Legal Matters

LAND & BUILDING POSSESSION AND OWNERSHIP

LAND:

A non-Thai national buying land in Thailand requires two considerations on the buyer’s part and is also subject to what options a seller is offering.

The first is freehold by a Thai company which ensures 100% control and perpetual ownership throughout future generations, but is substantially more expensive to set up and maintain.

The second is a leasehold from the "seller" which is far much less costly. In most cases, the seller will stipulate that the lessee pays the 1.1% lease registration fee charged against the rent declared paid for the first and or subsequent 30 year lease terms (depending on how the lease agreement is worded), but there are no annual maintenance costs whatsoever. Although nearly all proposed lease agreements are for three back-to-back 30 year terms, possession of the leased property can never be 100% guaranteed beyond each current registered term unless the original parties (Lessor & Lessee) are alive and well at the end of each 30 year term in order to effect extension or renewal for the next 30 year term. Perpetual, irrevocable letters of power of attorney executed by the lessor to effect such lease renewal is not an option because they are not supported by Thai law.

Some project developers offer off-shore company schemes through ordinary and preferential shareholdings in a Thai land owning company. This can be made to sound very attractive, but the bottom line is when such property is put on the market for sale, a buyer gets nothing but one or two share certificates for one or two off-shore companies against which no due diligence can be performed. The same applies if a buyer wishes to obtain credit facilities using the property as collateral which is only comprised of the same one or two share certificates.

It is also important to consider the fiscal status of the seller and whether or not they are making full or reduced declarations of sales proceeds at the land office for tax purposes. Under declaring on the seller’s part will not affect any freehold purchase, but may have serious consequences in the case of leasehold. The latter case puts a lessee at risk of having a lien put on the property by the revenue department for back taxes, which also applies in the case of a lessor being placed in receivership for non-payment of debt. While a lien on the property cannot interfere with a lessee’s possession of the property for the full extent of the remaining lease term under any current registered lease agreement, it would prevent any extension without settling some portion of debt owed by the lessor in order to release the lien.

Although the preceding paragraph sounds a bit onerous, numerous developers do conduct their business with complete transparency with the competent authorities as well as with ethical financial prudence that would not put their lessees at risk of having a lien put on their property. When this is deemed to be the case, with the exception of the possibility of not being able to enforce lease extensions in 30 or 60 years hence for the reason given above, a 30 + 30 + 30 year leasehold can be an attractive alternative over freehold through a company because most all long term lease agreements incorporate provisions to allow the lessee to convert leasehold to freehold in the event the law changes to allow non-Thai nationals to own land or if the lessee wishes to sell the property to a Thai national person or company. Additional weight is added to the leasehold option due to the expectation in the eyes of the general public that it is likely that Thailand within the next 30 years (hopefully sooner than later) will allow land ownership for private residence of up to one Rai each by non-Thai nationals. In part, this is due to pressure regularly presented to the Thai government by numerous other countries in Thai nationals are freely allowed to own land for private residence, including its neighbor Malaysia.

BUILDINGS:

There are no restrictions on non-Thai nationals from owning buildings. Therefore, whether land possession is under leasehold or freehold, it is highly expedient that non-Thai nationals own the buildings on their land for two main reasons: (1) Buildings owned by companies are subject to a Structure Usage Tax of 12.5% of assessed annual rental value, ie. If rental value is assessed at 10,000 Baht per month, this annual tax would be 15,000 Baht. and (2) Future sale of buildings (and land by Thai nationals) is not subject to capital gains tax, but rather a Specific Business Tax of 3.3% of the declared sale price if sold within five years of ownership. Afterwards, the sale is subject to only Stamp Duty of 0.5%. Although the formula for calculating personal income tax is rather complicated, it is based on the minimum assessed value of the concrete shell space and the number of years the property has been owned and in terms of percentage of total sale price, it relatively insignificant, especially when compared to taxes levied in most other jurisdictions. On the other hand, property sales by companies are always subject to payment of Specific Business Tax of 3.3% and capital gains of up to 30%.

Building ownership is established in one of two methods, namely, purchase of an existing building from the seller or being named in a building construction permit as "owner of the building" for new structures.

LIMITED COMPANY REGISTRATION

Required Documents:

Foreign National Promoters & Shareholders: Signed photocopies of passport particulars;

Thai National Promoters & Shareholders: Signed photocopies of I.D. Card (front & back) & Household Registration Document;

Company Promoters:

Minimum: 3 persons

Maximum: 100 persons

Except as provided otherwise pursuant to the Alien Business Act, investment laws, international treaties and other laws, not less than one Thai national person or juristic entity must always hold not less than 51% of all the shares issued by the limited company. All company shares are issued, not authorized; subsequently, a limited company cannot own or take on pledge any of its own shares. A Thai company with up to 49% foreign shareholding which holds shares in other Thai companies is deemed to be a Thai shareholder.

