Crackdown on foreigners using Thai nominees: DSI raid offices of law firm in Bangkok, Phuket and Samui

[Dogmatix]

The issue with the FBA has for decades been that it protects service sectors that shouldn't be protected because allowing foreign companies to compete in those spaces is beneficial for the Thai economy and the Thai consumer.  As a result of pressure from foreign businesses and governments and an understanding of the benefits by some enlightened Thais the attempts by the sour faced, xenophobic bureaucrats to plug the loopholes in the law permitting effective management control through preference shares and other structures have to date not been successful.  An obvious solution to this situation would be amend the FBA by opening up the service sectors (with the exception of those sectors that are regulated under separate laws, i.e. banking, insurance, securities, telecoms) to 100% foreign ownership.  At the same the law should also be amended to plug all the loopholes and define a company where foreigners have effective management control by whatever means as alien.  That would protect sectors that need to be protected and put an end to all the torturous nominee structures along with the massive fees they generate for lawyers. 

 

Unfortunately there still seems to be no willingness to open up the service sectors, so this unfortunate structure is likely to continue until there is a change of heart.  However, what we need to remember is that the international pressure that has hitherto prevented the sour faced ones from having their way and defining clearly in law controlled by foreigners are foreign applies only to companies that are doing legitimate businesses and overwhelmingly to substantial multinationals.  Foreign governments and multinationals accept that many countries don't permit foreigners to own land.  Most of them don't need to own land to run their businesses and don't want to the additional hassle and capital investment.  They are not going to care if a few hundred farangs get mopped up for owning land through shell companies and their land is put on the block.  They are also not going to care, if Joe Bloggs who put his life savings into a beach restaurant gets shut down for using nominee structures and loses his life savings.   There have been plenty of warnings, since 2006 when the Interior Ministry started cracking down on applications to transfer land to companies where the Thai shareholders had no money and were obviously nominees for foreigners to own land. Twelve years has been enough time for foreigners to stop trying to use these structures for new purchases and unravel prior structures, selling up where necessary.  If Thailand had a thorough crack down on shell companies owning land on behalf of foreigners and force them to sell off their illegally held land within 180 days, I don't believe there would be any backlash whatsoever from foreign governments or multinationals, as long as the multinational structures were not interfered with. There would no representations from ambassadors quibbling about definitions in Thai statutory law or cries that Thailand is not a rule of law jurisdiction.  It would just be seen that Thailand was enforcing its law that prohibits foreign ownership of land and that a small number of foreigners who chose to flout the law and ignore the warnings over the last 12 years had got steamrollered.     

[Dogmatix]

6 hours ago, OldSiamHand said:

As a casual observer with more than a passing familiarity with these issues, I would say that Horace as been spot on.

 

Your point is a valid one though, even though it is not illegal to set up a foreign controlled company whose sole purpose is to own property.   It is valid in the sense that we are talking about a company, which is intended to generate revenues and eventually a profit.  If the company simply sits on its assets (building and land) and fails to generate income but merely expenses (annual audits and other operating expenses), then the Revenue Department will raise an eyebrow and may conduct an audit after the company has submitted a couple of years of audited financials showing no revenues.  Where things go after that I'm not sure, but it is generally advised to avoid this situation by having the company generate revenues and a small profit.  For example, the company could lease the underlying land to the foreigner and earn rental income, with the foreigner owning the home in his own name (not prohibited under Thai law).

 

The problem with this is that rental income has to be treated as other income in the accounts, not operating income.  Since holding companies are not recognised under Thai law, the company would still be considered an inactive company, even if it is profitable, because it has no operating income and consequently no operations. I think that transferring the structure to the foreign, which is only possible with a new build that does not already have a house number serves no purpose and probably only draws greater attention to the fact that the company is a "man of straw" structure with the sole purpose of circumventing the Land Code.

[siamcrut]

Looks like there’s gonna be some nice houses for sale soon in Hua Hin. Any suggestion where to find those online ads? I might buy.

 

[The manic]

10 hours ago, Dogmatix said:

The issue with the FBA has for decades been that it protects service sectors that shouldn't be protected because allowing foreign companies to compete in those spaces is beneficial for the Thai economy and the Thai consumer.  As a result of pressure from foreign businesses and governments and an understanding of the benefits by some enlightened Thais the attempts by the sour faced, xenophobic bureaucrats to plug the loopholes in the law permitting effective management control through preference shares and other structures have to date not been successful.  An obvious solution to this situation would be amend the FBA by opening up the service sectors (with the exception of those sectors that are regulated under separate laws, i.e. banking, insurance, securities, telecoms) to 100% foreign ownership.  At the same the law should also be amended to plug all the loopholes and define a company where foreigners have effective management control by whatever means as alien.  That would protect sectors that need to be protected and put an end to all the torturous nominee structures along with the massive fees they generate for lawyers. 

