Foreign Direct Investment in Thailand
By Lukas Baumgärtner, Mag. Iur, LL.M., Attorney at Law at Luther Rechtsanwaltsgesellschaft (Bangkok and Yangon)
I. INTRODUCTION
Thailand has demonstrated a significant trajectory of economic development over recent decades, with foreign direct investment (ʺFDIʺ) being an important contributor to this success. FDI inflows stood at USD 10 billion in 2022, down by 31.5% compared to the USD 14.6 billion recorded one year earlier but still above the three-year average before COVID[i].
In the same period, the stock of FDI reached USD 306.1 billion, around 57.1% of the country’s GDP. As per the Thailand Board of Investment (ʺBOIʺ) figures, applications for investment promotion in 2023 reached a five-year high of USD 24 billion in combined value, an increase of 43% from the previous year’s number.
Thailand’s strategic position in Southeast Asia, combined with its relatively advanced infrastructure and skilled workforce, positions it as an attractive destination for FDI, which positively influences its overall economic growth. As of 2024, the Thai economy continues on a recovery path from the COVID pandemic. The Bank of Thailand projects a GDP growth of 2.6% for 2024, driven primarily by private consumption, tourism, and an increase in FDIs, particularly in the automotive sector.
Despite the reliance on FDI for economic expansion over the years, foreign individuals and entities face various prohibitions and restrictions when attempting to enter the Thai market. Numerous Thai laws, notably the Foreign Business Act B.E. 2542 (1999) (ʺFBAʺ) impose prohibitions and restrictions on foreign participation in certain business sectors.
II. REGULATORY LANDSCAPE
The main source of legislation regulating FDIs in Thailand is the aforementioned FBA.
The term ‘foreigners’ under the FBA is defined to include not only non-Thai individuals and legal entities established under the law of another country, but also locally incorporated entities where foreigners own 50% or more of the total issued shares[ii].
The FBA generally prohibits and restricts foreigners from operating in more than 40 categories of specified businesses activities, unless they have successfully obtained a foreign business license, which in practice is not easy to obtain, or unless they are otherwise exempted from the restrictions under the FBA[iii].
The FBA categorizes business activities that are prohibited or restricted into three annexed lists. In general, foreigners are prohibited from engaging in any business activities listed under List One.
List Two activities are available for foreigners approved by the Council of Ministers. In practice, however, we are not aware that such approval has been granted within the last 20 years.
Activities listed under List Three require a foreign business license, issued by the Foreign Business Commission, chaired by the Permanent Secretary of the Ministry of Commerce, subject to the criteria set-out below.
Additionally, the FBA allows for several exemptions from these stringent restrictions, including:
- Obtaining approval from Thailand’s Board of Investment (ʺBoIʺ) or the Industrial Estate Authority of Thailand;
- Fulfilling the minimum required capitalization for specific businesses;
- Foreign investor qualifying under relevant treaties; and
- Gaining exemptions issued through ministerial regulations.
Some laws have their own unique (stricter) definition of foreigners that are subject to regulation. For example, the Agricultural Land Lease Act B.E. 2524 (A.D. 1981) (as amended in 2016) defines foreigners as companies established under Thai law but 25% or more of whose shares are owned by other foreigners, or 25% or more of whose shareholders are foreigners.
Other laws limit FDI in companies that are qualified to obtain a certain business licence from the relevant regulator under those laws by using a different shareholding threshold and other tests. For example, to apply for a tourism business licence under Tourism Business and Tourist Guide Act, B.E. 2551 (2008) total issued shares in the applicant companies must be held directly by Thai nationals, at least 50% of the board of directors of the applicant companies must be Thai nationals and authorised directors of the applicant companies must also be Thai nationals.
In addition, the Act Promulgating the Land Code B.E. 2497 (1954) generally prohibits foreigners from owning land in Thailand, with very limited exceptions. Generally speaking, foreigners may own only land plots located within authorised industrial estates or land plots specially approved by the BOI for use in BOI-promoted investment projects. The same foreign land ownership prohibition also applies to locally incorporated companies more than 49% of whose shares are owned by foreigners, or more than 50% of whose shareholders are foreigners.
III. INVESTMENT SCREENING PROCEDURE
- Screening by the Foreign Business Commission
The government agency directly responsible for the overall compliance, licensing and enforcement of the rules and regulations set-forth under the FBA is the Department of Business Development under the Ministry of Commerce. Section 5 of the FBA sets out the main principles for allowing foreigners to operate restricted businesses in Thailand as follows:
“In granting permission to foreigners for the operation of businesses under this Act, regard shall be had to advantageous and disadvantageous effects on national safety and security, economic and social development of the country, public order or good morals, national values in arts, culture, traditions and customs, natural resources conservation, energy, environmental preservation, consumer protection, sizes of undertakings, employment, technology transfer and research and development.”
Even though it is being stated in the 2022 annual report of the Foreign Business Commission[iv] that the Commission’s goal is to create a balance between foreign investment promotion and Thai business protection, in practice, protectionism still plays a very critical role in determining whether a foreign business licence would be granted to any particular applicant.
