This is a common question, and unfortunately an all-too common situation in which foreigners find themselves. Buyers are quite often misled into believing they have gained something equivalent to freehold ownership when buying a leasehold unit through a Thai Company.
Instead, what they have really purchased is a unit which can only be resold either to a Thai national, or to a foreigner willing to take on a potentially illegal Thai company structure.
Everyone, or certainly the vast majority of people know that foreigners are not allowed to own land in Thailand.
A condo development is different in that a foreign national may own one or more units outright. The foreigner will jointly own a fraction of the land on which the building sits, but only if the total foreign ownership does not exceed 49% of the unit area of the resort.
With a freehold condo, a foreigner can feel secure because they also receive a Chanote Title deed issued by the local Land Department.
This confirms their full freehold ownership, and comprises part of the 49% of the development which is available to foreigners.
You may also want to read all about the benefits and advantages of owning a freehold condominium in Thailand:
So What Happens With the Other 51%?
The growth of the condominium sector for foreigners has taken off considerably over the last 15 years. The last 5 years has seen some areas of the island almost unrecognizable to how they were before. Condos seem to be sprouting up everywhere.
In every condominium project 51% of the unit area must be owned by Thais. In some instances, the developer retains ownership of these units and uses them to generate rental income. Others are actually sold to Thais.
The problem is that many projects attract only foreigners and it is not always possible to find enough Thais interested in living in an (almost) majority foreign owned resort.
In some resorts where foreigners would like to purchase a unit, but all the freehold units have been sold, they are allowed to acquire the Thai units as a leasehold.
This is allowed because the developer is a Thai company, meaning the units are still owned by a Thai entity. If they are leased, they remain “Thai owned,” which would not infringe on the 49% cap placed on foreign condominium ownership.
When a Leasehold Makes Sense
Of course, for some people a leasehold may be ideal.
For example, they may get the chance to buy at a significantly lower price than a freehold unit.
It may also make perfect financial sense because they were planning to rent long-term anyway, and by prepaying a leasehold for 30 years, they have no worries about inflation increasing their rent each year.
It is possible they are only be looking for somewhere to live for the next 30 years – for their retirement – and are not concerned with selling the lease on to someone else.
And because the initial 30 years is registered at the land department their occupancy will be legally protected under Thai law.
When a Thai Company Makes Sense
There are also situations when the use of a Thai company to purchase a condominium makes perfect sense.
Occasionally, there are bargains to be had in Phuket that involve the purchase of a leasehold condo. For example, an owner who wishes to sell their leasehold unit may realise that the luxury condo that they have owned for 15 years only has a further 15 years to run on the initial lease period. They have enjoyed their property for the last 15 years but now wish to sell the remainder of the lease.
It is highly unlikely they will receive back the original value as it will be hard to find a buyer willing to pay full price for only the remaining 15 year guaranteed lease period.
But someone in Phuket who already runs and controls a legitimate business with a Thai Co. Ltd. has the option to purchase this unit as a Thai freehold at a significant discount. It might be for either personal use or even as a company asset to provide accomodation for their staff.
Because they are purchasing a Thai freehold, not a leasehold with only a limited lease period involved, they are buying it in perpetuity. In other words, the company they control will own it forever.
This is when the use of a Thai Company makes absolute sense.
The Problems with Entering a Lease Agreement?
A lease agreement is not real ownership. It is essentially, a tenancy agreement for a legally fixed term, which may not exceed 30 years. You don’t get a Chanote title and you don’t get voting rights within the resort.
You can read more about leaseholds in Thailand here:
You may (or may not) see the leasehold renewed at the end of this 30 year term, but this is far from guaranteed. An extension is only a promise made by an individual or a developer, and you may find it is not enforceable when the time comes.
The route many take is therefore to set up a Thai Company and purchase the same unit, only instead of being a leasehold, it is a freehold in the name of the Thai entity.
The property may then be owned through the company in perpetuity, not just for the initial 30-year period. This sense of ownership is probably the main reason why people decide to purchase what are otherwise leasehold units.
After all, the Thai Co actually “owns” the unit. It doesn’t lease it. And since the foreigner has full control of the Thai company, it appears to be the perfect solution.
The Ideal Solution or Against The Law?
Many Phuket real estate agencies suggest that setting up a Thai Co. Ltd. to own a leasehold condominium is an ideal solution.
Of course a Thai company can be kept open for as long the shareholders wish, and it overcomes all the problems that arise from renewing lease periods in the future.
Owning a business in Thailand is perfectly legal. A company with legitimate Thai shareholders, with a genuine business, one that generates revenue, has proper accounting and which adheres to the corporate laws of Thailand may even purchase landed property in Thailand for business purposes.
It is true that prior to 2006 many people held companies which had no business activity at all. They were mostly holding vehicles, which allowed the foreign shareholders to own and live in a landed property such as a house or villa.