 

Unfortunately there still seems to be no willingness to open up the service sectors, so this unfortunate structure is likely to continue until there is a change of heart.  However, what we need to remember is that the international pressure that has hitherto prevented the sour faced ones from having their way and defining clearly in law controlled by foreigners are foreign applies only to companies that are doing legitimate businesses and overwhelmingly to substantial multinationals.  Foreign governments and multinationals accept that many countries don't permit foreigners to own land.  Most of them don't need to own land to run their businesses and don't want to the additional hassle and capital investment.  They are not going to care if a few hundred farangs get mopped up for owning land through shell companies and their land is put on the block.  They are also not going to care, if Joe Bloggs who put his life savings into a beach restaurant gets shut down for using nominee structures and loses his life savings.   There have been plenty of warnings, since 2006 when the Interior Ministry started cracking down on applications to transfer land to companies where the Thai shareholders had no money and were obviously nominees for foreigners to own land. Twelve years has been enough time for foreigners to stop trying to use these structures for new purchases and unravel prior structures, selling up where necessary.  If Thailand had a thorough crack down on shell companies owning land on behalf of foreigners and force them to sell off their illegally held land within 180 days, I don't believe there would be any backlash whatsoever from foreign governments or multinationals, as long as the multinational structures were not interfered with. There would no representations from ambassadors quibbling about definitions in Thai statutory law or cries that Thailand is not a rule of law jurisdiction.  It would just be seen that Thailand was enforcing its law that prohibits foreign ownership of land and that a small number of foreigners who chose to flout the law and ignore the warnings over the last 12 years had got steamrollered.     

It might be a relatively small number of people abusing the system but never the less a substantial amount. 

[Dogmatix]

Regarding the Land Code, I think that with all the discussion of the definition of the word "agent" in the CCC, we are ignoring the fact that there is no mention of the word "agent" in the parts of the Land Code that specify that alien ownership of land is prohibited and and the Land Department's right and obligation to force the sale of land that is illegally held on behalf of aliens.  

 

The word "agent" only appears in the section proscribing criminal penalties for "agents" who purchase land on behalf of aliens. Obviously a lot of careful thought has gone into the definitions and cross references with the CCC and the FBA.  I would like ask those who have knowledge of these things to give us their interpretation of Section 113 of the Land Code which provides for a fine of up to B20,000 and/or up to two years in prison for agents who purchase land on behalf of aliens, bearing in mind that the word used in the Land Code is "tua thaen" which has significantly broader connotations in Thai than the word "agent" in English .  Is the intent of the Land Code here to criminalise only real estate agents who have contracts in writing that make clear that they have been mandated to purchase land on behalf of aliens using whatever structure or mechanism the aliens choose to make it look as if the land is owned by a Thai person or entity, without criminalising anyone involved in setting up that structure?   Perhaps this is indeed the case but it would seem rather harsh on genuine agents who might have been contracted to purchase land by a principal that looks from the outside like a genuine Thai company, so much so that it can pass itself off as Thai to Land Department officials.  Is the onus on real estate agents to check the Thainness of all corporate clients to avoid going to jail?  Is it really credible that the intent of the Land Code was merely to punish agents and leave those who knowingly established a "man of straw" entity as a front for an alien to purchase land unscathed?  

 

My guess is that judges called upon to interpret Section 113 of the Land Code would be more swayed by their understanding of the intent behind the law than the narrow interpretation of the word "tua thaen" as an "agent" in the CCC.  In looking at the intent behind the law the FBA and its definitions are irrelevant because there was no foreign business law when the Land Code was promulgated in 1954. Since foreigners could hold 100% of their businesses and many of them could also own land under the treaties, there was no need for the Land Code drafters to go into complex definitions or details such as preference shares and voting rights. However, it is quite possible that part of the intent was to go after foreigners who were permitted to own land under treaty, such as Chinese people with British or French colonial passports holding land as nominees for foreigners who were not permitted to own land, such as Chinese people with Chinese passports.    

[Dogmatix]

24 minutes ago, The manic said:

It might be a relatively small number of people abusing the system but never the less a substantial amount. 

 

An example would be that neither the US government nor the US business community, which is hugely significant as an investor and an importer there, took a stand against Mexico for expropriating property of Americans who had used nominee structures to purchase land within 50km of the Ocean or 100km of the borders.  Everyone knew it was illegal to own to the land and there were plenty of warnings before the evictions started to take place.   The feeling at the State

Department, I am told by someone who served at a large US consulate in Mexico, was simply that they were idiots for breaking the law in a foreign country and it was just their tough luck that the Mexicans eventually decided to enforce their own laws.  I would suggest that investments made by US citizens illegally in Mexican land and subsequently impaired due to actions by the courts were quite substantial, as a lot involved hotels and resorts in addition to private residences and holiday homes.   In Thailand there are a lot of Brits involved in illegal land ownership and the British government is even less likely to lose sleep over their expropriations than the American government did in Mexico.  In Spain the British government did make representations to try to obtain compensation for Brits whose homes got bulldozed.  However, these were cases were the home owners were allowed to own the land and had not knowingly broken the law in most cases, as they were duped by developers into buying homes in non-residential zones that the authorities had not prevented them from building.  The British government fought for their compensation before or after their homes were demolished.  However, in Thailand this would not be necessary, since their homes would not be demolished and they would be given 180 days' to sell their illegal land. 

