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Another Shot In The Foot?

  • Written by Marc Holt
  • January 22nd, 2007
  • 9 min read



With all the recent changes in government we all have many questions. This article should help you clarify what is going on and how the new changes will affect you. Of course, I can’t answer all your questions here, but this should serve as a good start.

December was a bit of a shock. The interim Thai government promulgated a new foreign exchange (FX) law stating that the government will retain 30% of any money imported into the country that is not for investment into a business, or to buy a condominium. They will keep the money for 12 months and return it without paying any interest. If you take your money out of the government’s escrow account before the 12 months expire you will lose 10% of it in punitive charges.

Well, you can imagine what happened. The Stock Exchange of Thailand (SET) immediately went into meltdown and more than 8 billion Baht fled the country in a few hours. When the government woke up the next morning and saw the results they tried to backpedal, but it was too late. The damage was done.

The law was intended to stop anyone abusing the system like ex-PM Thaksin (or should I say Toxin?) did to avoid paying taxes. Unfortunately, it came much too late after the horse had bolted. But it should stop speculators manipulating the market in the future.

So, to clarify, here is what the FX law is intended to do: If you bring in money from overseas to invest in business or into a condominium, you can do that without having to give the government 30% for 12 months.

However, if you want to bring money in for any other purpose, the 30% rule applies.

This law, combined with the new Foreign Business Act, has already scared investors enough to force them to take their money elsewhere. For example, Amata Corporation Plc reported that they have already lost one big customer, First Solar, to Kuala Lumphur. First Solar, a joint venture between American and European investors, had planned to buy 200 Rai of land to develop in the Amata industrial estate. Amata reported that another 10 deals have been postponed indefinitely. As a result, they see negative growth this year. They have already lost the opportunity to sell up to 1,500 Rai of land this year, compared to total sales of 500 Rai last year. Existing customers have also put off expansion plans this year.

This is just one example. Lots of other companies are reporting the same. It’s going to be a tough year for us here in the Land of Smiles.

Foreign Business Act Changes

The new Foreign Business Act seems to impose impediments to investment at first glance. But if you read the new changes carefully you will see that it is still possible for foreigners to invest in Thai property legally. The law states that existing Thai nominee companies must divest their shares to a Thai entity and change the ownership of the property to leasehold.

Phanom Kanjanathiemthao, Managing Director of the property-consulting firm Knight Frank Chartered (Thailand), said the amendments to the Foreign Business Act (FBA) would particularly affect the psychology of foreign investors, Kanana Katharangsiporn reported.

''The issue of the use of voting rights will impede fundraising,'' Phanom said yesterday. ''The government should estimate risks and benefits before announcing FBA amendments, otherwise it will create the same impact as what happened with the capital control measure.''

Any company that might be affected by the amendments must quickly make its business legal, he added.

''If their business is lawful, there is nothing to fear. If their business is at risk from the amendments, they might draw the investment back.''

However, a good lawyer can help you structure your company to conform to the law and still give you control over your investment. I won’t go into details here, but you are welcome to contact me if you have any questions.

Condo Sales Growing

The good news for property buyers is that you can still bring in 100% of the purchase price for a condominium without having to add 30% on top. And you can re-export that money when you sell using the T.T.3 form you get when you import the purchase money, after paying business taxes of course.

As a result, we have seen an increase in demand for condominiums in recent months. However, demand for housing has dropped to zero and this will have a knock-on effect on the market as developers draw back from developing high-end housing projects.

Then there was the announcement by the ‘interim’ prime minister this week that “democracy doesn’t work for Thailand”. So he proposed that Thailand accept the old method of appointing the prime minister. He thinks Thais will accept that democracy would still be served by allowing the people to elect all other government ministers. A novel idea to say the least. Does this mean he would like to see Thailand moving towards a government similar to the Burmese model? If so, it certainly speaks volumes about the coup maker's real intentions, doesn't it? No wonder someone is throwing bombs around the capital with such abandon.

However, I seriously doubt this idea will be implemented. The Thai people, especially the more sophisticated ones in Bangkok, will not accept this.

