2024 Thai Nominee Shareholding Investigation

In early March 2024 the Thai media reported large-scale investigations of nominee companies in Thailand. The Department of Business Development (DBD), which is the agency within the Ministry of Commerce responsible for the registration of businesses in Thailand, targeted 419 companies suspected of acting as nominees for foreign corporations.

The investigation was not limited to one specific sector, city, or region; the companies being investigated by the DBD were located in Bangkok, Chiang Mai, Surat Thani, and Chon Buri, and 313 of the 419 companies (almost 75%) were required to provide additional documentation for further investigation.

The Department of Special Investigation (DSI) has joined this effort. The DSI was created in 2002 under the Ministry of Justice, and is responsible for investigation of criminal cases requiring special methods under the Special Case Investigation Act. Currently, the DSI is acting in collaboration with the DBD and the Tourism Department to investigate an additional 59 companies in Phuket that are suspected of functioning as nominees.

Why so many nominee companies?

The use of nominee companies is driven by Thai laws that restrict the business activities of foreigners in Thailand, particularly the Foreign Business Act (FBA) which prevents foreigners from engaging in nine specified business activities and requires foreigners to obtain a foreign business license (FBL) or foreign business certificate (FBC) before commencing any of the dozens of other business activities listed in the FBA. A company formed in Thailand qualifies as a “foreigner” under the FBA if foreigners hold 50% or more of the shares or ownership interests in the company. Land Code restrictions on foreign land ownership also encourage the use of nominees in Thailand in connection with real estate.

It can be challenging for foreign entrants into the Thai market to identify a suitable Thai joint-venture partner willing to acquire a 51% stake in a new business, and sometimes foreign investors prefer to hold a majority of voting rights/control, as well as the rights to receive a majority of the dividends. Company formation service providers have been known to offer their own Thai employees to serve as nominee shareholders, and in some cases Thai nationals have been drawn from the ranks of Thai domestic staff or acquaintances to act as shareholders in name only, without making any real investments or expecting financial returns from the relevant company’s business operations.

The oft-cited rationale for using Thai nominee shareholders when incorporating a company is that a company formed in Thailand can escape the FBA’s prohibitions and FBL/FBC approval requirements if Thai shareholders hold 51% of the company’s shares, and such a company also can commence business immediately, without needing to apply for an FBL/FBC (the application process for an FBL and FBC involve a considerable amount of documentation and, in practice, can take more than several months to complete).

Strictly speaking, this reasoning is technically correct, but the use of Thai nominee shareholders has onerous legal ramifications, which are not present in a company in which a Thai joint-venture partner of substance owns 51% of the shares.

Attractive, but unlawful 

While the commercial attractiveness of the nominee approach is obvious—a new company can be formed with 51% Thai shareholding and commence business in a matter of days rather than months—the use of nominees to circumvent the FBA is illegal. 

The anti-avoidance provisions of the FBA prohibit Thai nationals from acting as a foreigner’s nominee for purposes of holding shares in a company with a view to enabling the foreigner to operate an FBA-regulated business in violation of the FBA. This is part of a much broader prohibition, which also extends to Thai nationals assisting with, aiding and abetting, or participating in the operation of a foreigner’s business if the business is FBA-regulated and the foreigner is not permitted to operate the business in question.

Penalties for breaching the nominee prohibition include three years’ imprisonment and a fine of THB 1 million; the penalties apply to, and may be levied against, both the Thai nominee and any foreigner who allows a Thai national to act as a nominee. The court also is obligated to order the cessation of the nominee shareholding or other instances of aiding and abetting. Failure to comply with a court cessation order can result in daily penalties of THB 50,000 during the period of non-compliance.

A decade or more ago, concerns about penalties often were dismissed, in accordance with the prevailing view that the use of nominees was widespread and only specific sectors in tourist destinations, such as tourism or hotel businesses in Chiang Mai or Phuket, would come under the scrutiny of the DBD and the DSI; however, any sense of complacency now would be misplaced, and hazardous, given the current investigative appetites of the DBD and the DSI. 