[Dogmatix]

I wonder if the DSI is checking through the computers at DFDL to investigate exactly what kind of work the foreign lawyers they employ there do. Since legal service is one of the occupations prohibited to aliens in the 1979 Royal Decree one of the first things the foreign lawyers do when they arrive in Thailand is make a fraudulent application for a work permit, pretending that they will be working as trainers, advisors or administrators and this lie is repeated by their law firm employers.

 

It is small wonder that foreigners who begin their professional lives in Thailand with a criminal act by providing false information to a government official in order to circumvent Thai law are going to have no qualms about devising structures to facilitate foreign clients whose intent is to circumnavigate Thai law to own their own businesses and land. In the countries they come from lawyers are bound by codes of ethics not to commit illegal acts but these people throw those codes of ethics out of the window on their first day in Thailand.

[pgrahmm]

8 hours ago, The manic said:

It might be a relatively small number of people abusing the system but never the less a substantial amount. 

Chinese influx - and it's not small....

 

LOS could be over run before Thailand even knew what hit them...

 

Chatted with one guy who's wife was in real estate....The Chinese are snapping up 20+ mil house properties (big houses) using the same procedures that are getting scrutinized here (supposedly).....

Chances are it's in all markets but his wife is kept busy just with the high end stuff....

Thailand could quickly just end up being a Chinese precinct.....

 

 

 

 

 

[mogandave]

South Africa in the news lately....

[xylophone]

10 hours ago, Dogmatix said:

The issue with the FBA has for decades been that it protects service sectors that shouldn't be protected because allowing foreign companies to compete in those spaces is beneficial for the Thai economy and the Thai consumer.  As a result of pressure from foreign businesses and governments and an understanding of the benefits by some enlightened Thais the attempts by the sour faced, xenophobic bureaucrats to plug the loopholes in the law permitting effective management control through preference shares and other structures have to date not been successful.  An obvious solution to this situation would be amend the FBA by opening up the service sectors (with the exception of those sectors that are regulated under separate laws, i.e. banking, insurance, securities, telecoms) to 100% foreign ownership.  At the same the law should also be amended to plug all the loopholes and define a company where foreigners have effective management control by whatever means as alien.  That would protect sectors that need to be protected and put an end to all the torturous nominee structures along with the massive fees they generate for lawyers. 

 

Unfortunately there still seems to be no willingness to open up the service sectors, so this unfortunate structure is likely to continue until there is a change of heart.  However, what we need to remember is that the international pressure that has hitherto prevented the sour faced ones from having their way and defining clearly in law controlled by foreigners are foreign applies only to companies that are doing legitimate businesses and overwhelmingly to substantial multinationals.  Foreign governments and multinationals accept that many countries don't permit foreigners to own land.  Most of them don't need to own land to run their businesses and don't want to the additional hassle and capital investment.  They are not going to care if a few hundred farangs get mopped up for owning land through shell companies and their land is put on the block.  They are also not going to care, if Joe Bloggs who put his life savings into a beach restaurant gets shut down for using nominee structures and loses his life savings.   There have been plenty of warnings, since 2006 when the Interior Ministry started cracking down on applications to transfer land to companies where the Thai shareholders had no money and were obviously nominees for foreigners to own land. Twelve years has been enough time for foreigners to stop trying to use these structures for new purchases and unravel prior structures, selling up where necessary.  If Thailand had a thorough crack down on shell companies owning land on behalf of foreigners and force them to sell off their illegally held land within 180 days, I don't believe there would be any backlash whatsoever from foreign governments or multinationals, as long as the multinational structures were not interfered with. There would no representations from ambassadors quibbling about definitions in Thai statutory law or cries that Thailand is not a rule of law jurisdiction.  It would just be seen that Thailand was enforcing its law that prohibits foreign ownership of land and that a small number of foreigners who chose to flout the law and ignore the warnings over the last 12 years had got steamrollered.     

Nailed it in my opinion...……..well done!

 

There have been plenty of warnings, since 2006 when the Interior Ministry started cracking down on applications to transfer land to companies where the Thai shareholders had no money and were obviously nominees for foreigners to own land. Twelve years has been enough time for foreigners to stop trying to use these structures for new purchases and unravel prior structures, selling up where necessary.  If Thailand had a thorough crack down on shell companies owning land on behalf of foreigners and force them to sell off their illegally held land within 180 days, I don't believe there would be any backlash whatsoever from foreign governments or multinationals, as long as the multinational structures were not interfered with.

