Call us now:
Why having a thai Partner is critical for establishing a company in Thailand ?
Thailand remains one of Southeast Asia’s most appealing destinations for overseas financiers, providing a strategic location, established infrastructure, and competitive labor expenses. However, foreign businesspeople must navigate a complex legal environment when starting a business in the Kingdom, often requiring a reliable Thai partner to ensure compliance with local regulations.
Central to this framework is the Foreign Business Act of 1999, a key statute that limits the commercial activities non-nationals may lawfully undertake. The Act works alongside the Civil and Commercial Code and other sector-specific rules, forming the foundation of corporate and investment law in Thailand. Foreign investment in Thailand typically requires engaging a Thai partner to satisfy compulsory ownership quotas and licensing requirements.
At Benoit & Partners, we provide expert guidance to help foreign investors understand the Thai partner requirements under Thai law. Whether you’re starting a business, entering a joint venture, or navigating foreign ownership restrictions, our team assists in complying with local regulations. Specific laws govern the role and rights of Thai partners, making it essential to understand the legal framework, documentation, and requirements involved. We specialize in explaining key aspects of Thai partnership structures and ensuring a smooth, legally compliant investment in Thailand. With our support, you can confidently move forward with your business ventures.
This article provides a comprehensive legal explanation of why teaming with a Thai colleague is imperative, the constraints of the Foreign Business Act, the strict prohibition of proxy structures, exemptions under the Foreign Business Permit and Board of Investment, and the legal protections available to foreign shareholders.
Get expert legal guidance.
Table of Contents
The Foreign Business Act and the 49/51 rule: legal requirement for a Thai partner
The Foreign Business Act categorizes commercial lines into three distinct lists:
List 1: Activities completely barred to aliens like agriculture and land trading;
List 2: Activities linked to national security, culture, and arts requiring Cabinet assent for foreign participation;
Third list : industries where Thais are not yet prepared to contend requiring a Foreign Business License for non-national involvement, including most service industries.
While foreign investment under Lists 2 and 3 is restricted to 49% ownership without approval, a Thai partner is legally necessary for compliance.
The Foreign Business Act broadly defines foreign to include any company over 50% foreign-owned, even those incorporated locally. This threshold mandates the 49/51 structure and requires the inclusion of a Thai partner.
Non-compliance with this provision can lead to criminal penalties, including imprisonment for up to three years and substantial fines, in addition to the forced dissolution of the company. Therefore, a Thai partner is not merely advisable but legally indispensable in most non-exempt sectors.
Nominee shareholding structures, an illegal bypass of the Thai partner requirement strictly prohibited by the law
To bypass the foreign ownership restrictions under the FBA, some foreign investors have historically used Thai nominees, individuals who hold shares on behalf of foreigners without real ownership.
However, Section 36 of the FBA explicitly prohibits nominee arrangements. A Thai partner must be a genuine investor who contributes capital and exercises shareholder rights independently.
Authorities rigorously examine holdings that appear to lack financial means or decision-making input from local partners. Suspicions of evading ownership limits through nominees trigger investigations, led by regulators such as the Department of Business Development and Ministry of Commerce. Strict laws aim to prevent concealed foreign control through nominal Thai ownership on paper only.
If a firm is found to have used nominee shareholders, both the foreign and Thai partners face serious legal consequences, including imprisonment for up to three years, fines ranging from THB 100,000 to THB 1,000,000, and revocation of the company’s business registration. Therefore, any Thai partner involved must be a bona fide co-investor with a demonstrable financial interest.
Exemptions to the Thai partner necessity: FBL and BOI advancement
Two fundamental lawful instruments permit outsiders to work in restricted areas without a Thai Partner: acquiring a Foreign Business License (FBL) and getting promotion from the Board of Investment (BOI).
The procedure for procuring an FBL under Section 17 of the FBA requires extensive documentation and a legitimate justification of the business’ benefits to Thailand, such as innovation transfer and local employment. Approval is discretionary and subject to review by the Remote Business Committee. While obtaining an FBL allows for 100% foreign ownership, the process is difficult, and approval is not guaranteed.
The BOI may grant investment privileges to projects in key economic sectors under the Investment Promotion Act B.E. 2520 (1977). A BOI-promoted company may be exempt from the restrictions of the FBA, allowing 100% foreign ownership without the need for a Thai partner. Additionally, the BOI offers incentives, such as corporate income tax exemptions, import duty reductions, and relaxed rules for foreign employee work permits. However, these exemptions only apply to specific industries and require strict compliance with BOI-imposed conditions. Failure to comply can result in the revocation of benefits, reinstating the need for a Thai partner.
Corporate governance structures to frame relations between investors and Thai partners
The Foreign Business Act requires Thai majority ownership in certain sectors, but foreign companies can structure decision-making authority between shareholders. These rules are outlined in the Articles of Association, which can be tailored to decision mechanisms, voting thresholds, and board composition. A Shareholders’ Agreement often supplements these provisions, establishing contractual obligations beyond the articles. Together, they ensure transparency, predictability, and aligned objectives within the corporate framework.
