Thailand has strict rules and regulations to protect its domestic market. One such law is the Foreign Business Act, designed to shield Thai businesses from foreign competition. In this article, we delve into the critical aspects of this Act and shed light on how to operate legally in the Thai business landscape.
Recently we have seen a number of “labour hire” and “Foreign Consulting” firms set up under BOI offer to hire foreign employees and second them to an employer, thereby bypassing foreign hire regulations. This is strictly illegal, and the company and the employee are at risk.
The Foreign Business Act – How it works
The Foreign Business Act aims to prevent foreign companies and individuals (even Thai individuals working for a foreign company) from engaging in specific wholesale, retail, or consulting services within Thailand. These services encompass everything from pre-and post-sales activities, including direct sales, technical advice, or installation services.
In essence, if you are a foreigner and wish to conduct business activities in Thailand, you are generally not allowed to hire staff locally to carry out these activities without a suitable Thai corporate structure. This prohibition even extends to sales representatives working on a commission basis, which explains their scarcity in the Thai market.
Penalties and Consequences
Engaging in activities that violate the Foreign Business Act can have severe consequences. Those found guilty of enabling foreign entities to conduct prohibited business activities in Thailand can face substantial fines of up to 600,000 Thai Baht (approximately 17,000 USD) each day of the violation. Imprisonment and additional fines are also possible for foreign directors, managers, and Thai employees.
From a tax perspective, an employee formally salaried in Thailand in a way that violates the Act may be considered to be operating an unregistered (illegal) branch office. This means that all sales to Thailand, even if invoiced from abroad, could become subject to Thai corporate income tax. As a result, the illegal branch office may ultimately be dissolved, bringing the business relationship with Thailand to an end.
Recognising “Bogus Employment”
Some unscrupulous companies currently offer shortcut labour hire services for foreigners, put both your company and your employees at risk. To avoid violating the Foreign Business Act, it’s essential to recognise whether an employment arrangement could be considered illegal circumvention. Here are some key characteristics to watch out for:
- The formal employer labels themselves as a “staffing service provider,” “recruitment service,” or provides a “payroll service” in the employment contract.
- The formal employer’s Articles of Association list staffing services as their primary business objective rather than activities that justify the employees’ roles.
- If the employee’s activity deviates significantly from the employer’s business objective, this raises suspicions of illegal circumvention.
- A separate place of work for employees, away from the formal employer’s business premises, could indicate circumvention.
- If the foreigner outside the hire company exerts direct control over the employee’s activities, strengthening the case for illegal circumvention.
- A non-employer’s right to give professional instructions to the employee is a clear sign of circumvention, especially if instructions bypass a Thai intermediary.
- Employment duration directly linked to the “bogus employer’s” service contract raises red flags.
- The formal employer must provide the job descriptions; if created by the foreign company, it suggests their role as the beneficial employer.
Doing Business Legally in Thailand
Operating legally in Thailand is possible through avenues:
- Seek approval from the Thai “Board of Investment” (BOI) for specific activities, such as wholesale trade or supplying components to the automotive industry.
- The Trade and Investment Office (TISO) permits machine builders to provide technical services and directly sell products.
- The International Business Center (IBC) allows in-house services like market research and digital services, followed by wholesaling of your product.
- The International Procurement Office (IPO) enables distribution and inventory management for multiple suppliers.
- Apply for a Foreign Business License (FBL) through the government.
- Establish a Joint Venture with a Thai company to eliminate restrictions and operate as a local entity.
- Consider importer, distributor, or marketer agreements with reputable Thai partners offering tailored distribution services.
In conclusion, while it may seem convenient to operate on the fringes, Thailand’s Foreign Business Act is strict and leaves no room for ignorance. Adhering to the law and exploring only legal avenues are requisites for a successful and sustainable Thai business.