Company Name Reservation:

A company name reservation request form consisting of up to three preferences must be submitted to the provincial Commercial Registration Office which in turn faxes the request to the Trade Department in Bangkok. Replies are usually faxed back within 2-3 working days. Use of the word "Royal", other words pertaining to royalty or the Royal Family are prohibited. Inclusion of the words "financial", "foncier", "investment" or other related words require special application for approval and only the Thai name is deemed official for registration purposes. English or non-European language names may be followed by "Co., Ltd.", "Ltd.", or "Corp.,Ltd.". European language names must be followed by the English equivalent of “Co., Ltd.”, “Ltd.”, or "Corp., Ltd.".

Registered Capital and Capitalization Fees:

Shares must have a par value of not less than five Baht each. A minimum capitalization fee and stamp duty of 5,500 Baht is charged for up to the first 1.0 million Baht of registered capital. Above this, the fee and stamp duty is 550 Baht per 100,000 Baht of registered capital. If a Company intends to request a work permit for a foreign national director to perform work in Koh Samui, Thailand, the company must show having paid up capital of 2.0 million Baht for each work permit. As of 15 May, 2002, the Trade Department now requires bank certification or and affidavit signed by a Director-to-be at the time of submission as to the existence of such capital in cash or assets or upon any subsequent increase in capitalization, the same bank certification or affidavit signed by a Director. The minimum paid up capital is 25% with the balance callable as the company directors see fit.

Registration Procedures:

• First Stage: Memorandum of Association

  • A minimum of 3 natural persons must affix their signature to the Memorandum of Association form provided by the Trade Department in Bangkok and Commercial Registration Offices in the provinces. Attached to the Memorandum of Association is a detailed list of the company’s business objectives. Many business objectives are already included in one of four standard form sets provided by the Trade Department to which additional objectives can be appended. It is not required to use any of these standard formats and there is no minimum or maximum limit to the number of business objectives.

• Second Stage: Articles of Association (Company-by-Laws)

  • A minimum of 7 days must transpire from the date the Memorandum of Association is registered to the date the Articles of Association, Minutes of the Statutory Meeting and Duplicate Register of Shareholders are submitted for registration. A company may choose to use a basic set of Articles provided by the Trade Department or draft its own Articles to better suit its needs (highly recommended in most cases). The standard set provides that meetings may be summoned by public notice in a local newspaper and requires only 25% of the shareholders and/or their proxies to be present to form a quorum of which a simple majority vote is required to pass ordinary resolutions regarding appointment or removal of directors, altering the designation of the authority of the directors, changing the company’s registered address, adopting a new company seal, etc. By using customized Articles of Association, it is possible to grant a minority group of shareholders (i.e. 49% foreign nationals) a majority control of internal and external company affairs.

  • The company’s first Register of Shareholders must include the initial seven natural persons whose names appear on the Memorandum of Association to which other persons or juristic entities can also be added as additional shareholders without requiring any signatures or other documentation.

Board of Directors:

There are no restrictions on the number, nationality or authority of the Company’s Directors with the exception that the Company is required to have not less than one Director and that all Directors of the Company must be natural persons. Foreign national directors are required to have a work permit only if they conduct company business activities in Thailand.

Directors Authority:

The most common designation of directors authority is "The signature of one director together with the company seal". It is also possible either through the Articles of Association, or more commonly, through resolutions passed at a general meeting of shareholders, to limit the authority of the Company Directors either by specified name, numbers or category of transactions, ie. "The signature of one Director together with the Company Seal except for matters concerning the acquisition or disbursement of assets and/or incurring debt exceeding 100,000 Baht whereby such transaction shall require the signature of Director ’A’ and Director ’B’ together with the Company Seal".

Operation of Company Bank Accounts:

By resolution passed by the Board of Directors, authority to operate various types of Company accounts can be set up and restricted in any way desired and operated by any person or combination of persons as the Directors see fit. Companies are not required to open company accounts until commencing commercial business activities. Company expenditures may be made from cash on hand or money in private accounts, but must be accompanied by official tax receipts or payment vouchers issued by the Company.

Nominee Shareholders:

A Thai national cannot legally serve as a nominee owner of anything on behalf of a foreign national which by law a foreign national is not entitled to own in their own name. This applies to nominee shareholders of Thai nationality. However, it is common practice nationwide to provide "real" Thai national shareholders for the foreign owners of limited companies who in turn pre-sign Share Transfer Contracts and Letters of Proxy to be held by the beneficiary owners of the Company. In this case, the registered capital must be fully paid up to eliminate the possibility of any liability be held against the shareholders.

Time Frame:

Assuming that all personal identification papers and required signatures can be obtained as soon as they are needed, company registration can be completed in less than two weeks from the date a name is approved by the Trade Department.

Tax Identification Card Registration:

Limited companies are required to register for a Tax Identification Card within 60 days of registration. In addition to photocopies of a standard set of company documents other documents are required as follows:

• i. If the company owns the premise, proof of ownership together with a photocopy of the household registration document for the office address.

• ii. If the company is simply allowed to use the premises without a lease, a letter of consent signed by the owner of the premises together with signed copies of the household registration card for the premises, household registration card if the owner if not registered at the office address and a copy of the owner’s identity card;

• iii. If the premises is leased, a copy of the lease agreement affixed with duty stamps amounting to 0.1% of the total amount of rent paid over the entire lease term, a letter of consent from the lessee if not leased directly by the company, photocopy copy of the household registration card for the leased premises address and photocopy of the lessee’s identity card and household registration card if different from the office premises address or passport in the event the lessee is a foreign national.

