Thai Property - Recent events affecting foreigners - Market impact by Stephen Frost Bangkok International Associates BCCT P & I Committee 31 January 2007 Breakfast Seminar

1. Foreigners not able to purchase land (means LAND not buildings) 2. Definition of foreigner: Law prior to April 2006 Bangkok International Associates BCCT P & I Committee 31 January 2007 Breakfast Seminar a foreign juristic person, foreign natural person or majority foreign owned Thai company or partnership. 1

Commercial exceptions: 2. Industrial Estates Authority of Thailand has power to allow foreign majority owned companies to own land on IEAT owned or managed estates 4. Property funds licensed by the SEC may have all their units owned by foreigners 5. Banks and financial institutions that have become foreign owned with Bank of Thailand consent, may own land, or acquire land through a debt restructuring process, on the same basis as similar Thai-owned institutions 1. The Board of Investment power to permit promoted companies to own land for the purpose of the promoted business (limited amount of residential land as well) Bangkok International Associates 3. Ownership of buildings permitted BCCT P & I Committee 31 January 2007 Breakfast Seminar 2

Commercial exceptions: 6. Permission for land ownership may be granted to petroleum concessionaires under the Petroleum Act for use in approved projects Leasing Leases for industrial or commercial purposes up to 50 years permitted. Option to extend for further 50 years Registration of leases exceeding 3 years at Land Department Bangkok International Associates Enforceability? The original term and one extended term may be enforced by successors to the reversion or the lease. BCCT P & I Committee 31 January 2007 Breakfast Seminar 3

Residential exceptions: 1. A foreigner who invests at least 40 million Baht in authorized securities in Thailand, may purchase one rai of land for residential purposes, subject to MOI requirements. Purchase price paid is in addition to the investment monies. 2. Foreigner ownership of residential buildings permitted (see above). Bangkok International Associates 3. Condominiums – Foreigners (meaning foreign natural persons, foreign companies or foreign majority owned Thai companies) may own up to 40% of the net condominium area in a condominium project. Foreign natural persons must prove that foreign currency was brought into Thailand to purchase the unit. Leasing Leases up to 30 years permitted. Option to extend for further 30 years Register leases exceeding 3 years at Land Department. Enforceability? Court decisions indicate that the lease and extension may only be enforced between the original parties BCCT P & I Committee 31 January 2007 Breakfast Seminar 4

Practice of Land Department prior to April % Thai owned companies could be permitted to acquire land. Bangkok International Associates Land Department always entitled to call for evidence that Thais were not acting as nominees (e.g. consider where a 61% Thai owned company applies to register transfer, but has only one foreign director). Practice differed between different Land Department offices. BCCT P & I Committee 31 January 2007 Breakfast Seminar 5

Foreign Business Act (1999) Definition of alien /avoidance devices Bangkok International Associates Foreign Business Act restricts 43 categories of business under 3 Schedules Treatment different depending on Sch in which business is listed Consider whether renting is a service under Sch 3 Consider treatment of particular businesses e.g: 1. property consultants (Sch 3) 2. property developers (Sch 3) 3. land trading companies (Sch 1) 4. land holding companies (probably not under FBA) BCCT P & I Committee 31 January 2007 Breakfast Seminar 6

Foreign Business Act proposals (as at 9 January 2007) Current definition of alien applies to shareholdings only, and interpreted in practice as applying to first level of ownership only. Bangkok International Associates Extension proposed – to include companies where foreigners have a majority of the voting rights. Fines considerably increased, jail terms remain the same. All existing businesses that are alien under new definition must report within one year and obtain a certificate. BCCT P & I Committee 31 January 2007 Breakfast Seminar 7

Foreign Business Act proposals (as at 9 January 2007) THEN existing Schedule 1 and 2 businesses, must adjust voting rights and shareholdings within two years of the certificate. Bangkok International Associates BUT existing Schedule 3 businesses, may continue to operate. Amnesty for certain offences, including use of nominees, provided reported within 90 days, and position corrected within one year. BCCT P & I Committee 31 January 2007 Breakfast Seminar 8

Bank of Thailand capital reserve requirements (19 December 2006) Inbound payments of foreign currency for certain transactions, subject to retention of 30% by Bank of Thailand: retention is for one year without interest, unless fine of 10% deducted. Bangkok International Associates Payments for purchase of real property are excluded. Payments into property funds are subject to the rule. Loans from foreign parents to Thai associated companies, or foreign lenders to Thai borrowers that are maintained in foreign currency, or other loans that are fully hedged are not subject to the rule. BOT may further review transactions subject to the reserve rule. BCCT P & I Committee 31 January 2007 Breakfast Seminar 9

Applies to companies owning land Ministry of Interior letter Mor Thor 0515/Wor May 2006 Bangkok International Associates If a company or juristic person applies to register a transfer of land and it: has in its objects real property business has foreign shareholders or foreigner director (N.B. no limit in number or percentage) is reasonably believed to have used Thai nominees to hold shares on behalf of foreigners BCCT P & I Committee 31 January 2007 Breakfast Seminar 2006 Anti –Nominee Regulations (3) 10

