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Foreign Business Law Analysis

Foreign Business Act of 1999
I. Introduction

The Thai Foreign Business Act of 1999 ("FBA") governs the conduct of business by foreigners in Thailand. It took effect on March 3, 2000, replacing the Alien Business Law of 1972 (also known as N.E.C. Announcement No. 281). The FBA prohibits foreigners and foreign owned enterprises from certain business activities in Thailand, and sets forth under what conditions a foreigner or foreign enterprise can conduct other business activities in Thailand.

The FBA includes three lists of business activities. The first list contains activities that are completely prohibited to foreigners "for special reasons". The second list contains activities that are deemed to affect Thailand's national security, culture, natural resources or environment. Foreigners are allowed to engage in activities on List Two only with the permission of the Thai Cabinet. The third list contains activities that are deemed to be areas in which Thai businesses are not yet ready to compete with foreigners. These activities are permitted to foreigners only with the approval of the Director-General of the Business Development Department (formerly the Commercial Registration Department). A foreigner will be permitted to engage in activities that do not appear on the lists, subject only to a minimum capital requirement of Baht 2 million.

The business activities included in the lists under the FBA are different from, and less sweeping, than those included in the three annexes under the prior law. Under the FBA, more business activities are permitted without the need for a special license. Another significant difference between the FBA and the prior law is that the FBA clearly contemplates the Director-General of the Department of Business Development granting Foreign Business Licenses to foreigners so that they can, subject to conditions, perform activities contained in List Three. In practice under N.E.C. Announcement No. 281, Alien Business Licenses were generally only granted to foreigners to the extent necessary to allow the foreigner to carry out work under contract with the Thai government. Finally, "Representative Offices", which were specifically authorized under N.E.C. Announcement No. 281 are not provided for under the FBA. The Department of Business Development now treats an application for a "representative office" in the same manner as any other Foreign Business License application.

A foreigner contemplating establishing a business in Thailand should note that the Foreign Business Law is not the only Thai law affecting a foreigner's right to engage in business in Thailand. Many other laws establish restrictions on foreign ownership, including, for example, laws on banking, insurance, telecommunications and employment agencies. Those laws are not affected by the FBA.

A foreigner contemplating establishing a business in Thailand should note that the Foreign Business Law is not the only Thai law affecting a foreigner's right to engage in business in Thailand. Many other laws establish restrictions on foreign ownership, including, for example, laws on banking, insurance, telecommunications and employment agencies. Those laws are not affected by the FBA.

II. Scope of the FBA

A. Foreigners subject to the FBA

Under the FBA, the threshold question for determining whether or not an individual or entity is subject to the law's provisions is "what is a Foreigner?". The FBA defines the following persons and entities as "Foreigners":

1. An individual who is not a Thai citizen
2. A company or partnership not registered in Thailand
3. A company or partnership registered in Thailand and:
4. Having half or more of its capital held by a Foreigner(s) under (1) or (2) above; or,
5. Having an individual under (1) above serve as managing partner or manager (for limited or registered ordinary partnerships only)
6. A company or partnership registered in Thailand having half or more of its capital held by Foreigners under (1), (2) and (3)(a)
In simple terms, "Foreigners" under the FBA include foreign individuals, foreign-registered companies, companies registered in Thailand but majority owned by foreigners and partnerships managed by foreigners.

The definition of "Foreigner" is quite similar to that of an "Alien" under the old Alien Business Law. One notable difference is that the number of foreigners who hold shares is irrelevant under the FBA. Six of seven shareholders-the minimum number under Thai law- of a Thai-registered company can be foreign and the company would still not be considered a "Foreigner" so long as one Thai holds more than half of the capital of the company. Under the previous law, if half or more of the shareholders were "aliens", so too was the Thai-registered company, even if a Thai held a majority of the capital.

B. Special provisions for certain foreigners

The FBA contains special provisions for certain types of foreigners. The special provisions include:

1. Foreigners operating under special treaties to which Thailand is a party. This is a reference to American individuals and companies operating under the Thai-U.S. Treaty for Amity and Economic Cooperation. Under current policies, such companies are subject to minimum capital requirements for a Foreign Business License (see IV (A) below). Subjecting the so-called "treaty companies" to the minimum capital requirement appears to violate the "like-treatment" terms of the treaty, and seems even to violate the terms of the FBA itself. However, for now the Baht 3 million capital requirement applies to treaty companies.
2. Foreigners operating under privileges granted by the Board of Investment or the Industrial Estate Authority of Thailand.
3. Foreigners operating a business under temporary permission of the Thai government.
4. Foreigners operating a business under permission or rights granted under N.E.C Announcement No. 281 before March 3, 2000 (the FBA's effective date).
III. Listed Activities

(Note: the complete text of Lists One, Two and Three appears at the end of this summary)

A. List One activities

List One of the FBA contains activities that Foreigners are prohibited from engaging in "for special reasons". In general terms, the activities relate to sensitive areas such as publication and broadcasting of news, domestic agriculture, trading in Thai antiquities and national historic objects, casting of Buddha images and alms bowls and land trading.

