house ownership in non shell company

[tpaul1]

I know a lot has been written about Thai companies owning properties and foreigners controlling them. The main legal drawbacks seem to be:

 

1) The companies are not really doing any business

2) The Thai shareholders are nominees and could be investigated to see if they really invested money in the business.

 

Taking 1),  if an existing company (call it Company A) had a supplier who was not an official company, then would it make sense to set up a registered business (non VAT) which owned the property  (call it Business B)and then put the supplier's business through Business B? Of course, this would rely on co operation of the Company A's CEO with this plan but as it just happens that the CEO wants to live in the house, this would be easy to do. The advantage would also be that the transactions for the supplier would now go through a genuine business (Business B). Are there any disadvantages to this? If it is viable, what sort of turnover would be considered a reasonable amount to justify it as a genuine business and not a shell company on say a property worth 5 million THB? By the way, the activities passing through Business B would be entirely consistent with using such a house ( small scale printing and fabrication of textile products which could be done on a domestic sewing machine etc.)

 

Taking 2), how much would it take to satisfy any authorities that the shareholders were real? Do they need to see money trails and if so, how much of a loan or mortgage from the foreigner would be acceptable as a rough rule of thumb on a property worth 5 Million THB. The obvious way would be for the Thai shareholders to mortgage the property to the foreigner for the full amount or anything above what they could reasonably be accepted to pay from their own savings/income. However,  I understand this may be scrutinized at some future unknown date and cause problems. If the Business B were to pay the mortgage off out of 'profits' from its business activities, would this go some way to satisfying that everything is correct. On the face of it, to enable locals to set up a business to supply another one is not that unusual or strange and something which happens a lot.

 

Any other things I've missed?  Thanks for any advice

 

[johng]

1 never invest more than you are prepared to walk away from.
2 Rent.
Yes both cliches, the real estate agents will flame never mind.

[lkn]

The company must be majority owned by Thai citizens, so the Thai shareholders will need to provide (at least) 51% of the seed capital and will also be responsible for 51% of the debt taken on by this company, likewise, they will be entitled to 51% of the profit.

 

[LukKrueng]

Basically the foreign ownership of property (land) by proxy is illegal. Seems you are "trying to invent the wheel" by dressing up the company in a different way. Many people are doing it, and have been doing it in the past, and most were never investigated and nothing happened to them. BUT - it is still illegal, and the government does check and crack down on such things from time to time. There are legal way to hold property in Thailand, such a long term (30 years) lease and life long rights to use a plot of land.

[tpaul1]

20 minutes ago, LukKrueng said:

Basically the foreign ownership of property (land) by proxy is illegal. Seems you are "trying to invent the wheel" by dressing up the company in a different way. Many people are doing it, and have been doing it in the past, and most were never investigated and nothing happened to them. BUT - it is still illegal, and the government does check and crack down on such things from time to time. There are legal way to hold property in Thailand, such a long term (30 years) lease and life long rights to use a plot of land.

 

Not really, this is my point, when does a shell company not become a shell company? As I understand it, if a foreigner invests in a Thai business which is conducting business activity and requires property to conduct that business and it is a Thai majority owned business, then everything is correct providing the foreigner is holding a minority of the shares.  At the other end of the spectrum, if the company is doing no activity, then it obviously a shell company. Where do the lines blur? If the property was worth say 5M THB and was a commercial building, and the company was doing 50M THB of turnover,  would assume this would be seen as above board and legal. On the other hand, if the building were residential and being used for small scale publishing and e-commerce, how much business activity would be considered ok beforre it became a shell company? 1M, 100K 10K? If you see my point.  Most people would not pursue this method since a lot are either retirees, working offshore and don't want to complicate their lives unnecessarily by creating a legitimate business just to own a property. However, in the case I am thinking, that business activity is happening anyway, just not being directed through that address.

 

[tpaul1]

On 10/25/2016 at 6:12 PM, johng said:

1 never invest more than you are prepared to walk away from.
2 Rent.
Yes both cliches, the real estate agents will flame never mind.

yes, I am aware of that having rented for 30 years here and been very cautious. I have a successful business which I built up from nothing and I am acutely aware of the first point. However, just because one is prepared to walk away, doesn't mean that you shouldn't be as prudent as possible to reduce the risks substantially. This has been my philosophy since I started my business here and I'm definitely not of an optimistic nature when it comes to making investments.

