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Setting Up a Branch Office vs a Subsidiary in Thailand
10/08/2023
Expanding a business into Thailand requires careful consideration of the legal and operational aspects of establishing a presence there. Two common options for foreign companies are setting up a branch office or a subsidiary. While both structures have their advantages and drawbacks, it is crucial to understand the differences to make an informed decision.
This article provides an overview of the key factors to consider when choosing between a branch office and a subsidiary in Thailand.
Key points
- A branch office is an extension of the foreign parent company, while a subsidiary is a separate legal entity incorporated in Thailand.
- Advantages of a branch office include control, 100% foreign ownership, ease of setup, and the ability to hire foreign employees at a lower ratio.
- Advantages of a subsidiary include limited liability, separate legal entity status, and potential tax incentives under the Board of Investment.
- Both branch offices and subsidiaries must comply with the Foreign Business Act regulations, and businesses in Thailand may have restricted or prohibited activities for foreign companies.
What is a Branch Office?
A branch office is an extension of the foreign parent company and allows for establishing a presence in Thailand without forming a separate legal entity. This structure is suitable for multinational companies that want to maintain control over their operations in Thailand.
For more information about Branch Offices, please check out this blog post.
What are the Advantages of a Branch Office?
Branch Offices offer the following advantages:
Control: As the branch office remains part of the parent company, it allows for full control and decision-making authority over the operations in Thailand.
100% Foreign Ownership: Branch offices can be 100% foreign-owned, providing flexibility for foreign companies. Subsidiaries, conversely, can be 100% foreign-owned, but this depends on their business activities as they face restrictions from the Foreign Business Act.
Hiring Foreign Employees: A branch office in Thailand can hire foreign and local employees. For branch offices to hire foreigners, they must satisfy the Thai to Foreign Worker Ratio of 1:1. This ratio is significantly lower than that of a Thai limited company (4:1) and is a very attractive advantage.
Ease of Set-up: Establishing a branch office is generally simpler and faster than setting up a subsidiary. The process can be completed within a shorter timeframe if all the required documents are in order.
What are the Disadvantages of a Branch Office?
Branch Offices have some nice advantages but are also subject to some disadvantages.
Business Activities: A Branch Office can perform any “income-related activity” in Thailand on behalf of its head office. It is important to note that the activities of the Branch Office are restricted to the business for which it is registered. If the business activities are considered a ‘restricted business’ under the Foreign Business Act, which in most cases it will be, a Foreign Business License must be obtained from the Ministry of Commerce. A Foreign Business License is not required if the business is not considered a restricted business, but a Commercial Registration Certificate from the Ministry of Commerce would be needed.
Liability: The parent company assumes complete liability for the debts, obligations, and legal issues arising from the branch office’s activities in Thailand. Any legal action against the branch office extends to the parent company.
Limited Independence: While a branch office can conduct business activities in Thailand, it is still considered an extension of the parent company and can only undertake the activities of the parent company. This limited independence may pose challenges in certain situations, such as obtaining licenses or participating in government tenders.
Tax Implications: Income generated by the branch office in Thailand is subject to corporate income tax at the same rate as Thai entities. This may result in a higher tax burden than a subsidiary qualifying for certain tax incentives.
What is a Subsidiary?
A subsidiary is a separate legal entity incorporated in Thailand, wholly or partially owned by the foreign parent company. This structure offers distinct advantages and provides more flexibility regarding operations and compliance with local regulations
Subsidiaries offer the following advantages for interested parties:
Limited Liability: One of the primary advantages of a subsidiary is the limited liability it offers. The parent company’s liability is generally limited to the amount invested in the subsidiary.
Separate Legal Entity: A subsidiary is considered a separate legal entity from its parent company, providing more independence and flexibility in business activities in Thailand.
Tax Incentives: Certain types of businesses may qualify for tax incentives under the Board of Investment (BOI) regime, which can result in reduced tax rates or exemptions.
What are the Disadvantages of a Subsidiary?
