Foreign Investors using Thai Nominee Shareholders in Limited Companies in Thailand
Generally foreigners or foreign companies are restricted or prohibited to operate businesses in Thailand without a license or permit. Foreigners who want to operate restricted businesses can in some cases have a license or permit granted in accordance with the Investment Promotion Act (Board of Investment of Thailand), the Foreign Business Act (Department of Business), a treaty or other laws.
Foreigner or foreign companies can operate restricted businesses with approval of the Thai government under a special act or treaty. These companies will operate the business as a foreign company in Thailand. These companies do not have the problem of Thai nominee shareholders (they could be 100% foreign owned). Nominee shareholding structures are used by foreigners who operate a restricted or prohibited business for foreigners through a majority Thai owned but foreign controlled Thai limited company. The nominee shareholding structure in a Thai company is commonly used by foreigners to circumvent the restrictions under the Foreign Business Act.
Shareholders
A Thai shareholder is an individual or another Thai company or juristic entity who owns one or more shares of the company. Thai shareholders may earn dividends and shareholders may have ordinary or preference shares. All shareholders in the company must have voting rights. Bearer shares (meaning shares in the company which are transferable by delivery of the share certificate) are not allowed in Thailand. Shares are registered in a person's or juristic entity's name and are transferred at the Department of Business Development and not by handing over the share certificates.
The use of nominee shareholders is prohibited under the Foreign Business Act.
Section 36 Foreign Business Act; 'A Thai national or juristic person that assists a foreigner in avoiding the Foreign Business Act by means of holding shares as a nominee or being a nominal owner of the company, shall (including the foreigner allowing Thai nationals or juristic persons to do so) be liable for a fine of 100,000 to 1,000,000 Baht and/ or imprisonment of up to three years'.
The investment structure of 51% Thai and 49% foreign is in compliance with Thai law as long as the Thai partners or shareholders are real investor/ shareholders and not nominees or a proxy for the foreign investor merely to have the company classified as a majority Thai owned company.
Definition of a nominee shareholder under the Foreign Business Act
Under present law (section 4 Foreign Business Act) the test who invested the capital is effectively the bar on the use of Thai nationals or holding companies as nominee shareholders by foreigners in a Thai company. The Thai partners or shareholders in the partly foreign owned company must actually invest or at least be able to invest his share in the capital of the company. Proof thereof will be required under the Business Registration Rules when forming the company. Shareholders must submit evidence of financing used to hold shares, including bank statements and other documents.
Besides the capital investment requirement by the Thai shareholders there is no enforced definition of what constitutes a Thai nominee shareholder.
There have been plans in the government to amend the foreigner definition in the Foreign Business Act, and by this way solving the nominee problem in Thailand. Under current laws and policy it is relatively simple for foreigners to operate restricted businesses by using Thai nominee shareholders and controlling the company through preference shares and majority voting rights in the company.
Any suspected use of nominee shareholders by foreigners to circumvent the Foreign Business Act should be forwarded to the police and following to a court to determine if in the specific case nominees are used by the foreigner. We have not heard of any such case or cases in which a higher court defined the term nominees under the Foreign Business Act. There was an attempt to bring the Shin corp takeover by Temasek to court to determine if nominees were used by Temasek in the takeover of the Thai telecom giant Shin Corp, however this case never made it to court.
The solution to the nominee problem
It is not the government's policy to investigate existing partly foreign owned companies operating restricted businesses, but it is also not fully ignored. Investigations happen on a case-by-case basis. The nominee problem could be solved by the government by enforcing a stricter definition of nominees and to start investigating existing partly foreign owned companies, or by amending the foreigner definition under the Foreign Business Act by including voting right and management as a criterion in defining a company foreign.
The most likely solution is an overhaul of the Foreign Business Act and the foreigner definition (i.e. how a Thai company is deemed a foreign company). This will likely affect existing companies as the directors in the company must rotate and be re-elected yearly. Foreigners would simply not be eligible for re-election and loose control in the company.
Sample definition of nominee
a) A nominee shareholder, being either a natural person or juristic person, who is registered as the holder of shares in the partly foreign owned company but who does not actually invest in the company, nor has the financial means to pay up his shares, nor has a beneficial interest in the company, nor has any form of control in the company.
b) Is there an intention to evade the law? Indicators would be:
- how is management control structured,
- is there a loan investment supplied or guaranteed by the foreigner (did the Thai shareholder actually invest in the company),
- unbalanced voting rights attached to shares held by the foreigner,
- and the flow of funds from dividends paid by the company to the shareholders.
It is be up to a court to detirmine if actually nominees are used under the Foreign Business Act.
Foreigners who want to operate a business through a majority Thai owned limited company should comply with the business registration rules, which are aimed at preventing the use of Thai nominee shareholders. Generally these rules are circumvented and the share structure is changed after the formation of the company. It is recommended that the company is formed with the shareholding structure as it will operate the business under, even if this means a certain scrutiny of the Thai shareholders when forming the company.
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