- Reserved Matters and Joint Decision Rules
To facilitate joint rule and prevent unilateral actions, owners may stipulate vital choices. These include amending founding documents, increasing capital, taking on debt, or appointing directors. Such actions require approval from both the Thai partner and external shareholders. Reserved topics in both constitutional papers and investor contracts foster responsibility and synchronization between the partners. - Share Transfer Conditions and Approvals
Shareholder relationships can also be governed by transfer restrictions. These may include pre-emptive rights, tag-along or drag-along clauses, or the requirement for board or shareholder approval before a transfer. Such mechanisms protect all parties and preserve the stability of the shareholding structure. They ensure any change in ownership respects the initial spirit of the partnership.
- Board Composition and Appointment Mechanisms
It is also possible to agree, in the Articles or through a Shareholders’ Agreement, on rules for the appointment of directors. For example, each shareholder group may nominate a proportional number of directors or may require mutual consent for key appointments. This ensures balanced representation at the board level and contributes to good governance practices.
These measures aim to structure a clear and predictable cooperation framework between the Thai partner and the foreign investor. They ensure full compliance with Thai corporate law and do not intend to circumvent the legal framework.
Get expert legal guidance.
Legal agreements to frame the relationship between foreign investor and Thai partner: why the shareholder agreement matters
In joint ventures between a foreign investor and a Thai partner, the Shareholder Agreement plays a pivotal role. It defines the legal and commercial framework of the partnership. The Articles of Association provide the general legal structure of the company. However, the Shareholders’ Agreement offers a tailored and private contract between the parties. This contract reflects their specific expectations, strategic goals, and risk allocation mechanisms.
What is the intent of a shareholder agreement?
The primary function is to provide clarity on internal dynamics. It delineates the prerogatives and obligations of each party. It establishes processes for consensus building and conflict mediation. It also supplies a framework for unforeseen difficulties like paralysis, separation of ways, or fluctuations in involvement.
This is especially important when one side, often the foreign investor, takes on disproportionate risk. The foreign investor contributes capital or expertise, while the Thai partner offers local networks, authorizations, or operational backing.
Key elements commonly incorporated
A well-drafted shareholder agreement in Thailand routinely incorporates the following provisions:
- Procedures for important determinations: Stipulations defining decisions requiring unanimous assent, supermajority approval, or basic majority consent. This includes investments, leadership selection, strategic planning, or substantial outlays.
- Profit allocation: Clear rules for how and when dividends are distributed, accounting for shareholder loans or reinvestment intentions.
- Reserved prerogatives:A list of strategic determinations that cannot be made without express permission from both shareholders. This safeguards the minority entity, often the foreign investor.
- Impasse solutions: Processes to resolve deadlocks, such as mediation, third-party arbitration, or buy-sell options.
- Transfer of shares: Clauses regulating pre-emptive rights, rights of first refusal, tag-along and drag-along privileges, and any limitations on transfer to third parties.
- Exit pathways: Predetermined procedures for departure, such as put and call options, initial public offerings, or termination of the joint venture.
- Confidentiality and non-compete: Protections against disclosing sensitive business information and competition by the Thai partner post-departure.
Each provision must be carefully negotiated to reflect the commercial realities and long-term vision of the parties. It must also ensure conformity with Thai societal values and regulatory constraints.
Our team at Benoit and Partners routinely assists foreign investors in drafting and assessing customized agreements. These agreements align with Thai law and safeguard their interests. We help structure secure and balanced partnerships from the outset.
Conclusion
The legal necessity of a Thai partner in Thailand is not simply due to customary practice, but stems from the Foreign Business Act’s requirements. Thai law explicitly forbids proxy arrangements, further emphasizing the need for authentic and transparent partnerships. While some carve-outs exist, such as through a Foreign Business License or BOI incentives, these come with stringent stipulations and limited applicability.
In light of these realities, foreign investors should structure their partnerships carefully. Thai law provides a robust governance framework, including corporate bylaws and contractual instruments. These allow shareholders to clearly define roles, responsibilities, and decision-making processes. These tools do not undermine the Thai partner’s position but aim to create a balanced and well-regulated relationship among all parties.
By incorporating sound governance principles into the company charter and supplementing it with well-drafted agreements like shareholder accords or loan contracts, foreign investors and their Thai counterparts can create a stable and predictable business environment. Such arrangements help prevent misunderstandings, align interests, and ensure long-term cooperation.
Given the uniqueness of each case, engaging qualified Thai legal counsel from the start is essential. This ensures full compliance with local regulations, avoids inadvertent proxy risks, and establishes a legally sound and sustainable business partnership in Thailand.
If you need further information, you may schedule an appointment with one of our lawyers.
FAQ
In most service and restricted sectors, yes. Thai law (Foreign Business Act B.E. 2542) requires that foreigners hold no more than 49% of shares unless a specific exemption applies.
No. Nominee shareholding structures are illegal in Thailand and can result in criminal penalties, including imprisonment and company dissolution.
Foreigners may apply for a Foreign Business License (FBL) or receive Board of Investment (BOI) promotion to operate with 100% foreign ownership, under strict conditions.
Through well-drafted Shareholders’ Agreements, reserved matters, voting rules, and governance structures that ensure balance and transparency.
The Articles of Association and a Shareholders’ Agreement are essential. Additional agreements may include loan contracts or director appointment clauses.