by Mr. Ponthep Werachon
Thai Solicitor
Mrs.Darunee Werachon
Thai Solicitor & Accountant

WERACHON LAW OFFICE : 315/304, Moo 12 Theppasit Road (Soi 12) Nongprue,Banglamung, Pattaya City Chonburi 20260
Kingdom of Thailand Tel: (038) 304 084, (038) 251 533, Fax: (038) 304 027 Mobile: 081 423 4255, 089 889 6483, Website: www.thaisolicitor.com, e-mail: thai@werachonlawyers.com

Do most of foreigners in Pattaya break the laws of the Kingdom? If the answer is “Yes”, “What laws?” should be the next question in your mind. In this article, we will talk about two laws, i.e., the Land Code 1954 and Alien Business Act 1999.

The Land Code 1954

The Land Code 1954 imposes a restriction on all foreigners to the ownership of land, with the exception of inheritance from a Thai national or investment of Baht 40 millions or seek for investment privileges under the Board of Investment (BOI) or Industrial Estate Authority of Thailand (IEAT).

The company is deemed “Foreigner” or “Alien” by Section 97.- with the criteria for determining by the  “Number of Shares ” a  foreigner or foreigners hold in that company. If the number of shares held by a foreigner or foreigners is not more than 49%, the company can enjoy the status of a Thai company to have the ownership of land even a signatory director is a foreigner. There is no restriction about the “Voting Right” in which foreign shareholders can have preferential shares to have more voting rights more than Thai shareholders.

Many foreigners see the loophole to have Thai nominees to hold 51% shares of their shares. The word “Nominee” was the jargon term secretly used by a certain group of lawyers and their clients without any proper definition until the midst of 2006 in which the term “Nominee” became conspicuous to the public by the acquisition of shares of Shin Corp by a Singaporean Company involved with many strategic businesses under the Alien Business Act 1999.

Having a “Nominee” is illegal under what law and punishment should be the question in your mind.  “It is either the Land Code 1954 or Alien Business Act 1999 or both”

Section 113.- of the Land Code 1954 imposes the punishment for any Thai person who connives with a foreigner to own land. We cannot find any punishment for foreigners involved in using “Nominee Structure”. However, these foreigners may be punishable by other laws for a specific circumstance, e.g., production of false information to a registrar.

“Anyone acquiring the land as an agent (acting on behalf of the other) of any foreigner or alien juristic person shall be liable for fine not more than Baht 20,000, or imprisonment of not more an two years or both”

The company having “Nominee Shareholders” shall be fined not more than Baht 50,000 by Section 112.

The implementation of the Land Code has been practically tolerant in many resort cities, especially Pattaya for decades. With the problem in Koh Samui in May 2006 about the bandidos allegedly laundering their dirty money in some development projects, the public became aware of the “Conspiracy Theory” that some foreigners set up more than 300 companies for each of them with some lawyers who became their nominee shareholders. How can a lawyer have money to invest in 300 companies?

Most foreigners setting up a Thai company to buy real properties in Pattaya are retired person who can enjoy their hibernation. No “Conspiracy Theory in any Crime” to harm a society.  The company is “Dormant” without any business activities with the only one purpose to own property for retreat. However, these dormant companies must register their contemplated business activities or objectives. Nobody care what activities their lawyers will put for their dormant company. The most popular activities are “Purchase, Sale and Rent of Real Property” “Import, Export” and  “Business Consultancy” etc. Please search for more information “Setting Up a Dormant Company to Buy Land” in our reading room www.thaisolicitor.com

The Alien Business Act 1999

The implementation of law can be practically tolerant by a specific rationale for specific region. The equilibrium between the tolerant pragmatism and the good faith of property buyers in Pattaya was affected once again by the scandalous acquisition of  Shin Corp by a Singaporean company by using the “Nominee Transaction” which is in violation of the Alien Business Act 1999.

Many years ago, Shin Corp was owned by the family of our former prime minister who was toppled by the military coup on 19^th September, 2006. As it is always used as a pretext by the military coup is to accuse the then government for corruption. Shin Corp is the target because it was the concessionaire of many strategic businesses which are TV station, airline, telephone etc.

On 20^th July, 2006, the Commerce Ministry issued a circular letter to all company registrar offices instructing them to inspect all Thai shareholders in the newly set up Thai-foreigner joint companies to ascertain if they are real or nominee shareholders. All Thai shareholders will have to show the bank statement for the past six-month period.

However, the inspection will not be retroactively on the existing companies or 100% Thai companies who apply for the change of shareholding structure from 100% Thai to be 49% foreigners and 51% Thai with a foreigner as a signatory director.

The violation of the Alien Business Act 1999 by using the “Nominee Shareholders” is more serious than the violation of the Land Code 1954. The imprisonment and fine under the Alien Business Act 1999 is applicable also to foreigners

The Alien or Foreign Business Law 1999 divides business into three categories with the different degree of restriction to foreigners from Annex I includes businesses which are absolutely taboo to foreigners by the special reason.  Annex II includes businesses involving National Safety or Security or Affecting Art, Culture, Traditional Customs, Folk Handicrafts or National Resources and Environment. However, foreigners can do the businesses listed in Annex II by seeking permission from the cabinet and Annex III are businesses involved with service businesses in which Thai nationals are not ready to complete with foreigners. However, foreigners can do these businesses by seeking permission from the Director General of the Department of Business Development.

For businesses not mentioned in these three categories, foreigners can freely do without permission, e.g., manufacturing. You may set up a factory with 100% shares. The privileges under the Board of Investment (BOI), Industrial Estate Authority of Thailand (IEAT) or the Thai-US Treaty of Amity and Economic Relations can also exempt foreigners from the restrictions under the Alien Business Law 1999.

Some elusive foreigners find the loophole of the Alien Business Act 1999 to set up a Thai company which requires 51% Thai shareholders. Some foreigners use the “Nominee Shareholders” to hold 51%, some foreigners ask their lawyers to draft the special articles of association to provide majority voting rights to foreign shareholders by the preferential shares.

What are the business activities and objectives of your company? If your business activities involve “TV station”, you will definitely share the same destiny with Shin Corp because the television station of business is listed in Annex I. If your business activities involve “Purchase, Sale and Rent of Real Property” which are deemed “Land Trading”, your business activities will fall into Annex I.

The business activities of land trading require your company to register the Specific Business Tax (SBT) for real estate business or Value Added Tax (VAT) that will be burdensome for you. It is advisable to register your business in Annex III which may be “services” or “import-export”. You company can become dormant but paying tax for 4,000 to 5,000 Baht or more for the rent you pay to your company. You will not be involved with any “Conspiracy Theory”. If you declare the dormant status of your company to the Tax Office, your company will not fall into the Alien Business Act 1999.

The worst-case-scenario is if you mistakenly registered business the activities of “nuclear plant” for your dormant company, you will definitely have a big problem with Mr. Bush.