ALG＆Associates (Thailand) Co., Ltd. -Legal and tax services in Thailand-

Clients that are considering their business expansion into Thailand aren't familiar with the laws, regulations and affairs in the country.

That said, there are very few experts, including local consultants and Thai lawyers, who have a systematic understanding of the laws and regulations in Thailand. When expanding their business into Thailand, it is necessary to not only establish a company, but also to make preliminary preparations and consider the type and structure of the company according to the nature of the business in the country. Things that need to be considered before establishing a company include checking the laws and regulations in Thailand with regard to the nature of the business, applying for permits/approvals in advance, appointing a Thai company, drawing up a joint venture agreement, and the appropriate type/structure of the company based on these factors. Getting the support from lawyers who are familiar with the laws, regulations, affairs in Thailand is essential to complete these tasks.

When expanding a business into Thailand, it is essential to establish a company, such as a branch or a local corporation in the country. It is necessary to consider the following depending on the type and structure of the business planned in Thailand.

Firstly, the above-mentioned matters should be considered and decide whether to establish a company wholly owned by foreign (Japanese) capital or a joint venture with a Thai company. If the company is subject to the restrictions of Foreign Business Act, it is possible to establish a company or a branch with 100% foreign (Japanese) capital after obtaining a permit from the Ministry of Commerce. If the company qualifies for an investment incentive benefit, they should apply for BOI (investment incentive benefit) and obtain the permission before establishing a company.

There are several types of companies when it comes to establishing one in Thailand. Depending on the type of the company, details that need to be prepared in advance differ. Consulting with a lawyer in regard to this matter beforehand is highly advisable.

Foreigners such as Japanese expatriate employees must obtain both a work visa (business visa) and a work permit to work in the country. If a foreigner is found to be in Thailand to work without a work visa or work permit, he/she will be fined for illegal stay and, in extreme cases, ordered to return home or banned from entering Thailand for a certain period of time. Therefore, it is necessary to prepare for the work visa and work permit applications on a regular basis. This includes having the required documents ready in advance such as annual and monthly tax declarations of the company, social insurance declaration documents, company registration documents and financial statements. In addition, there are conditions imposed on the work permit, such as the amount of capital and the number of Thai employees. It is important to check and make sure these conditions are met each time the permit is renewed.

If one of the required documents is missing, or one of the conditions isn’t met just before the expiry of the work visa or work permit, the applicant may not be able to extend the permit and may be forced to leave the country. In some cases, expatriate employees are later found to have stayed in Thailand illegally for a long period of time because their work permits have expired when they re-enter the country. It is therefore essential to ask a corporate lawyer who is familiar with these procedures to continuously monitor expatriate employees’ work visas and work permits on a regular basis.

In order to expand a business into Thailand, It is necessary to consider whether the business to be carried out in Thailand qualifies for the Thai Investment Incentive Benefit. It’s also called BOI, which is the acronym for the Board of Investment, the English name of its governing body. Those companies that are granted investment incentives to carry out business are also known as BOI companies.

BOI includes tax and non-tax benefits as described below. Both provide relaxed regulation benefits for foreign-invested companies and employing foreigners, so when a business qualifies for BOI, it’s encouraged to take advantage of it. When applying for BOI, various measures need to be taken to ensure that the scope of benefits is as wide as possible. There are strict conditions regarding the decision of the investment amount and the timing of investment. Unfortunately, local staff/consulting firms are rarely able to provide this kind of advice when they are asked to apply for BOI. As a result, there are many cases where an investment is not included in the investment amount, which is one of the conditions for getting BOI granted, and additional investment is unavoidably required. Or another BOI application is required immediately afterwards because the scope of business covered by BOI is too narrow. In the worst case scenario, the BOI application may be rejected. To avoid such situations, prior consultations with a lawyer who is knowledgeable about BOI applications is vital.

[Benefits of being approved as a BOI company] The following BOI benefits are granted upon approval as a BOI company.

When expanding a business into Thailand, many joint ventures or acquisitions (M&A) with Thai-shared companies already operating in Thailand often take place in order to avoid Foreign Business Act being applied and gain access to the Thai market and to smoothly acquire manufacturing facilities and employees.