The crackdown by the authorities in 2006 put a stop to this, and the practise of using straw men and holding companies died down for a while. Although it did curtail the practice to some extent, the new legislation and guidelines put in place at the Land Department did not have a lasting effect.
Either way, it was widely known what the new guidelines intended to accomplish.
Their aim was to stop the use of a Thai Co. Ltd. for the purpose of a foreigner buying real estate, which under Thai law, should only be available to Thai nationals.
This applied not only to villas and houses, but equally to the 51% of condominiums reserved for Thais.
Of course, people are still using Thai companies as holding vehicles for property, but anyone doing so must consider the fact that they are breaking the law.
It is a blatant attempt to circumnavigate Thai law, and would not hold up in court should the ownership ever be challenged and find its way in front of a judge.
The Use of Nominee Shareholders
But one thing is certain. In nearly every single case, the Thai companies buying the 51% of condominiums allotted for Thais are using nominee shareholders.
And while the use of a company may be arguable, using nominee shareholders is without question an illegal activity.
It is highly likely that at some stage in the future it will not end well for owners of such companies.
Eventually, the authorities in Thailand will decide to clamp down on these illegal nominee structures, and the companies may be forced to close and to sell the assets held by the company.
Sadly, if this comes to pass, both the Thai nominees and the foreign shareholders could face fines and/or imprisonment.
The Additional Running Costs Involved with a Thai Company
One thing that buyers are not usually aware of is that a Thai company costs money to run. And it is not cheap – especially if you do things correctly.
Because of this it makes absolutely no sense for anyone purchasing a low-end condominium through a Thai Co. Ltd.
For example, accounts must be prepared every year and filed with the authorities. Tax returns must be submitted and paid. The accountant or lawyer preparing all the documentation will also need to be paid.
Obviously the running costs do not take into consideration the expense of setting up the company in the first place, which is also not cheap if done correctly.
The Problems With Selling a Leasehold Condominium Owned Through a Thai Company
There is no disputing it. Selling a leasehold condominium is much harder than selling a freehold condominium.
Some owners of a Thai company structure who have purchased leasehold units tend to question the logic behind the differentiation. Many believe the units they have purchased should be looked upon in the same way as freehold units within the same development.
These beliefs, however, may stem from self-serving real estate agents or from the improper legal advice they received when buying their leasehold condo unit in the first place.
Unfortunately, when you decide to sell your condo, you must either find a Thai buyer, or someone who wants to take over your Thai company. This means another foreigner willing to accept the company’s legal liability, including the possible use of illegal nominee shareholders.
Of course, they will also have to accept the yearly running costs.
And finding that buyer could be a challenge, especially if they are aware that it will be just as hard for them to sell the unit on to another buyer in the future.
The Cost to Sell is Greater Too!
We have always stressed that Thailand is an extremely conducive environment for investing in real estate. The government has always tried to attract new investment by keeping taxes low and this includes sales taxes.
It is true that the cost of purchasing a leasehold from a new development may be lower than purchasing a freehold.
For the most part, this is because the taxes to register a freehold are 6.3%, usually split between the buyer and the developer. The costs of registering a leasehold, however is only 1.1%, and this is usually covered fully by the buyer.
But buyers can easily be misled by advice that buying a leasehold is much more cost effective because of these lower fees. Possibly because the lower cost also compensates somewhat for the expense of setting up of a Thai Co. Ltd.
Anyone owning a condominium in their own name for a period of over 5 years significantly reduces their tax upon sale. This usually equates to 0.5% of the price of the unit at the time of sale.
By contrast, if a leasehold condo unit is owned though a Thai company, a tax rate of 3.3% is applied.
Why Would You “Choose” a Leasehold Over a Freehold Condo?
It is understandable that people with plenty of money who want to live in a villa might choose to go the Thai Co. Ltd. route. For some people, they have the money to lose even if they are told to dissolve the illegal company and to sell their villa.
But the situation with a condo is so very different. After all (in simple terms) for every 100 condo units in Phuket, 49 of them are available as freehold.
New investors must ask this extremely pertinent question when making a decision to buy: Why on earth would I buy a leasehold unit when nearly half of the units on the island are freehold?
When contemplating a condominium purchase in Phuket there are many relevant points which every buyer must consider.
This is especially true if you are weighing up the purchase of a freehold unit versus a leasehold unit through a Thai Company Limited.
Firstly, when agents suggest that a cheaper leasehold compensates for the company ownership structure, this does not take into consideration the additional cost every year of running the Thai Company Limited. Nor does it factor in the higher cost to sell.
Secondly, if you are using nominee shareholders in your Thai Co. Ltd. you are breaking Thai law. Even if you are not found out, will any buyer accept the risk of taking over this structure from you?
This brings up the final point: selling a leasehold is not easy. In a country where foreigners are becoming more educated as time goes on, your resale market is increasingly limited.
Potential buyers will be limited to newcomers “fresh off the boat” who are still completely oblivious to the laws in the Kingdom of Thailand.
Read more of our related articles on the Phuket real estate market: