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As loopholes in the laws governing foreign ownership of land and property in Thailand were firmly closed over the summer, Robert C. Reynolds of Krabi Consultants examines the fallout, and looks at the options now available to foreign investors in KrabiTHE real estate market in Thailand has undergone some recent changes that have drastically altered the landscape for foreign investors. In previous years, overseas investors wishing to sidestep the prohibition of foreign ownership of land would simply open up a limited company with a majority of Thai shareholders and purchase the property. This was true for individual homes as well as developments. In almost every case, the Thai shareholders were in name only (nominee), often supplied by the attorney's office who had registered the company on behalf of the foreigner. In these companies, the Thai shareholders never paid for their shares, and usually had little or no participation in the project or development. The foreigner, in setting up the company, would use various methods to safeguard his investment, such as issuance of Class A and B voting shares to insure his ability to control the company.
Over the past several months, the authorities in Bangkok have clamped down on these methods of investing, and the term "nominee" is now being held in such low esteem that it should only be mentioned in whispers. In addition, devices such as the issuance of different voting classes of shares have been ruled by the courts to have the intent of forming a majority foreign owned corporation - prohibited under Thai law.
What started this enforcement of the company registration and land ownership rules can only be surmised by those of us outside the inner circle in Bangkok. Certainly the political fallout in the capital, as well as well-publicised land scandals involving foreigners in high profile tourist destinations have played a role. The result has been a close monitoring of company registrations with foreign shareholders and with the objective of real estate development, and intense scrutiny of land transfers by any companies with foreign shareholders. Currently, in any land transaction, the Thai shareholders, or "nominees", in a company are required to prove their financial interest - at the very least their ability to pay for their shares, by showing a bank transfer, a salary or asset test, or other verifications of wealth. Without these, the land transfer to a company with foreign ownership will simply be blocked.
These restrictions, along with the cancellation of the Investment Visa (popular among condominium buyers) has put a dark cloud over the small to medium scale foreign investment in real estate in Thailand. The number of new company registrations by foreigners to invest in real estate has collapsed, and the number of land transfers to those companies is almost non-existent. In response, investors are reverting to using Thai companies or Thai individuals to hold their property investments, significantly raising the risk profile for most projects. Many professional investors have postponed or cancelled projects waiting to see if the environment changes.
The most popular method now available to an individual looking to purchase a retirement or holiday home in Thailand is to take a 90 year lease on the land and purchase the house on that land outright, a perfectly legal and transparent way of doing things. The lease is usually written in 30 year segments, with renewal options, and Thai developers, who previously had shunned leases in favour of selling land, are now more than happy to write a contract for a leasehold purchase.
The lease itself needs to be registered at the local Land Office, and then re-registered every 30 years - the current tax payable is 1.1 per cent of the assessed value of the land. After the registration of the land lease, the house becomes the property of the foreigner. This process has long been in use by many developers who foresaw the possible complications of opening shell companies for the purchase of homes. As a result, there has been very little resistance to this method of "buying land" in Thailand for home ownership.
Given the current climate, those contemplating investing in real estate development for the first time should beware of new Thai "friends" offering to hold your land in their name, and disregard the advice of those who "have a cousin in the land office" who can sort things out for you. The latest mandates are coming directly from the Ministry of the Interior, and the local authorities have no discretion over the interpretation of the law. Find yourself a good lawyer, educate yourself about all the legal and tax issues involved, and steer clear of the wisdom of the chap sitting at the corner pub every night.
Robert C. Reynolds is managing director of Krabi Consultants, a real estate agent in Ao Nang.
Above: Will the roof fall in on the housing market in Krabi? Enforcement of the law is unlikely to deter foreign investors.
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