Dear All
With reference to our meeting on 18 May 2015, we would like to provide you with our Thai tax and regulatory opinion on the new business activities of Namchow (Thailand) Ltd. (“Namchow” or the “Company”) below.
Background information
Currently, Namchow has five BOI certificates which specify the same specific condition that Namchow must have the registered capital of not less than Baht 924,500,000. This is because Namchow has had this registered capital amount of Baht 924,500,000 since 1997.
As per the provided BOI applications for the above projects, the source of investment specified in each project came from the retained earnings of Namchow.
Namchow is considering carrying on the new business activities in the near future:
1) Import for sale of frozen dough and frozen noodle to the following customers in Thailand:
Japanese restaurants;
Bakery shops;
Modern trade, e.g. Tesco Lotus, BigC, Top Supermarket, etc.
2) Opening its own shops to sell the imported frozen dough and frozen noodle (similar to 7-ELEVEN and CP Fresh Mart, etc).
3) Setting up a new factory and import raw materials, e.g. wheat flour, for manufacturing of frozen dough and frozen noodle for domestic sale and export. For domestic sale, Namchow may sell to the above customers and also open its own shops.
As discussed in the meeting, currently, the Company has the retained earnings of more than Baht 100 million and it would be possible for Namchow to increase its capital for another Baht 100 million to do the trading business in Thailand.
KPMG’s opinion
1. Foreign ownership restriction
Pursuant to the Foreign Business Act B.E. 2542 (1999) (“FBA”), Namchow as a foreigner under the FBA will be prohibited from carrying out some certain businesses in Thailand which include wholesale, retail sale and all kind of services.
Based on our analysis and our discussion with the officer of the Department of Business Development (“DBD”), the minimum capital requirement for each of the above new business activities under the FBA is as follows:
List of new businesses of Namchow Business under FBA Minimum capital for each business
Import for domestic sale of frozen dough and frozen noodle to Japanese restaurants, bakery shops, and modern trade in Thailand Wholesale business* (restricted under FBA) Baht 100 million registered and paid up capital for each wholesale shop or office
Opening its own shops in Thailand to sell the imported frozen dough and frozen noodle to the end customers who buy for their own consumption (similar to 7-ELEVEN and CP Fresh Mart), if any Retail sale**
(restricted under FBA) Baht 100 million registered and paid up capital for five retail shop or office
Manufacturing of frozen dough and frozen noodle for domestic sale and export (by importing raw materials, i.e. wheat flour, from China or Taiwan to be used in manufacturing process)*** Manufacturing business (Not restricted under FBA) - In case of without BOI certificate: Baht two million registered and paid up capital
- In case of obtaining BOI certificate (if possible): upon investment in the proposed manufacturing project
Notes
*Wholesale business
The “wholesale” under the FBA includes selling the products to the purchasers who will further sell to their customers, or use such products as raw materials for producing other products.
**Retail sale
The “retail sale” under the FBA includes selling the products to the end customers who buy for their own consumption.
***Manufacturing business:
• BOI investment promotion
Based on our discussion with the BOI officer, manufacturing of frozen dough is not eligible to obtain an investment promotion from the BOI under the BOI’s Announcement No. 2/2557. This is because the frozen dough would be considered as the food in a kind of bakery products.
The manufacturing of frozen noodle may be eligible to obtain an investment promotion from the BOI under category 1.17: Manufacture of food using modern technology. However, the manufacturing process and finished products should be taken into detailed analysis as to whether it could fall under the above BOI eligible business.
• FBA
Normally, manufacturing of products and selling such products manufactured by itself in Thailand is not prohibited under the FBA. Only manufacturing of some certain products such as flour from rice and plant, plywood, lime, etc. will be restricted under the FBA.
Based on our discussion with the DBD’s officer without disclosing Namchow’s name, the manufacturing of frozen dough and frozen noodle by importing raw materials, i.e. wheat flour, from other foreign countries (e.g. China and/or Taiwan) to be used in manufacturing process, and sell such frozen dough and frozen noodle manufactured by itself is not restricted under the FBA.
