That’s how you can establish a presence in Thailand, Vietnam or Indonesia.
The falling exchange rate of the euro and the ASEAN Economic Community (AEC), which became a reality on 1 January 2015 ensure that Southeast Asia, with its more than 600 million consumers, is an increasingly attractive market for the German economy. However, getting started must be well conceived and prepared. Again and again, Western companies find themselves in the bog of illegality after establishing a subsidiary or hiring an employee there. With bitter consequences for everyone involved.
Because most Southeast Asian governments indeed believe that they don’t need any foreigners for making money through trading and services. That the locals should be the ones to benefit from trade. Delivering German goods to Asia is of course alright. But to actively market those in the country should be the prerogative of local businesses.
Accordingly, Thailand for example has expressly prohibited foreigners from engaging in wholesale and retailing activities, in other words marketing and sales, in Annex 3 of the Foreign Business Act. Even worse: Violations of this prohibition will be prosecuted.
What is an unauthorized business facility?
By the way, this means that even a foreign company which employs a Thai national as an employee or self-employed agent acts unlawfully. The unpleasant consequence is that the Thai employee is deemed to be a (unauthorized) “permanent establishment” of the foreign manufacturer. For the permanent establishment, the foreign company must file a tax return and thus disclose – and pay taxes on – the income in Germany from the export transaction! And the poor employee, too, risks having to pay tax not only on his income. The employee acting in good faith may even be liable to pay revenue taxes on his/her business transactions.
Hence be careful especially with offers for ‘payroll services’, offering foreigners to process salaries for having their “own man” in Thailand, Vietnam or Indonesia. Often they don’t even know themselves to what extent they engage their clients in illegal activities. This ignorance in turn of course does not exempt the foreign companies from their liability.
Disappointed employees and competitors are a risk
Certainly, the police won’t drive around in Thailand or Vietnam all day to uncover these abuses through thorough detective work. And they don’t even need to. The mere forwarding of a treacherous email to the authorities by a disgruntled employee or a tip-off by a competitor who has just lost out on a tender may be sufficient to trigger a ‘visit’ by the investigators. Because nothing is more fun than to catch foreigners engaged in illegal activities and then to publicly hold them accountable.
About the author:
Dr. Gunter Denk (Bangkok) is a lawyer and founder of the industry consultancy ‘Sanet Asean Advisors’. This group of consultants operates six affiliated companies and liaison offices in the main capitals of the AEC economic union. SANET repeatedly dealt with the legal and sales restructuring of German subsidiaries in Southeast Asia in recent years. Denk is the author of numerous books and publications about the ASEAN economic area.
‘Rep’ offices or regional headquarters are not a solution
Even though many business so believe or are persuaded to believe by not very trustworthy consultants, not even representative offices (‘rep office’) or regional headquarters are a solution in this case. Both forms of business operation are not permitted to carry out sales activities. They also require a fair amount of organisation and are comparatively expensive.
A ‘regional headquarter’ serves, among other things to assist other business operations of the parent company in Asia by providing general services, e.g. order processing, consolidation, quality assurance, etc. Rep offices, too, is permitted to engage in a number of activities, such as market monitoring, procurement processing and quality testing, and even the transmission of information to customers is allowed. Especially this last point induces many businesses to abuse this ‘transfer of information’ for distribution activities. But woe if the authorities become aware that this ‘transfer of information’ also involved negotiations on prices or contract terms. Then the transaction immediately tainted again with illegality and all ensuing criminal consequences.
The “business unit” – the legal way to have your own body
But how do you go about if you first want to start off ‘low key’ with a single employee? There is a way that you can have your ‘own’ person, who only deals with the sale of your own products.
The consultancy Sanet in Thailand, for example, has a wholly owned Thai import and export company called ‘Sanet Trade & Services Co. Ltd.’ (STS). As a Thai company with numerous import licences, this company may trade, market, sell and provide services without any restrictions.
Under the umbrella of this trading company, STS then operates specific ‘Business Units’ for foreign manufacturers and specifically employs an employee for selling and marketing the products of this business unit.
The cost of this solution are extremely low and are only slightly higher than that of illegal ‘payroll services’. In return, the European exporter no longer has the bother of accounting, taxes or labour law.
Unlike ‘payroll services’, Sanet Trade & Services Ltd. also provides modern office and conference facilities with secretarial services and a complete infrastructure. It monitors the travel activities of employees, while the technical management is provided largely by the foreign principal. The marketing consultants of the Sanet group under the same roof can even help with the market cultivation. And of course, Sanet also offers a recruitment service to handle recruitment matters.
For 200 million Thai Baht foreigners can trade and provide services on their own
It is legal to set up a trading company and to furnish such company with a capital base of 100 million Thai Baht (EUR 2.7 million). Then you are permitted to sell your products to wholesalers or (!) industrial end users. And for double the capital amount, you are even permitted to do both. However, land ownership, for example, to build your own warehouse is prohibited, even with this investment amount as well as the sale of services.
The ministerial exemption
You can also try to get a ministerial exemption from the prohibitions of the ‘Foreign Business Act. In most cases, however, this attempt fails quickly due to a lack of public interest in a permit.
Become a Thai company by ‘cross shareholding’
‘If foreigners are not permitted to trade, then I must somehow try to turn my trading company into a Thai company.’ This is the notion behind the concept of ‘cross shareholding’. In this case, you establish 2 wholly-owned foreign companies, usually a holding company and an operating company. Then both companies each buy 51% of the shares of the other company, as a result of which both companies are suddenly owned to 51% by a Thai company. In reality, they are of course both controlled by the foreign investor. While the Ministry of Commerce currently still turns a blind eye on these “grey area” business models, the Land Ministry already now refuses to recognize this structure as a Thai company. So you cannot acquire land ownership through such a construction. In any event, this form of cross-shareholding cannot be considered to be ‘sustainable’.
The interesting option of a ‘Trade and Investment Service Office’ (TISO)
In Thailand, the ‘Board of Investment (BOI)’ offers a legal way for marketing and sales activities through the recognition of a limited company as a TISO (‘Trade and Investment Support Office’). However, this option makes sense only for the producers of high-tech products requiring intensive consulting input.
A foreign-owned company, recognized as a TISO may sell to wholesalers (!) and support the parent company with direct imports. Furthermore, they may offer services in connection with their products and even acquire land ownership. But be careful: Goods stored may not be sold directly to the industry. For such transactions, you must always have a wholesaler as an intermediary.
Sanet Trade & Services Co. Ltd. (STS) in Bangkok offers under the management of the German graduate engineer (Dipl.-Ing.) Sven Korf ‘regional key accounting’ on behalf of Western companies throughout the entire ASEAN region. Depending on the contractual arrangement, existing dealers are first screened or they look for new trading partners. In close cooperation with the parent plant, they then establish annual sales targets and monitor them continuously. The STS-team of Sven Korf advises traders also in technical aspects and monitors their local services. These services are offered primarily for project transactions, e.g. for the engineering of special machines. For more information about these services, please send an Email to firstname.lastname@example.org or click on the Sanet website.
The contractual sales partners
The classic method of selling goods abroad is selling through one or more importers in the target country. But the disadvantages are known: The importer of course expects a good margin, which is often more important to the importer than the market share of his contracting partner in the country. At Sanet we see almost on a monthly basis companies being surprised by the low turnovers in the ASEAN countries and wondering at the same time how their importer was able to get rich on such turnovers. Monitoring contracting partners is of course difficult from a distance of 10,000 km. Moreover, the lack of marketability runs counter to the motto of ‘Export was yesterday, the future’s presence!’