The Foreign Business Act (FBA)
There has been a lot of speculation on changes to the Thai Foreign Business Act and how it will affect land purchase by foreigners. Before I explain what the changes are, it might be a good idea to look at why the Thai government is preparing to make these changes.
All this came about because ex-Prime Minister Thaksin sold parts of his telecommunications company to Temasak Holdings from Singapore. Using a loophole in the law, he didn’t pay any taxes. This raised the ire of the people and led to his downfall. The government is determined to close this loophole so that another Temasak deal will never be possible. But that’s a bit like throwing out the baby with the bathwater. I think the end result will be a disaster for the Thailand property market. Foreign property investors will be shut out. An end to the income from land sales will have a severe impact on the economy and on ordinary Thais. Let’s face it, foreigners have been the driving force in the growing property market up to now.
The current FBA states that a company with the majority of its registered capital held by foreigners is defined as an ‘alien’ company. Strictly speaking, Thai law prohibits foreigners registering a 100% owned alien company. To my knowledge, the only way this can be done is under the Thai/US Amity treaty. I am not sure this treaty is still in force, or if it allows you to own land outright, but if you are American this may be worth looking into.
However, foreigners are able to set up joint venture companies with Thais acting as nominees to do business here. This is how these companies are usually set up. The Thais hold the majority of up to 51% ordinary shares with one vote per share. The foreigners hold the minority in preferential shares with as many as 100 votes per share, giving them effective control of the company and a higher return from the company income. These companies are currently recognized as legal Thai entities, able to conduct any business reserved for Thais.
The problem, as the Thai government sees it, is that foreigners have been using this legal strategy to go into property development, a business that is reserved only for Thais. The Thais see this as a direct threat to their sovereignty. They don’t want foreigners owning Thai land. They reason that if foreigners want to come and live in Thailand they are welcome to lease the land, but they cannot own it.
But foreigners don’t see it like that. First, the current leasehold laws only allow one 30-year term. An extension may be negotiated with the land owner to extend the lease, but the law does not guarantee an extension. Obviously, for long-term investors, this is a very risky proposition. In addition, foreigners are used to holding the freehold title to land they buy, and they feel uncomfortable signing up for a short-term lease. One way out of this impasse would be for the Thai government to allow 99 year leases, as is common in many other countries, especially in the West. So far, they have resisted all requests for this.
The Thais say that foreigners are welcome to lease the land and then own any property built on it 100% freehold. A curious situation, to say the least. They expect foreigners to come here, sign a short term lease with no guarantees built into it, put up a building, and then face the prospect of leaving that building if the Thai land owner decides not to renew the lease. Hardly an attractive proposition.
The Thais are worried that foreigners will swoop in and buy all the land if they give us the right to own land. Unfortunately, they obviously haven’t looked at what happened to other countries that opened their property market to foreigners. Take Australia, for example. Anyone, providing he has the money, can go there and buy land. I believe Mr Thaksin owns several properties there, as do many other wealthy Thais. There are no restrictions on them at all.
Because there are no restrictions, the property market in Australia is very healthy. The influx of buyers the Thais fear has not happened. Sure, a lot of Japanese went to the Gold Coast and Sydney and bought up a lot of property a decade ago. But this helped boost the economy and the local property market. The Japanese could not take the property with them. The wealth generated from those properties flows out to Australians as well as the property owners. Everybody wins.
Now, let’s examine Thailand’s case. The population is currently about 80 million. A miniscule percentage are very rich. There is a growing, but still relatively small middle class. The majority of Thais are still poor. However, without a vibrant property market, many Thais are going to lose their jobs and income and remain poor. This is already happening because of the current political and legal uncertainty. While the Thai government continues to try and restrict foreign investment in their property market the money will go elsewhere.
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I have had several emails from people who were interested in buying property here telling me they have taken their money to other countries instead. That money could have been benefiting Thais. Instead, it is gone and it will never come back.
Thais in the construction, furniture, decoration, landscaping, transport, and many other associated industries have already lost their jobs and income. Without foreign investment flowing into the country the money well is drying up. Thailand can’t generate enough foreign income just from agriculture or manufacturing. The property market is an integral and very rich source of funds. Thai landowners are calling me up every day begging me to help them sell their land and buildings. I wish I could. But the money is not there. The only properties I can sell these days to foreigners are condos.
Let’s say that the government does come to its senses and allows foreigners to own land. What will happen? Will we see millions of foreigners coming here and buying up the country?
Estimates put the current population of foreigners currently residing in Thailand at less than half a million. This includes the many Japanese and other Asian nationalities running factories and businesses. A much smaller percentage of foreigners are here on short-term contracts of two to five years managing international businesses. The rest of the foreign contingent is made up of small entrepreneurs like myself, men married to Thais, and retirees who have come to live out their last years.
The business people are bringing in not only valuable skills and technology transfer, they are generating enormous income for Thailand. Under the Board of Investment rules foreign companies can buy land and own it in industrial park reserves. This land can only be used for industrial purposes. Owning this land does not impact any Thais wanting to own land.
