Business people with a plan to expand the business into Thailand, might consider to do it by establishing a branch office. Companies often contact Herrera and Partners in Thailand to get our professional opinion on which is the best structure for the business growth. This article, was prepared by the lawyers of Herrera and Partners and will discuss the significant aspects regarding the advantages and drawbacks of setting up a branch office in Thailand.
The requirements to incorporate a Branch Office in Thailand
Under the Foreign Business Act, B.E. 2542 (“FBA”), the branch office is considered as a foreign entity because it is not the separate entity of the parent company, as is a part of a foreign company operating the business in Thailand. In other words, this means the branch office must be subject to the business restriction which does not allow the foreigner, both individual and juristic person, to do the reserved businesses unless obtaining permission from the Thai government. Accordingly, if you want to conduct the business through a branch office and your business fall within the scope of that restricted activities, you must get prior permission before starting the business.
Some foreign companies assume that they will be free from those limitations if your business is not one of the restricted businesses. Unfortunately, the Thai Foreign Business Act mostly covers all services. There are only few businesses that do not require permission such as the securities business, trade business, trustee business, financial institution, insurance business, or in case you provide service for a governmental entity. But the reason behind this exemption is that there is a specific law to control each of those businesses which could be more complicated than the restriction under the FBA, according to the Ministerial Regulation on Service Businesses not Subject to Application for Permission in Foreign Business Act, B.E. 2556 (2013), as amended in 2019.
The essential requirement to obtain permission is the minimum capital to invest in Thailand. The minimum capital must be greater than 25% of the annual average of the estimated expenditure for a period of three years but must not less than 3 million baht. In fact, you would need to bring the money in foreign currency from abroad to Thailand, by 25% of the minimum investment within the first three months, 50% within one year, and the remainder at least 25% of the minimum capital. All amounts must complete within three years from the date of obtaining the permission. Moreover, you must show the evidence of money transfer by submitting it at the Department of Business Development (DBD) within 15 days from the date that you bring the money into Thailand according to the Ministerial Regulation on Minimum Capital and Timeframe for Bringing or Remitting of Minimum Capital into Thailand B.E. 2545 (2002), as amended in 2009
Due to the above complicated procedures, Herrera and Partners attorneys in Thailand advice to most of foreigners to expand their business through a subsidiary by setting up a separate company in Thailand. You can reduce the process and do not need to concern whether the board will approve or not your application. Also, if all the documents are correct, then our lawyers can set up the subsidiary company within one day.
Income Tax Imposed on the Income of the Branch Office
Under section 66 of the Revenue Code, the foreign company carrying on business in Thailand must pay the income tax for any income incurring from the business in Thailand at the same rate as the Thai entity. Therefore, if you conduct the business through a branch office, all income from the branch in Thailand will be considered as an income of the foreign company generated from the business in Thailand and thus will be subject to the corporate income tax at the same rate with Thai corporation without any exemption, although your company is not incorporated in Thailand.
Moreover, if you are looking for a tax incentive under the BOI. This business structure might not be appropriate. Because section 17 of the Investment Promotion Act B.E. 2520 (1977), provides that the person seeking the investment promotion must be the company incorporated under the law of Thailand. The branch office thus will not qualify for this promotion because even if you have obtained the license for doing the business in Thailand as mentioned above, this is not the company registration. Therefore, if you want to apply for this promotion. You need to incorporate that branch as a limited company under the law of Thailand.
We understand that until now, you may not find the interesting setting up the branch office but in H&P lawyers’ opinion, there is one significant difference that that may change your opinion, which is the power of control.
As the branch office is still a part of the parent company, this means the parent company can fully take control over its branch. This may not happen to the subsidiary. Because the subsidiary is a limited company incorporated in Thailand. you, therefore, must comply with the corporate law which does not allow the foreigner to hold 100% of shares unless you get a business promotion from BOI. You still need the Thai partner in your subsidiary (at least 51%). On the other hand, if you set up a branch office, you will not be limited by this rule and could design your own management without interference from another partner.
If you need to talk with a lawyer in Thailand on what is the most suitable legal structure to do business, please contact H&P at [email protected]
