Singapore -- (SBWire) -- 10/24/2011 --A few days ago my client, Paul, sent me an email. He had reserved an apartment in Pattaya.Foreign freehold is available. But tagent who showed him the property advised him to buy it with a Thai company instead. He was surprised to say the least.
So he sent me a copy of the agent’s email and asked me what I thought. The contents were so misleading - I asked Paul if I could share some of it with you. Here is what the agent said. "Using a Thai Limited Company as the method for foreign ownership is legally bullet proof. The majority of foreign investors in Thailand use this method. It is better than leasehold because it gives the foreigner freehold ownership."
A few things to note here:
First - foreign ownership via a Thai Limited Company is not ‘legally bullet proof’.
Second - it is not the preferred method of property ownership in Thailand.
Third, and most important - it does not give the foreigner freehold ownership.
The agent went on. “All experienced real estate agents and property professionals recommend this ownership method along with well-respected international law firms. It is legally bullet proof.”
I was interested to hear what a few international lawyers in Thailand thought of this. So I sent them a copy. Both replied very quickly.
"I haven't had chance to read the whole email as I'm rushing to a meeting. But, a Thai company being 'bulletproof'. That statement is concerning," the first replied.
The second said; "I would never describe any investment as ‘Bullet proof’. As I am sure that you are aware, the use of a limited Thai Company is appropriate for certain investors and not others due to issues such as nominee shareholders, majority ownership by Thai shareholders, the Foreign Business Act etc."
The agent’s explanation continued. “You, the foreign shareholder, will own 490 shares of the company but the Thai shareholders will only own 51. You also get preferential shares which are worth 10 times more than each Thai share. To completely protect you, the company rules will state that Thai shareholders have no rights to vote, won't be paid dividends and have no control of the company. They are just there on paper to satisfy Thai company law.”
A Thai Limited Company can be 49% owned by a foreigner. But the remaining 51% must be owned by Thais. That is 490 foreign shares to 510 Thai shares - a typing mistake? Maybe he just forgot to mention that there would be 10 Thai shareholders owning 51 shares each? For the record, there must be a minimum of 3 Thai shareholders.
One thing is correct - you can set up preference shares for the foreign shareholder. It can effectively give you control of the company. But you still only own 49 per cent. “This exact company structure is used by many large foreign companies who operate in Thailand such as Samsung, Mazda, Honda, IBM and Marks and Spencer.”
Firms like these invest huge amounts of money into Thailand. They are usually granted Board of Investment approval to operate as 100% foreign owned companies. Others are Thai companies, with active Thai shareholders and directors. “You should know that I am completely risk averse. I use this method of ownership myself and I would never recommend my preferred method of ownership if there was ANY risk involved whatsoever.”
Would you set up a company in your own country and ask people in the street to be shareholders? No. neither would I. So why would you do it in Thailand? If the other agent really was ‘risk averse’ wouldn’t he have done his due diligence? Wouldn’t he have found out exactly what the risks of owning property via a Thai company are?
The reasons kept coming.
“Buying costs – buying freehold in your own name in this particular building commands a premium of 300,000 Baht (US$ 10,000). This means the cost of using a Thai company structure is significantly lower. As I have mentioned, there are no legal benefits of buying freehold and I have used the limited company method several times for my own properties. It is a good way to maximise your returns while avoiding any exposure to risk.”
By now I was pretty amazed. If you can buy freehold in your own name without any hassle - would you do it? Or, would you pay someone to set up a company, file accounts every year, pay an accountant and have shareholders who you've never met owning 51 per cent of your company/property? And the difference in costs is practically nothing. Especially when you consider your setup costs and on-going fees.
“Selling Costs. If you own your property with a Thai company there is no transfer tax to pay when you sell as you are effectively selling a company NOT a property. This will save you 3 per cent on your resale costs and also helps to maximise your returns.”
If you sell a Thai company and make a profit you must pay corporate income tax on that profit. This is often more than personal income tax. And most investors will not want to buy your company anyway.
Why?
Because you don’t just get the property - you are legally responsible for all the company’s liabilities. Most will want to set up their own company (or their lawyer will advise them to). So it’s likely you will have to pay transfer fees and taxes anyway. Worse still, you could be left with a Thai company and Thai shareholders who you don't know.
It takes time and is expensive to close a Thai company. So you could be filing accounts long after you sell your property. But the truth is, they will probably buy the property next door which has a foreign freehold title. Paul was so upset he cancelled his reservation. He has no confidence in anything the agent told him now. Want to know more about your ownership options in Thailand?
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Thailand Property Bullshit, Claptrap and Other Lies
Despite being in the business for 20 years – You'd be surprised by the rubbish put out by real estate agents, developers and even lawyers. But I was amazed an agent actually put this in writing.