[Dogmatix]

One thing that has not been mentioned so far in this thread is that while Thailand prohibits foreign land ownership, has a restrictive foreign business law and reserves certain occupations, including law for Thais, it is relatively easy for foreigners who working in legitimate jobs to obtain Thai citizenship.  Since 2008 it has been made particularly easy for foreign males married to Thais who are now even exempted from the requirement of having knowledge of the Thai language.  They only need to have been working in Thailand and married to Thais for three years to apply and no longer need to obtain permanent residence first.  Compare this with the UK for example where you need to get Indefinite Leave to Remain and hold that for several years before you can apply for citizenship. In the UK you in addition to being able to speak English, you need to pass a very difficult "Life in the UK Test" just to obtain Indefinite Leave to Remain, which is a prerequisite for citizenship.  

 

I know that not everyone wants Thai citizenship, even if they have decided to settle in the country.  But many of the foreign businessmen who own land and businesses through convoluted nominee structures are in a position to become Thai citizens, either through permanent residence or marriage, if they want to which would enable them to unravel the convoluted structures and sleep more peacefully at night.  For someone who is so committed to Thailand that he would take the risk of using nominees to illegally own land, you would think this might be an attractive option. 

 

So basically the proper way for foreigners to own land in Thailand is to stop being foreigners.  Personally I have found this a very liberating experience and now own houses and over 200 rai of land in my own name.  Now that I have learned from this very interesting thread that there are still a lot of people determined to ignore the warnings since 2006 about using "man of straw" companies to own land, I will be keeping a weather eye open for bargains in resort areas, in case the balloon ever does go up and all the sophistic arguments about how it is perfectly legal for foreigners to own land through nominees, agents, representatives or however, you choose to translate "tua thaen" turn out not to hold water.  

[mogandave]

One thing that has not been mentioned so far in this thread is that while Thailand prohibits foreign land ownership, has a restrictive foreign business law and reserves certain occupations, including law for Thais, it is relatively easy for foreigners who working in legitimate jobs to obtain Thai citizenship.  Since 2008 it has been made particularly easy for foreign males married to Thais who are now even exempted from the requirement of having knowledge of the Thai language.  They only need to have been working in Thailand and married to Thais for three years to apply and no longer need to obtain permanent residence first.  Compare this with the UK for example where you need to get Indefinite Leave to Remain and hold that for several years before you can apply for citizenship. In the UK you in addition to being able to speak English, you need to pass a very difficult "Life in the UK Test" just to obtain Indefinite Leave to Remain, which is a prerequisite for citizenship.  
 
I know that not everyone wants Thai citizenship, even if they have decided to settle in the country.  But many of the foreign businessmen who own land and businesses through convoluted nominee structures are in a position to become Thai citizens, either through permanent residence or marriage, if they want to which would enable them to unravel the convoluted structures and sleep more peacefully at night.  For someone who is so committed to Thailand that he would take the risk of using nominees to illegally own land, you would think this might be an attractive option. 
 
So basically the proper way for foreigners to own land in Thailand is to stop being foreigners.  Personally I have found this a very liberating experience and now own houses and over 200 rai of land in my own name.  Now that I have learned from this very interesting thread that there are still a lot of people determined to ignore the warnings since 2006 about using "man of straw" companies to own land, I will be keeping a weather eye open for bargains in resort areas, in case the balloon ever does go up and all the sophistic arguments about how it is perfectly legal for foreigners to own land through nominees, agents, representatives or however, you choose to translate "tua thaen" turn out not to hold water.  

Thailand does not recognize dual citizenship does it?

[Dogmatix]

20 hours ago, mogandave said:

Is there a country that does not make illegal things that were previously legal?

 

 

The UK completely changed the ground rules for offshore companies that own land in the UK.  Most recently they have gone as far as to "lift the corporate veil", which is practically unheard of in rule of law jurisdictions and consider the shareholders of offshore companies as individuals for purposes of its iniquitous Inheritance Tax.  That means that when a shareholder in an offshore company that owns property in the UK dies, his heirs are liable for Inheritance Tax.  It is unheard of in any jurisdiction, as far as I know to pass a tax liability through to a company's shareholders.  Companies don't die and the heirs of their shareholders should not be liable to inheritance tax.

 

The UK encouraged foreigners to invest in UK property and was delighted to pocket the taxes and economic benefits generated.  One of the big attractions was that non-resident individuals and companies were exempt from capital gains tax.  After the country had benefited enough from these investments, the government turned the tables completely and amended the tax laws to make non-residents liable for capital gains on property. 

 

Here are two examples of how the UK attracted foreign investment into its property market and then totally turned the tables on the investors.

[Horace]

15 hours ago, mogandave said:

Given the companies are absolutely circumventing the spirit of the law, I do not see how this would cause a big stir.

 

They are not absolutely circumventing the spirit of the law. 

