Foreigners warned on land ownership inThailand
Source: Samuiforsale - Opinion (January 2007), following a Bangkokpost article dated January 29 2007
Holding companies and Thai nominee shareholders
Foreign investors holding property through shell companies using Thai nominees have been warned to restructure their holdings or face prosecution. The Commerce Minister Krirk-krai Jirapaet told foreign journalists at a dinner talk on Friday: 'Foreigners using shell companies to buy housing across the country are violating two laws. One, the Land Act that forbids foreigners from holding land and two, the Foreign Business Act by using nominee structures. I recommend that they restructure'.
Q and A with samuiforsale
Q - What aspect of such shell companies the minister refers to is illegal?
A – Basically, because of the nominee structure the actual owner of the shares is considered the foreigner and therefore under the Foreign Business Act the company foreign and any company foreign under the Foreign Business Act is foreign under the Land Code Act. In essence there are 3 issues:
- nominee shareholders are holding the shares on behalf of the foreigner (legally considered the actual owner) and therefore the Thai company is in fact foreign owned
- the purpose of circumventing foreign ownership laws through a Thai company is illegal and therefore void under the Civil and Commercial Code
- in a land holding structure the company as a juristic is illegally holding the land on behalf of a foreigner (illigal under the Land Code Act)
Q - What does the Minister mean with restructure and what actually changed that foreigners now may need to restructure?
A – The main change under the amended FBA will be that companies controlled by foreigners would be classified as foreign, even if their direct shareholdings are in a minority. The minister could mean that foreigners operating certain businesses and/ or holding land must comply with the new foreigner definition when this becomes law and give majority voting rights and control to the Thai shareholders within a certain period of time. It is uncertain if this will include requirements to have a specific number of Thai or resident directors in the company (there are currently no general restrictions on the nationality of directors of a Thai limited company). The final version of the amended FBA is still under consideration. It is not clear if the minister means that shell companies holding land must comply with the new foreigner definition irrespective their business objectives. It is also not clear what the government will do with the illegal nominee shareholding structures or shell companies in general.
If the government would investigate these companies and Thai nominee shareholders irrespective voting rights in these companies, foreigners could be ordered the termination of the illegal nominee shareholdings or face prosecution and companies may be closed down and removed from the register for companies. Both under the FBA and the Land Code Act there are serious penalties for the foreigner who uses nominees and shell companies to circumvent the FBA or the Land Code. The problem with holding land through shell companies is that even if you would restructure the share structure or change your business objectives to comply with the FBA, the Land Code has its own rules prohibiting the use of shell companies for land purchase. Even if a shell company complies with the restrictions under the FBA, still the Land Department could deem the company foreign or prohibit the use of nominees or deem the company as the owner in place of the foreigner or the legal set up an attempt to circumvent the laws against foreign land ownership and therefore illegal. Under a strict interpretation and implementation of the law foreigners could be forced to dispose of the land within a certain time frame or the title deed could be corrected.
Q - In the same article the minister is quoted, 'if the investors cannot observe one or two laws that are similar to those in other civilized countries, then we should not care about them' and ‘look around you, all the land in Samui, Phuket and Koh Chang is in the hands of foreigners. They cannot take the land away but there's a sense of nationalism and therefore they should restructure'. Would this not be extremely unfair for the thousands of foreigners, who often in good faith and with the help of Thai lawyers and even with involvement of local officials bought villas as second or retirement homes in Thailand, to ask them to restructure when this is practically impossible?
A – Firstly, it is foreign land ownership we are talking about and this is prohibited under Thai law, as is the use of Thai nationals as nominees or shell companies to circumvent the law. This is not new. Together with the 'sense of nationalism' the minister refers to, foreigners owning properties through shell companies should be worried at the moment. Restructuring to comply with the law may be practically impossible under the announced enforcement of the expanded definition of nominee and foreign. Some foreigners now want to sell their freehold ownership, however, prices are based on foreign investments and there are simply no foreign buyers at the moment and Thais are not paying the current prices. An example how Thai businessmen exploit the current fear among foreign property owners is the private VIP scheme, or the Thai property Long-stay program or Samui Vacation Investment Program. They advertise with slogans like ‘breaking news, your property is at risk', meaning, give us your property for free and we give you for a rip-off fee a 30-year lease in return. I would advice foreigners owning properties not to panic and the best advice would be to wait and see, certainly not to get involved with these kinds of schemes, as this is not approved by the government. Wait and see is the best advice. It would be a big scandal for the Thai government if foreigners who bought properties in good faith would be denied rights to the land or would be forced to dispose of the land. There are too many legal and political complications and this problem is simply too difficult for this temporally military government to solve. The current situation is in the first place created and allowed by the previous government(s) and its local officials and other powerful Thais. It is clear that the government wants to clear up the nominee problem. Recent attempts by the previous government, Land Office guidelines and business registration rules, to tackle the nominee problem have shown how difficult it is. Lawyers found ways to cheat these rules and powerful people (including Thai politicians) have manipulated the application of the rules at the local level for their own benefit.
Q - Why would 'powerful people' manipulate the rules at the local level for their own benefit?
