Articles

Opinion and Analysis

Capital Controls Still Wreaking Havoc: 30% Rule Obstacle for Local and Foreign Business

Published in The Nation, November 2007

Michael Doyle & Nippita Pukdeetanakul

Since the government first introduced the capital controls back in December 2006, both local and foreign business people have been scratching their heads trying to figure out how best to contend with them.

The purpose of the controls is to stem the strengthening of the Thai Baht, but a byproduct has been to make certain types of common transactions between Thailand parties and offshore parties much more troublesome.

The capital controls include something that has become widely known as the “30% Rule”. The 30% Rule states that for certain transactions in which parties in Thailand receive a loan or investment from parties offshore, thirty percent of the amount received by the Thailand party is required to be deposited with the Bank of Thailand, interest free, for a period of one year.

This rule has really disrupted the market because it applies to very common transactions such as loans from offshore parties to Thailand parties and the purchase of shares of Thailand companies which are not listed in the SET.

Below I explain these two situations in which the rule applies and common exceptions applicable to both.

Loans From Offshore Parties

Generally, if a Thailand party receives a loan from a party offshore and the proceeds of the loan are received as any currency other than Thai Baht, the 30% Rule applies. If so, the receiver’s bank in Thailand is required to deposit 30% of the total amount of the loan received with the Bank of Thailand, interest free, for a period on one year.

For example, say a party in Hong Kong agrees to loan a party in Thailand $100,000 US at a 5% interest rate for a period of 5 years.

Upon the Thailand party’s receipt of the $100,000 US the 30% Rule would apply. Accordingly, the Thailand party’s receiving bank would be required to deposit 30% of the amount received with the Bank of Thailand, interest free, for a period of one year.

Exceptions

In the above example the 30% Rule applies because the amount received by the Thailand party was in foreign currency, in that case US Dollars.

If the Hong Kong lender would have instead purchased Thai Baht in Hong Kong and then transferred the Baht equivalent of the $100,000 US into Thailand the rule would not have applied.

Also, if the Hong Kong lender would have entered into an arrangement with a Thailand bank to fully hedge the loan amount during the period of the loan the rule also would not have applied.

A hedge in this case is an arrangement with a bank to lock in, in advance, the exchange rate to be used to purchase

Thai Baht when the loan is received by the Thailand bank and
foreign currency at the time when the loan is later repaid.

Typically, these rates are negotiated with the bank granting the hedge on an annual basis.

Equity not listed on the SET Purchased by Offshore Parties

The 30% Rule also applies when offshore parties purchase shares of Thailand registered companies.

The rule applies to share purchases if the

total amount of the purchase price is the equivalent of $20,000 US or more,
purchase is for 10% or less of the total outstanding shares of the company, and
purchase is made in foreign currency.

For example, suppose a Japanese investor purchases a 5% of the total outstanding shares of a Thailand company for $50,000 US. In this situation the rule would apply, therefore, the receiving bank would deposit 30% of the purchase price received with the Bank of Thailand, interest free, for a period of one year.

Exceptions

If the purchase price does not meet the equivalent of $20,000 US threshold the rule does not apply.

For example, suppose a German investor purchases shares of a Thailand company representing 5% of the Thailand company’s total shares for $19,000 US. In this situation the rule would not apply because the amount of the purchase price does not meet the minimum threshold amount of $20,000 US.

If the purchase is for over 10% of the Thailand company’s total outstanding shares the rule does not apply.

Suppose a Swedish investor purchases 11% of the total outstanding shares of a Thailand company for $21,000 US. In this situation the rule would not apply because the percentage of total shares purchased exceeds 10%.

Also, note that if the offshore party purchases Thai Baht offshore (which is normally much more expensive that purchasing Baht in Thailand) before he transfers the purchase price into Thailand the rule also does not apply.

For example, suppose a French investor purchases 3% of the shares of a Thailand company for a purchase price of $25,000 US. Here the rule would normally apply, however, in this situation the French investor purchases the Thai Baht equivalent of the $25,000 US offshore and transfers that amount to the seller in Thailand. Accordingly, the rule would not apply.

Conclusion

This rule causes problems and confusion in the above situations especially if the transaction parties had not already factored the rule into the deal from the very beginning.

When the rule was first announced I had hoped that it would only be a temporary measure and there seems to be signs that the government may be planning to do away with the capital controls at the end of the year.

However, until the government does so, the business community needs to keep these rules in mind when planning cross-border transactions.

Michael Doyle is a US attorney and author of the books Doyle’s Practical Guide to Thailand Intellectual Property Law and Doyle’s Practical Guide to Thailand Business Law. His email address is michael@serimanop.com. Nippita Pukdeetanakul is a Thailand attorney. Her email address is nippita@serimanop.com.