The joint venture or acquisition of a Thai company when correctly done can reduce the costs of business expansion and give a significant advantage in subsequent operations and in increasing sales in the Thai market. The details below are about joint venture companies and M&A in Thailand.

A company established jointly with a local company, such as a Thai company, is called a joint venture company. Under Thai tax law, when it’s not jointly established with a local company, but which carries on business in Thailand through joint investment, it may be referred to as a joint venture entity and be taxable, but the difference between a joint venture company and a joint venture entity is that the former establishes a company in Thailand, whereas the latter does not establish a company in Thailand but carries on business in Thailand through a partnership agreement or similar arrangement with a Thai company. It should be noted that in Thailand, both of them are sometimes referred to as joint ventures.

One of the advantages of establishing a joint venture company is that Japanese companies can avoid being subject to foreign investment regulations. Other advantages include having access to the Thai market and factories and equipment already in operation. However, as the local Thai company needs to hold shares of the joint venture company, there must be more than one local Thai company to hold shares and rules regarding the operation of the joint venture company must be incorporated in advance. Therefore, when establishing a joint venture company with a local Thai company, it is necessary to draw up a joint venture agreement that sets out appropriate rules for the operation in advance.

When drafting a joint venture agreement, legal reviews should be carried out from a medium to long-term perspective by a lawyer who is familiar with Thai joint venture companies, taking into account the appropriate rules to be set for the operation in Thailand and the subsequent exit strategy.

M&A stands for mergers and acquisitions. M&A when expanding a business into Thailand is merging with or acquiring a local Thai company that is already carrying out business in Thailand. The following three methods are available under Thai law when it comes to mergers and acquisitions.

Absorption-type mergers are not yet allowed at present, although they are expected to be brought in through a future amendment to the law. In either case, when conducting a M&A, the financial and legal risks of the local Thai company must be properly assessed and the price of the merger or acquisition of business or shares must be calculated. It is therefore essential to conduct financial and legal due diligence on the local Thai company prior to the M&A, and to draft an agreement for the subsequent execution of the M&A.

Although they are less detailed than Japan, Thailand also has laws and regulations regarding taxation, labour, foreign investment, civil (company law) and criminal matters, unfair competition prevention and intellectual property rights, personal data protection, and construction/environmental regulations. Violating these regulations can cause concrete damage to companies operating in Thailand or force them to suspend their business. And it may also affect the headquarters in Japan due to a compliance breach. There is also a risk of criminal penalties for Japanese expatriate employees depending on the laws and regulations violated.

Companies established in Thailand must operate in compliance with the various laws and regulations surrounding Thai businesses. In 2019, the Personal Information Protection Act has been introduced in Thailand, and Thai subsidiaries are required to create systems to protect personal information in the same way as Japanese headquarters. Furthermore, when the Thai subsidiary’s parent company is Japanese, it may be subject to extraterritorial application of the Japanese Antimonopoly Act and the Unfair Competition Prevention Act, as typified by the offence of bribery of foreign public officials. In addition, as Thailand is far from Japan with a different language and culture, it is necessary to establish various internal controls to prevent fraud and a system that enables continuous monitoring. In particular, since the coronavirus pandemic, Japanese companies have reduced the number of Japanese expatriate employees from their Japanese headquarters. There is a growing demand for internal control and monitoring systems for Thai subsidiaries after they have expanded their business into the country, such as outsourcing to Thai law firms that work closely with Japanese law firms/corporations.

In Thailand, Foreign Business Act (FBA) prohibits foreigners, foreign corporations and companies that directly or indirectly hold 51% or more of the shares or equity from carrying out business activities in the country in principle, except in the manufacturing and exporting sectors. Under Foreign Business Act (FBA), prohibited businesses are divided into three categories: 1 Businesses prohibited from operating by foreigners for special reasons; 2 Businesses affecting national security, culture, tradition, local crafts, natural resources and the environment; and 3 Businesses not ready to compete with foreigners. For businesses that fall under 3 of these categories, foreign corporations and foreign-invested companies are allowed to operate in Thailand after obtaining a foreign business permit (business licence) from the Ministry of Commerce. However, the necessity and the existence of competition in Thailand are the factors to be considered in order to be granted a foreign business permit (business licence).

