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Foreign Business Act and Reserve Requirement Update

In the October-December 2006 edition of the SGA Bulletin we featured articles about a number of new regulations and orders affecting foreign persons and/or entities in Thailand. In the latter part of 2006 changes were made to immigration regulations, company registration procedures and land purchase procedures for certain transactions involving foreign persons or entities.  In the first three months of 2007 additional legislation has been passed regulating the actions of foreign persons and entities in Thailand.

Most notably in early January 2007 amendments to the Foreign Business Act were passed by the Cabinet.  The amendments significantly change the definition of a foreign company to include companies where 50% or more of the voting rights are held by foreign persons or entities.  In late March 2007 the amendments to the Foreign Business Act are still pending approval by the Council of the State and an alternative version of the amendments have been introduced.

In December 2006 the Bank of Thailand issued a reserve requirement stipulating that financial institutions must withhold 30% of foreign currency bought or exchanged against the Thai baht (except in cases where the transaction is related to trade in goods and services or repatriation of investments abroad by residents).  The Bank of Thailand has subsequently announced several exemptions to the 18 December reserve requirement in 20 December 2006 and 1 March 2007 Orders.

This month's feature news articles Amendments to the Foreign Business Act and The Reserve Requirement and Exemptions include both an interpretation of the legislation and an overview of subsequent developments.

Foreign Business Act Amendments

On 9 January 2007 the cabinet passed amendments to the Foreign Business Act of 1999 introduced by the Ministry of Commerce. If the amendments become law several provisions of the Foreign Business Act would be repealed or modified. 

Provisions of 9 January 2007 Foreign Business Act

The definition of "foreign" business entities would be modified to include entities where half or more of the voting rights are held by foreign nationals. Thai business entities that would become foreign business entities operating in the restricted List One or the restricted List Two categories, under the amended definition, would be required to file for a certificate of authorization and would be allowed to continue to operate as a foreign company in restricted List One or restricted List Two for two years. Thai business entities that would become foreign business entities operating in List Three would be allowed to carry out their business indefinitely provided they were issued a Certificate of Authorization. 

Persons or business entities in violation of certain provisions of the Foreign Business Act (including the provision prohibiting the use of nominee shareholders) would be required to alert the Ministry of Commerce and would have one year to restructure their company to be in accordance with the law. Fines levied for violation of certain provisions of the Foreign Business Act would be increased or modified. List Three of industries restricted to foreigners would also be slightly modified.

Alternative Version of the Foreign Business Act Introduced

The government may be asked to consider a new version of the Foreign Business Act drafted by a National Legislative Assembly member and signed by more than 50 legislative members in March 2007.  The new version is intended to ameliorate some of the more restrictive requirements of the amendments of the FBA approved in January.  While the act reportedly also contains the controversial provision defining a company as foreign if more than half of voting rights are held by foreign nationals, the draft amendments differ from the Ministry of Commerce version in their handling of existing companies. The newly introduced amendments call for the establishment of a screening committee that would evaluate issues such as voting rights and nominee structures on a case to case basis with firms operating on a "good faith" basis waived from the FBA.

Commerce Ministry Proposes Changes to Alternative Draft

According to media reports released in the end of March 2007 the Commerce Ministry is proposing changes to the draft FBA prepared by members of the National Legislative Assembly.  The secretary to the Commerce Minister is reported to have called the "good faith" provisions of the draft bill, in which the operation of foreign companies in restricted industries would be considered on a case by case basis by a special committee, impractical.

The Reserve Requirement and Exemptions

On 18 December 2006, the Bank of Thailand issued Announcement No. 51 "The Reserve Requirement on Short-Term Capital Inflows". Under this regulation, the Bank of Thailand requires financial institutions to withhold 30% of foreign currency bought or exchanged against the Thai baht (except in cases where the transaction is related to trade in goods and services or repatriation of investments abroad by residents). After one year, foreign customers can file a request for the return of their funds. Customers repatriating their funds before one year will be refunded only two-thirds of the reserve amount.

Exemptions: Equity investments in SET, MAI, TFEX and AFET

Two days after the issuance of the reserve requirement, the Bank of Thailand issued a 20 December 2006 announcement relaxing certain provisions of the requirement. Currency bought or exchanged against the baht for equity investments (not including mutual funds) in the Stock Exchange of Thailand (SET), the Market for Alternative Investment (MAI), the Thailand Futures Exchange (TFEX), and Agricultural Futures Exchange of Thailand (AFET) are exempted from the 30% reserve requirement. The baht proceeds obtained from the above transactions can be credited to Nonresident Baht Accounts allowed to exceed 300 million baht.

