Introduction - Current Situation of Nominee (Nominee Use) -
In Thailand, there are laws regulating business expansion by foreign entities. Ideally, businesses should operate legally. However, as a reality of Japanese companies' expansion into Thailand, including listed companies, there is a practice known as "nominee borrowing," where individuals or entities of Thai nationality are enlisted on paper to avoid being considered "foreign companies" and thus circumvent foreign investment regulations.
However, this scheme is illegal as it circumvents the purpose of foreign investment regulations, carrying the risk of imprisonment for up to three years and court orders for corporate dissolution for violators.
To understand the legal considerations regarding nominee borrowing, we spoke to Tanat, an in-house lawyer at KCP, with actual court cases involving Japanese companies where risks materialized.
What is the Foreign Business Act in Thailand?
The Foreign Business Act B.E. 1999 (referred to as "FBA") is a law enacted in Thailand for the purpose of protecting national security-related businesses, as well as Thai arts, culture, and natural resources, or businesses that Thai nationals cannot compete with foreign capital. According to the provisions of this law:
Japanese individuals and Japanese companies are considered "foreigners" under this law, thus requiring compliance when conducting business in Thailand.
Definition of "Foreigner"
Article 4 of the law defines a foreigner as follows:
A. Natural persons not having Thai nationality
B. Legal entities not established or registered within Thailand
C. Legal entities registered within Thailand as follows:
1. Entities established with more than 50% capital or share ownership by individuals or entities as described in A or B above.
2. Entities established with more than 50% capital or share ownership by individuals or entities as described in A, B, or C above.
Regulated Industries
Regulated industries are classified into three categories:
Category 1: Industries entirely prohibited for foreign companies due to special reasons.
Examples include: Land trading in Thailand, newspapers, radio or television broadcasting, agriculture, livestock farming, etc.
Category 2: Industries prohibited due to reasons related to national security, culture, or natural resources.
(Requires approval from the Cabinet and the Minister of Commerce for foreign investment)
Group 1: Businesses related to national security
Examples: Military-use products like firearms, domestic land, sea, and air transportation, etc.
Group 2: Businesses affecting culture
Examples: Sale of Thai national art (wood carvings, silk, Thai musical instruments, etc.)
Group 3: Businesses affecting the environment
Examples: Salt fields, mining, wood processing, etc.
Category 3: Industries prohibited due to Thai nationals' insufficient competitiveness compared to foreigners.
(Requires approval from the Foreign Business Committee and the Director-General of the Department of Business Development for foreign investment)
While a total of 21 industries are prohibited, primarily, the following industries are listed as examples:
1. Accounting and legal consulting
2. Architectural design and engineering
3. Retail businesses with capital of less than 100 million baht
4. Wholesale businesses with capital of less than 100 million baht
5. Advertising
6. Food and beverage (restaurants)
7. Service industry
Let's examine a court judgment where nominee borrowing was utilized to evade foreign investment regulations.
Court Case | Supreme Court Case No. 5457/2560 (2017 AD)
The case involves a plaintiff who utilized a loan agreement (money lending contract) to lend funds to a nominee in order to enter Thailand through a scheme designed to evade foreign investment regulations. When the plaintiff sought repayment of the loan amount from the defendant based on the loan agreement, the court ruled that the right to claim repayment of the loan amount was not recognized.
The plaintiff sued both the first defendant (the nominee lender) and the second defendant as a guarantor. Both defendants agreed and executed a deal where the plaintiff borrowed funds to invest 51% in the defendant's company. However, the contract was deemed a transaction to evade foreign investment regulations for that acquisition.
The appellate court's judgment stated, "Contracts entered into with the purpose of evading foreign investment laws by holding shares under the name of Thai nationals are void under Article 150 of the Civil and Commercial Code. Therefore, the loan agreement cannot be recovered as a debt violating the law under Article 411 of the Civil and Commercial Code."
In situations where relationships with nominees deteriorate, such as being pressured for buybacks, the position of foreign companies borrowing names becomes precarious. Despite long-standing personal trust, there is a risk of hidden agendas due to financial downturns, manipulation, or asset seizures.
Countermeasures
Countermeasures generally fall into three categories:
1. Obtain permission through legally prescribed methods.
2. Obtain investment benefits from the Thailand Board of Investment (BOI).
3. Collaborate with appropriate local Thai companies.
We recommend the third option, "Collaborate with local Thai companies," where we assist in exploring and negotiating business partners, proposing optimal investment and business schemes, and supporting transactions until closure.
If you are considering resolving nominee borrowing schemes or planning future expansions, please feel free to contact us. Our Thai legal team will assist you.
Comments