[tpaul1]

On 10/27/2016 at 1:42 PM, lkn said:

The company must be majority owned by Thai citizens, so the Thai shareholders will need to provide (at least) 51% of the seed capital and will also be responsible for 51% of the debt taken on by this company, likewise, they will be entitled to 51% of the profit.

 

The profit issue is a minor consideration since the company would be making a very modest profit. The ownership and proof of invested capital seems more problematic, and I wonder how the Thai company using a mortgage against funds invested by the foreigner can be used to satisfy this requirement. Again, if we took an extreme case and 100% of funds were supplied by the foreigner, would it be viewed differently to if only 10% were provided and mortgaged placed on the chanoot?

 

I also understand that none of this is set in stone as it has not been tested in court as far as I am aware and as we all know a great deal of discretion is given to the local office and offer handling each case.

 

I suppose I am just looking for any words of wisdom or anyone who has experience doing a similar thing.

[trogers]

Ratio of property value to paid up capital and annual turnover.

 

Bt5m: Bt1m: Bt5m, or

 

Bt5m: Bt10m: Bt50m

 

Such simple ratios would point out intentions...

Edited October 29, 2016 by trogers

[lkn]

3 hours ago, tpaul1 said:

The profit issue is a minor consideration since the company would be making a very modest profit. The ownership and proof of invested capital seems more problematic, and I wonder how the Thai company using a mortgage against funds invested by the foreigner can be used to satisfy this requirement. Again, if we took an extreme case and 100% of funds were supplied by the foreigner, would it be viewed differently to if only 10% were provided and mortgaged placed on the chanoot?

 

From Thailand Lawyer:

 

• A nominee shareholder is a shareholder in name only; in reality nominee shareholders lacks any real financial stake or interest in the company.
• Under Thailand business law, the practice of nominee shareholders is illegal. The prohibition is found in the Foreign Business Act 1999, and the Land Act.

From your own statements, it seems clear that you are talking about nominee shareholders.

 

Doesn’t really matter how much business you do, if your shareholders did not actually invest anything in your enterprise then they are not shareholders.

[sendintheclowns]

5 hours ago, LukKrueng said:

Basically the foreign ownership of property (land) by proxy is illegal. Seems you are "trying to invent the wheel" by dressing up the company in a different way. Many people are doing it, and have been doing it in the past, and most were never investigated and nothing happened to them. BUT - it is still illegal, and the government does check and crack down on such things from time to time. There are legal way to hold property in Thailand, such a long term (30 years) lease and life long rights to use a plot of land.

Oh no! Not the 30 year Thai property scam. Please refer to 2014 rulings by Phuket Provincial and Appeal Courts,  where a 30 year lease of  an apartment, registered with the Buildings Registrar,  with the right to renew, was deemed to be a ''hidden'' purchase of land and building and declared invalid. After posting that (I couldn't resist) - would a moderator suggest where further posts on that specific topic should be to an more appropriate forum, please? Ta.

[lkn]

51 minutes ago, sendintheclowns said:

Oh no! Not the 30 year Thai property scam. Please refer to 2014 rulings by Phuket Provincial and Appeal Courts,  where a 30 year lease of  an apartment, registered with the Buildings Registrar,  with the right to renew, was deemed to be a ''hidden'' purchase of land and building and declared invalid. After posting that (I couldn't resist) - would a moderator suggest where further posts on that specific topic should be to an more appropriate forum, please? Ta.

 

The ruling you refer to was about a construct where a company owned the land and in their bylaws, they were forced to renew the lease twice (so for a total of 90 years), and the lease-takers had a majority vote in this company, or some such.

 

The entire thing was declared invalid, which meant there was no company to own the land in the first place and hence no lease for the foreigners.
 

I am quoting from memory, the actual details may have been different, but anyone who had done a bit of research or spoken to a lawyer, would have known, that the scheme was dodgy, and the ruling has not changed the legality of a 30 year lease (to foreigners), as you seem to imply.

[khunPer]

It has been discussed in numerous threads, but sometime the usable answer posts are hidden between warning posts.

 

It's against the intention of the Law to use a Thai company limited to hold land for an alien (foreigner). The method using proxies, as referred to in the past, seem not to work any more, as the 51% Thai shareholders has to show proof of funds, and lawyers don't just put some names in, when registering a company for you; i.e. you need yourself to find real Thai shareholders.