Exemptions: Investments in Debt Instruments and Unit Trusts

Non-resident investments in debt instruments and unit trusts covered by hedging contracts of at least three months are exempt from the 18 December 2006 reserve rule according to a 1 March 2007 Bank of Thailand announcement. The Central Bank will require investors to first buy financial products as an underlying transaction for conversion into baht.  Funds will be required to be held in special custodian bank accounts opened before 30 March and designated for non-resident deposit baht accounts for debt securities and unit trusts.  The Central Bank will also relax a rule prohibiting non-residents from selling bonds before three months.

Note: There are other exceptions and certain cases may fall within a "gray area" and be decided at the discretion of Bank of Thailand officials. Also in general the regulations come into play with amounts over 20,000 USD.

Thai NGOs Concerned Over Japan-Thailand FTA

According to media sources, the Office of the National Human Rights Commission of Thailand held a press conference on 16 February to oppose the decision to accelerate the signing of a Free Trade Agreement between Thailand and Japan.  Representatives from non-profit organizations are worried the FTA will have negative consequences on Thailand.  In its current state, the FTA would allow Japan to control micro-organism patents and may allow toxic wastes to be dumped in Thailand.

Draft Law Would Enable BOT to Issue Fewer Bonds

A new law authorizing the Bank of Thailand (BOT) to take deposits from commercial banks should lead to the issuance of fewer bonds reported one 21 February government source.  The Bank of Thailand has allegedly faced criticism for issuing too many bonds to absorb the liquidity in the baht after measures last year weakening the baht.  If the draft act is implemented the Bank of Thailand could take deposits from commercial banks with interest payments giving the BOT another tool to handle liquidity. Commercial banks would receive interest similar to the returns obtained from holding BOT bonds.

The Ministry of Commerce has suggested setting aside 200 million baht for businesses who can prove they have been adversely affected by Thailand's Free Trade Agreements.  A Ministry Official reported that monies from the fund would be used to conduct research to improve the productivity and competitiveness of Thailand's industries, rather than given directly to affected industries, to avoid violation of World Trade Organization rules.

Insurers Disapprove of Life Insurance Act Amendments

Insurers announced on 7 March 2007 that life insurance premiums would rise after the Life Insurance Act is amended.  According to media sources life insurers are in opposition to the act as they believe insurers are already sufficiently protected under the legal reserve system.  The amended act would require insurers to contribute between .25% and .5% of premiums to a government fund that would be used to compensate consumers in the event that an insurer becomes insolvent.

Cabinet Passes Alcohol Control Bill

On 13 March 2007 the cabinet approved a draft Alcohol Control Bill which would impose a total ban on the advertising of alcohol and raise the minimum of age for purchase of alcoholic beverages to 20.  The bill awaits consideration by the National Legislative Assembly.

1/2548 Thailand Supreme Court Opinion 15 (No. 547) 2005
Likid Tubtimthong v. Laor Tubtimthong

Re: Paternity

The first defendant and the plaintiffs' mother have lived together as husband and wife since 2480 (1937), but they do not have a marriage license. Furthermore there is no evidence proving the first defendant has registered the plaintiffs as his adopted children or that the court has passed a judgment recognizing the defendant as the father of the plaintiffs.  Neither plaintiff has a legal father.  According to Section 156/2 of the Civil and Commercial Code, children cannot sue their parents. As the plaintiffs are not the legally recognized children of the defendant, they can sue the first defendant.

1/2548 Thailand Supreme Court Opinion 113 (No. 625) 2005
Somboon Chinwongprom vs. Threenirat Kongbangpra

Re: Loan Agreements

The defendants refuse to comply with a loan contract made with the plaintiff.  The defendants dispute the contract as they claim to have procured a loan for 100,000 baht but the plaintiff changed the amount to 275,000 baht.  If the statement of the defendants is true, then the plaintiff has defaulted on the contract and the court could dismiss the case.  Both defendants are willing to pay the plaintiff 100,000 baht with interest if the plaintiff returns the fake contract so they can destroy it.  However the court can not permit this because if the loan contract is fake then there is no written evidence of the loan.  Also the contract belongs to the plaintiff.  Therefore the counterclaim the defendants filed against the plaintiff is dismissed.

1/2548 Thailand Supreme Court Opinion 36 (No. 256) 2005
Peranut Viannak vs. Arkarnsonkroa Bank

Re: Labor; Employment Contract

The plaintiff is the manager of the consumer credit department. His responsibility is to analyze and manage the consumer credit system. However the plaintiff gives consumer credit without performing any analysis. The plaintiff’s behavior is not in compliance with the bank's regulations. Although there is no evidence of whether the noncompliance of the plaintiff is intentional, the plaintiff's actions demonstrate that he is irresponsible and this is the reason why the defendant does not trust the plaintiff to work for the company anymore. The defendant's reasons for terminating the employment contract of the plaintiff are valid.  The defendant does not have to pay indemnity to the defendant or allow the defendant to work for the company again.

