If you are a foreigner looking to buy a condominium in Thailand, it is important to educate yourself on the types of ownership available.
Generally speaking, with condos, freehold units are your best option. However, many buyers also opt to set up a Thai Company in order to purchase a leasehold unit. Because the company is a Thai entity, that leasehold becomes a freehold unit under the law.
While this is a viable option, buyers must recognise that this ownership structure is not the same as a foreign freehold. In addition to being required to operate a company, that unit can only ever be resold to either a Thai national or another foreigner willing to take on the company structure.
Since a lease will ultimately expire, it can also be argued that company ownership is better than buying a leasehold, especially if the buyer gets a great deal on the Thai freehold unit in question.
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 foreign buyers, so it’s not always possible to find enough Thais who wish to live 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. For example, someone retiring may be looking for somewhere to live for the next 30 years, and therefore may not be overly concerned about 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 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. (or decides to set one up) has the option to purchase this unit as a Thai freehold at a significant discount. It might be for either personal use, for a rental business, 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 remaining lease period, 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.
What Could Be Called a Bargain on a Leasehold Condo?
If you are considering the purchase of a new build condo, and the sales agent is trying to convince you that a leasehold is so much cheaper than a freehold, that is the time for some healthy scepticism. In this situation, a leasehold is not the bargain the agent claims.
While you do avoid the freehold upgrade charge and the higher registration fees, it doesn’t mean you have hit the jackpot. There are other factors at play which should make it abundantly clear that buying a leasehold on a new build really isn’t worth it.
It may look like a bargain initially, but after a few years the leasehold owner starts to realise they may have made a mistake by not going for the freehold condo. If the leaseholder has been living in the condo, and decides to leave Thailand, finding a buyer for a leasehold will not be as easy as it would be for a freehold.
Setting up a Thai Co. Ltd. would give them the option of transferring Thai freehold ownership to the company, rather than being limited to the time remaining on a lease. While this would make it easier for them to sell on to a new buyer, it may be a complication and an expense they are not willing to deal with.
It is also possible that they have bought within a resort which also has a number of freehold owners wishing to sell. If that’s the case, then the leasehold owner must be willing to sell at an extremely competitive price if they are to attract buyers who can just as easily buy one of their neighbours’ freehold condos.
It is here when they are forced to accept the fact that, in the resale market, their unit is not the same as a freehold. In order to complete the sale, they must offer their unit at a much lower price. Much obviously depends on the quality of the development and the current market sentiment, but some discrepancy between freehold and leasehold resale prices is a reality.
The notion of a bargain is obviously a subjective one, but we would argue that when leasehold condos resell for at least 20% less than freeholds, as they often do, this hardly represents a bargain.
The Problems with Entering a Lease Agreement Without a Thai Company
A lease agreement is technically 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 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.
This is why many people decide 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 freehold ownership is probably the main reason why people decide to purchase what to a foreigner would otherwise be leasehold units.
After all, the Thai Company actually “owns” the unit. It doesn’t lease it. And since the foreigner exercises a certain amount of 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 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.
And if you run a genuine business – one that generates revenue, pays taxes, has proper accounting, legitimate Thai shareholders, and adheres to the corporate laws of Thailand – your company may 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. These were mostly holding vehicles, set up specifically for 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 curtailed the practice to some extent, the new legislation and guidelines from the Land Department did not have the desired lasting effect.
Either way, it was widely known what the new guidelines intended to accomplish.
Their aim was to stop foreigners from using Thai companies to buy real estate which by 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 continue to use Thai companies solely as holding vehicles for property, but anyone doing so must consider the fact that they may be breaking the law. And if they are using nominee shareholders, then they certainly are.
The Use of Nominee Shareholders
In the vast majority of cases where a foreigner uses a Thai Company to buy a leasehold condo (from the 51% of units designated for Thai ownership), the company is employing nominee shareholders.
While company ownership is allowed, using nominee shareholders is always questionable. It may be violating both the Foreign Business Act and the Condominium Act. Section 67 of The Condominium Act specifically states that anyone owning a condominium unit on behalf of an alien (foreigner) shall be subject to penalties.
You may read the full English translation of the Condominium Act 2008 amendments provided by the Thai Government’s Department of Lands here:
Foreigners who do things correctly through an experience lawyer have nothing to fear. For example, someone may have established a legitimate property rental business, file their accounts, and pay their taxes. And they may also have found legitimate Thai investors/shareholders for their company.