 

Recently a method using preferred shareholders together with a Holding Company has been mentioned. From the posts, the method can be something like this:

 

Company A

–has for example a shareholder capital of 100,000 baht, of which 51% or 51,000 baht is owned by Thais. 51,000 baht is easy to show proof of. The Thai shareholder(s) shall all, or at least a number of them, have preferred shares; which have no voting rights, but are instead paid a guaranteed dividend of for example 4% or 10% a year, i.e. 10% of 51,000 baht = 5,100 baht guaranteed annual dividend.

 

Company A holds as parent company, 51% (or more) of the shares in a subsidiary Company B.

 

Company B

–can have any shareholder capital value, as the major shareholder is A, and eventually a foreigner with less than 50%, preferably not more than 39%, if company B is buying land. The shareholder capital of company B can for example be 2 million baht or 5 million baht or...

Company A can borrow money for buying shares in company B. Dividend paid from company B to company A shall be used to pay dividend to preferred shares, pay back loan, and/or reinvest in company B.

 

A foreigner can lend the money to company A; but for more specific set-up advise I will recommend OP to talk to an experienced business lawyer, as I'm merely referring to other posters, and my own common sense, also based on my experience as shareholder in a Thai company limited.

[LukKrueng]

9 hours ago, tpaul1 said:

 

Not really, this is my point, when does a shell company not become a shell company? As I understand it, if a foreigner invests in a Thai business which is conducting business activity and requires property to conduct that business and it is a Thai majority owned business, then everything is correct providing the foreigner is holding a minority of the shares.  At the other end of the spectrum, if the company is doing no activity, then it obviously a shell company. Where do the lines blur? If the property was worth say 5M THB and was a commercial building, and the company was doing 50M THB of turnover,  would assume this would be seen as above board and legal. On the other hand, if the building were residential and being used for small scale publishing and e-commerce, how much business activity would be considered ok beforre it became a shell company? 1M, 100K 10K? If you see my point.  Most people would not pursue this method since a lot are either retirees, working offshore and don't want to complicate their lives unnecessarily by creating a legitimate business just to own a property. However, in the case I am thinking, that business activity is happening anyway, just not being directed through that address.

 

 

And the Thai partners - are they real or proxies??

 

[blackcab]

5 hours ago, sendintheclowns said:

Oh no! Not the 30 year Thai property scam. Please refer to 2014 rulings by Phuket Provincial and Appeal Courts,  where a 30 year lease of  an apartment, registered with the Buildings Registrar,  with the right to renew, was deemed to be a ''hidden'' purchase of land and building and declared invalid. After posting that (I couldn't resist) - would a moderator suggest where further posts on that specific topic should be to an more appropriate forum, please? Ta.

 

I think you need to refer to the ruling to educate yourself further on the details of the judgement. A 30 year lease is absolutely legal in Thailand. Granting an additional lease before the first lease has expired is not.

 

As we are talking about commercial property, under some circumstances it is possible to have a 50 year lease, as set out in the Lease of Immovable Property for Commercial or Industrial Purposes Act 1999. It can be hard work to get this type of lease though.

[tpaul1]

On ‎10‎/‎29‎/‎2016 at 7:18 PM, LukKrueng said:

 

And the Thai partners - are they real or proxies??

 

This is indeed my original question :) At what point is Thai partner a proxy and at what point are they real? It is easy to see with your typical 'shell company' that they are proxies. But if the company is conducting a modest amount of business and the Thai partners who are also employees and receiving an income from said business have invested using borrowed money from the foreigner, are they real? Of course the company is set up for the purpose buying property (hence why the thread is in this part of the forum) but at what point are you in legally speaking safe territory when it comes to setting up such a company. To see another example, (at the risk of stereotyping forum members), if a foreigner lent his girlfriend and her friends to set up a modest fashion shop (which included land purchase) and expected the loan to be repaid with some interest would that be allowed? if the said foreigner then moved in and lived upstairs in the shop, while his g/f and partners were slaving away downstairs, would it be considered that the Thai partners were real or proxy?

Edited October 31, 2016 by tpaul1

[tpaul1]

The problem with a 30 year lease is that it assumes that the foreigner has in most cases put down deep roots and intends to stay there for the duration, is the way I see it. If he wants to move on, all he can do is sell an ever shortened lease to another foreigner or am I missing something? It doesn't make it attractive as an investment or very flexible if you have intentions of moving later. Please correct me if I am missing something.