While subsidiaries have their advantages, they do offer some disadvantages too.
Shareholder Requirements: Most of the popular business activities for foreign entrepreneurs will be restricted by the Foreign Business Act. In this situation, the subsidiary will require > 50% Thai ownership of the shares, except for businesses that qualify for BOI promotion or operate in specific industries.
Complex Set-up: Establishing a subsidiary entails more complex legal and administrative processes, including drafting articles of association, appointing directors, and meeting statutory requirements.
Please see here for more information about establishing a subsidiary/limited company in Thailand.
Cost and Time: Setting up a subsidiary in Thailand can be more time-consuming than a branch office due to additional legal and compliance requirements.
Increased requirements for hiring foreign staff: For subsidiary companies to hire foreigners, they must satisfy the following ratio (per foreign employee): Thai to Foreign Worker Ratio of 4:1 and have 2 million THB in registered capital. Please note for foreigners married to Thai nationals, these requirements are halved.
What is the Best Company Structure for a Subsidiary?
A limited company in Thailand is similar to an LLC in other countries. It is a preferred choice for many foreign investors who wish to start a business in the country. A limited company has directors and shareholders (Thai and foreign) and offers limited liability to its shareholders.
To start a limited company in Thailand, you will need:
- 2 shareholders
- One or more directors
- 50,000 THB minimum capital (2M THB if you want to hire a foreign employee)
- A registered corporate address in Thailand
- The shareholders must be individuals for registering the company (“promoters”). Once registered, the shares can be transferred to corporate shareholders.
The directors must be individuals. It is not possible to have corporate directors in Thailand.
What are the Legal Considerations for Branch Offices and Subsidiaries in Thailand?
Foreign companies must comply with the Foreign Business Act (FBA) regulations to establish a company in Thailand. The FBA categorizes business activities into three lists: prohibited, restricted, and activities that require special approval.
What are the Prohibited Activities for Businesses in Thailand?
As indicated in List One of the FBA, prohibited activities are strictly reserved for Thai nationals and cannot be conducted by foreign companies. These include activities related to land trading, farming, fisheries, and certain professional services.
Restricted Activities
The Foreign Business Act restricts foreigners from undertaking about 50 types of business. These business activities have been grouped into three lists.
List one includes newspaper businesses, animal farming, land trading, and other activities. Foreigners are prohibited from operating businesses in list one for “special reasons,” no approval is available for a foreigner or foreign entity to obtain.
List two has three groups and includes businesses related to national security and domestic land, waterway, or air transportation (including the domestic airline business). Foreigners or foreign entities can operate a business engaged in list two activities if approval has been given by the Minister of Commerce and the Cabinet. However, it is very difficult to obtain such approval.
List three Foreigners and foreign entities are prohibited from engaging in list three activities because “Thai nationals are not ready to compete” with foreigners. Foreigners and foreign entities can receive approval from the Director-General of the Commercial Registration of the Department of Business Development and the Foreign Business Committee for these activities. List three consists of “other categories of service business except those prescribed by ministerial regulations”.
What is a Foreign Business License (FBL)?
If a foreign entity wishes to engage in any of the activities listed in List 2 or 3 of the Foreign Business Act in Thailand, they must obtain a “Foreign Business License”.
To apply for a Foreign Business Licence, an application must be filed with the Business Department and reviewed by the Cabinet or Foreign Business Committee.
When considering applications, various criteria will be considered. Examples include:
- the advantages and disadvantages to the nation’s safety and security,
- economic and social development,
- size of the enterprise and
- local employment opportunities, etc.
- Approval of a business license application is more likely when the authorities view the business as:
- providing significantly more benefits,
- protecting and promoting Thai interests and
- not being in direct competition with Thai-owned businesses.
What is the Minimum Capital Requirement?
A Branch Office must meet the minimum capital requirement of at least 3 million THB. This capital must be remitted to Thailand within specified timeframes, as per the regulations set by the Department of Business Development.’
In practice, the minimum capital requirement for a subsidiary is 50,000 THB (2M THB if you want to hire a foreign employee).