B. List Two activities

List Two contains activities that are deemed to affect Thailand's national security, culture, natural resources or environment. These activities will be permitted only with the approval of the Thai Cabinet, and generally will require a minimum of 40% shareholding by Thais. It might go without saying that a Foreigner's obtaining the approval the Thai Cabinet to engage in a business is not easy. Businesses included in List Two include firearms, domestic transportation, trading in antiques, Thai arts or handicrafts, production of specified handicrafts and similar products, and specified mining, farming and wood fabrication activities.

C. List Three activities

List Three contains activities that are deemed to be areas in which Thai businesses are not yet ready to compete. These activities will be permitted to foreigners only with the approval of the Director-General of the Department of Business Development. Unlike activities under Lists One and Two, it is thought that a Foreigner might have a reasonable opportunity to obtain permission to engage in a List Three activity. Moreover, List Three specifically identifies some activities that Foreigners are permitted to engage in, and calls for the Director-General to issue regulations identifying additional service activities that Foreigners will likewise be permitted to engage in (indeed, a draft regulation is being circulated in the Thai government identifying several such service activities (see III(F) below)).

D. Annual review of listed activities

The FBA requires that the content of the Lists be reviewed annually, and that appropriate revisions be made. If a Foreigner establishes operation of a business that is subsequently placed onto one of the lists, the Foreigner's business will be "grandfathered" and allowed to continue doing business provided it gives timely notice to the Department of Business Development.

E. Ability to engage in unlisted activities

If an activity is not included on one of the Lists, a Foreigner is allowed to engage in such activity without a Foreign Business License. Essentially the only requirement is that the Foreigner have capital of no less than Baht 2 million.

F. Proposed regulation permitting certain service activities

List Three provides that the Department of Business Development can issue regulations excepting certain types of service activities from the provisions of List Three. Such service activities specified in a regulation will be treated as an unlisted activity and no Foreign Business License will be required. Under a draft regulation not yet in force, the following service activities would be excepted from List Three:

1. Rental of property;
2. "Leasing business" as defined under the Thai Revenue Code;
3. Commercial banking;
4. Lending of money;
5. Insurance business;
6. Pawn shops;
7. Taking of property on deposit;
8. Warehousing;
9. Operation of schools;
10. Operation of entertainment halls;
11. Hair cutting, styling and operating beauty salons;
12. Photography and operating photo shops;
13. Operating laundries;
14. Tailoring and dressmaking.
IV. Criteria and procedures for obtaining a license

If a Foreigner wishes to engage in a business activity in Thailand that is included on List Two or Three, the Foreigner must obtain a Foreign Business License. The FBA specifies that the licenses will be issued pursuant to regulations to be issued by the Department of Business Development. The draft regulations are still under consideration. Applications for licenses are, however, being processed. Because of the lack of regulations, the applications are considered on a case-by-case basis. There are few exact criteria, but the following factors are considered by the Department of Business Development when processing an application.

A. Minimum capital requirement:

The FBA provides that a Foreigner applying for a Foreign Business License must meet minimum capital requirements that are to be contained in regulations issued by the Department of Business Development. The law itself specifies that the minimum capital shall in no event be less than Baht 3 million. By policy of the Department of Business Development, the minimum capital is 25% of projected operating expenses during the first three years of business or Baht 3 million, whichever is greater. These minimum capital requirements are also applied to "treaty companies" operating under the terms of the Thai-U.S. Treaty on Amity and Economic Protection.

B. Maximum foreign shareholding for List Two activities:

Under the FBA, at least 40% of the capital of an applicant seeking a license to engage in an activity under List Two must be held by Thais. However, under special circumstances the percentage of Thai shareholding can be reduced to as low as 25%. Such reduction requires special approval from the Thai Cabinet.

C. Factors for consideration in granting a Foreign Business License

Not all applicants meeting the minimum capital requirement will be granted a Foreign Business License. The decision as to whether to grant the license will be at the discretion of the Thai Cabinet for List Two activities or the Director-General of the Department of Business Development for List Three activities. The following factors are considered in implementing the FBA:

1. the advantages and disadvantages to Thailand's safety and security;
2. economic and social development;
3. public order and good morals;
4. the art, culture and traditions of Thailand;
5. natural resource conservation;
6. energy and the environment;
7. consumer protection;
8. size of the proposed enterprise;
9. impact on employment;
10. technology transfer;
11. research and development
D. Procedures

The FBA provides that all applications for Foreign Business Licenses be submitted to the Director-General on forms that will be prescribed by regulation. The application will be then be taken under consideration by the Thai Cabinet or the Director-General Department of Business Development, as appropriate. The consideration period should not exceed 60 days, however an extension of up to an additional 60 days can be granted.

V. Penalties

The penalties prescribed for violations of the FBA include one-time fines ranging from Baht 100,000 to 1,000,000 and daily fines of from Baht 10,000 to 50,000, as well as imprisonment for a period not to exceed three years.

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