In addition, if Namchow opens its own shops to sell the frozen dough and frozen noodle manufactured by itself, this sale of its own manufactured products will not be restricted under the FBA (not deemed as retail sale under the FBA).
2. Potential options regarding the minimum capital requirement
As discussed above, Namchow will be required to have additional capital for doing the above new business activities, i.e. Baht 100 million for the wholesale business, and/or Baht 100 million for retail sale, etc.
There are potential options regarding the above capital increase as follows:
Option 1: Capital reduction and capital increase
Step 1: Request for BOI approval for capital reduction
Based on our discussion with the BOI’s officer, the officer informed us that under the BOI’s regulation, the Company may apply for the amendment of registered capital as specified in its BOI certificates. In this regard, the Company must prepare and submit the application for amendment of the registered capital to the BOI (one application per one BOI certificate).
For instance, the Company may apply for reducing the registered capital from Baht 924.5 million to Baht 600 million to cover all the new business activities in the future.
Please note that the approval of the above application is at the sole discretion of the BOI.
In this case, there would be a possibility to get the BOI’s approval if:
The Company could provide the appropriate reason why it applies for reducing the registered capital, such as it has used retained earnings for each project, not the paid up capital, and has still derived the profits from its business operations, etc.
The Company could show evidence to prove that it has used its retained earnings as the source of funds for each BOI project such as the audited financial statements during those relevant periods of the above BOI certificates, etc.
A certified true copy of the minutes of shareholders’ meeting to approve the amendment of registered capital in the BOI certificates with the reason must also be submitted to the BOI.
Normally, it would take five working days for the BOI’s consideration after submitting the completed application and supporting documents.
Step 2: Registration of capital reduction with the DBD
After getting the BOI approval for the capital reduction, the Company is required to register the capital reduction with the DBD according to the BOI’s approval letters.
For the capital reduction, the Company must publish a notice of the capital reduction at least once in a local newspaper and send a notice to all creditors asking for any objection the creditors may have to such capital reduction. The objection period is 30 days regardless of whether there is a creditor’s objection or not.
It would take approximately two months for the capital reduction registration.
• Thai tax implication on capital reduction
Please also note that where the Company has retained earnings equal to or more than the capital reduction amount, the return of such reduced capital to Namchow Chemical Industrial Co., Ltd., the foreign company not carrying on business in Thailand, would be subject to 15% Thai withholding tax (“WHT”). This WHT is a final tax.
Step 3: Amendment of registered capital in the BOI certificates
After the capital reduction registration, the Company must bring all the original certificates along with the corporate registration documents showing the reduced capital to the BOI to record the new capital in the original certificates according to the BOI’s approval letters.
It would take approximately 10 working days for the above amendment.
Step 4: Registration of capital increase with the DBD
For the next step, the Company will register the capital increase with the DBD in an amount to comply with the minimum capital requirement for FBA purposes.
For the capital increase registration, the Company has to submit a letter issued by a commercial bank certifying that the Company has received the share payment from the shareholder who subscribes for the newly issued shares along with the registration application.
It would take approximately one month for the capital increase registration.
There is no Thai tax implication on the capital increase.
Option 2: Dividend payment and capital increase
Step 1: Payment of interim dividend to the shareholders
Upon receiving the dividend from the Company, the shareholders could use such dividend amount to pay for the newly issued shares to the Company upon the capital increase registration.
Based on our discussion with the Bank of Thailand, the officer advised that it would be acceptable that the dividend would not be remitted to the shareholders in overseas but kept by the Company for the shareholders’ payment of increased capital. However, the Company should prepare evidence to support the payment transaction accordingly such as:
- Minutes of the shareholders’ meeting to approve the interim dividend payment, by which the shareholders also agree to have the Com