Vacation is over: a crackdown on nominees begins.

Home » Vacation is over: a crackdown on nominees begins.

In the past weeks, Thai news and social media has been filled with reports of foreigners illegally working in Thailand and hiding behind nominee shareholders to bypass laws on restricted jobs and land ownership.  The fallout from these actions includes a targeted response from authorities who have started in-depth investigations into foreign-owned and run businesses. 

The Department of Business Development (DBD), led by Director Auramon Supthaweethum, has investigated over 400 companies in popular tourist areas such as Phuket, Bangkok, Chiang Mai, Surat Thani, and Chon Buri that are suspected of having Thai shareholders or Directors acting as nominees for foreigners.  Further checks will ensure that foreigners aren’t directly engaged in activities reserved for Thai nationals. 

These inspections initially focused on the hospitality sector, particularly businesses managing tours, restaurants, car and motorbike rentals, hotels, and real estate. In total, 419 firms were identified as making use of a business nominee structure; of these, 313 were requested to provide additional documentation for verification.

The companies and businesses facing the most scrutiny in these tourist areas are those set up by “business and legal consultants” who themselves work through a nominee structure and offer “consulting” rather than licensed professional services. These “consultants” typically place company ownership in the names of their staff, spouses, or friends. This practice is particularly risky because even the laxest government officer can search the DBD database and identify office cleaners and motorcycle taxi drivers listed as shareholders in companies worth tens or hundreds of millions of Baht.  There has been an instance where a single low-level staff member of one “legal consulting” company was a shareholder in hundreds of companies with shares worth over THB 150 million. 

Nominee shareholding explained.

Nominee shareholding involves appointing a random Thai national to act as a shareholder on behalf of a foreigner in a Thai majority company. This is considered illegal under various Thai laws.

Section 4 of the Foreign Business Act (FBA) defines a Foreigner as:

  1. Natural person not of Thai nationality.
  2. Juristic person not registered in Thailand.
  3. Juristic person registered in Thailand having the following characteristics: 
    • Having half or more of the juristic person’s capital shares held by persons under (1) or (2) or a juristic person having the persons under (1) or (2) investing with a value of half or more of the total capital of the juristic person.
    • Limited partnership or registered ordinary partnership having the person under (1) as the managing partner or manager.
    • Juristic person registered in Thailand having half or more of its capital shares held by the person under (1), (2) or (3), or a juristic person having the persons under (1), (2) or (3) investing with the value of half or more of its total capital.

A majority Thai-owned company where Thai nationals own most (51% or more) of the shares by value is considered a Thai company. Foreigners are not allowed to use Thai straw men as shareholders to create a majority Thai-owned company. Using Thai nominee shareholders to circumvent the FBA is illegal and could lead to criminal charges (sections 36 & 37 FBA).

The FBA also prohibits foreigners from holding majority ownership or being employed in specific sectors, particularly agriculture, tour companies, retail, media, and telecommunications. Foreign investors sometimes use Thai nominees to hold shares to comply with these ownership requirements while retaining effective company control to get around this prohibition.

Companies that breach the FBA can face fines of up to 1 million Baht, and the Thai nominee faces fines and imprisonment. Directors of these companies can also be prosecuted.

Nominee shareholding is also rampant in landed property ownership. Under the May 2006 Land Office guidelines, before allowing a land transfer to a partly foreign-owned company, every Thai shareholder must:

  1. show evidence of sufficient income for his investment (e.g. work history, monthly salary), and 
  2. if a loan funds the capital investment, evidence must show sufficient income to repay this investment (e.g. work history, monthly salary).

In addition, Section 94 of the Land Code Act states, ‘All the land which an alien (foreigner) has acquired unlawfully or without permission shall be disposed of by such alien within the time limit prescribed by the Director-General, which shall not be less than one hundred eighty days nor more than one year. If the land is not disposed of within the time prescribed, the Director-General shall have the power to dispose of it’.

Further, Section 96 of the Land Code Act states, ‘When it appears that any person (including a juristic person) has acquired land as the owner in place of an alien or juristic person under the provisions of Section 97 and 98, the Director-General shall have the authority to dispose of such land, and the provisions of Section 94 shall apply mutatis mutandis’.

While nominee shareholding may seem convenient for foreigners setting up a business in Thailand or buying landed property, it poses significant legal and regulatory risks. If discovered, companies using nominee shareholders face severe penalties, including fines, imprisonment, and the revocation of business licenses.

Unfortunately, there are no fixed definitions of a ‘nominee’, but the indicators are:

  1. lack of management and control,
  2. voting rights;
  3. the flow of funds from dividends paid by the company to the shareholders; and
  4. how was the capital financed (e.g., the money transferred from abroad to the Thai shareholders to buy shares)?

Other Issues

Besides the legal risks of using nominees, there are also practical considerations. Firstly, there is no control over the disposal of the shares, and if the nominee dies, the family may rightfully claim ownership of the shares and regain control of the company and its assets.

Also, nominees seldom stay passive when the enterprise makes a significant profit. We have seen issues where a nominee holding the majority of the shares wants to exert control over the company, even going so far as to demand half the profits of the operations or half the payment from a land sale. Don’t forget that without the “nominee” approval, you can’t dispose of assets (e.g., landed property) and can’t declare a dividend.

At a minimum, the nominee will ask for a substantial payment to exit quietly. 

What can foreigners do? 

When choosing a Thai partner, it must be someone financially secure and able to invest in the business. A red flag arises if a background check reveals that the Thai Partner works as a security guard or cleaner on a meagre salary.  Foreigners can legally retain company control through well-designed shareholder agreements. Still, they must be constructed based on business purposes and not be a ubiquitous template dragged off an internet search. 

Foreigners can also apply for BOI promotion, in which 100% of the shares can be foreign-owned. This is reserved for specific industries that Thailand wants to promote. 

Treaty of Amity companies allow USA citizens to hold a majority stake; however, they still need to obtain a foreign business certificate enabling the company to carry on certain activities that haven’t been prohibited to foreigners.

Another option is to apply for a Foreign Business License under the Foreign Business Act. The license allows a foreign company registered in Thailand to carry out approved activities. Still, any activities on the prohibited list will not be approved and are reserved for Thais only.

Suppose the company is to engage in import/export, manufacturing, or specifically promoted industries and wishes to be based in an industrial estate. In that case, the Industrial Estate Authority of Thailand (IEAT) offers additional ownership and control privileges, including the right to own land inside one of its estates. 

The way forward

The best way to start a business in Thailand is to speak to a reputable advisor, ideally a registered law or accounting firm. A professional lawyer or other registered professional can discuss the company’s activities and advise on a suitable structure.  A good rule of thumb is always to be wary of businesses staffed only by “consultants” and always ask any advisor for their professional qualifications and some background of their experience.

There are solutions to running a business in Thailand, and spending time either correcting your existing structure or developing a new business structure will pay dividends during this period of increased scrutiny of foreign-run businesses in Thailand.

Silk Legal provides various services related to corporate and commercial matters. This article is for information only. While we have tried to keep our updates as accurate as possible, errors and changes to proposed legislation may affect your decisions. Please feel free to contact us for a free consultation at [email protected]

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