Thailand's Supreme Court has issued a decision concerning Thailand withholding tax for capital reduction payments made by Thailand companies.

Supreme Court Case No 6900/2559

A Thailand company with paid up share capital of 200,000,000 Baht and retained earnings of 336,435,737 Baht, had a shareholder holding 1,720,000 shares in the company. In 2006, the Thailand company reduced its capital by 1,720,000 shares the shares held by that shareholder. The capital reduction payment the company made to the shareholder was 387,670,800 Baht made up of 172,000,000 Baht for the shareholder's shares and 215,670,800 Baht for the shareholder's portion of retained earnings. No withholding tax was deducted.

The Revenue Department issued an assessment to the company for withholding tax on 215,670,800 Baht (the portion of the capital reduction payment that was the shareholder's portion of retained earnings) on the basis of that amount being a dividend payment under Section 40(4)(b) of the Revenue Code, which is subject to 10% withholding tax.

The company disagreed, claiming the amount of 215,670,800 Baht was part of the company's capital reduction payment under Section 40(4)(d), which is not subject to withholding tax, and that it could not be a dividend because there was never any resolution of the company to pay a dividend and because it was paid to one shareholder only, not to all shareholders. ​

The Supreme Court reasoned:

• Under Sections 1224-1228 of the Civil and Commercial Code, a payment for a capital reduction is a payment for a reduction of share capital only; and
• Retained earnings are different from share capital in that they come from the profits of the company that under Sections 1200-1205 of the Civil and Commercial Code can only be distributed to shareholders as dividends;
  

And therefore ruled that:

• The amount of 215,670,800 Baht being the portion of the retained earnings the company paid to the shareholder was not a capital reduction payment under Section 40(4)(d) of the Revenue Code but a share of profits dividend payment under Section 40(4)(b), which is subject to 10% withholding tax.

​Note for Foreign Company Shareholders

Whilst this Supreme Court Case determined the 10% withholding tax liability for retained earnings portions of capital reductions under the domestic withholding tax laws, foreign company shareholders should note that the same rate of 10% would also apply for retained earnings portions of capital reductions under the international payments withholding tax laws.

---