The process from applying for a foreign business permit (business licence) to obtaining it takes approximately six months, and the client applying for the permit must also undertake various tasks, such as preparing a business plan and business description. However, most experts who are asked to apply on behalf of their clients often do so without considering the prospects of obtaining a licence, or their applications often fall foul of 1 and 2, resulting in a failure to obtain a licence. It is therefore recommended that the application for a permit should be made after a prior consultation. A thorough review and explanation of the prospects of obtaining a permit should be given by a lawyer who is familiar with the application procedures under Foreign Business Act.

In the event that a company that has expanded their business into Thailand is faced with an unavoidable dispute or has to withdraw from Thailand, there are regulations regarding dispute resolution and withdrawal procedures in the country. These procedures are difficult for the general public to understand and are rarely explained by local consultants. An overview is given below.

In the event of a dispute with a Thai company, it is common for the company to file a court case or respond to a court action, as is the case in Japan. Japanese companies in Thailand do not often file court cases, but they may be sued by Thai companies they subcontract with or neighbouring factories. In Thailand, it is common to file a suit in court and discuss the matter in court proceedings before negotiating for a long period of time when parties are unable to reach an agreement after a while. So lawsuits aren’t as rare as in Japan. In addition, even Japanese companies in Thailand, which are usually reluctant to file a civil court case, may need to file a civil court case in order to avoid the expiry of the statute of limitations and to record the write-off of bad debts as deductible expenses when collecting accounts receivable. Furthermore, companies must prepare for a tax court action if they are subjected to a taxation penalty they do not agree with, and for a labour court action if they are sued by workers for unfair dismissal or other reasons.

In addition to these court proceedings, Thailand also offers an arbitration system. The premise is that the parties concerned have agreed to use the arbitration system. Even if an arbitral award is received from an arbitral institution outside Thailand, enforcement based on it can in principle be carried out in Thailand. If an arbitral award is received by a Thai arbitration institution, it is possible to enforce it in another certain country. Dispute resolution by arbitration is expected to resolve disputes more quickly than in court, as the decision is made by experts in the industry involved in the dispute (arbitrators) and the arbitral award is a final decision. However, costs are often higher than in court, including the fees of the arbitrators and the lawyers in charge of this.

Trial representation in Thailand is exclusive to Thai lawyers. The reason why we say Thai lawyers here is that only Thai nationals are allowed to practise as lawyers in Thailand. However, compared to the Japanese bar examination, qualification as a lawyer is granted after a very simple training and examination, so Thai lawyers' abilities and fees vary greatly. Not many Thai lawyers are able to explain the prospects of a court case or the flow of procedures to the satisfaction of Japanese companies. Legal grounds for complaints and pleadings are also often vaguely explained. Thai lawyers' ethics are also not as thorough as those of Japanese lawyers. In the worst case, they may even take the other party's side before you know it. If the Japanese company lacks literacy, there is a risk of unexpected results, and it is also very difficult to appoint a reliable lawyer. Therefore, it is advisable to choose a reputable firm that has a Japanese lawyer who is familiar with the Thai court system and also has a law office in Japan.

If a business in Thailand has unfortunately not been successful and they are considering withdrawing from Thailand, they will most likely withdraw by dissolving or liquidating the Thai company they have established themselves. Alternatively, there may be cases where the Thai company is acquired by another company and the company withdraws.

Dissolution and liquidation procedures of a Thai company must be approved by a majority of shareholders by a special resolution at a general shareholders' meeting. However, if the Thai company is a joint venture, prior discussions are often held to negotiate the purchase of shares held by the joint venture partner. In addition, if the Thai company to be dissolved has debts, it cannot liquidate itself unless the Japanese parent company sends funds to liquidate it voluntarily. In this case, the company will have to move to a procedure called special liquidation and liquidate itself under the same procedure as a bankrupt company. In the case of special liquidation, as a result of the bankruptcy procedure being applied, it takes a very long time - up to 10 years - to complete the whole process. Many Japanese companies therefore voluntarily liquidate their debts and register themselves as liquidated in order to avoid it. In addition, when dissolving or liquidating a company, other issues are often dealt with simultaneously, such as

As mentioned above, the key to a smooth withdrawal of a company from Thailand is to deal with a variety of issues across tax, labour, company law and bankruptcy law in a unified manner. Therefore, it is essential to have the advice and support from a lawyer who is familiar with various issues, not just the dissolution and liquidation procedures.