• iv. A map drawing showing the company’s office location.

Various Taxes:

• Monthly Filing

  • i. Withholding taxes for salaries, wages, rent, advertising and other services hired on a regular or occasional basis must be submitted within the 7th day of each successive month. The rates vary according to category of payment.

  • ii. Value Added Tax (VAT) paid out for purchases of goods and services is deducted from VAT collected for sales of goods and services and the difference must be submitted within the 15th day of each successive month. The current VAT rate is seven percent.

  • iii. Specific Business Tax for banking, insurance, real estate and other specific, but limited, categories of business activities must be submitted within the 15th day of each successive month.

• Bi-Annual Filing (all companies):

  • An estimate of annual profit or loss must be submitted within two months after the first six months of the financial year of the company, usually designated as 1 January to 31 December. If a profit is estimated, 50% percent of the tax on such profit must be paid within two months after the first six months of the financial year.

• Annual Filing (all companies):

  • A complete audit report comprised of not less than a balance sheet and profit loss statement certified by a licensed auditor must be submitted within five months after the end of the financial year. Net profit is taxed at 30% after deductions of international standard categories of overhead expenses and prepaid mid-year tax submissions (if any). Net losses (if any) can be carried forward for a period of five years. For a period of four years commencing year 2004, limited companies with capitalization or assets not exceeding 5 million Baht at the end of each financial year and annual net taxable income up to I million Baht, the tax rate has been lowered to 10%. For net taxable income over I million Baht up to 3 million Baht, the tax rate is 25%. Over 3 million Baht is taxed at 30%. This is an incentive intended to help Small & Medium Enterprises (SME’s).

LAND OFFICE FEES & TAXES PAID UPON REGISTRATION OF REAL ESTATE TRANSACTIONS

The categories of fees, taxes, costs and expenses paid at the Land Department Office at the time of registering various categories of real estate transactions are as follows:

Transfer Fee:

2.0% of the minimum assessed value (MAV) established by the Land Department.

Stamp Duty:

0.5% of the declared value. If the seller, juristic or natural person, is registered with the Revenue Department to pay specific business tax on sale of real estate, the stamp duty is waived.

Specific Business Tax:

3.3% of the declared value. This is always paid when a juristic person sells real estate and paid by natural persons who’ve owned the real estate for less than 5 years at the time of sale and provided they are not deemed to be in the business of selling real estate.

Income Withholding Tax:

1.0% of the declared value if sold by a juristic entity; 5.0% based on the MAV worked into a complicated formula which uses the number of years held as part of the formula. If a natural person sells only one piece of real estate (land and/or building) in any one calendar year, the personal income tax liability is based entirely on the Land Department’s MAV and paid in full at the time of registration of the sale without need to submit or declare this sale income in an annual personal income tax form in the subsequent calendar year. The Land Department’s MAV for land and buildings is reassessed every four years. The MAV for buildings is calculated based on current market costs to construct a concrete shell building, with exception for condominiums for which the MAV is based on the developer’s "published" sales prices at the time of registering the condominium project with the Land Department.

Capital Gains Tax:

The term "Capital Gains Tax" does not exist in Thai tax law. When a company sells real estate of any kind, the difference between the original purchase price and the subsequent declared sale price is treated as normal income, in the same way as income derived from trading merchandise or providing services. Overhead business and administration expenses, including amounts paid towards transfer fees and specific business tax at the land office at the time of sale are tax deductible items. What ever is left over becomes net taxable income against which the company income tax rate is 15% for net taxable income of up to 1,000,000 Baht, 25% for net taxable income over 1,000,000 Baht up to 3,000,000 Baht and 30% for net taxable income over 3,000,000 Baht. This concept, commonly referred to as "capital gains tax" is not applicable to sale of any kind of real estate by natural persons, except those engaged in trade or development of real estate.

Lease Registration Fees:

1.1% of the total amount of rent declared paid over the entire registered lease term (maximum 30 years).

Mortgage Registration Fees:

1.1% of the total collateral amount.

Miscellaneous Expenses:

There are additional minor expenses which rarely if ever exceed 1,000 Baht per transaction.

Business Service Fees

Private Limited Company Registration

Commercial Department Fees and stamp duty:

Registered Capital of up to 1,000,000 Baht:5,000 THB (550 Baht per 100,000 Baht registered capital over one million Baht)

Solicitor, Document Processing and Translation fees (inclusive):

• Lodging request to the Trade Department to reserve company name.

• Draft and lodging all application forms and documents to the Commercial Registration Office concerning registration of the Memorandum and Articles of Association, minutes of the Statutory Meeting, etc.

• Tax I.D. Card registration for the company and its Directors.

• Minutes to Directors Meetings as required for initial transactions, etc.

• Meeting with certified accountant subsequent to registration

• (All documents in Thai Language according to Thai Law)

50,000 THB

Translations:

Translation of documents into English language

( Directorship documents only - no charge ) 6,000 THB

 

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