Here is an overview of the main legal and practical problems frequently encountered by foreign investors in Thailand.
As well as ways of minimising or avoiding these risks.
In this post-Covid era, foreign direct investment (FDI) in Thailand is on the rise, with FDI inflows and investment promotion applications up 36 % year-on-year (around $13 billion).
As a result, Thailand's gross domestic product (GDP) is set to rise from 2.6 % in 2022 to 3.7 % in 2023.
According to the Thai government, the main sources of foreign investment in Thailand last year were Japan, Singapore, the United States, Taiwan, HK and China.
The Investment Board found that the electronics, electric vehicles and cars, and digital sectors had the highest growth rates in 2022.
Many factors make Thailand an attractive location for foreign investment, including :
- Its geographical location in South-East Asia
- A skilled workforce
- Board of Investment incentives
- The introduction of long-term resident visas for foreigners
In November 2022, the Board of Investment Office (BOI) introduced other incentives to promote investment, such as tax exemptions, new industry categories and special investment zones.
Based on these positive financial trends and the government's encouragement, things are looking good for foreign investors and investment in Thailand.
However, with increased investment comes increased risk and the potential for problems and disputes.
What you need to know to avoid problems:
1. Licensing, company structure and contractual issues
Under Thai law, foreign companies wishing to invest in Thailand must comply with the Foreign Business Act B.E. 2542 (1999) (FBA), which identifies three categories of companies whose access is restricted to foreign investors.
The following table provides a brief explanation of these three categories and examples of companies belonging to each category:
Therefore, in order to conduct business in Thailand, foreign investors must obtain one of the following documents:
- A foreign business licence (FBL); or
- A Foreign Business Certificate (FBC) for the activities promoted, issued by the Office of the Board of Investment (BOI); or
- An FBC for approved activities, issued by the Industrial Estate Authority of Thailand (IEAT); or
- An FBC under an international treaty such as the Treaty of Amity and Economic Relations between the United States and Thailand (1996).
In addition to the above restrictions, foreigners are not allowed to own land in Thailand, unless they benefit from certain exceptions (for example, if they have obtained investment promotion through the BOI).
Given these restrictions, it is common for foreign investors wishing to do business in Thailand to set up a joint venture, usually in the form of a Thai limited liability company, with a Thai company or Thai nationals.
When setting up a JV with a Thai company, foreign investors should take a number of factors into account to avoid potential future problems:
As foreign investors are generally minority shareholders in a joint venture, they must ensure that contractual provisions protect their rights.
For example, provisions relating to decision-making (such as the quorum required for shareholder or board meetings, the number of seats on the board and veto rights) and the operation of the company must be carefully drafted to ensure that foreign investors can retain a role in the management and operation of the joint venture.
In addition, it is important to think ahead by anticipating future dispute resolution scenarios, paying particular attention to lock-in, termination and dispute resolution clauses.
Clauses relating to applicable law and the settlement of disputes
These clauses need to be drafted with particular care.
The applicable law specified in the contract will determine the legal framework that applies to the contract, encompassing the rights and obligations of the parties.
For example, provisions concerning restrictions on the transfer of shares or meetings of shareholders and directors will be governed by the applicable law.
In addition, the foreign investor must carefully assess whether the applicable law chosen adequately protects the interests of minority shareholders.
Secondly, the dispute resolution clause sets out the mechanism for resolving any disputes that may arise.
It is essential that foreign investors carefully assess which dispute resolution mechanism (such as litigation or international arbitration) will effectively serve their interests in the event of a dispute.
Consistency between the applicable law clause and the dispute resolution clause must be taken into account in order to avoid lengthy and costly legal proceedings.
Poorly drafted clauses in these areas can inadvertently lead to costly and time-consuming disputes.
Articles of association (AoA)
Under the Thai Civil and Commercial Code, a company's activities must comply with the provisions of its articles of association.
It is therefore essential to carefully examine all the clauses of the joint venture agreement and to align them with the articles of association in order to avoid discrepancies and future complications.
Use of nominees
Thai law strictly prohibits the use of Thai nominees to hold interests on behalf of foreign investors.
Setting up a joint venture in Thailand involves various tax considerations, including VAT registration, withholding tax, specific business tax and corporate income tax.
In addition, it is essential to take into account the tax incentives offered by the BOI.
2. Employment issues
Thailand is generally known for its employee-friendly stance.
There are often disputes between employees and employers over dismissal (unfair dismissal), forced resignations and pay cuts.
When a foreign investor sets up a joint venture with a Thai company or individual, they should be aware of the following Thai labour laws to avoid any future problems with employees:
Under Thai labour law, employers have the power to dismiss employees with or without cause, although in practice it is difficult to dismiss employees with cause unless there is substantial evidence and good reason.
The law specifies that the employer may terminate the employment contract without compensation if the employee "deliberately disobeys" or "habitually neglects" his or her duties, or if he or she is found "guilty of serious misconduct" justifying dismissal for cause.
Even if there are valid grounds for dismissal, the law requires the employer to clearly state the grounds invoked in the letter of dismissal and not to modify them or add others at a later stage.
There is an important practical distinction between dismissals "with cause" and "without cause", as the amount due to the employee in the event of dismissal differs.