What are the Administrative and Reporting Requirements for Companies?
All companies in Thailand must maintain proper accounting records, file annual financial statements, and submit tax returns to the relevant authorities. Compliance with local regulations and reporting obligations is essential to avoid penalties and maintain good standing.
Tax Implications
Branch offices are subject to corporate income tax in Thailand at the same rate as Thai entities. Understanding and complying with tax obligations, including filing tax returns, withholding taxes, and other applicable tax regulations, is essential.
In Thailand, both domestic and foreign companies have distinct taxation rules. Companies incorporated within Thailand are subject to taxation on their global income. On the other hand, foreign companies, i.e., those established under foreign laws, are only taxed on the profits derived from or resulting from business operations conducted within Thailand.
The applicable corporate income tax (CIT) rate for all companies, regardless of origin, is 20%.
However, foreign companies that do not conduct business activities in Thailand, are still liable to pay a final withholding tax (WHT) on specific types of assessable income. These include interest, dividends, royalties, rentals, and service fees originating from or associated with transactions in Thailand. Generally, the WHT rate is 15%, with dividends being taxed at a slightly lower rate of 10%. It’s worth noting that different rates may apply if a relevant double tax treaty (DTT) exists between Thailand and the foreign company’s home country.
For more information about tax in Thailand, please take a look at our blog post here.
How can Belaws help?
For more information about starting a company in Thailand, why not talk to one of our experts now?
Please note that this article is for information purposes only and does not constitute legal advice.
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Consultations can be hosted via WhatsApp or Video Conferencing software for your convenience. A consultation with one of our legal experts is undoubtedly the best way to get all the information you need and answer any questions you may have about your new business or project.
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Frequently asked questions
What is the difference between branch office and representative office in Thailand?
A branch office in Thailand is an extension of the foreign parent company, allowing for full control and decision-making authority over operations. In contrast, a representative office is a non-trading entity, limited to conducting market research and promotional activities. While a branch office can engage in income-related activities, a representative office cannot.
Can I open a branch office in Thailand?
Yes, you can open a branch office in Thailand if you are a foreign company. It allows for 100% foreign ownership, offers control over operations, and allows hiring foreign employees. However, you must comply with the Foreign Business Act regulations and consider the associated liabilities.
What is the difference between branch and subsidiary in Thailand?
A branch office is an extension of the foreign parent company, while a subsidiary is a separate legal entity in Thailand. Branch offices offer control and simplicity but come with the parent company’s liability. Subsidiaries provide limited liability, separate legal entity status, and potential tax incentives but involve more complex setup and compliance.
What is a representative office in Thailand?
A representative office in Thailand is a non-trading entity that can conduct market research and promotional activities but cannot engage in income-generating activities. It serves as a liaison between the foreign parent company and Thai stakeholders.
Is a branch same as a representative office?
No, a branch office and a representative office are not the same. A branch office can engage in income-related activities and is an extension of the foreign parent company, while a representative office is limited to market research and promotional activities.
What is the difference between branch office and office?
An “office” in this context typically refers to a generic workplace or workspace. A “branch office” is a specific type of office that represents a foreign company in Thailand, while an “office” can be any place of business, including those of Thai companies.
How do branch offices work?
Branch offices work as extensions of foreign parent companies in Thailand. They engage in income-related activities on behalf of the parent company, maintain control, hire employees, and comply with Thai regulations, including the Foreign Business Act.
How to open a representative office in Thailand?
Opening a representative office in Thailand involves a formal registration process with the relevant authorities. However, it’s essential to note that representative offices are limited to non-income-generating activities such as market research and promotion. Compliance with local regulations is necessary.
What is the difference between agent and branch?
An “agent” typically refers to an individual or entity authorized to act on behalf of another party. A “branch” is an extension of a foreign parent company in Thailand. While both can represent foreign interests, a branch office has a more formalized structure and can engage in income-related activities, whereas an agent’s role is often more limited and may not involve income generation.
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