MANY foreign companies enter Thailand to take advantage of low operating and overhead costs. They may want to transpose these benefits to foreign affiliates that are financially unstable or have expensive expansion plans.
That is, they want to use the benefits gained from operating in Thailand to benefit their group companies as a whole, especially if a group company is ailing.
Inter-company loans are the most common way to transfer funds among group companies. Interest rates can be kept low and the repayment plan can be more flexible than for bank loans.
However, in Thailand, companies must understand that lending is a restricted business for foreigners and requires special approval.
The Commerce Ministry does allow foreign companies in Thailand to provide loans to affiliated companies.
However, over the past few years, it has begun rejecting requests to do this, especially when it involves affiliates outside Thailand that are struggling financially.
The ministry is concerned that the loans won’t be repaid based on the financial statements of the borrower showing its low financial capacity.
Another important reason is that the ministry views that there will be an evasion of the 10 per cent tax on dividend payments, in the case of loans to parent companies or major shareholders.
If this happens the Revenue Department will lose lots of revenue.
While many foreign investors think that lending falls within the Board of Investment’s scope as a treasury centre and that they have to go through a time-consuming and extremely difficult process with the Bank of Thailand to obtain a treasury centre licence before they can apply for investment privileges from the BoI, inter-company lending may be eligible for the BoI’s promotion in the service and public utilities category.
This is because the lending activity is actually treated as a business service that may qualify for B0I approval if the loans to affiliated and group companies are denominated in baht.
What foreign investors need to know are the general and specific criteria prescribed by the BoI for this service activity.
For example, annual selling and administrative expenses or paid-up registered capital must be at least Bt10 million, depending on the activity they apply for promotion.
If the criteria are satisfied, the chance of getting BoI approval is quite promising.
If you, as a foreign investor, are approved by the BoI to engage in lending activities with the aforementioned characteristics and loans are transferred to an affiliate abroad, the funds must be converted into a foreign currency as required by the central bank and must not exceed the limit specified under the central bank’s exchange control regulations.
Although this might sound complicated and troublesome, a well-planned strategy and thorough understanding of the BoI’s regulations will help foreign investors overcome these problems and difficulties in transferring funds overseas.
RUJISAYA BUBPAPROHM is the tax and legal manager at PwC Thailand.