In the event of dismissal without cause, the employer is obliged to pay unpaid wages, compensation in lieu of notice, redundancy pay, unused annual leave and all other compensation provided for in the employment contract.
If the dismissal is "for cause", the employer is theoretically not obliged to pay compensation in lieu of notice or redundancy.
However, employers must be careful when dismissing an employee for cause, to avoid the possibility of a claim for "unfair dismissal".
In practice, it is not uncommon for employees dismissed in Thailand to file claims for "unfair dismissal", even in cases where there is no reason for the dismissal, particularly if the statutory payments have not been made in full.
To avoid lengthy proceedings before the Thai labour courts, employers should, depending on the circumstances, seek legal advice from the outset and consider the possibility of mediation or settlement with the employee.
Changes to the terms of the contract
Under Thai labour law, employers are prohibited from making changes to terms and conditions of employment that are less favourable to employees without their consent.
These include provisions relating to working hours, wages, social protection, annual leave, working conditions and the workplace.
Language of the contract
Although Thai employment law does not require a written employment contract (for open-ended contracts) or the use of the Thai language for the contract, it is advisable in practice to have a written agreement.
If the employee is Thai and does not fully understand English, it is advisable to draw up the contract in Thai (or in a dual language, English and Thai).
This minimises the risk of misunderstanding the terms of the employment contract and potential disputes in the future.
Thailand recently introduced the "Work from Home Bill", amending its labour law to establish a framework for remote working arrangements for employers and employees.
Employers and employees can now agree in writing that employees will work away from the office using information technology, and remote employees must be treated in the same way as those working 'in person'.
In addition, employers must arrange visas and work permits for all foreign employees.
In order to apply for work permits for foreign employees, the company must meet the following conditions:
- Registered capital of at least 2 million baht per work permit;
- Maintain a ratio of 4 Thai employees to 1 foreign employee;
- Proof of investment capital of at least 3 million baht for the company (if the company is not registered in Thailand).
Exemptions are provided for foreign companies with the required BOI permit or for foreign employees covered by specific exemptions, such as diplomats, persons carrying out temporary business activities in Thailand or holders of a Smart Visa.
3. Compliance issues
According to a survey conducted by PricewaterhouseCoopers (PwC), around one in four Thai companies was a victim of fraud, corruption and other economic/financial crimes in 2022.
Alarmingly, the survey also revealed that only 37 % of Thai companies have risk management and compliance functions in place to address fraud risks, which is below global standards.
The main types of fraud faced by Thai companies are cybercrime, procurement fraud and asset misappropriation.
Foreign companies entering into joint venture agreements with Thai counterparts face similar problems.
Foreign investors are often confronted with problems such as the disclosure of confidential information or trade secrets to competitors, the misappropriation of petty cash and the embezzlement of company funds by employees, as well as the corruption of public officials.
These problems are usually revealed through complaints procedures, document reviews, internal reports or whistleblowing hotlines.
However, the lack of adequate risk management and compliance functions in many Thai companies means that actual cases of fraud may be even more numerous than reported.
For foreign investors, particularly large multinational companies, these problems within the Thai joint venture can have serious consequences for business and reputation.
To limit the risk of fraud, foreign investors are strongly advised to ensure that the Thai JV has rigorous reporting and compliance procedures and guidelines in place.
These measures will enable any problems to be prevented and resolved quickly.
It is essential to communicate these procedures clearly to managers and employees, by organising regular training sessions in Thai.
In addition, the company must set up accessible reporting channels and whistleblowing hotlines for employees.
In addition, Thailand's National Anti-Corruption Commission (NACC) has published guidelines for companies to implement adequate internal control measures to prevent corruption by the company and its employees.
Although the existence of a comprehensive compliance programme does not exonerate a company from liability in the event of corruption, it may be considered a mitigating factor by the courts if a person associated with the company is implicated in a case of corruption.
Once a report has been made under the company's established procedures, it is essential that the company responds quickly and transparently to the concern expressed.
To ensure an effective and efficient process, it is advisable for the company to put in place a well-defined internal investigation plan.
This plan should cover both minor and major incidents of fraud or non-compliance, specifying the designated investigators, the scope of the investigation, the stages of the procedure, the estimated timetable and the circumstances requiring the engagement of external legal counsel.
If a bribe is discovered at the end of the investigation, the consequences for the company will vary depending on the recipient of the bribe.
Thai law defines bribery as the offence of giving, or promising to give, any property or advantage to a public official to induce him to perform, or not to perform, or to delay the performance of his duty.
In 2015, the anti-corruption law was amended to include foreign civil servants and civil servants from public international organisations.
Penalties for bribery in Thailand depend on the nature of the bribe and the specific laws governing the competent authority involved in the bribery incident.
Foreign investors should also bear in mind that certain acts, such as colluding in tenders to submit proposals to public bodies, are criminal offences in Thailand.
Thailand offers many promising investment opportunities and the future looks bright for the country.
However, it is essential that foreign investors are aware of the common issues that arise when doing business in Thailand, particularly when investing through a Thai joint venture, as discussed above.
Thoroughly assessing and proactively addressing these issues in advance will help to achieve investment objectives in Thailand.
See also :
File produced by Emi Rowse, Thanyaluck Thongrompo, Sirapat Chaisarnseri, Joshua Woojung Yang, Kudun & Partners for the Bangkok Post