1/2548 Thailand Supreme Court Opinion 52 (No. 406) 2005
Chat Cheowchan vs. Veerachai Tungthrongvachakig

Re: Sale-Purchase Agreements

The plaintiff and the defendant made a sale-purchase contract. The purchase was to be made in the name of the plaintiff. The defendant had the responsibility to divide the land into parcels and then transfer the ownership of the parcels to the plaintiff.  In order for the defendant to transfer the parcels, the defendant must register a transfer of ownership.  However, when the time for registration came, the defendant refused to divide the land and was not ready to register the transfer.  Although the plaintiff did not come for his appointment with the defendant and it is unclear whether the plaintiff had the money to purchase the land, the plaintiff did not default on the agreement.  Therefore the defendant has no right to confiscate the money that the plaintiff has already paid.  The agreement stated that both the plaintiff and the defendant must pay all money owed to one another. When the plaintiff sent a notice letter for the defendant to appear to register the transfer of ownership, the defendant failed to appear. This means that the defendant did not follow through with the agreement. Therefore the defendant must return the plaintiff's money. The plaintiff also has the right to request a penalty from the defendant.

9/2548 Thailand Supreme Court Opinion 202 (No. 6471) 2005
Porntip v. Panomprai Katesa

Re: Divorce

While the defendant and the plaintiff were separated, the plaintiff accused the defendant of having an affair. The plaintiff claimed the affair caused her severe humiliation and demonstrated that the defendant did not wish to live together as husband and wife because he inflicted a great deal of pain on his family. Throughout their four years of separation, the defendant also failed to provide expenses to the plaintiff and did not return to live with the plaintiff. It is clear that the plaintiff agreed to live apart from the defendant because they could not live together as husband and wife during their 3 year marriage. The plaintiff therefore has the right to file for divorce.

9/2548 Thailand Supreme Court Opinion 5 (No. 1651) 2005
Mr. Prasit Panpa vs. Mr. Tam Rodyoi

Re: Contracts; Loan Agreements

The defendant procured a loan from the plaintiff in the amount of 10,000 baht. The plaintiff signed a loan agreement but did not write down any details of the loan and gave the agreement to the defendant to sign. At a later time the plaintiff filled in content and the amount of money loaned claiming the defendant had procured a loan from him in the amount of 300,000 baht. However because the defendant did not acknowledge the plaintiff's action, the loan agreement did not stand as evidence in court.

9/2548 Thailand Supreme Court Opinion 96 (No. 202) 2005
Rolex A.S. Company vs. Nuntana Pitisaithakorn

Re: Trademarks

The trade-mark “Rolex” is a very popular brand as Rolex A.S. Company is capable of creating quality watches. As a result of the popularity of the "Rolex" brand there are persons who sought to benefit from the brand name “Rolex” without requesting authorization. Although some companies used a trademark similar to the "Rolex" trademark, the trademark of these companies was not similar enough to confuse the customers.

The defendant, the managing director of Solex International company, did register her trade-mark under a name different from "Rolex". Her products are not watches, but jewelry made from expensive metal or bronze. She did not have the intention to violate the trademark law or make her customers confuse her brand with the Rolex company. Although the defendant wishes to produce and sell a watch under the name “Solex”, there is no evidence that customers will confuse this brand with “Rolex” as they know that “Solex” is a trade-mark of a key company. Therefore the defendant can register a trademark under the name “Solex” without being in violation of any laws.

9/2548 Thailand Supreme Court Opinion 141 (No. 5492) 2005
Saya and Kanong Kumnarai vs. Prasert Mabundit

Re: Sale-Purchase Agreements; Co-Ownership

The defendants and the plaintiff were entitled to a piece of land. The land was divided and owners of sections were designated. The defendants and the plaintiffs had the right to their section of land because they were entitled to the land title deed. When the plaintiff made a sale contract with the defendants for the sale of the northern section of the land it would be complete only when all the co-owners signed the agreement. If the defendant sold the property to the plaintiff without the consent of the co-owners then it would not be binding. Because the land title deed was owned by multiple persons, everyone had the right to every part of their land. Therefore it was impossible for the plaintiff to divide the land for the defendants and himself.

11/2548 Thailand Supreme Court Opinion 115 (No. 6580) 2005
T.C. Pharmaceutical Industrial vs. Vinai Kongkiatepaiboon

Re: Trademark

The word “sponsor” means support in the English language, therefore it is a natural word and not a word that was created. As for the word “sponsor” in the Thai, it was spelled in the Thai alphabet according to the pronunciation of the English word “sponsor”. The plaintiff registered a trade-mark under the words "sponsor" and “sponsor” (in Thai) in 1983. Products and commercials have been made under this trademark, but they were not successful. The plaintiff registered the trade-mark to produce mineral and other types of drinks, which are products under Category 42. The defendant, however, requested to register a trademark for flip flops under Category 25. Although the defendant and the plaintiff use the same trademark, they are creating different products; therefore the plaintiff can not sue the defendant