At least two shareholders are required to form a new company, and the use of a Thai shareholder (even holding only a single share) simply to make up the required minimum number of shareholders is not, of itself, a breach of the nominee prohibition, but as soon as Thai shareholders hold more than half of the shares of a company that engages in an FBA-regulated business, the possibility of investigation (and alleged breaches of the nominee prohibition) arises.

M&A implications

Foreign individuals or entities that acquire shares of Thai companies can inherit nominee shareholder risks if Thai shareholders hold more than 50% of the shares in the Thai target company, and effectively hold shares or operate the business as nominees on behalf of a foreign shareholder(s). Even if the share transaction is limited to acquisition of a minority shareholding interest, the foreign acquiror can be liable for three years’ imprisonment and THB 1 million in penalties if the Thai shareholders are nominees and the foreign acquiror allows the nominee shareholding structure to continue after completion of the share transfer.

Determining whether Thai shareholders are nominees is an essential part of buyer-side due diligence in a share acquisition transaction, and this involves a degree of financial due diligence on the Thai shareholders and a detailed review of documentation signed by the Thai shareholders in relation to majority shareholding.

If due diligence identifies a nominee shareholding situation, in violation of the FBA, the replacement of the nominee shareholder with a legitimate shareholder should be a condition precedent to completion of the share transfer. In some cases, a Thai nominee shareholder will have executed documentation that makes it easy to transfer the shares to a legitimate shareholder. However, in other cases the nominee shareholder will insist on receiving payment for the shares, even though the nominee paid nothing for them in the first place. If the foreign shareholder does not pay, and the nominee shareholder continues to hold the shares, the foreign shareholder will continue to be at risk of enabling a nominee arrangement, and faces financial and control risks if the nominee shareholders insist on being paid dividends and act to block future capital injections and other shareholder resolutions.

Land-owning companies not exempt from FBA exposure

The Land Code imposes restrictions on ownership of land by foreign companies, and nominee shareholding has been used to circumvent land ownership restrictions also. The widespread practice of using nominee land ownership arrangements currently is being investigated by both the DSI and the Land Department. Over the last few years, there has been an increase in investigations of nominee arrangements, particularly in the tourism and hospitality sectors, reflecting increased scrutiny of alleged FBA violations in these industries.

The anti-avoidance provisions of the Land Code are not drafted as broadly as those in the FBA, and the penalties (imprisonment for two years and penalties of THB 20,000) apply to a Thai national who acquires land on behalf of a foreigner. The foreigner’s exposure arises from the forced sale of the land: foreigners who own land unlawfully have between 180 days and a year to sell the land, failing which the Director General of the Department of Lands can proceed with disposal of the land – and in some areas it can be difficult to achieve fair market value in a forced sale situation, which raises the prospects of capital losses on the sale of the land. 

However, it would be a mistake to assume that commonly used corporate landholding structures are not at risk of scrutiny if there is no active investigation by the Department of Lands.

Thailand’s Civil and Commercial Code (CCC) provides the legislative basis for the formation of companies (other than public companies, which are regulated by different laws) and refers to a contract for the organization of a company as a contract whereby two or more persons unite for a common undertaking with a view to sharing profits. The concept of a not-for profit company does not exist in the CCC, and the Revenue Department of Thailand expects a company to generate revenue from its assets.

This issue frequently arises when the Revenue Department investigates occupied residential land owned by companies and asks to see the lease agreement between the company that owns the land and the occupants. If there is no lease agreement, the Revenue Department is free to assess income taxes based on its own estimate of market rent for the land, resulting in unanticipated tax bills (potentially backdated, and with added penalties).

If there is a lease agreement (an advisable practice), the company that owns the land is potentially in the business of renting land, a service regulated by the FBA. As a result, companies that own land will be exposed to scrutiny under the FBA unless the land is unoccupied. The due diligence process for acquiring land-owning companies in which a majority of the shareholders are Thai nationals therefore should follow an approach similar to due diligence on acquisition targets under the FBA, with modifications to account for the differences in anti-avoidance regimes in the Land Code and the FBA.

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