Buying a business in Thailand: legal framework and precautions to take

Buying a business in Thailand

Buying a business in Thailand is an attractive decision for many international investors, seduced by the country’s dynamic economic growth, strategic position in Southeast Asia and pleasant living environment. However, while this ambition may seem promising, there are many important legal subtleties to understand. Indeed, Thai law imposes specific restrictions on foreigners with regard to commercial property. Legal and financial pitfalls must be avoided to ensure the legality of the operation and the security of the investor.

Who can buy a business in Thailand?

The first question to ask when considering buying a business in Thailand concerns who is legally entitled to do so. Under the Foreign Business Act, foreigners are subject to specific restrictions concerning the acquisition and operation of a commercial business. The Act distinguishes three categories of activities, depending on their accessibility to foreigners:

List 1: Activities totally forbidden to foreigners, such as rice cultivation, fishing or the press. These sectors are reserved exclusively for Thais.
List 2: Activities authorized to foreigners under certain conditions, notably by obtaining a Foreign Business License (FBL). These sectors include, for example, construction work or the production of specific goods.
List 3: Activities requiring special authorization, issued by the Director General of the Commercial Registration Department, such as wholesaling or the sale of certain products.

For foreigners wishing to buy a business, it is therefore essential to determine in which category their sector of activity falls and, if applicable, to ensure that they meet the criteria required to obtain a commercial license.

The main criteria for obtaining a business license in Thailand are as follows:

1.Type of activity: Certain activities are strictly forbidden to foreigners (List 1 of the Foreign Business Act). For List 2 and 3 activities, a business license is required. The authorities will examine whether the activity is beneficial to the Thai economy, national security or social development.

2.Minimum capital: Foreigners must prove that they have sufficient capital. For most activities, the minimum capital requirement is 2 million baht, but for certain activities it may be 3 million baht or more.

3.Benefits for Thailand: The license application is examined according to the positive impact the activity could have on Thailand, particularly in terms of employment, technology transfer and local economic development.

4.Number of Thai employees: Companies run by foreigners are often required to hire a certain number of Thai citizens, especially if the foreigner wishes to obtain a work permit. A common ratio is 4 Thai employees for each work permit.

5.Financial stability: The applicant must prove financial stability to ensure that the business can grow without jeopardizing the local economy. This includes proof of funds and sound financial management.

These criteria are essential to ensure that foreign investment in Thailand makes a positive contribution to the economy while complying with local regulations.

It should also be noted that, under the Foreign Business Law, a foreigner may not hold more than 49% of the shares of a company operating in regulated sectors. However, there are exceptions to this rule, notably for companies promoted by the BOI. Under the BOI, investors may be authorized to hold the majority of shares under certain conditions.

What are the advantages and disadvantages?

Buying a business in Thailand offers undeniable advantages, not least the chance to benefit from the country’s economic growth and tourist appeal. However, there are also many disadvantages, particularly for foreign investors subject to strict legal restrictions.

Advantages :

High profitability potential in fast-growing tourist areas.
Tax advantages for companies promoted by the BOI or covered by bilateral treaties.

Disadvantages:

Significant restrictions on foreign ownership and the need to obtain a business license.
Risks associated with taking over an existing company’s liabilities.
Unpredictable rent increases and key money practices.

The steps involved in buying a business in Thailand

Generally speaking, acquiring a business in Thailand is done either by buying out shares in an existing company, or by creating a new legal entity. Here are the main steps to follow:

1.Setting up or buying out a company: One of the most common ways of buying a business in Thailand is to buy out the shares of an existing company. When making a buyout, it is essential to carry out a thorough check to ensure there are no hidden liabilities, debts or other legal commitments that could weigh on the buyer.

2.Obtaining a Foreign Business License (FBL): To undertake a business activity in Thailand, it is necessary to first obtain a foreign license in certain sectors as defined by the Foreign Business Act. This administrative process can be lengthy and complex, which is why it is often advisable to instruct a local lawyer specialized in commercial law.

3.Signing a commercial lease: The majority of businesses in Thailand operate from rented premises. The lease contract is therefore a fundamental element in the acquisition of an existing business. It is important to understand the terms of the lease, including its duration, renewal terms, and the practice of “key money”, a substantial sum paid to the landlord in advance to guarantee the contract.

Where to buy a business in Thailand?

Certain regions of Thailand are more suitable for buying a business, depending on the activity in question. Tourist areas such as Bangkok, Phuket, Pattaya and Chiang Mai attract a great deal of foreign investment in the hotel, restaurant and leisure sectors. These areas offer strong potential for international clientele, but also present higher costs and increased competition. Less touristy areas, on the other hand, may offer lower-cost opportunities, but require in-depth analysis of local economic development prospects.

Pitfalls to avoid

Buying a business in Thailand can be risky if certain precautions are not taken. Here are the main pitfalls to avoid:

Taking over an indebted company: When acquiring an existing business, it is possible to inherit not only the assets but also the liabilities of the company, including hidden debts or ongoing litigation. It is therefore essential to carry out a thorough verification before finalizing the transaction.

The commercial lease trap: As mentioned above, many businesses in Thailand operate under lease agreements, and landlords may impose restrictive conditions or significant rent increases at each renewal. In addition, the payment of key money to secure the renewal of the lease can represent a significant additional cost.

Failure to meet Thai employee quotas: For a foreigner to obtain a work permit in Thailand, the company must employ a minimum of four Thai employees per work permit granted. It is crucial to check that the company complies with this quota, or risk finding itself in breach of the law.

Conclusion

Investing in a business in Thailand can be a lucrative opportunity for foreign investors, provided they fully understand the legal framework and take the necessary precautions. The restrictions imposed by the Foreign Business Act require careful planning, particularly when it comes to setting up a company and obtaining the requisite business licenses. Due diligence is essential to avoid financial and legal pitfalls, and it is strongly recommended to consult a specialist lawyer before committing to any transaction. A thorough knowledge of Thai property and business laws is the key to successful business investment in this country.