 

The law here says that "Alien" companies cannot own land or engage in activities that violate the FBA.  The law says nothing about foreigners having voting control of different voting rights.  When Thai law makers enacted these laws, they were very specific in defining Aliens as majority foreign ownership.  Not a word about shares with different voting rights.  If the company is majority Thai owned, its not an Alien.

 

Moreover, this was a conscious decision made by Thai lawmakers.  They considered adding voting control and economic rights, but decided against it. 

 

If they do what you suggest, it is not within the "spirit of the law".  Its contrary to the spirit of the law.  The spirit of this law is that Aliens can't own property, and Aliens are only defined in terms of foreign majority ownership of shares.  A conscious decision was made not to include ownership control or economic rights, and past Thai government officials promoted investment in Thailand by highlighting that it was perfectly legal to have a Thai company that was controlled by foreigners own land if Thais held a majority of shares.  

 

In other words, if they do what you suggest the government is saying you can't take our announcement or laws seriously.  We can take away property rights from foreigners if we change our minds about what the law should say based on some imagined, but never expressed, "spirit" of the law.  That would be a disaster. 

[Dogmatix]

http://www.africanews.com/2018/08/21/south-africa-public-hearing-on-land-expropriation-without-compensation-begins//

 

Here is a country  that is not only expropriating land without compensation from foreigners but also from its own citizens on grounds of race. I am sure multinationals will continue to invest in South Africa nonetheless.

[Dogmatix]

6 minutes ago, Horace said:

 

They are not absolutely circumventing the spirit of the law. 

 

The law here says that "Alien" companies cannot own land or engage in activities that violate the FBA.  The law says nothing about foreigners having voting control of different voting rights.  When Thai law makers enacted these laws, they were very specific in defining Aliens as majority foreign ownership.  Not a word about shares with different voting rights.  If the company is majority Thai owned, its not an Alien.

 

Moreover, this was a conscious decision made by Thai lawmakers.  They considered adding voting control and economic rights, but decided against it. 

 

If they do what you suggest, it is not within the "spirit of the law".  Its contrary to the spirit of the law.  The spirit of this law is that Aliens can't own property, and Aliens are only defined in terms of foreign majority ownership of shares.  A conscious decision was made not to include ownership control or economic rights, and past Thai government officials promoted investment in Thailand by highlighting that it was perfectly legal to have a Thai company that was controlled by foreigners own land if Thais held a majority of shares.  

 

In other words, if they do what you suggest the government is saying you can't take our announcement or laws seriously.  We can take away property rights from foreigners if we change our minds about what the law should say based on some imagined, but never expressed, "spirit" of the law.  That would be a disaster. 

 

You are describing companies that get lawyered up by DFDL and many others.  Most of these are likely to have a legitimate business and most of the legitimate businesses, with some notable exceptions such as property developers, have no need for or interest in owning land in Thailand. Even the foreign hotel groups almost never have any ownership in the hotels they manage or the land they manage.  Industrial investors usually have a way through the BOI to legimately own land, if they choose to own rather than rent.  Large multinationals such as Tesco separate their activities into those where 100% ownership is permitted, ie. retail in the case of Tesco and businesses where it is not, such as logistics, operating car parks, staff canteens or owning land for the business, which in Tesco's case is legitimately owned through a listed Thai REIT.  The AIS and DTAC structures that must rank amongst the most heavily lawyered nominee structures in Thailand passed muster after years of investigation for violation of the FBA.

 

Despite the raid on a large law firm for publicity purposes and probably for the purpose of shaking it and its clients down for cash, I don't think these significant foreign investors will face much of a threat because of reasons you mention and because they are in a position to select Thai nominee shareholders who are persons of substance, able to pay for their own shares, even if they actually received an offshore loan to purchase them which they pledged their shares against.  If the balloon goes up they will go after the low hanging fruit of foreigners who have used the simplest corporate structures and own their land through inactive "man of straw" companies that have Thai shareholders who didn't have the financial ability to invest in businesses whose only purpose is to buy a residential landed property for a foreigner to live in without business potential.  As many have pointed out, it will be the Chinese "invaders" who will upset the apple cart for everyone else, not the farang retirees.

[xylophone]

26 minutes ago, Horace said:

 

They are not absolutely circumventing the spirit of the law. 

 

The law here says that "Alien" companies cannot own land or engage in activities that violate the FBA.  The law says nothing about foreigners having voting control of different voting rights.  When Thai law makers enacted these laws, they were very specific in defining Aliens as majority foreign ownership.  Not a word about shares with different voting rights.  If the company is majority Thai owned, its not an Alien.

 

Moreover, this was a conscious decision made by Thai lawmakers.  They considered adding voting control and economic rights, but decided against it. 

