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published on 24 February 2021 | reading time approx. 4 minutes
Thailand’s M&A year 2020 started reasonably solid, with some significant transactions in real estate, infrastructure and construction, energy, as well as food and beverages. Then, the developing Covid-19 crisis impacted investor confidence, and we saw shallow M&A activity during the summer. Starting September and October, the pace picked up again, especially with deals in telecommunication and media, as well as – again – energy and real estate. Many deals in 2020 happened on a local level, which can be explained mainly by the travel restrictions in light of the pandemic. Overall, the analysts expect slightly below pre-Covid-19 M&A activity for the end of the year and the first half of 2021.
In general, foreign investors have to deal with investment restrictions under the Thai Foreign Business Act (FBA). Simplified, the FBA requires foreign investors to obtain specific permissions for many business activities in Thailand. Thus, international M&A activity in Thailand can in some cases be complicated due to these restrictions.Foreign investment (as 100 per cent solutions or as a partner in a Joint Venture) is, however, possible in many areas. Particularly attractive at the moment are the energy and infrastructure sectors, as well as industrial manufacturing. For German investors, Thailand has traditionally been a destination for mechanical engineering as well as automotive investments. Since Thailand keeps pushing its digitalization agenda (“Thailand 4.0”), we see potential opportunities in the areas of automation and robotics.
Thailand utilises the same common deal structures as other jurisdictions, share and asset deals. Both types of deal structures are common in practice. The general rules apply: While the share deal is straight forward, the asset deal allows for the acquirer to choose certain assets and protects the acquirer from potential liabilities. Thus, if the target is experiencing financial difficulties or the acquirer is uncertain of potential liabilities, an asset deal should be considered.
Transfer of shares is reasonably easy and can be done within one day. Most commonly, shares are issued as name certificates for shares. However, shares can be issued as certificate to the bearer.Shares entered in name are transferred by written agreement and affixed signature of transferor and transferee. At least one witness is required (the Articles of a company can require multiple witnesses). The transfer is subsequently registered in the register of shareholders, which includes the name and address of the transferee. Please note that the share transfer is invalid against the company and third parties unless registered in the register of shareholders. Shares entered to the bearer are transferred by delivery of the certificate.
For asset deals, the Thai Revenue Code provides provisions allowing to transfer an entire business to the acquirer. In this case, the transaction will be deemed at the net book value, eliminating a potential risk of a taxable gain for Corporate Income Tax purposes. In addition to that, the sale of the assets will not be subject to VAT.Currently, Thai law allows for amalgamation, meaning companies A and B form company C and companies A and B are dissolved in the process. The amalgamation process is exempted from Corporate Income Tax. However, since companies A and B are dissolved in the process, any losses carried forward are lost, too. A new reform will add a merger provision allowing for similar benefits as the amalgamation.
Foreign direct investment is subject to the Foreign Business Act. The FBA restricts the ability of foreigners to engage in certain business activities. Thus, most foreigners engaging in sales or providing services will have to either obtain a Foreign Business License or be granted an investment promotion. In case of a successful application, foreigners may run the business as 100 per cent foreign-owned.While an investment promotion (if suitable) is generally the more comfortable option and infers additional benefits (such as easier access to visas and work permits for foreign employees and, in some cases, interesting tax incentives), it is only available for “new” projects. Thus, if the acquirer simply tales over an existing business, the chances for a promotion are low. Further structuring will be necessary.
The implications of the FBA are the most relevant risk for foreign investment. Thus, the market entry has to be planned carefully. A majority foreign-owned investment will have to deal with the investment restrictions. Furthermore, in practice, we see issues arising regarding cultural differences, and differences regarding the business strategy may create controversy, especially in cases of Joint Ventures. Meticulous planning is vitally important.Thus, in many cases, setting up a new entity will be the safer option. However, if the target holds valuable permissions (for example a BOI promotion), an acquisition via a share deal should be considered. In case of asset deals, the acquirer should review if the license is transferrable (not all licenses are).
Generally, all internationally accepted valuation methods are common in the market, including Dicsounted Cashflow analysis (DCF) and comparable company analysis with trading multiples like P/E ratio or EBIT-multiple.
The Thai Board of Investment (BOI) has implemented a series of measures to mitigate the impact of the Covid-19 pandemic on businesses, including steps to encourage rapid investment especially in the manufacturing of medical equipment – but also other areas. Measures include easing certain restrictions and requirements, as well as extending deadlines and speeding up approval processes. Additional or more attractive tax breaks are also offered in some sectors, for example an additional 3 years of a 50 per cent Corporate Income Tax reduction fur qualified investments in the medical sector, following the regular tax break of 3-7 years under respective BOI promotions.Besides these measures from the BOI, there have been several tax reductions implemented by the Thai Revenue Department on a temporary basis, such as reduction in Withholding Tax rates or higher tax allowances for companies not laying off staff in order to ease the impact from the current pandemic. Such measures are not specifically M&A focused.
Martin Chrometzka
Associate Partner
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Philip Ende
Rödl & Partner in ASEAN
