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Khao Lak Property

 some points to consider at a purchase
Offering properties for “sale” to foreigners under a long term registered lease is becoming the norm for new developments in resort areas. Even condo developments limited to offering 51% of their freehold capacity to foreigners may offer the remaining units to foreigners on a long term leasehold.
If however you are considering purchasing a resale villa from another foreigner, you may very well find that it was purchased as a freehold property. As it is not possible for the foreigner to own the land, it would have been acquired in a Thai company in which he has a minority shareholding and Thai shareholders own at least 51% of the share capital and make up the majority of shareholders in number.




Sale structuring
In the current uncertain climate surrounding the interpretation and enforcement ofThailand’s land ownership and foreign investment laws, resales of these types of properties will most likely be structured as a sale of the owner’s Thai company. This way, transferring ownership of the company avoids the scrutiny of the authorities that a freehold sale of the property would otherwise attract which could prevent the sale going through.
The current owner will therefore end up selling his interests in the Thai company i.e. the company’s shares and any debt financing, rather than the property itself. In the past, a buyer may have preferred to start with a fresh Thai company rather than buy into an existing company and its history but these days this is less of an option for many foreign buyers.




Tax considerations
It can end up being very tax effective for a foreign owner to sell his company on to the next foreign owner. A sale of real estate attract a number of transfer taxes when a transfer is registered at the Land Department office and the gain made from the sale will be subject to corporate income tax of up to 30% and the payment of any gains out of the company in the form of a dividend will attract another 10% tax. It quickly becomes apparent to a seller that the sale of the corporate structure is the best exit strategy, as well as being probably the only viable route in most cases for foreign buyers.
One issue the new owner will face is that the Thai company will continue to record the value of the property in its books at the property’s original cost price and not the value that the new owner has paid. As a result, when the new owner comes to sell the property in the future he too will likely prefer selling the company on as well, otherwise a sale of the property out of the company will mean he ends up making a taxable gain that is equal to the real gain made by him plus the gain made by the owner before him.
The tax on the unrealized capital gain inherited from the seller may not necessarily be a problem in the future, if the current legal environment concerning foreign ownership persists and the sale of the company remains the most practical option. It is an important issue to be aware of however when taking over a company, especially if the property has been held for some time and it has appreciated considerably since it was first purchased. It is of course possible to record a revaluation of the property in the accounting records to reflect the current price paid for the property but this has no affect on the cost base for tax purposes.




Price considerations
The taxes saved by the seller needs to be appreciated early on by the buyer in the sales negotiations. Knowledge of this should give the buyer the ability to negotiate a price that takes into account the Thai tax savings that the seller will achieve from the sale, potentially at the expense of the buyer because of the unrealised taxable gain in the company that he inherits, so that both parties effectively end up sharing in the tax benefits of the share sale.
Taking over the Thai company owning the property will require the usual legal, financial and tax due diligence to understand what exactly the new owner is buying into and whether or not there are any potential liabilities or material issues that might pass over to the new owner. On the tax side for example, if the property has been used as a holiday home by the current owner, he should have been paying some rent to the company – there may otherwise be under declared income for tax purposes. Also the payment of house and land tax of 12.5% on the rental value of the property – payable regardless of whether rents have in fact been paid – should also be reviewed.




Leasehold option
A new owner may consider registering a lease over the property for the maximum term of 30 years to secure his rights to possess the property in the long term. This does not mean he ends up paying for the property twice – the rental can be payable on an annual basis over the lease term and will in many ways be akin to paying rent to himself.
Holding a leasehold interest in the property can then put the new owner in a position similar to many of the leasehold developments on offer – bearing in mind that many of the new developments offered as leasehold may also face the same freehold land ownership issues in the end.




Thailand Property
This article was written by Paul Ashburn, Senior Partner, BDO Advisory Limited.




BDO Advisory Limited, a limited liability company incorporated in Thailand, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO International network and for each of the BDO Member Firms.




Visit BDO website at www.bdo-thaitax.com.