 

If they do what you suggest, it is not within the "spirit of the law".  Its contrary to the spirit of the law.  The spirit of this law is that Aliens can't own property, and Aliens are only defined in terms of foreign majority ownership of shares.  A conscious decision was made not to include ownership control or economic rights, and past Thai government officials promoted investment in Thailand by highlighting that it was perfectly legal to have a Thai company that was controlled by foreigners own land if Thais held a majority of shares.  

 

In other words, if they do what you suggest the government is saying you can't take our announcement or laws seriously.  We can take away property rights from foreigners if we change our minds about what the law should say based on some imagined, but never expressed, "spirit" of the law.  That would be a disaster. 

Dogmatix post # 364 nails it...…….so no more discussion necessary on the point of foreigners setting up shell/sham companies for the sole purpose of land ownership (obviously with Thai shareholders having no financial input, no income or that the company produces nothing).

 

Seems pretty clear to me!

 

Thanks Dogmatix.

[Horace]

3 hours ago, Dogmatix said:

Despite the raid on a large law firm for publicity purposes and probably for the purpose of shaking it and its clients down for cash, I don't think these significant foreign investors will face much of a threat because of reasons you mention and because they are in a position to select Thai nominee shareholders who are persons of substance, able to pay for their own shares, even if they actually received an offshore loan to purchase them which they pledged their shares against.  If the balloon goes up they will go after the low hanging fruit of foreigners who have used the simplest corporate structures and own their land through inactive "man of straw" companies that have Thai shareholders who didn't have the financial ability to invest in businesses whose only purpose is to buy a residential landed property for a foreigner to live in without business potential.  As many have pointed out, it will be the Chinese "invaders" who will upset the apple cart for everyone else, not the farang retirees.

 

A few comments.   

 

First, I am not less confident than you are about whom will be targeted.  True filed a criminal complaint against DTAC alleging it was using an illegal nominee arrangement.  It is correct that ultimately that claim went no where, but not after attracting a great deal of attention and generating negative press for Thailand.  Important foreign players in the region still remember that.  I think these sorts of investigations will be handled in an opportunistic fashion.  If a Thai company is facing competition from a major foreign company, there is going to be a strong incentive to use the DSI if the definition of nominee is changed.  This is why it is so important that we hold the line on the definition of an "Alien" and the use of terms such as "nominee".  

 

Second, these companies are not using nominees.  That term is thrown around too much.  First, the use of nominees is criminal act.  I suggest caution in saying companies like Tesco are using "nominees". I don't think Tesco would appreciate that.    Second, the definition of a "nominee" is ambiguous and contested.  You don't need to look beyond this thread to see that.  Can we agree to use a neutral term for the Thai shareholders in structures owned by companies like Tesco and Farang retirees, such as "Thai shareholders"?  Its more accurate and doesn't bring in the baggage that comes with the term "nominee".  And if the structures are set up properly, the Thai shareholders are not "nominees" under any existing Thai law.

 

Third, this may or may not be driven by "Chinese invaders". We don't know.  But its a fair guess that if this becomes common, and a Thai national covets the property of a Farang retiree, the property interests of that Farang retiree are are at tremendous risk.

[OldSiamHand]

15 hours ago, Dogmatix said:

 

The problem with this is that rental income has to be treated as other income in the accounts, not operating income.  Since holding companies are not recognised under Thai law, the company would still be considered an inactive company, even if it is profitable, because it has no operating income and consequently no operations. I think that transferring the structure to the foreign, which is only possible with a new build that does not already have a house number serves no purpose and probably only draws greater attention to the fact that the company is a "man of straw" structure with the sole purpose of circumventing the Land Code.

That's interesting.  So from an auditor's perspective, a company set up to hold land and possibly a building would be considered inactive unless it engaged in other business activities that generated operating income.

 

So, for sake of argument, if setting up a company using preference/ordinary shares with a bona fide Thai shareholding making an investment (not acting as a nominee under the DBD's rules) and which does not generate any operating income, then what are the implications after a few years of inactivity?

[OldSiamHand]

15 hours ago, Dogmatix said:

Unfortunately there still seems to be no willingness to open up the service sectors, so this unfortunate structure is likely to continue until there is a change of heart.    

In (some) fairness to the Thai bureaucracy, there have been moves to open up the service sector under the FBA, with securities services being one of the more recent that comes to mind (this does not absolve securities companies from licensing requirements, however).  There is, I believe, language in the FBA which requires the DBD to review the lists of restricted activities under the FBA to determine whether Thais are now ready to compete, although I'm not sure how regularly they do this.  

[Horace]

11 minutes ago, OldSiamHand said:

There is, I believe, language in the FBA which requires the DBD to review the lists of restricted activities under the FBA to determine whether Thais are now ready to compete, although I'm not sure how regularly they do this.  

