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The proposed changes to the Foreign Business Act are unlikely to pass before a new government takes over, but the fallout from the legal meddling has fundamentally altered the way foreigners structure land deals in Thailand.

"It's woken people up," said Paul Ashburn, a senior partner of BDO Richfield Advisory Ltd. "Now people must think more seriously about how they set up a Company here."

While the Foreign Business Act has stolen most of the headlines, industry executives say a May 2006 ruling by the Interior Minister under the government of former prime minister Thaksin Shinawatra sought to make it more difficult for foreigners to purchase freehold even before the military-installed government started tinkering with foreign ownership rules.

That 2006 policy directive called on provincial governors to carefully scrutinize any purchase of land by a company with a foreign shareholder or director to make sure the Thai shareholder is not simply a nominee. In particular, officials must look at the Thai shareholder's occupation, duration of work and monthly income.

The order was meant to step up enforcement of a law that had been on the books for years. The land code has always stated that a foreign individual or a company with more than 49% of shares held by foreigners cannot own land in Thailand. Nominees have also always been prohibited, but Land Department officials became so lax over the years enforcing this provision that it became accepted as a legal norm to purchase freehold property.

Coincidentally, officials at the Commerce Ministry also failed to enforce the Foreign Business Act, which similarly prohibits nominee shareholders from acting on behalf of a foreign company. This law had been skirted in many mergers and acquisition deals, including the purchase by Singapore´s Temasek Holdings of a 49% stake in telecommunications firm Shin Corp from Thaksin?s family in January 2006.

The Shin deal kicked the opposition Democrat party into gear, and they accused holding company Kularb Kaew-which holds a majority stake in another holding company that owns 52% of Shin Corp-of acting as a nominee for Temasek. That case is moving forward, with police issuing an arrest warrant in late September for Malaysian businessman Surin Upatkoon, who bought a 68% stake in Kularb Kaew in March 2006, two months after the deal. Surin has charged the police with misconduct claiming he has evidence that he invested his own money in the company.

Separately from the Kularb Kaew case, the government pushed ahead with amendments to the Foreign Business Act that would define a company's nationality based on voting rights as well as shareholding. This change could affect thousands of companies in Thailand, including property developers.

Companies that trade land would fall under List One of the FBA, which absolutely prohibits foreigners from taking part. Once enforced, firms that buy and sell property would have one year to change their corporate structures to comply with the new FBA.

Construction and leasing firms offer services that fall under List Three of the FBA, which includes sectors in which Thai companies are not ready to compete. Under the proposed draft bill, existing firms would be exempt from the changes but new companies would need to comply with the new law.

Nevertheless, the amended FBA now appears dead. As the bill came up for debate in August, economic nationalists in the military-appointed legislature added an amendment that made the bill even tougher towards foreign business than the government originally wanted. In response, the Commerce Ministry withdrew the bill, and now it's stuck in committee.

"For the moment the FBA is shelved," said Twatchai Yongkittikul, secretary-general of the Thai Bankers' Association. "I proposed to the prime minister that if the law is going to be tabled, we should start with a general symposium for people to see the pros and cons of law. We have to ask ourselves frankly if we want foreign investment. If we want it, we need to discuss this clearly."

The Democrat party, one of the few parties to spell out a clear position on the Foreign Business Act, has already said it would scrap the proposed changes. However, the party said it plans to crack down harder on nominees, meaning that the long-used method of using a company to purchase freehold land will still face close scrutiny.

The party has also said it plans to scrap the Bank of Thailand's capital controls issued in December 2006 that require foreigners to put 30% of non-trade-related inflows into an interest-free reserve account for one year. Combined with the lack of domestic financing sources for foreigners, this measure has kept many prospective buyers on the sidelines.

More than anything, however, property developers hope a Democrat victory in the elections scheduled for December will lead to positive sentiment for the overall economy, as the political stalemate that began in January 2006 could finally come to a close. Democrat leader Abhisit Vejjajiva has already laid out an agenda that supports foreign investment and the liberalization of certain sectors, and is a more palatable choice for the military and royalist elite than former members of Thaksin's Thai Rak Thai party, which a junta-installed court dissolved in May.

"If the election is held in December and Abhisit is elected, the positive vibe from the BBC and CNN will improve the picture," said Larry Cunningham, managing director of Phuket One Real Estate. "Some of the smarter buyers are already realizing things are likely to clear up."

Since the government still bans freehold sales to foreigners and finding a legal vehicle to do so has become increasingly difficult, analysts expect that most future sales will be leasehold. For months, industry executives have speculated that the government would boost the 30-year lease available now to 50 years or more, but so far that hasn't hit the legislative radar screen.

With only a couple of months to go and a full plate for the military-appointed legislature, any further changes to the property laws will likely wait for the next elected government, which should be formed at some point in January. Many foreigners are hoping the new leaders bring legal clarity to the property markets so Thailand can achieve its potential.
 

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