CHAVALIT LAW GROUP Solicitors & Advocates

 
I.  Salient Points regarding Taxes on Financing
Revenue Code of Thailand

• interest paid by a Thai legal entity to a Thai individual or a Thai legal entity is subject to tax
• dividend paid by a Thai legal entity to a Thai individual or a Thai legal entity may be subject to tax
• capital gain received by a Thai individual or a Thai legal entity is subject to tax unless exempted under Thai law
• a payment may be classified into interest, dividend, capital gain or service fee depending upon relevant facts
• a Thai individual or a Thai legal entity is to be taken into consideration for tax purposes

DTA

• interest paid by a Thai legal entity to a foreign individual or a foreign legal entity is subject to tax unless reduced or exempted under a DTA
• dividend paid by a Thai legal entity to a foreign individual or a foreign legal entity is subject to tax but may be used as a tax credit in a foreign country
• capital gain paid by a Thai legal entity to a foreign individual or a foreign legal entity is subject to tax unless exempted under a DTA
• fees paid by a Thai legal entity to a foreign individual or a foreign legal entity may be subject to Thai tax

DTA-examples of provisions of a DTA
Business Profits
The profits of an enterprise of a Contracting state shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.

In the determination of the profits of a permanent establishment , there shall be allowed as deducting expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.

Dividends
Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contraction State.

Interest
Interest may be taxed in the Contracting State in which its arises and according to the laws of the Contracting State, but the tax so charged shall not exceed

• 10 % of the gross amount of the interest if its is received by any financial institution
• In all ,other cases, 25% of the gross amount of the interest;

Interest arising in a Contracting State and paid to the Government of the other Contracting state shall be exempted from tax of the first-mentioned State.

Questions

1. What is the maximum withholding tax rate on interest under the Revenue Code of Thailand ?
2. Does a financial institution include an insurance company ?
3. What does the Government cover ?
4. Why does Thailand refer to the local authorities ?

Interest may be payable by remittance of money.
“remittance of money” means:

1.  Actual remittance
2. remittance of money by debits of bank accounts in the same country or in different countries.

Capital Gains
Gains from alienation of immovable property may be taxed in the Contracting State in which such property is situated.

Gains from the alienation of movable property forming part of the business property employed in a permanent establishment which an enterprise of a Contracting State has in the other Contracting State may be taxed in the other State.

Gains from the alienation of any property or assets, other than those mentioned in paragraph 1 and 2 of this Article and paragraph 2 of Article 12, shall be taxable only in the State of which the alienator is a resident.

II. Structuring a financial deal and tax considerations
Financing

1. Equity Financing
2. Debt Financing
3. Project Finance
4. Corporate Finance

Advantages and disadvantages between equity financing and debt financing
Equity Financing
Subscription for new shares is not expense and deductible.
Net profits of a company is subject to 30% corporate income tax.
Debt to equity ratio may be low.
Equity may produce more dividends for a BOI company

Debt Financing
Interest on the debt is tax expense and deductible.
Interest payable a Thai company to a foreign company is subject to only 15% withholding tax or 10 withholding tax as the case may be.
Debt to equity ratio may be high.
Debt of the company may not be useful if the company has obtained investment privileges from the Office of BOI.

Equity Financing
Shares
Dividend

• Dividend
• Profit sharing
• other distribution to shareholders

Debt Financing

• B/E, P/N
• Loan, Trade Credit
• Bonds, Debentures, Notes

Bill of Exchange / P/N

• Interest is subject to Thai tax
• Capital gain is subject to Thai tax
• Stamp duty shall be affixed on B/E, P/N

Loan

• Interest is subject to Thai tax
• Capital gain is subject to Thai tax
• Stamp duty shall be affixed on a loan agreement

Loan- Other Payments

Fees
Any of fees payable may fall within a different type of income under provisions of the Revenue Code of Thailand ?

What category of income does any of the following fall within ?

• Management Fee
• Agency Fee
• Front-End Fee
• Commitment Fee
• Standby Fee
• Guarantee Fee

Loan – exemption
Interest on a loan paid by a Thai company to an import-export bank of a foreign country is exempted from Thai taxes under a relevant DTA

Bonds, Debentures and Notes

• Straight Bonds, Debentures
• Convertible Bonds
• Exchangeable Notes
• Floating Rate Notes
• Secured Notes
• Subordinated Notes
• Structured Notes

Tax implications on bonds, debenture and notes

• Interest is subject to Thai tax
• Capital gain is subject to Thai tax
• Stamp duty shall be affixed on bonds

Comparison between Loan and Bonds
Tax treatment on the loan is similar to that on the bonds except that 1% withholding tax on interest of the principal of Bonds paid by one Thai company to another company.

Loan is generally not subject to approval of the Bank of Thailand.
Issuance of new bonds shall be approved by a meeting of shareholders of a company.
Offering of new bonds shall be approved by the Office of the SEC of Thailand.