 

You are correct, but until recently I have not seen this done.  There is a "regulatory guillotine"  initiative involving TDRI and the SET that is supposed to take a look at unnecessary regulation in Thailand.  I know members of the foreign chambers have asked this group to look at opening up the FBA (particularly annex 3), but no idea if anything will actually occur.  About three years ago there was a similar initiative that started off with a great deal of publicity, but has gone quiet and didn't seem to accomplish much.  We can hope that the most recent initiative will yield some positive reforms, but I wouldn't hazard any predictions.

[Horace]

27 minutes ago, OldSiamHand said:

That's interesting.  So from an auditor's perspective, a company set up to hold land and possibly a building would be considered inactive unless it engaged in other business activities that generated operating income.

 

So, for sake of argument, if setting up a company using preference/ordinary shares with a bona fide Thai shareholding making an investment (not acting as a nominee under the DBD's rules) and which does not generate any operating income, then what are the implications after a few years of inactivity?

 

I don't have the answer to your specific question, but if the company has no nominees and is collecting rent from the occupant of the property (say, a foreigner), there is revenue and the specific land and property tax on the rent must be paid to the Revenue Department (not a small amount of tax).  The company is economically active, paying taxes and the Revenue Department is happy.

[OldSiamHand]

9 minutes ago, Horace said:

 

I don't have the answer to your specific question, but if the company has no nominees and is collecting rent from the occupant of the property (say, a foreigner), there is revenue and the specific land and property tax on the rent paid.  The company is economically active, paying taxes and the Revenue Department is happy.

I would have thought so too, and in fact have seen these structures without any issues raised by the revenue department. 

 

Dogmatix's post seems to suggest that the outcome could be different, since such income would not be considered operating income and thus from the perspective of the RD the company is in effect inactive or dormant.  I'm not an accountant, but that seems odd to me, if the purpose of the company is to own land, then its operations would include deriving value from such holdings, with rental income thus constituting operating income.  

[Horace]

3 minutes ago, OldSiamHand said:

I would have thought so too, and in fact have seen these structures without any issues raised by the revenue department. 

 

Dogmatix's post seems to suggest that the outcome could be different, since such income would not be considered operating income and thus from the perspective of the RD the company is in effect inactive or dormant.  I'm not an accountant, but that seems odd to me, if the purpose of the company is to own land, then its operations would include deriving value from such holdings, with rental income thus constituting operating income.  

 

If rent is being paid, the company is economically active.  Rental payments are income.  And the Land and Property tax on rent is high (I believe 12.5%), while the tax on land which "dormant" (owned by wealthy landowners who either hold the land as an investment or don't bother to file returns) is very low.  The Revenue Department is quite happy with the taxes it obtains from these structures.  Unlike many other companies in Thailand, they actually pay taxes.

[mogandave]

 
If rent is being paid, the company is economically active.  Rental payments are income.  And the Land and Property tax on rent is high (I believe 12.5%), while the tax on land which "dormant" (owned by wealthy landowners who either hold the land as an investment or don't bother to file returns) is very low.  The Revenue Department is quite happy with the taxes it obtains from these structures.  Unlike many other companies in Thailand, they actually pay taxes.

Does rent count as revenue for a business that has no other activity?

Is so, what is the rent amount based on?

[xylophone]

So while you "lawyers" are rambling on about DTac, True, Tescos and the like, along with other "large" companies and how they are structured can you please settle that which would be a problem for many house and land owners here......

 

Is it legal for foreigners to set up shell/sham companies for the sole purpose of land ownership with Thai shareholders having no financial input (in fact all of the funds coming from the foreigner), having no income, employing no Thais, and with the company producing nothing? 

[Dogmatix]

2 hours ago, mogandave said:

Does rent count as revenue for a business that has no other activity?

Is so, what is the rent amount based on?

 

 

 

It counts as revenue but is unlikely to qualify as operating income and more likely to be classified as other income along with interest and dividend income.  You might be able to get your auditor to agree to classify it as operating income but I think most will not, unless operating a rentals business is a core operating business of the company.  The typical shell company set up to own a house will use the address of the property as its registered address.  Thus what you are doing in accounting terms is renting out unused space at your office to a farang to use as living quarters.  But you are not in the business of buying or building property and renting it out to people, as this is just a one-off.  When I was in this sort of situation I had the same thinking that I would book rental income but my accountant told me the auditor would insist on the rent being booked as other income for the above reasons.  She advised against doing it because she felt that booking the rental income would involve hassle and tax expenses without making the company look more credible, since it would still be an inactive company with only passive income and no operating income.  

 

Of course the Revenue Department is happy to collect tax on any type of income that is declared.  However, one risk of having an inactive company with or without other income is that the RD is more likely to come and audit it with the angle that you must actually operations, or why would anyone set up a company, but you are failing to declare the income from them. The DBD is also empowered to strike off companies that remain inactive, with or without other income, for I think three years, although I have never heard of this happening.  Normally inactive companies get struck off after failing to file statutory accounts for some years instead. 