Thailand Property Tax

When does specific business tax apply?
The sale of immovable property shall be subject to 3.3 per cent specific business tax if the property is sold in a commercial manner or for profit, and the sale falls within the scope of taxable sales listed in Royal Decrees issued the Revenue Code.
A taxable sale is firstly confined to sales requiring registration of rights and
juristic acts e.g. the sale of land, buildings or condominium units whereby
the transfer of ownership must be registered at the land office.




How is specific business tax paid?
Specific business tax is payable at the land office when registering the
transfer of ownership. You need to pay the tax to complete the transfer.
The tax is imposed on the gross receipts before deduction of expenses
from the sale of the property, and market value rules apply for calculating
the correct tax base.




In practice, the land office will collect tax on the higher of the official
appraised price and the declared sales price. If you encounter a situation
where the sales price declared will be lower than the official appraised price,
and you believe your sales price is market value, then you may need to pay
the tax first on the official appraised price at the land office and take your
case up later with the Revenue Department.




What types of sales are exempted?
A taxable sale includes the sale of immovable property made within five
years from the date of acquisition of the property, if the sale does not
otherwise fall within other categories of taxable sales. A private sale will
typically be taxed under this category.
The acquisition date is taken as the date of registering the transfer of
ownership. In the case where the land and building were acquired at different
times, the five year time limit shall be deemed to have commenced on the
later of the acquisition dates.
Private home owners who sell their home after holding it for more than five
years will not have to pay specific business tax on the sale of the property.
This is the same as saying that if you hold the property for more than five
years, the property is not considered sold in a commercial manner or for
profit.




A number of exceptions are provided if the property is sold within five years
of acquisition, two of which are explained below.
1) Principal place of residence of the seller
A seller will not be liable to specific business tax on the sale of his principal
place of residence, if his name appears in the house registration book of
the property for not less than one year from the date that the property was
acquired. In the case where the name of the seller appears in the house
registration book more than once but the period of registration in total
adds up to a year, the seller shall be deemed to have been registered for
at least one year.




In the case where the property sold is marital property, only one of the
spouses must be recorded in the house registration book for not less than
one year to qualify for exemption. In the case where a person transfers his
ownership interest in a property to his spouse, the transferor’s name must
appear in the house registration book for not less than one year.
Special rules apply in the case of joint ownership of property. Where the joint
owners will be taxed separately on the transfer of their ownership interests,
the owner must have their name in the house registration book for not
less than one year. In the case where the joint owners are liable to specific
business tax as an ordinary partnership or ´body of persons´, rather than
as separate taxpayers, the house registration exemption cannot be used.
2) Property sold acquired through inheritance
Property sold that is acquired through inheritance will not be subject to
specific business tax. For example, take the case of a married couple that
purchases a condominium unit as an investment property and the husband
subsequently passes way and bequests the property to his wife. If the wife
sells the unit within five years from the date of acquisition, the sale of the
wife’s ownership interest in the property prior to the husband’s death shall
be subject to specific business tax, whilst the portion inherited shall not be
subject to specific business tax.




These two examples highlight the various circumstances that can determine
whether or not a sale will be subject to specific business tax. If a sale is not
subject to specific business tax it may instead be subject to stamp duty of
0.5 per cent.




What if the buyer pays the specific business tax for the seller?
In the case where the purchaser agrees to pay taxes or fees in registering
the transfer of the property which the seller is liable to pay under the law,
than such tax or fees shall be included in the tax base for computing specific
business tax.
For example, a sales contract may provide that the buyer shall be liable to
pay the specific business tax due on registration of the property. The specific
business tax is the liability of the seller under the law so the tax base should
be grossed up for paying specific business tax.




What if the sales price is under declared?
Parties may be tempted to under declare the sales price at the land office
to reduce the tax payable. Paying the specific business tax at the land office
may not be the end of the story however. The Revenue Department may
still seek to examine that the correct amount of tax has been paid when
it conducts a tax audit. If evidence is discovered that the real sales price
is higher than that declared at the land office, resulting in a tax shortfall,
then the Revenue has the power to collect the shortfall from the seller, plus
penalties and surcharges for late payment.




This article was written by Paul Ashburn, Senior Partner, BDO Advisory Limited.




BDO Advisory Limited, a limited liability company incorporated in Thailand, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO International network and for each of the BDO Member Firms.




Visit BDO website at www.bdo-thaitax.com.

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