Branch Office Setup
Multinational companies wishing to operate their businesses in Thailand might not want to establish a Limited Company as normally these companies would want to maintain and exercise control over their subsidiaries. They may instead want to function their business through a branch office located in Thailand. Under the Thai law, the branch office is also governed by the Foreign Business Act B.E. 2542 (FBA) which means that in the case where the activities of a branch office fall into one of the categories under the FBA, it requires a Foreign Business License (FBL).
Foreign businesses seeking to establish their presence in the form of a trading branch office have to meet the requirements specified under the FBA. The company must first verify that the business activities it would perform in Thailand fall within the scope of regulations and laws. The FBA specifically classifies the type of business activities which are restricted for foreigners to engage in or those activities which foreign nationals or companies are allowed to partake into. Another important thing to consider is income and corporate income tax. Corporate Income Tax (CIT) is a direct tax levied on a juristic company or partnership carrying on business in Thailand or not carrying on business in Thailand but deriving certain types of income from Thailand. This is imposed on the net profits as per the generally accepted accounting principles and according to the conditions described in the Revenue Code of Thailand. These areas need to be studied and discussed.
In granting permission to foreigners for operation of businesses under this Act, regard shall be had to advantageous and disadvantageous effects on the following:
- national security and safety;
- economic and social development of the country;
- public order or good morals, national values in arts, culture, traditions and customs;
- natural resources conservation, energy, environmental preservation;
- consumer protection;
- sizes of undertakings;
- technology transfer; and
- research and development.
In many ways, the branch structure is similar to that of a company limited. Both structures are allowed to engage in trading activities and are allowed to earn income in Thailand. The established branch office operates normally just as a regular limited company would only with one exception – there are no shareholders, directors, etc. This is so because the branch office is an extension only of its head office. Shareholding, as well as directors of the company, are based on the head office overseas.
Unlike the Representative Office and Regional Office, Branch Offices under Thai law are not limited to the "non-trading" activities. They are allowed to earn income. The Branch Office's liabilities arising from the action of the business in Thailand will not be limited within Thailand but extends to the head office overseas. For example, a multinational company establishes a branch office in Thailand and the branch enters into a distribution agreement with a Thailand company but breached the said agreement. The Thailand company which contracted the branch could also sue the head office of the multinational company directly or jointly.
On the other hand, setting up this structure in Thailand is relatively time-consuming and involves high establishment costs. Foreign companies, such as a branch office, are required to apply for and obtain a Foreign Business License (FBL) before commencing its operations.
A foreign company interested in opening it has to submit an application that is reviewed and approved by the committee on its merits. In order to be successful, the parent company needs to explain how opening this structure in Thailand would benefit the country in terms of finances or development. The Foreign Business Act lays down the process by which the FBL is obtained. The FBL application has two parts (a) acceptance of the application by an officer of the Ministry of Commerce for review by the Foreign Business Committee and (b) review of the application by the Board.
Section 16 of the Foreign Business Act enumerates the requirements for a foreigner intending to apply for a Foreign Business License. A foreigner must have the qualifications and must not be under prohibitions as follows:
- being of not less than twenty years of age;
- having a residence in the Kingdom or having been permitted to enter the Kingdom temporarily under the law on immigration;
- not being an incompetent or quasi-incompetent person;
- not being a bankrupt;
- not having been punished by a court judgment or ordered to pay a fine in settlement of any offense under the FBA unless having been discharged for a period of not less than five (5) years prior to the date of the application of the license;
- not having been imprisoned by a court judgment for offenses of cheating, cheating creditors, misappropriation or offenses related to trade under the Penal Code or the offenses related to loans fraudulent to the public or the offenses under the law on immigration, unless having been discharged for a period of not less than five (5) years prior to the date of the application for the license;
- not having a license issued under this Act revoked within the period of five (5) years prior to the date of the application for the license.
In the case where a juristic person is an applicant, foreign directors, managers or persons responsible for the operation of such juristic person must also have the qualifications as mentioned above.
According to the approval of a Foreign Business License, capitalization will be calculated from at least 25 percent of average estimated expenses for the first 3 years but not less than 3 million baht. Should the company meet all requirements and succeeds in opening a branch office, the branch is then allowed to operate in Thailand for a period of five years (unless specified otherwise). After this period is over, the extension of the Foreign Business License is possible provided the foreign company successfully brought in the required amount of capital.
For further details, please contact our Thai corporate lawyers who could provide you with guidance regarding the business establishment.