According to the statistics published by Japan External Trade Organization in 2021, Thailand was the top country where Japanese companies, mainly in the automotive industry, made direct investments. Even in the midst of the coronavirus pandemic, Thailand is still appealing for Japanese companies in terms of investment. However, they tend to face difficulties, such as not being compliant with foreign investment regulations or missing the opportunity to apply for BOI (investment incentive benefit), due to the fact that the language and laws are different to Japan and not many local law firms are reliable or competent. So they often don’t get enough guidance from the local law office they have contacted and end up expanding their business into Thailand without being fully prepared. Both of our Japanese and Thai offices assist such clients and Japanese lawyers offer consultations from various angles other than corporate registration so that they can expand their business into Thailand at ease.
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Usually, Japanese companies that aren’t familiar with the laws and regulations in Thailand contact a local law or accounting firm when they establish a local representative office or corporation in the country.
Unfortunately, most of these local law or accounting firms don’t have an office in Japan and aren’t reliable. All they offer is to apply for corporate registration on behalf of their clients. They don’t go above and beyond for the clients and educate them about foreign investment regulations or whether they qualify for BOI (investment incentive benefit).
Most of these local law/accounting firms don’t translate or explain the corporate registration to the clients in Japanese, so it’s not always guaranteed that such registration is done as intended. There’s a risk that a person from the local law/accounting firm pretends to be a representative of the client’s business and steals funds. As a result, such clients could end up having to redo the registration or being unable to operate their business as planned.
In order to avoid those risks, it’s vital to have a support system both in Japan and Thailand, so that such clients can be equipped with the knowledge and information needed to expand their business into Thailand. Consulting with Thailand-based experienced Japanese lawyers who are reliable and apply for permits/approvals required for the business as well as benefits is also crucial.
It takes about 2 weeks to prepare documents for corporate registration in Thailand. It's highly likely that the documents would be accepted without issues as long as they are submitted with all the information required. However, it’s necessary to consider what kind of company is going to be established depending on the type of business beforehand. It might also be required to consider a shareholder structure/capital amount, appoint a Thai company if required, and prepare a joint venture agreement.
There are two things that those companies that are expanding their business into Thailand must consider. One is the foreign investment regulations and the other is the investment incentive benefit. Thailand has foreign investment regulations under Foreign Business Act and depending on the industry such as domestic conveyance. Therefore, they need to consider whether the approval under Foreign Business Act can be granted while being compliant with the industry foreign investment regulations if there’s any. Then they will need to decide on a shareholder structure as well as appointing a Thai company if required. It would take 6 months from preparing to apply for the permit to having the application approved under Foreign Business Act.
When the business qualifies for BOI (investment incentive benefit), they might benefit from tax benefits, being exempt from the foreign investment regulations under Foreign Business Act, and relaxed working conditions applied to Japanese expatriate employees. This is something that needs to be considered before corporate registration in Thailand. BOI (investment incentive benefit) will be explained later in this page. It would also take 6 months from preparing to apply for it to having the application approved.
The following is the procedures for corporate registration.
Booking a company name- 3 days required
The booking is valid for a month. Therefore, corporate registration should be completed within the time frame although rebooking can be done in case the initial booking is invalid after a month.
Registering "Memorandum of Association" 3 days required
Since 2008 when Civil and Commercial Code was amended, "Memorandum of Association" can be registered at the same time as corporate registration with the approval of all the founders and shareholders after an organisational meeting (See #3). Therefore it's common to register them both at the same time. In order to prepare "Memorandum of Association", the following needs to be decided.
Organisational meeting and corporate registration 1 to 14 days required
An organisational meeting is held to decide and approve of the cost of corporate registration, initial shareholders, representative director and directors, and by-laws. As mentioned above, #2 and #3 take place simultaneously when all the founders and shareholders agree.
Opening a corporate bank account
Normally, submitting the minutes of the board of directors meeting is required. If the shareholders include a parent company or other corporations, a certified copy of the parent company's commercial registration and its translation is also required. Some banks may ask for a translation certified by a notary office in Japan or a translation certified by a Thai consulate. Additionally, information on the parent company's shareholders may also be required along with tax return accompanying documents and their translations.
Submitting a bank certificate that confirms the payment of capital to the Board of Trade of Thailand
Depending on the amount of capital, this must be done within 15 days of the corporate registration.
Tax Registration - The Revenue Department or regional office of the Ministry of Finance
If a business is subject to VAT or specific business tax, it must be registered for VAT (not required if it’s not expected to generate revenue) within 30 days before commencing operations and for specific business tax (not required if it’s not expected to generate revenue) within 30 days after commencing operations.
Other required procedures
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.
Company types
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.
Procedures for obtaining visas/work permits
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.
Establishing a BOI company
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.
Joint venture company
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
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.
Legal affairs/compliance
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.
Foreign investment restrictions under Foreign Business Act
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.
Dispute and arbitration procedures
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.
Withdrawal procedures
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.
As we have seen above, when expanding a business into Thailand, it is necessary to gather and investigate information on various laws and regulations. However, as the source of information is in Thai and mainly based on research conducted by Thai lawyers, it is not possible to confirm the reliability of the information and research results unless the party receiving the information and research results is literate. In the case of joint ventures with Thai companies, it is also necessary to conduct investigations in advance through experts such as Thai lawyers, and in this respect, there are also issues such as reliability as described above.
Furthermore, most law firms in Thailand, including large firms, have specific areas of expertise in each field. In most cases, they are familiar with labour issues, but not with company law, or do not know anything about taxation. Large firms may be able to have a number of lawyers present for consultation, but this is very costly, and in ordinary law firms, the client only gets answers to the questions they have asked.
In addition, there have been recent incidents where consultants asked to set up companies in Thailand have embezzled funds without doing so, or have not set up companies as intended by their clients. Therefore, when preparing to expand a business into Thailand, it is recommended to contact a lawyer in both Japan and Thailand who can provide legal advice and assistance from a cross-sectional and multifaceted perspective, including taxation, labour, company law, foreign capital spiritedness and BOI.
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