[lkn]

1 hour ago, tpaul1 said:

[…] At what point is Thai partner a proxy and at what point are they real? It is easy to see with your typical 'shell company' that they are proxies. But if the company is conducting a modest amount of business and the Thai partners who are also employees and receiving an income from said business have invested using borrowed money from the foreigner, are they real? Of course the company is set up for the purpose buying property (hence why the thread is in this part of the forum) but at what point are you in legally speaking safe territory when it comes to setting up such a company. To see another example, (at the risk of stereotyping forum members), if a foreigner lent his girlfriend and her friends to set up a modest fashion shop (which included land purchase) and expected the loan to be repaid with some interest would that be allowed? if the said foreigner then moved in and lived upstairs in the shop, while his g/f and partners were slaving away downstairs, would it be considered that the Thai partners were real or proxy?

 

In your hypothetical, the g/f owns the company and thus the land, so there is little risk of being accused of using it as a vehicle to allow a foreigner to own land.

 

In your other hinted setup, if you do an actual loan (with a loan document and payment terms) then I would think this is enough to claim they are real shareholders, because they have a real financial interest in this, e.g. if the business goes bankrupt, they’ll stand to lose money (since they owe you their seed capital), if the land appreciate in value, the majority of the appreciation will go to them, if external creditors goes after your partners, they might make a claim toward business assets (this is where you probably want to secure the debt via the title deed, if that is actually possible), furthermore, if you die, your estate only gets a minority stake in the business, but would of course also get the debt owed from your Thai partners.

 

Doing such setup though is risky for both you and your Thai partners, and this is where you may have some additional “contracts”, for example to compensate your Thai partners for their cooperation or to ensure you gain more than just a minority of the property appreciation. Such contracts though would reveal that you are effectively using proxies.

 

 

One does wonder, if you have a Thai that you trust (as you would with the above setup), why not just skip all this company stuff and buy in their name for funds you lend them?

[sendintheclowns]

On 29/10/2016 at 4:08 PM, lkn said:

 

The ruling you refer to was about a construct where a company owned the land and in their bylaws, they were forced to renew the lease twice (so for a total of 90 years), and the lease-takers had a majority vote in this company, or some such.

 

The entire thing was declared invalid, which meant there was no company to own the land in the first place and hence no lease for the foreigners.
 

I am quoting from memory, the actual details may have been different, but anyone who had done a bit of research or spoken to a lawyer, would have known, that the scheme was dodgy, and the ruling has not changed the legality of a 30 year lease (to foreigners), as you seem to imply.

Thanks for what appears to be a post from a well informed contributor, on the legal situation. I stand corrected.  I have been confused by the different descriptions on Thai law websites. Would your share your opinion, why so many of the lawyer's websites say  that it is legal (under certain circumstances) to have a 30+30+30 lease of an apartment ? Thanks. Most developments I have checked into - the farang developers, directly or indirectly, own the land. This topic seems to have been going on, as long as I have live lived here (20 years) I'm sure this should be moved to another forum.

[lkn]

3 hours ago, sendintheclowns said:

Would your share your opinion, why so many of the lawyer's websites say  that it is legal (under certain circumstances) to have a 30+30+30 lease of an apartment ?

 

I searched for 30+30+30 lease and the results included pages from Siam Legal, Thailand Lawyer, and SamuiForSale, all dedicated to the subject of renewing a 30 year lease, and none of them stating that it was possible to guarantee (by law) the renewal after the initial 30 years, I found the most elaborate discussion (with reference to relevant laws) here https://www.samuiforsale.com/real-estate/renewal-options-in-a-thai-lease-agreement.html

 

I recommend reading the entire page, but here’s an excerpt (about renewal options): “legally it is only a promise of the owner and therefore not automatically binding upon third parties [and] not enforceable by legal action as a contract, because of the length of time between the promise was given and the execution of the promise”

 

I wouldn’t be surprised if some lawyers claim to have found a legal construct that guarantees the renewal, as was the case in Phuket, but I would not put much faith in such construct. Remember that these people’s salary depends on selling their services, not so much on whether or not you can actually renew the lease in 30 years (or the option gets transferred to your children when you die), and as there seems to be no shortage of gullible buyers in Thailand and somewhat lax ethical standards among some of the people in the real estate business (including foreigners!), it’s should come as no surprise that you can find people willing to guarantee you all sorts of things that are just not possible to guarantee.