In practice, the Foreign Business Commission would issue a foreign business licence to an applicant only if the Commission believes that the overall Thai economy would somehow benefit from the proposed business of the applicant. For example, the applicant’s business requires high FDI into Thailand, uses advanced technologies with potential technology/knowledge transfer or would create a large number of local employment opportunities.
- US-Thailand Treaty of Amity
A notable exemption under the FBA applies to US investors under the Treaty of Amity and Economic Relations between the Kingdom of Thailand and the United States of America from 29 May 1966[v]. This treaty allows US citizens and companies incorporated under US laws, to own and operate businesses in various sectors of the Thai economy without the restrictions typically imposed by the FBA.
Companies incorporated under the Treaty of Amity in Thailand can operate as fully foreign-owned entities without the requirement to obtain a Foreign Business License or Board of Investment promotion. Instead, they are only required to apply for a Foreign Business Certificate, which permits them to engage in certain economic activities in Thailand free from the usual limitations on foreign companies.
To be eligible for the protections offered by the Treaty of Amity, the Thai company must be majority-owned (over 50%) by US citizens or US entities, and more than 50% of its directors must be US citizens.
Please note that this type of treaty is unique to the relationship between Thailand and the United States. There are no similar treaties or specific regulations that offer equivalent benefits to European investors.
- Non-compliance under the FBA
The Department of Special Investigation (ʺDSIʺ) of the Ministry of Justice also has the authority to investigate potential violations of the FBA that are criminal offences. The DSI is generally responsible for investigating complex criminal matters or criminal matters that have or could have a severe impact on the general public.
The DSI is usually involved in investigations into the purported use of illegal Thai nominees by foreigners to circumvent foreign direct investment regulation under the FBA and foreign land ownership restrictions under the Land Code. The DSI works closely with the DBD and the Land Department on such investigations.
A violation of the FBA, such as operating a restricted business without a foreign business licence or using a Thai nominee to own shares in a local company to circumvent restrictions, could result in the imposition of severe penalties against the offender, including a monetary fine of between 100,000 baht and 1 million baht or a maximum imprisonment term of three years, or both. In cases where the offender is a company, the company directors and executives, who have responsibility for the violation of the FBA by the company, are also subject to the same penalties. Further, offenders would be ordered by a Thai court to cease business operations in Thailand that are in violation of the FBA; a failure to comply with such a court order would subject the offender to an additional fine of between THB 10,000 and THB 50,000 per day throughout the period of the violation.
IV. TYPICAL INVESTMENT STRUCTURE
In general, most foreign investors tend to establish a private limited company under the Civil and Commercial Code B.E. 2535 (1992) (ʺCCCʺ) for their business ventures in Thailand. The CCC itself does not require any minimum capital or contain requirements on the nationality or residency of directors. The CCC requires only that private limited companies have a minimum of two shareholders, one director and a registered address in Thailand.
However, company legal structures could be affected by requirements under special laws that regulate foreign direct investment, including the FBA. For example, if a private limited company established under the CCC is considered a foreigner under the FBA and it wishes to obtain a foreign business licence, it would need to have, at the very least, minimum capital of THB 3 million (approx. EUR 75,000) and at least one director (of any nationality) resident in Thailand and legally responsible for the licensed business operations.
It is quite common for foreigners to form an incorporated joint venture with Thai parties by structuring a joint venture company in such a way that it is majority owned by the Thai parties so that the company is not considered ʺforeignʺ and hence is not subject to the numerous restrictions under the FBA and other laws. It is generally possible for foreigners in these circumstances to maintain control over the joint venture company (to a certain degree) through various mechanisms, such as by inserting into a joint venture agreement veto rights or consent requirements in connection with important board and shareholder matters.
V. MERGER AND ACQUISITION
Furthermore, merger control is new territory under Thai law as it started to be implemented only in late 2018 pursuant to the Trade Competition Act B.E. 2560 (2017) and regulations issued thereunder.
Mergers and acquisitions of businesses in Thailand that have a significant share in a particular market and, under the current regulations, a minimum turnover of THB 1 billion (approx. EUR 25 million) in the previous fiscal year may require a pre-merger approval from the Trade Competition Commission or a post-merger notification to the Commission, depending on the circumstances[vi].
There are no special rules applicable to foreign acquirers at present. However, the consequences of a target business becoming a foreign entity as a result of an acquisition tiggers considerations under numerous Thai laws, including the FBA (please see above).
[i] United Nations Conference on Trade and Development, World Investment Report 2023. Available at: https://unctad.org/system/files/official-document/wir2023_en.pdf
[ii] Foreign Business Act, B.E. 2542 (1999), Section 4.
[iii] Foreign Business Act, B.E. 2542 (1999), Section 8.
[iv] 2022 Annual Report of the Foreign Business Commission, page 14. Availabe at: https://www.dbd.go.th/download/foreign_file/ pdf/AnnualReport_FBA_2022.pdf.
[v] Treaty of Amity and Economic Relations between the Kingdom of Thailand and the United States of America. Available at: https://treaties.un.org/doc/Publication/UNTS/Volume%20652/volume-652-I-9345-English.pdf
[vi] Trade Competition Act 2017, Section 51.