A - In Thailand powerful people can manipulate the law or enforcement of the law for their self-interest. They have huge interests in land and property developments in tourist areas like Phuket and Samui where based on foreign investment land and property prices skyrocketed the recent years. Prices in areas like Samui and Phuket are based on foreign investment and they are simply trying to protect their investments. There is an additional risk, as it has become common practice for these people to invest in title-less land. Influential Thais know how to cheat the rules and have the connections to get such land upgraded. If needed documents are created or adjusted. The administration of land is a mess, the documentation is confusing and the scale of corruption and financial interest is huge. Converting land from title-less to properly-titled is one of the easiest ways to make a lot of money in Thailand fast. Powerful Thais get the cooperation of the local officials by one means or another. As a result large areas have been illegally upgraded or encroached on reserved forest land. The Samui Land Department is blamed for ignoring land encroachments. In Samui thousands of rai has been illegally issued title deeds. Worthless land, often mountain forest land, became worth millions and is sold to foreign investors who now may face legal problems for a- illegal possession of public land or b- unlawful foreign land ownership. Just take as an example the recent land scandal around the Peak project. It is corruption and self-enrichment of powerful Thais, including leading members of the Thai Rak Thai party and local politicians and officials that is to blame for the current problems. A recent land scam allegedly involving government men and ranking officials selling illegally upgraded mountain land to foreigners confirms the current problems and corruption. Public land not qualified for a private land deed would have become worth 150 million baht if they were not stopped - and this is just the tip of an iceberg, and it is certainly not only Samui but Phuket has the same problem of corrupt officials illegally upgrading land and selling the land to foreign investors suggesting it is all legal, and these are just a few samples of a practise that goes back a long time.
Q - If foreign shell companies are illegal, is not the Land Department to blame?
A - Company ownership is not illegal per se and the local officials could argue that they did nothing illegal when they registered land into a partly foreign owned company. The foreigner broke the law, they followed the official process. However, section 74 of the Land Code states '.... If there is reason to believe the recording of such rights and legal acts is an evasion of the law or there is reason to believe the purchaser is purchasing on behalf of a foreigner, instructions shall be asked of the Minister whose word shall be final'. The use of shell companies for land purchase is an evasion of the law and the company is purchasing on behalf of the foreigner. It is clearly illegal, however, no minister yet has issued clear instructions how to deal with this problem.
Q - Do you expect this military government to tackle foreign land ownership?
A - It is anybody's guess what the government will do. Based on the Commerce minister's comments the situation is very uncertain and anti foreign. The question is also what the Land Department will do. Certain is that the amendments in the FBA will directly affect companies operating (or having objectives to operate) businesses on List 1, 2 and 3 of the FBA. Shareholding structures in these businesses will face close scrutiny by the government and will have to restructure their indirect foreign ownership or will face legal problems. This includes partly foreign owned companies developing and selling land and villas to foreign buyers. I expect for the short term that there will remain some form of status quo when it concerns foreign land ownership through shell companies. These companies must comply with the new foreigner definition under the FBA and then the situation will be ignored again. In the longer term the government, maybe the next elected government, will have to change the law and allow foreigners to own land (unlikely) or find a reasonable solution for the current problem or continue to ignore the problem until they worked out what to do with the problem. One solution could be that there will be some kind of amnesty for foreigners who bought property through shell companies, where the land will be handed over to say the Treasury Department and the foreigners in return will receive a 30-year lease.
Q - If these shell companies have always been illegal, why has this become such a common practice?
A - If a lie is told often and long enough and the law not enforced it becomes the truth. The same with Thai land holding companies for foreign land ownership. Foreign purchasers believed these companies were a legally recognized and sound method for foreigners to 'own' land in Thailand. In fact it is and always has been illegal and exists based on a non-enforcement of the law. The current announced shift in law enforcement is not an unforeseen development for legal specialists as the laws prohibiting the use of Thai nominees and shell companies by foreigners have always been there. The law was not enforced by the previous government, though the risk of future law enforcement was always there.
Q - How about the lawyers who advised these structures?
A - As the minister said, foreigners holding property through shell companies using Thai nominees are violating two laws. As it always has been illegal quite a few law and accounting offices provided legal advice and substantial assistance to their foreign clients' breach of the law and supplied the means to do so, while the client often in good faith thought he was entering into a legally sound, accepted and recognized method for land purchase. I believe statistics showed there were about 1200 new companies registered in 2005 in Samui. There are huge profits to make as long as these property law firms play the game with the real estate agents and local government. I guess if foreigners were properly advised about the illegal aspects and risks and concerns involved in company ownership 80% would have pulled out of the deal. How many 'law firms' are there currently on a small island as Samui assisting foreigners to set up a Thai limited company and purchasing land? Thirty? Forty? There is a fierce competition for the legal work and obviously they do not explain the legal risks and concerns to foreign purchasers. The truth changes where there is money to be made. All these law and accounting firms used or still use nominees and holding vehicles to set up front companies for land purchase and assist foreigners in violating the law for their own commercial self-interest. This company ownership structure is not something they would sell to their friends and family or they would use themselves. Some law offices knowingly misled and ill-advised foreigners for their self-interest and they could be held accountable for their negligence and sometimes I would say even criminal acts. They are liable for their professional conduct that is impermissible and, if found guilty, for committing an offence aiding and abetting the commission of an offense under the Land Code and the FBA. There are several groups to blame for the fact that land in Samui, Phuket, Hua Hin, Pattaya, Rayong and Koh Chang is in the hands of foreigners; Thai and foreign lawyers setting up these ownership structures, the Thai government allowing it, Thai politicians, local officials, powerful Thais making money out of it, however, generally not individual foreigner who in good faith invested his money in a villa as second or retirement home in Thailand.
Update :
- There is currently a new government and the previous government withdrew its draft FBA. It is not known if or when or in what form the draft law will be resubmitted read more...
- Recent articles (2012) in the media show that foreign land ownership through nominees and Thai companies is still a hot issue for Thai politicians read more...
Continue: more documents sought in nominee hunt
