the business, and the ratio of Thais to alien persons responsible for the management of the business.
13. For what taxes is the form liable? Sole proprietorships and unregistered partnerships are subject to personal income tax at progressive rates ranging from 5% to 37%. After-tax profits when distributed to partners are not their taxable income. Registered ordinary partnerships, limited partnerships, and limited companies generally pay corporate income tax at a rate of 30% on net profits. Presently, Small and Medium-Sized Enterprises with paid-up capital as at the end of an accounting period not exceeding THB 5 million enjoy discounted corporate income tax at rates of 15% to 30%, depending on the amount of net profits, with a tax exemption for the first THB 150,000 of net profits. A branch office is subject to corporate income tax at the rate of 30% on net profits derived from its business operations in Thailand. A regional office or representative office is permitted to engage in non-income-generating service activities on behalf of the head office in Thailand. They are strictly prohibited from accepting purchase orders or making sale offers and negotiating and entering into any business arrangement with any customer, sales agent, or other party in Thailand. Therefore, they cannot generate income and pay no income tax. 14. What is the tax treatment of payments to foreign owners? Non-resident investors, whether individual or juristic person, are subject to income tax in the form of a withholding tax at the rate of 10% on dividends or share of profits received from a company or a partnership established under Thai law. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Dividends distributed by a company or share of profits paid by a partnership to a resident investor, whether individual or juristic person, are subject to 10% withholding tax (the same rate as non-resident investors). For a resident investor, the 10% withholding tax is deemed as an advance tax payment which can be used as a credit against the annual income tax payable. However, for a non-resident investor, the 10% withholding tax is deemed as the final tax payment and there will be no further Thai income tax imposed on such dividend. For dividend received from a Thai company, an individual shareholder who is domiciled or is a resident of Thailand may choose to: (1) treat the 10% withholding tax as a final tax payment of such dividend, or (2) include the dividend with other income in computing individual income tax payable in filing an annual income tax return. Under alternative 2, the individual will receive a tax credit equal to the amount of dividend multiplied by the corporate income tax rate divided by the result of 100 minus the corporate income tax rate. The tax credit is required to be first included as assessable income and then deducted from the total amount of tax payable. Dividend paid by a Thai company to another Thai company may be exempt from Thai income tax (e.g., 10% withholding tax and 30% corporate income tax) if the holder of the
shares in the payer company is in compliance with conditions prescribed in the Revenue Code. For a non-resident investor, capital gains from the sale of non-listed securities will be subject to withholding tax at the rate of 15% and tax may be exempted under an applicable double tax treaty. For a resident investor, capital gains are generally taxed as ordinary income of the seller, which shall be subject to a progressive rate of 5% - 37% (if the seller is an individual) or included in computation of paying tax at 30% of net profits (if the seller is a juristic person), as the case may be.