Foreign Business Act (Draft 2007)

Foreign Business Act
Foreign Business Act

The first draft amendment to the Foreign Business Act was issued by the Ministry of Commerce in late December 2006. A second draft was issued by 58 NLA members in March. A third draft was approved by the Cabinet in April, and is now being considered line by line. Its significant points are as follows.

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Its significant points are:

 

  1. The present definition of alien means foreign individuals or companies, and Thai companies where foreigners hold a majority of the shares. The draft proposes to extend that, so that Thai companies where foreigners hold half or a majority of the voting rights will also be alien and restricted from participation in businesses regulated under the FBA, unless permission for majority foreign ownership is obtained.

 

  1. Limited grandfathering is included for existing businesses. All existing companies that are alien under the new definition, and have been operating and earning income for one year, are required to report to the MOC within one year and obtain a certificate. Once a certificate is issued:

 

    • Sch 3 companies may continue operations indefinitely (this would include most service businesses).

 

    • Sch 1 and 2 business may only operate for three years. Within that period, they must adjust their shareholding or voting profile to conform to the new definition.

 

  1. As to offences under the Act, the fine rate bands are increased by 500%. Existing prison terms of three years are increased to five years. Directors or partners of businesses will face personal liability for offences committed.

 

  1. Retailing and wholesaling businesses are further regulated. The existing right to have 100% foreign ownership of such businesses, provided 100 million Baht capital was fully paid or 20 million Baht per shop/unit, is abolished. Note also these businesses face further regulation under the proposed Retailing Bill. Note also that as existing Sch 3 businesses, they may be able to take advantage of the grandfathering provisions, see above.

 

  1. There is no further liberalization of restricted business categories. Certain business activities regulated under separate legislation are now removed from the FBA.

 

Objections of the foreign business community

 

The objections of the foreign business community to the draft can be summarized as follows:

 

  1. In its WTO commitments, Thailand guaranteed equal national treatment of businesses of WTO member countries, provided foreign equity investment was limited to 49%. There was no mention of voting rights or management control. The present proposals breach Thailand’s WTO commitments. To continue with these proposals runs the risk of a WTO complaint, which could take some time to be resolved, with resulting damage to Thailand’s economy and international standing.

 

  1. Many foreign companies in Thailand have adopted a corporate structure whereby the foreign minority shareholders are given effective control, by creating two classes of shares with differential voting rights. Such structures are legal and have been accepted for registration by the Ministry of Commerce for many years. The present proposals will change the law and make these structures illegal.

 

  1. On an international economic level, Thailand’s direct competitors for FDI, such as Malaysia, Vietnam, China and India, are all competing to attract foreign investment by creating corporate structures and taxation incentives that are better, or at least as attractive, as their competitors. It thus seems rather strange that by approving a narrowing of the definition, and not considering further de-regulation, Thailand is going in the opposite direction, and presenting to the world an image of a protectionist and inward looking economy.

 

April – Further proceedings in the NLA

 

The FBA draft that received its first reading in the NLA in April, was then referred to a special Committee and Sub Committee of the NLA for further consideration.

 

August – Further debate in the NLA

 

On 8 August 2007, the draft FBA as revised in committee, was presented to a full meeting of the NLA for further debate. A group of NLA members presented a further draft of the bill that included an extension of the definition of alien to apply to management control as well as voting rights and shareholdings. In a vote, this more stringent version was supported by 76 NLA members. Only 64 members supported the original version drafted by the Ministry of Commerce. Under the circumstances, the MOC withdrew the bill for further consideration. The Commerce Minister said that he was not sure if the matter could be proceeded with in the present NLA.

 

August – Remark by the Minister of Finance

On 29 August 2007, at a joint lunch meeting of the British and American Chambers of Commerce, Minister of Finance Dr. Chalongphob Sussangkarn said that he thought there was a “50/50 chance” of the FBA proposals being passed by the present government.

 

The new Constitution was approved in a referendum in August. Politicians are now starting to prepare for the General Election which is expected to happen on 23 December 2007.

 

Thus as at 4 September 2007, it is not clear whether this government will be able to proceed further with its proposals to change the FBA.

 

We shall have to wait and see.

 

©    Bangkok International Associates September 2007

 

Bangkok International Associates is a general corporate and commercial law firm. For further information, please contact Stephen Frost by email at sfrost@bia.co.th or telephone (66) 2 231 6201.