On a personal note, my eldest daughter aged 7 was booked to participate in the New Year show at the World Trade Center. We were just about to leave the house when we heard reports of the bomb explosions, so we called and canceled. It was lucky that the bombers let the bombs off early in the evening so that there were relatively few deaths and injuries. Imagine the carnage if a bomb had gone off at WTC at midnight.

The Building Continues

Despite the problems facing the property market, developers are still forging ahead building new housing estates and condos. Either they know something I don’t, or they have already committed too much money to just stop. The condo developers are in a good position, but what about the housing developers?

My advice would be to reconstitute your developments as condo projects instead. You can still build houses, as long as you include a condo building on the property. Of course, you will still have to abide by the 49/51 ownership rules; foreigners may buy up to 49% of a condo project and the rest must be sold to Thais.

The other alternative is to change your company shareholdings to conform to the new laws and then lease the land to foreign buyers. Although Thai law mandates a 30-year leasehold term, I have heard of several developers that have drawn up their own 99 year leasehold contracts, giving investors a much more secure instrument to invest in. Perhaps it is time the government followed suit?

Can developers recover their investments?

Yes, provided they stay within the law and set up creative legal structures to protect their investments. For example, if they already own land through a Thai nominee company they will have to bring in real Thai shareholders to own 51% of the company. If the foreign investor is married to a Thai, this should not present a problem, and it may even strengthen the marriage, as the Thai partner will have a direct stake in the success of the company.

The Foreign Business law also specifies the type of shares that may be issued by a company with a foreign stakeholder. However, if the foreigner owns less than 40% of the company shares, there may be ways to use the law to control the company effectively. A good lawyer can advise you better on this. Nudge, nudge, wink, wink.

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Even a clock that does not work is right twice a day. — Polish Proverb

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The Economy and What It Means For You

Sadly, with the sudden drop in the housing market because of all these changes and uncertainty it's the low- to middle-income Thais who are suffering. Many have lost their jobs, and this is having a knock-on effect on support industries too. The worst is yet to come, because the full effect of these government policies hasn’t started to bite fully. Already, many Thais in all business sectors are complaining that the new laws are hurting them financially. I wonder how long it will be before the bite becomes bad enough that they start demanding a change in government?

So, the entire economy is feeling the effects of the last twelve months. First the political problems with ex-PM Thaksin, then the coup and the bombs, the crackdown on Thai nominee companies to own land, the FX announcement, and now the changes to the Foreign Business law have all contributed to the downturn in confidence. If the government takes concrete action right now to rectify these problems we should see a return of confidence within the next twelve months. If not? Well, we may have to wait at least 2 years or more for the sunshine again.

Read this article by “Arm Cloth” (me) for some in-depth background over the last 25 years: (yes, I know, funny domain. But the article is interesting)

Property prices are actually coming down now. Something that has been unheard of in the past. So, if you have a strong financial position and you believe things will get better in the future, then investing in Thai land now could be a good idea.

If you are not that confident about Thailand then Cambodia, Viet Nam and China are offering very attractive benefits to potential investors. My first choice would be Cambodia, as I have spoken to some senior government officials tasked with bringing in foreign investors to buy and own property freehold, and they are doing everything they can to make it easy.

Vietnam and China only offer leasehold property options, so that may not interest all. However, their economies are growing while Thailand’s is shrinking. I believe VN will soon overtake Thailand.

My advice?

If you are living overseas, sit back and watch events unfold. I have a feeling that this year is going to be a very ‘interesting’ time…in the Chinese meaning of the word. It will shake out the real estate market, that's for sure! Many of the real estate agent ‘cowboys’ who have been operating, especially in Pattaya, Samui, and Phuket, will decamp, leaving the field clear for the professionals. That can only be a good thing for the industry, and ultimately you, the buyer.

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Did you know? Most lipsticks contain fish scales. Perhaps that explains something about our wives!

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DISCLAIMER: Although I research topics as thoroughly as possible, the author cannot be responsible for any errors in information, or for any action you may take based on the information contained in this article.
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Stickman's thoughts:

This is the hot topic in Bangkok at the moment with all sorts of conjecture about what the future holds. I sure as hell hope that some expats are wrong…