 

If the company gets a WP for the foreigner who rents its surplus office space, you have another element to consider which is VAT.  You need to register for VAT and file VAT returns in order to obtain and maintain a WP, although the threshold for VAT registration for companies that don't need a WP is revenue of B1.8 million a year. Persistently filing VAT returns with negligible income, despite employing a foreign expert, could cause suspicion, also resulting in an RD audit. 

 

In answer to the question how much rent should be charged by someone intent on going this route, I would say it should be an approximation of a market rent, in case the RD does decide to audit. If you know what houses in that area are renting for you can discount that to take account of the fact that the tenant is not renting the entire house.   

[Horace]

15 hours ago, Dogmatix said:

You might be able to get your auditor to agree to classify it as operating income but I think most will not, unless operating a rentals business is a core operating business of the company.

 

I am no accounting expert, but I don't see why it can't be classified as operating income.  There is no law or rule saying a foreigner cannot have control over a company whose core business is renting property.  That does not make the company a nominee company (assume bona fide Thai investors are buying the 51% Thai shares), although it may trigger more scrutiny from the DBD or Land Office these days.

 

Agree that the key issue here is justifying that the rent payments are fair market value.

 

What this means if that when a foreigner sets up a company (without nominees but bona fide Thai shareholders) to own a company that owns the property where that foreigner lives that foreigner will need to pay taxes that a Thai owning and living in that exact same property would never have to pay. The Revenue Department (probably the most proactive Thai government department) seems quite happy this sort of arrangement.

[Dogmatix]

5 minutes ago, Horace said:

 

I am no accounting expert, but I don't see why it can't be classified as operating income.  There is no law or rule saying a foreigner cannot have control over a company whose core business is renting property.  That does not make the company a nominee company (assume bona fide Thai investors are buying the 51% Thai shares), although it may trigger more scrutiny from the DBD or Land Office these days.

 

Agree that the key issue here is justifying that the rent payments are fair market value.

 

What this means if that when a foreigner sets up a company (without nominees but bona fide Thai shareholders) to own a company that owns the property where that foreigner lives that foreigner will need to pay taxes that a Thai owning and living in that exact same property would never have to pay. The Revenue Department (probably the most proactive Thai government department) seems quite happy this sort of arrangement.

 

The accounting guidelines for other income are that it is passive income that is not generated by the company's operations, e.g. rental, interest and dividend income.  Holding companies are not permitted in Thailand.  Even listed holding companies have to have some operations of their own, e.g. INTUCH which is the holding co for AIS, Thaicom etc has some small operations of its own to comply with the law. Renting out unutilised space in its office for someone to live it cannot be considered as a company's operations and is therefore booked as "Other income". The Revenue Department is only concerned with enforcing the Revenue Code.  It has no interest in the Land Code or the FBA.  Other income is taxable, so no problem for them to collect tax revenue on it. However, if already mentioned, reporting no operating income year after year could expose a company to a Revenue Dept audit to see if it is concealing its operating income.  They tend to come to your office without notice. Similarly accounts that are qualified by the auditor more than one year can attract a Revenue Dept audit to find out what the management had to hide.  Unless you can read Thai, you probably won't realise that your auditor has qualified your accounts. 

 

This was a pretty good way to own your own house, as a foreigner, before 2006 but I think that people who think that it still is today are deluding themselves. But good luck to them. 

 

 

[Dogmatix]

20 hours ago, OldSiamHand said:

In (some) fairness to the Thai bureaucracy, there have been moves to open up the service sector under the FBA, with securities services being one of the more recent that comes to mind (this does not absolve securities companies from licensing requirements, however).  There is, I believe, language in the FBA which requires the DBD to review the lists of restricted activities under the FBA to determine whether Thais are now ready to compete, although I'm not sure how regularly they do this.  

 

This was actually smoke and mirrors. Securities companies were released from Annex 3 of the FBA but they were never under the jurisdiction of the FBA because they are regulated under the SEC Act which covers foreign ownership. That is capped at 40% but the SEC has the discretion to approve up to 100% foreign ownership on a case by case basis.  The SEC started using this discretion after the 1997 crisis when securities companies were going tits up and there are now several foreign owned securities companies.  Today I am not sure if the SEC would approve a foreign takeover, as the economic situation is stable and securities companies are not going bust.  However, there should be no problem in acquiring a majority stake from an exiting foreign player. Interestingly foreign ownership of securities companies has not caused huge disruption in the industry for or caused theThai players disappear. Only the Asian players are interested in the retail market.  The farangs names like JP Morgan and McQuarrie just run a full service Thai brokerage to service their institutional clients which is not very cost effective, especially for JPM which is just about dead in the water. 

 

I think the DBD was also trumpeting about releasing other service sectors, over which they have no jurisdiction, from Annex 3, although I don't know if it has happened yet. Other sectors where foreign ownership is covered in their own special laws include, telecoms, banking, insurance and asset management (also under the SEC Act). Basically an exercise in BS to try to justify tightening up the FBA.