For a company that doesn’t tick all the boxes, however, they may find they have some problems if the Thai authorities decide to clamp down at some stage. If this happens, they may be forced to close the company and sell all of its assets (including property).
The Additional Running Costs Involved with a Thai Company
Buyers are typically not aware of the cost involved in running a Thai company. It is not really cheap – especially if you are doing things correctly. There are cheap versions available from cheap accountants and lawyers, but these may not hold up under scrutiny.
And there is not only the expense of setting up the company, but the running costs each year also add up. Again, this is not cheap if done correctly.
For example, accounts must be prepared every year and filed with the authorities. Tax returns must also be submitted and taxes paid. In addition, an accountant or lawyer will almost certainly be needed to prepare all the documentation, and they do not work for free.
Because of these expenses, owning a low-end condominium through a Thai Co. Ltd. makes absolutely no financial sense. If you are buying a condo as an investment property, you must ensure that expense of running the Thai company is not completely swallowed up by the rental income you will realistically be earning.
The Problems With Selling a Leasehold Condominium Owned Through a Thai Company
Selling a leasehold condominium is much more difficult than selling a freehold condominium. Very few people would dispute this.
Some owners who have purchased leasehold units for roughly the same prices on new developments question the differentiation. They believe their unit(s) should be viewed exactly the same as freehold units within the same development, especially of a Thai company owns the units as Thai freehold.
This belief may stem from what they were told by self-serving real estate agents, or from improper legal advice they received when buying their leasehold condo unit in the first place.
Unfortunately, when you decide to sell a leasehold 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 liabilities.
This is not referring solely to the yearly running costs, but also to the potential for legal jeopardy if the company turns out to be nothing more than a holding vehicle, and/or it has utilized illegal nominee shareholders.
As mentioned above, resorts oriented toward foreigners have a difficult time selling their 51% Thai allocation to Thai nationals. You can expect no less of a challenge locating your own Thai buyer. Likewise, finding a foreign buyer to take on the potential liability of the company will not be easy, especially if that person has done their homework, and knows that they will have a difficult time finding their own buyer in the future.
We must also add that condominium units held by legitimate Thai corporate structures can be much easier to sell, especially if they are offered at realistic prices.
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 goes out of their way 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. This is mainly because the taxes to register a freehold are 6.3%, split between the buyer and the developer. The cost of registering a leasehold, however is only 1.1%, and this is usually covered fully by the buyer.
These lower fees can compensate somewhat for the expense of setting up of a Thai Co. Ltd., so a buyer can easily be misled if the advice they are given goes no further than this. But advice offering “full disclosure” would include the cost of selling.
Anyone owning a condominium in their own name for longer than 5 years significantly reduces their tax upon sale.
By contrast, if a leasehold condo unit owned though a Thai company is sold, the tax rate would be 3.3% of the sale price.
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. Even if they are ultimately forced to dissolve an illegal company and sell their villa, they can afford to lose the money.
The situation with condominium investors is usually very different. For starters, not every condominium investor will have “money to burn”, as with our villa investor above. And when someone is hunting a condominium, they also know that (in simple terms) 49 of every 100 condo units in Phuket are available 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?
You need to have a good reason to buy a leasehold unit, and the main one is that you picked it up at a bargain price.
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, titled in your own name, versus a leasehold unit owned through a Thai Company Limited.
If a foreigner finds an amazing bargain on a leasehold unit, and aims to do things correctly, then it is certainly a better option for them to own freehold through a Thai Company. Taking the unit on a leasehold basis would limit the length of time they may stay there, and it would also offer little or no re-sale value.
But when agents who sell new projects to prospective buyers suggest that a cheaper leasehold compensates for setting up the company ownership structure, this does not take into account the annual cost of running the Thai Company Limited. It also does not factor in the higher cost to sell.
Furthermore, if you take advice on establishing a Thai Co. Ltd. using nominee shareholders, you will be breaking Thai law. Even if you are never found out, what are the chances a buyer would ever accept the risk involved with taking over this structure from you?
This brings up the final point: selling a leasehold is not easy. In a country where foreigners are educating themselves more and more on the real estate market, the resale market is becoming increasingly limited.
Potential buyers will be limited to newcomers “fresh off the boat”, who are still completely oblivious to the property laws in the Kingdom of Thailand.
Read more of our related articles on the Phuket real estate market: