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Foreigners can safely invest in leasehold properties
and are unlikely to run afoul of the Foreign Business Act (FBA) in its current
state or even if the changes planned by the current government are implemented,
according to Marcus Collins, a partner with the Bangkok law firm McEvily &
Collins.
The FBA does contain a number of business activities that have a direct impact
on the property sector, chiefly property development and rental of property.
Rental is going to be in Annex 3 which is a services provision and land
development is in Annex 1.
An important change being considered is that the majority of directors need to
be Thai but Mr Collins explained that the FBA in its current form does not have
such a provision.
"So you could argue that if it doesn't deal with that, why make it tougher than
it is? Why make it tougher than the original intent of the purpose of this law,
a law ... that was put in place by a military dictator in the 1970s?"
Legal interpretations still hazy, says Mr Collins
The original law, which is the FBA as it stands today, says a company is Thai if
the majority of the shares are held by Thai shareholders, which is minimum 50%
plus 1 share, for the purpose of engaging in activities in Annexes 1, 2 and 3.
This is not the same as what the Land Code says, in which the split has to be
49-51%.
"It doesn't say they have to have the majority of the votes in a shareholders'
meeting, nor does it say you have to have majority of Thai directors in a
company."
However, Mr Collins explained that if the changes are implemented it would allow
existing companies that have different shareholding ratios and fall under Annex
3, which includes rentals, to be grandfathered. "So any company that now has a
leasehold development with different rights for different types of shares would
be okay because it wouldn't have to change that."
However, the nominee issue persists because a company would still have to have
Thai shareholders who are not considered nominees.
"That issue doesn't go away ... either in the Land Code or the FBA. That issue
has not been addressed properly in any of the discussions that we have seen in
the past year or so, [under] the military government that has been in place or
even previous to that when the whole debate started about Thaksin Shinawatra and
Shin Corporation.
"So it's funny, it's been a year now and nobody has yet come out from the
government with a statement. 'Okay, we believe the nominee is the following
person, we consider the following structures to be nominee."'
Mr Collins added that this was an issue that must be resolved even if the
authorities abandon FBA amendments.
"If we focus on the rumour for a moment, some Democrat Party members have come
out with statements ... that first they felt it was wholly inappropriate that a
temporary military government would start messing around with laws that have
such an enormous impact on the Thai economy. So their first statement was.
'Apart from all this discussion about amending the FBA, we feel that actually
this current government shouldn't really start messing with this law."'
If the Democrat Party is part of the next government, it is possible that it
could opt to deal with sensitive business issues by means of specific laws
already on the books, for banking, insurance or other sectors. "That is the way
they should do it because it would be a much more targeted approach," says Mr
Collins.
However the nominee issue lingers in the Land Code, which has not been amended
for many years.
Mr Collins pointed out that over the years the Interior Ministry has instructed
Land Department offices how to deal with land acquisitions by companies that are
partially owned or run through a board of directors by foreigners.
"And we have that experience in the past year or so. ... It has made it a lot
more difficult to transfer land, there is a lot more evidence that has to be
supplemented to show that Thai shareholders in these companies have really
invested money in these companies."
So while action has been taken in relation to the usage of a Thai company to
purchase land, Mr Collins observed that the Land Code itself hasn't really been
amended or any regulations issued that clarify what the Interior Ministry feels
is the definition of a nominee.
"We have to kind of guess. The example I give a lot of people is if you are a
foreigner and legally married to a Thai woman and your Thai wife holds shares in
your company, which is very usual to do anywhere in the world _ people operate
private business, their wife is often a shareholder, their children are often
shareholders _ is that a nominee?
"The wife may not physically invest money but if you are married, in a lot of
legal systems my money is her money, her money is my money, so why wouldn't we
share the money? That is one example."
He offers another example of a small company with registered capital of two
million baht, which has invested in property worth 50 million. It is entirely
legal under Thai law and is done all the time, but you have to show the Land
Department where the rest of the money comes from. But it is not necessarily a
problem, as the money may be lent by a director or a shareholder or even a bank.
"This still has to be under the Land Code of 51% Thai shareholding but the Land
Department doesn't say anything about the issue of differential in voting
rights," says Mr Collins. "It doesn't say you cannot have _ as the bill for the
FBA says _ different classes of shares. The Land Code just says if you are using
a Thai company that buys property you have to have 51% of the shares registered
in the name of Thai nationals.
"So it doesn't say anything about the directors having to be Thai or voting
rights having to be one share one vote ... but it also doesn't say what the
nominee means while mentioning that it nominee arrangements are illegal."
In this company with two million baht, the Thai shareholder holds shares worth a
little more than a million but it could be insisted that the Thai shareholder
has to invest that money himself or borrow that money from somewhere to truly
invest that money in the company.
"We as a firm take the position that if you have this kind of a structure, then
yes, you need to make sure that the Thai shareholder indeed invested that money
in the company and you need to show evidence that that money was paid up for the
shares. Otherwise you do run the risk that that Thai shareholder would be
considered a nominee.
"But would it be necessary that the Thai shareholder invest 51% of the overall
project cost? If you can leverage a project by borrowing money from elsewhere, I
don't see that that would be a requirement but these types of questions we don't
have an answer to. I know that a number of our colleagues take the same position
as we do and say that as long as you make sure that your Thai investor invests
the money in the shares _ at par value of the shares _ he or she shouldn't be
considered a nominee.
"But after all these discussions this past year or so, some of us are not even
sure anymore whether that is actually the correct statement. So in that sense
there remains a lot of uncertainty."
Despite the vagueness, Mr Collins says he sees no rush by people to get out of
freehold situations just because they are afraid something will happen.
The fact remains, he says, that people are selling because they can make
profits, and prices in the likes of Phuket, Samui and Krabi are still going up
substantially.
source: Bkk Post
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