Bangkok International Associates Then the officer is entitled to examine the following: income of Thai shareholders their occupation length of employment monthly income evidence of loan, where a loan obtained to purchase shares The Thai shareholders are under a duty to provide such evidence. BCCT P & I Committee 31 January 2007 Breakfast Seminar Ministry of Interior letter Mor Thor 0515/Wor May

Further action? Bangkok International Associates In cases of doubt, the transaction may be referred to the Land Department in Bangkok. Does the Regulation apply to existing companies? Regulation is silent on this. Probably yes. BCCT P & I Committee 31 January 2007 Breakfast Seminar 12

Applies to companies owning land Further instruction - Ministry of Interior letter Mor Thor 0515/Wor July 2006 Bangkok International Associates A further letter was issued in July 2006 to clarify the previous instruction: The previous instruction applies to juristic persons with objects to buy, sell, or rent land, operate hotels and resorts. The evidence required from Thai shareholders is: BCCT P & I Committee 31 January 2007 Breakfast Seminar 13

Further instruction - Ministry of Interior letter Mor Thor 0515/Wor July 2006 Bangkok International Associates 3. Where a shareholder is a juristic person with Thai nationality (even where it has no foreign shareholders or directors), the source of money to buy shares, showing evidence namely a balance sheet. If the money was borrowed, the loan agreement, and minutes of meeting relating thereto. 1. A letter from an operating company certifying position, employment period and monthly salary or other reliable evidence. 2. The source of money to buy shares, whether from savings, sale of land, inheritance or loan by showing e.g., bank book, agreement to sell land, evidence showing inheritance or loan. BCCT P & I Committee 31 January 2007 Breakfast Seminar 14

Further instruction - Ministry of Interior letter Mor Thor 0515/Wor July 2006 Bangkok International Associates 4. Where a juristic person buys land at a price higher than the capital without a mortgage, the source of money, with evidence. If the money was borrowed, minutes of meeting, loan agreement and evidence as follows: where the loan is from a foreigner or foreign juristic person, evidence showing the source of money, i.e. overseas transfer documents, account withdrawal slip, board minutes of lender. If the loan is from a Thai individual or juristic person (even where the juristic person has no foreign shareholders or directors), evidence proving the source of money, e.g., balance sheet, account withdrawal slip, board minutes of juristic lender. BCCT P & I Committee 31 January 2007 Breakfast Seminar 15

Practice Bangkok International Associates Provided that the evidence is produced, then the transfer should be registered. Does the Regulation apply to existing companies? Regulation is silent on this. Probably yes. BCCT P & I Committee 31 January 2007 Breakfast Seminar 16

Applies to ALL companies Commercial Registration Department Regulation No. 102/2549 issued 20 July 2006 effective 15 August 2006 Bangkok International Associates CRD Regulation on Documents required for Registration of Partnerships and Limited Companies: 1. companies and partnerships with foreign partners or shareholders investing or owning shares from 40% but less than 50% of the registered capital or 2. companies and partnerships having foreign investors or owning shares less than 40% of the registered capital, but a foreigner is the authorized director What companies does it apply to? BCCT P & I Committee 31 January 2007 Breakfast Seminar 17

Commercial Registration Department Regulation No. 102/2549 issued 20 July 2006 effective 15 August 2006 Bangkok International Associates Information to be submitted on registration by all Thai partners or shareholders: Information concerning the source of capital, identifying the money equivalent to that which came in for investment or share ownership, of each partner or shareholder. This means: deposit bank book or bank statements for 6 months, or documents issued by the Bank to certify the financial status of the partners or shareholders, or evidence showing the source of money for investment or owning shares BCCT P & I Committee 31 January 2007 Breakfast Seminar 18

Does Regulation apply to existing companies? Bangkok International Associates Not mentioned specifically, possibly not (tentative view) Does Regulation only apply on registration of company or on future capital increases? Regulation is silent on this issue. Probably it does. Further directive Where up to one rai of land is purchased for the use of the managing director of a company, and this is confirmed in writing, such a transfer will be permitted. BCCT P & I Committee 31 January 2007 Breakfast Seminar 19

Comments Bangkok International Associates 1. The Land Department has always had power to investigate companies that own land, for the presence of nominees. 2. Do the new rules impose an unduly onerous burden? Time to change voting structure/share ownership, under FBA changes. Position of existing companies/future acquisitions of land 3. Will the new regulations eliminate the use of nominees? 4. Will the new regulations have a significant adverse effect on the property market? Position of new companies BCCT P & I Committee 31 January 2007 Breakfast Seminar Documents to be submitted by Thai shareholders 20

Bangkok International Associates Thank you for your interest! Stephen Frost Bangkok International Associates Tel BCCT P & I Committee 31 January 2007 Breakfast Seminar