 

[tpaul1]

Thanks for all the posts on this subject of the company, seems like the consensus is luke warm at best. How about if a lease is the better option, what are the advantages and disadvantages of putting the house in the name of a Thai citizen child (ten years old) in trust and lease it to me? Is it even possible and if so, is it desirable? The child is my foreign business partner's daughter. I am 100% sure of his trustworthiness and his wife is as trustworthy as you can hope. If the trust were in my friend's and his wife's name until their daughter reached 18, how much control would my friend have? I understand at the age of 18, things could change but I won't worry about that yet. Also, for the payment, the money could be shown to come from my business partner from offshore if that would help, or not? Any thoughts?

[blackcab]

37 minutes ago, tpaul1 said:

Thanks for all the posts on this subject of the company, seems like the consensus is luke warm at best. How about if a lease is the better option, what are the advantages and disadvantages of putting the house in the name of a Thai citizen child (ten years old) in trust and lease it to me? Is it even possible and if so, is it desirable? The child is my foreign business partner's daughter. I am 100% sure of his trustworthiness and his wife is as trustworthy as you can hope. If the trust were in my friend's and his wife's name until their daughter reached 18, how much control would my friend have? I understand at the age of 18, things could change but I won't worry about that yet. Also, for the payment, the money could be shown to come from my business partner from offshore if that would help, or not? Any thoughts?

 

You need to be careful with the word "trust". Trusts, as in a formal arrangement with trustees and beneficiaries are not recognised whatsoever in Thailand.

 

If you put property in someone else's name, it ceases to belong to you from that point on.

 

Putting the property in the name of a child means it will be difficult to sell the property until the child is 20, but not impossible if the parents back the sale.

 

If the property is owned by a minor then it can only have a maximum lease of 3 years placed against it.

 

You cannot encumber the property of a child with a longer term lease or a usufruct without permission of the Court, and it is unlikely you will get such permission for a residential property.

[khunPer]

1 hour ago, tpaul1 said:

Thanks for all the posts on this subject of the company, seems like the consensus is luke warm at best. How about if a lease is the better option, what are the advantages and disadvantages of putting the house in the name of a Thai citizen child (ten years old) in trust and lease it to me? Is it even possible and if so, is it desirable? The child is my foreign business partner's daughter. I am 100% sure of his trustworthiness and his wife is as trustworthy as you can hope. If the trust were in my friend's and his wife's name until their daughter reached 18, how much control would my friend have? I understand at the age of 18, things could change but I won't worry about that yet. Also, for the payment, the money could be shown to come from my business partner from offshore if that would help, or not? Any thoughts?

I've seen posters in TV-forum saying that you need to make lease or usufruct Agreements and register at Land Department before transferring the property to a minor – i.e. with the previous (present) owner – as you cannot make it when a minor owns the land.

Normally the land/property cannot be sold before the minor is of age (20 years old).

Be aware of who is guardian for the minor – i.e. a Thai mum, mentioned without postulating anything negative – as it will be a question of trust between you and the guardian only.

Check with an experienced property lawyer in the local area – knowing the local Land Department; as their rules can be slightly different from provinde to province – for best up-to-date advice.

[tpaul1]

Thanks to Blackcab and KhunPer for their replies. I guessed it couldn't be that easy or everyone would be doing it! On the parents, excellent point, and understood the reason for raising it. The father is my business partner for 15 years so no problem with him (foreigner) and his missus has shares in our company so as trustworthy as any Thai I know but obviously, I want to avoid any point of friction with my business partner if his missus were to have a controlling stake and started to get funny about things. I could just put it in her name I suppose though, the idea was that with my business partner being a trustee it would hopefully minimize that risk. The  point about not having a long term lease is an excellent one so that would remove any security I might have in living there. Theoretically, the daughter could shoo me out the place, not a good thought The other way would be for them to take out a mortgage with me so at least I could sell or get the investment back if it went pear shaped but it is all starting to get complicated again I think! Maybe just a purchase by my business partner's wife and 30 year lease to secure it might be the best when all things are considered. I'll just need to remember her birthday in the future!  Any thoughts?