So, let’s leave the approximately 200,000 business people here on contracts out of the equation and examine what has happened so far with the rest of us foreigners. The retirees can get special visas to stay here, as long as they can show the government they have sufficient funds to support them. They come here, meet Thais and often marry or live with them. They want to buy a home where they can set up a comfortable life and live securely. When they die, the Thai partner often inherits the property. So no losses there. Of course, under the new FBA law, that won’t happen. Their Thai partners lose, and Thailand loses.
How about other foreigners who marry Thais, people like me? I have two daughters in school, I run a business that generates foreign income, as well as employing Thai staff. I have no rights whatsoever. I cannot vote. If I want to buy land and a house I have to put it into my wife’s name, because I can’t own it. Yet my money buys everything for my family. But if the Thai government ever decides it doesn’t want us here any more, I lose everything. As I already have nothing, as far as the Thai government is concerned, I can hardly complain, can I? I don’t think this is a recipe for building a secure future. But many of us still build our lives here and contribute to the Thai economy and society anyway.
Are millions of foreigners likely to come pouring into Thailand if the government relaxes the land ownership laws?
No! Why would they?
Moving to a new country, building a new life there, learning the culture and language is a daunting prospect. Not many people want to do that. I seriously doubt we would see many more people coming here at all. So that fear is unfounded too.
All in all, the fear that Thais may lose control over their country by relaxing the property laws is patently false. If the Thai ministers who are worried would travel overseas and examine what has happened in other countries, they would see that their fear is entirely misplaced. Open the market to foreigners and billions of dollars would flow into this country. The standard of living would rise, and all Thais would benefit.
Oh! No, that’s not correct. All Thais, except the 60 richest families who control Thailand, would benefit. The rich families are the ones desperate to keep the status quo. They rely on keeping the populace barely educated, addicted to mind-numbing soap operas and comics, so that they won’t think about opportunities to improve their lives. After all, if the rich lose their monopoly on the country their power would be eroded. They would not be able to make so much money any more. Or would they?
Think about it. If more money starts flowing into Thailand, more business opportunities will open up, and the rich will use their riches to get richer. And as the economy grows, all Thais will have better lives.
That is a nice dream, but right now it is a very distant one. The reality is that the government doesn’t see these opportunities, so they are looking for ways to tighten their grip instead. They believe a monopoly will work.
The Council for National Security (the military rulers) appointed the Cabinet on January 9 to amend the FBA. Looking closely at the proposed law, however, things are not as bad as they seem on the surface. For a start, the new law is designed to stop nominee structures where Thai shareholders don’t benefit. But the present bill that will be presented to the National Legislative Assembly does not prohibit minority share control. So, in effect, all that will change is that any Thai shareholders must now be paid according to their shareholding in the company.
The intent of the law is that no matter what percentage of shares are held by a foreigner, the company will be regarded as an ‘alien’ company and it must not engage in any activities that are reserved for Thais. This means that telecommunications and property businesses will be barred. However, if you want to set up a company to conduct a legitimate business, investors will not face any problems at all, as long as they comply with the law.
This will not stop foreigners wishing to invest in the property market. Even now, some land offices are insisting that a Thai senior partner must show that he has invested in the company, and that he really benefits from it.
Usually, a bill like this would take at least one year to be passed into law. However, the government appears to be rushing this revision to the FBA through as fast as it can. Perhaps this haste will result in a poorly thought out bill that does more harm than good in the long run, opening the way for further ways to exploit loopholes. Where there is a will there is always a way, especially in Thailand.
Once the bill is passed, companies will have one year to change their structure to conform to the new laws. Companies have to comply with the following conditions depending on their business:
1. Companies engaging in List 3 businesses such as construction, services, retail, wholesale, broker or agent, and hotel business will be allowed to continue their business operations until they are dissolved under the new law.
2. Companies engaging in List 1 and 2 business such as domestic air transport, mining, newspapers, and television will be allowed to continue their business for two years after the promulgation of the law. But according to a meeting between representatives of foreign chambers of commerce and Deputy Prime Minister M.R. Pridiyathorn Devakula on Jan 10, there is a possibility that the grace period may be extended for up to three years.
Companies that fail to notify the DBD within one year and continue their business operations will be subject to imprisonment or fines, or both, as fixed in the FBA. The FBA amendment carries higher fines than the current FBA.
The new FBA amendments apply only to companies engaged in businesses reserved for Thais under the FBA and/or other local laws. Foreigners or companies that are defined as ''alien'' under the FBA but engaged in businesses that are not reserved under the FBA, such as most manufacturing and all export activities will not have to change. And companies granted approval by the Board of Investment to conduct reserved businesses such as manufacturing for export, or technology businesses, are not subject to the FBA or the proposed amendment to the FBA.
So there we have it. If this law passes, foreigners wishing to do business here in the future will find it harder, but not impossible. And like any law, I am sure a good lawyer will be able to find ways to work within the law while giving investors the best possible legal structure to do business profitably.
DISCLAIMER: All information and the opinions expressed in this newsletter have been researched as thoroughly as possible. However, the author is not responsible for any actions readers may take after reading this document. Please consult a qualified lawyer to ensure you get the best possible advice.
It will be interesting to see what happens…