Convertible Bonds – Quasi-Equity Securities

Interest
Tax treatment on interest of the convertible bonds is the same as that on interest of the bonds.

Dividend
Tax treatment on dividend shall be applied to shares converted from bonds.

Exchangeable notes
Tax implications on exchangeable notes differ from those on convertible bonds.

Bonds – other payments

• Arrangement fees
• Underwriting Fees
• Selling Concessions

Warrants
Warrants issued and offered to investors
Warrants issued and offered to directors and employees of a public company

At the time of the exercise of the warrants into new shares by directors and employees of the public company, it is deemed that the directors and employees receive assessable income under Section 40(2) and Section 40 (1) of the Revenue Code respectively which is calculated on the following basis:

• If shares are listed on the SET and a IPO price is determined, the value of the shares shall be the IPO price deducted by the exercise price.
• If shares are listed on the SET and a IPO price does not exist, the value of the shares shall be an average of the market price of the shares in the month of receipt of ownership of the shares deducted by the exercise price.

Open-End Fund and Closed-End Fund

• Fund establishment under the SEC Act is not a company or a partnership
• Proceeds from sale of investment units of the fund are exempted form Thai tax.

Swap

• select a counter party, not the same bank, fro a swap transaction
• pay fees in a transaction
• avoid default payment

Securitisation

• avoid transfer of excessive assets
• use an offshore company
• issue exchangeable notes
• guarantee of the notes by a Thai company

Repo

• use manufactured interest
• pay fees
• avoid having a P/E in Thailand

Short Selling

• lending fee regarded as interest for CIT purpose
• ending fee regarded as service fee for VAT purpose

Questions

1. Is a transfer of shares on a short selling in Thailand a true sale ?
2. When is a transfer of shares in a short selling subject to tax in Thailand ?
3. Are dividends received by a Thai company in connection with a short selling exempted under Thai laws ?

III. Avoiding pitfalls in financial transactions

Pitfalls in financial transactions include:

Grossing-up provisions are used in a domestic financial transaction.
Payment of fees are made to a Thai individual or a Thai company.
Accrued interest is capitalized into a new principal of the debt.
Payment of interest is made to a foreign company.
Payment of capital gain or fees is made to a foreign company without regard to a country of a foreign company.

Payment of income is made to a foreign company with its P/E in Thailand.

IV. Techniques for Tax Planning on Financing
Shares
Company A borrows money to purchase shares , interest on the loan from the date of acquisition of ownership of the shares is deductible as expense of Company A.

Loan – Interest for payment of Dividends
Interest on the loan of a company for payments of dividends are deductible expenses of the company. But such interest does not result in revenues of the BOI business , interest shall be expense on the non-BOI business.

Loan – Accrued interest and Advisory fees
Company A in Thailand agreed with Company B in a foreign country which does not carry on its business in Thailand that accrued interest shall be capitalized into new principal amount.  It shall be deemed that accrued interest is received by Company B.

If the advice on manufacturing or administration is not sophisticated or does not require high technology, the fee shall be service fees under Section 40 (2).It shall be deemed that the advisory fees are received by Company B. The fees shall be deemed to be business profits.

Bonds – Depository
Company A in Thailand will offer and issue new bonds to foreign investors and will appoint the Depository Trust Corporation in the USA or DTC  to be depository and clearing agent  for Company. DTC holds bonds on behalf of actual bondholders.  Company A will pay interest to DTC.

Question
What is tax treatment on interest paid to DTC ?

Interest

• use of a loan in replacement of bonds in relation to interest for tax propose.
• 15% withholding tax on interest will be reduced to 10% withholding tax if conditions under a DTA are complied with.
• Interest is an deductible expense.

Dividends

• holding a certain percentage of shares in a Thai company
• holding shares for a certain period of time
• use of foreign-sourced dividend

Capital gains

• shareholding by an individual in Thailand
• shareholding by a resident in a qualified DTA country

Service Fees

• choose a foreign company incorporated in a DTA country
• avoid having a P/E in Thailand

Avoid having a P/E in Thailand in a financial transaction

P/E
Permanent Establishment;
PE shall include

• Assets such as a place of management , a branch, an office, a warehouse or a building site;
•  Activity such as construction, installation or assembly project which exists for six months; or
• Agent (dependent) distinguished from independent agent, a broker, general commission agent .

PE shall not be deemed to include :

• the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; or
• he maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise.

An agent shall be deemed to be a PE only if:

• He has and habitually exercises an authority to negotiate and conclude contracts for or on behalf of the enterprise;
• He habitually maintains a stock of goods or merchandise belonging to the enterprise from which he regularly delivers goods or merchandise for or on behalf of the enterprise;

The fact that company A in Thailand is controlled by Company B in a foreign country shall not constitute a PE
Question
What does “carrying on business” mean ?

 
Author: Partner Picharn Sukparangsee