Joint Venture in Thailand between Thai and foreign companies are increasingly common in the areas of production, marketing, distribution and services. As in other countries, joint venture partners are usually companies or individuals operating in the same industry or in related activities and markets, with similar goals and growth strategies.
Joint Ventures are growing in Thailand, especially among foreign companies wanting to enter the marketplace, relying on a local enterprise already operating with similar products or finances in order to develop the business together.
Thai law is fairly simple and safeguards companies: it is based on the principles of German law, thanks to Japan’s strong influence on Siam during the period between the two World Wars.
This article was made possible thanks to the Conference held on 22nd November 2017, organized by the Italo-Thai Chamber of Commerce and thanks to the speaker, Prof. Alessandro Stasi of Mahidol University, to which you ask for further consultations through www.mila-law.com.
Why Make a Joint Venture in Thailand?
One of the main reasons for this is the good future expectations of the market in the region, the lower skilled labor costs, the favorable infrastructure, the size of the market (Thailand is considered as the gateway to ASEAN, a macro area with 10 countries and 700 million population), political and economic stability, the ability to find raw economic goods, its excellent geographic position, in the center of South-East Asia.
Essential elements for setting up a Joint Venture in Thailand are:
- An explicit or implicit agreement;
- A common purpose the group intends to play;
- Shared profits and losses
- The power of each member in controlling the project.
To select the right partner for your Joint Venture in Thailand, it is advisable to verify that the following conditions exist:
- Interest in a joint venture relationship with a foreign partner
- Vision and business strategy compatible
- Compatible management
- Effective bidirectional communication
- Products, markets and complementary services
- Financial solidity
Pros and Cons of a Joint Venture in Thailand:
The main advantages in a Joint Venture in Thailand include: enhanced financial resources, sharing of economic risk, sharing of know-how, technologies and approaches to the new market, expanding its network of contacts.
The potential disadvantages of a joint venture: shared profits, reduced control over some important issues, undesirable product or project quality, uncontrolled increase in operating costs.
Types of Joint Venture
There are two types of possible Joint Ventures in Thailand:
- Contractual Joint Venture (not legally constituted)
- Equity Joint Venture (legally constituted)
In Thailand, the laws applicable to Joint Ventures are:
- Law on Contracts, the main source of contract law, is sections 354 to 394 of the Civil and Commercial Code (Book II, Title II), which governs the regularity of the contract
- Civil and Commercial Code, which governs relationships between individuals as individuals
- Revenue Code, which regulates the taxation of the group
An important and significant factor is that the Thai Civil Code does not consider a Joint Venture as a legal entity. In practice, the law is an agreement between people or companies.
On the contrary, the Revenue Department considers the Joint Venture as a taxable entity, like a constituted company, with its own separate accounts.
The Joint Venture, not legally constituted (Contractual Joint Venture)
It is required that at least one of the partners in the joint venture is a legal entity and has two elements:
- Joint venture investment and joint venture profit / loss sharing / venture agreement
- The partners have a solid responsibility towards third parties that relate to the Joint Venture.
A foreign company participating in an unincorporated joint venture must obtain an Alien Business Permit and create a branch in Thailand. Foreign (physical) partners do not need to apply for a tax document (Thai Tax Code) because the mere fact of being a partner is not considered to be “doing business”. However, the Company itself must register with a process that takes about 5-7 weeks to complete. The government tax, levied at the time of issuing the work permit for the foreign partner, is five baht per 1,000 baht of the foreign capital’s Social Capital, with a maximum commission of 10,000 baht.
Considerations on taxation
- Foreign companies can target their investments in a Thai joint venture through an offshore company.
- Thailand has agreements to avoid double taxation (“DTAA”) with many countries, including Italy and most of the EU.
- There are reductions in the reduced rate deduction rates applicable to capital gains, commissions for technical services, etc.
Technical Considerations on Intellectual Property Rights (IP) of the Parties:
- If commercial secrets or know-how are provided, how will these assets be treated if the Joint Venture is dissolved?
- If the provided IP is subject to a patent, copyright, or registered trademark, what if legal protection is lost or challenged?
- Which Intellectual Property is not included in the concession? Pay attention to “implicit” licenses, remembering that you are subject to Thai law.
- Nature of the grant: assignment or license?