The Definition Of Foreigner

[george]

The definition of foreigner

The issue of nationality for investment purposes under the parameters of Thai law

Despite consistent good news about Thailand's strong performance on both the economic and general administrative fronts, the country has not attracted a lot of attention from international investors. As good as it seems, however, many investors remain cautious about Thailand as memories of the financial crisis in 1997 with unfinished skyscrapers left standing and the gigantic unfinished pillars of the Hopewell rail project still fresh in their minds.

Rather than simply jump in and establish operations alone, many foreign investors are now more comfortable with working with local partners. At the very least, having Thai partners offers other benefits besides limiting financial risk.

This week, we will look at how foreign investment laws define foreign participation. Given the above, the first commercial issue will be the shareholding ratio between foreigners and Thais. Of course, a commercial issue is one thing; the legal requirement is another, but unfortunately the legal requirement is always the key element that drives the shareholding structure of entities.

In Thailand, no specific law governs foreign investment as such. Foreign participation is included in various pieces of legislation, mostly Acts issued to govern specific types of businesses and industries. Businesses, which have limits on foreign participation, include life and non-life insurance, banking & finance, transport, recruitment and private schools.

Foreign shareholding limits under those laws are different. For life and non-life insurance, as well as banks and financial institutions, the limit is set at 25% of the total shares issued and subscribed. In fact, the law specifies that Thai nationals must hold at least 75% of the total shares issued. The relevant Acts do not specify or define the term ``foreigner'' at all.

While other laws impose different Thai and foreigner ratios and use slightly different language. One common thread that these laws have is that they do not define the term ``foreigner'' or ``Thai'' anywhere. They merely provide for the limitation of foreign participation in the industry or business activity that the Act governs. It is fairly straightforward to define the term ``foreigner'' when we refer to an individual. However, some interpretation is required when one considers what constitutes a ``foreign entity''. It is equally simple if a foreign entity is established somewhere outside Thailand, even though no legislation deals with the nationality of legal entities, such as provisions to state that the nationality of an entity is generally regarded as the entity of the nation in which it is incorporated.

The issue of the nationality of an entity becomes more complex when the entity is established under Thai law and in Thailand, but half or more of its shares are owned by foreigners. Again the same issue above arises. There is no specific law on the nationality of an entity. The question then is how can one determine whether an entity complies with the ceiling of foreign participation imposed by the relevant Act of such industry/business activity.

This is how the famous Foreign Business Act comes into play in determining the term ``foreigner''.

The Foreign Business Act defines the term ``foreigner'' to include a legal entity that: (i) is incorporated outside Thailand; (ii) is incorporated in Thailand but 50% or more of its shares capital are owned by a foreign individual or entity that is incorporated outside Thailand; (iii) a limited partnership or ordinary partnership with a foreign managing partner; and (iv) a legal entity that is incorporated in Thailand but 50% or more of the share capital is owned by the entity specified in (i) - (iii) above.

Due to the important role played by the Foreign Business Act in determining the term ``foreigner'' as mentioned above, there has been, to a certain level, some confusion that the Foreign Business Act is Thai legislation that governs ``foreign investment''.

It should now be clear to you that this understanding is inaccurate. The Foreign Business Act, in fact, is intended to have the same function as other specific legislation issued by various government agencies who look after each specific business and industry. However, the Act does, unlike other specific legislation applicable for specific industries/businesses, cover many areas of business. Thus, due to its detailed definition of the term ``foreigner'' (and maybe its title also), the Foreign Business Act has gained a reputation, albeit unintended, as the primary law governing foreign investment in Thailand.

The point? Don't assume that a single definition of the term ``foreigner'' exists. Consider the nature of the business first, and then look at how the law relating to that business defines the term ``foreigner''.

Peerapan Tungsuwan is a partner of Baker & McKenzie. To The Point is Baker & McKenzie's weekly column covering topical legal issues for the benefit of general readers. Comments and questions are welcome at

[email protected].