Case study: Legalization of distribution in Thailand

The Initial Situation:

Gradual transition to unauthorised activities of the rep. Offices

“They were aware that with these services and activities they were gradually leaving the legal ground of a rep office, but didn’t many others do the same?”

A northern European company produces machines and equipment that are used in automation systems. There are already export sales to Thailand, but the company now wants to establish itself directly in the market. A law firm in Bangkok recommends setting up a representative office (RepOffice) to get started. It was founded, an office manager was appointed, and a small team of Thai employees was set up.

It soon proved to be the right decision, as the modern industrial companies in Thailand generated considerable turnover. After just two years, the company was already generating well over one million Euros in sales for its parent company in Europe. The RepOffice presented the products, provided information on their application, advised the production department, and conveyed the direct order to the European parent company.

Whilst being aware that with these services and activities they were gradually leaving the legal ground of a RepOffice, weren’t many others doing the same? Who would be interested in this, and should they pass up the lucrative contracts?

An unexpected visit from the authorities: a competitor enquires!

Naturally, the competition became aware of the sales achievements. A Thai company found out that the growing new competitor only had one RepOffice in Thailand and informed the authorities. And so the RepOffice received a visit from the authorities. They wanted to know more about the activities. Whether it was true that they had offered prices to customer “X” and even negotiated the right components for customer “Y”.

The head of the RepOffice initially managed to reassure the officers by pointing out possible mistakes made by a former employee. However, it was clear that they were now under surveillance

The Challenge

Looking away is no longer an option

If the ban on sales and other services that applies to rep offices in Thailand is violated, the business license may not only be revoked and the office manager deported within 48 hours. If the RepOffice is also regarded as an (unauthorized) permanent establishment of the parent company, corporate income tax would be levied on all sales to Thailand. A horror for the local finance department.

The aim was to find a legal structure for the successful but illegal sales activities as quickly as possible.

The Procedure

Definition of the necessary activities and an adapted legal structure

“Finding the best solution requires not only legal knowledge, but above all an understanding of business management. Because it is crucial that the right questions are asked.”

There are expensive, complicated, semi-legal, but also efficient and legally secure solutions for the legal distribution of foreign companies in Thailand.

This is why the Sanet management consultants worked hand in hand with Sanet Legal Ltd, the Group’s law firm, from the outset. It was crucial that the right questions were asked:

What is the nature of its products and for which industries are the products intended? Do you need technical advice, stock management, spare parts for distribution? Do you want to buy products in the country, possibly process them further or even trade them? Are exports or drop shipments to third countries planned? Where exactly will the products be produced and, ultimately, will you sell directly to the processing industry or rather to system integrators or distributors?

It all depends on which legal form is considered and which costs and conditions are associated with legal distribution.

All legal options were then reviewed to determine whether they covered the desired activities. The financial and organizational conditions associated with the individual options were also presented.

In principle, it was agreed to establish a company limited by shares, similar to the German GmbH. This was then considered and compared with the requirements:

  • a lifting of the distribution ban through capitalization of Company Limited
  • a joint venture with a 51% Thai majority
  • an application for a Foreign Business License
  • a Foreign Business Certificate as Trade and Investment Service Office (TISO)
  • a cross-shareholding structure
  • a business unit at a Thai distribution service provider
  • an International Trade Centre (ITC) under BOI
  • the International Headquarters (IHQ) under BOI

In addition, the individual possible solutions were analyzed for any privileges, such as the right to land ownership, facilitation of work permits for foreigners and similar.

The Solution

“The company was able to further expand its sales activities in a fully legalized manner. Fears of unexpected visits from the authorities and unfavorable competitors are a thing of the past.”

After careful consideration in a workshop between our client, the Sanet sales experts and the lawyers from Sanet Legal Ltd., it was decided to set up a Trades & Investment Service Office (TISO). The necessary capital requirement of around EUR 25,000 was just as affordable as the minimum costs required by the BOI for such a company.

With the authorization, services and sales support of the parent company and its affiliated companies, the main activities in Thailand would now be legal. It was also allowed to import parts or buy and trade parts in the country. Sanet provided practical solutions to the TISO’s restrictions on the direct sale of stock goods to end users.

It took two weeks to set up the company and the application process for the TISO took around eight weeks after the documents were submitted. Sanet also provided support with these documents, in particular with drawing up the business plan with the right parameters for the authorization review.

After the business certificate for the TISO was granted, an application for a more comprehensive Foreign Business License (FBL) had a better chance of success. This license included practically all sales restrictions, which meant even more extended sales rights.

In addition, the company was formally granted the right by the government to acquire land for its service office. The RepOffice was initially “shut down” and is about to return its license.