Thailand Entire Business Transfer Tax Exemptions Continue
Tax Insight | Vichit Vatcharanukul | February 2014
When the Thailand Government issued Royal Decree (No 542) in September 2012, it did not stop the tax exemptions for entire business transfers, and the tax exemptions continue on as the Government had always intended.
The only thing the Government did in September 2012 was to close the loophole of utilizing the entire business transfer laws for normal sales of a business in order for shareholders of the transferor company to get cash distributions from the transferor company free of tax.
In November 2008, when the economic crisis was impacting Thailand and many Thailand companies were undertaking M&A transactions to reorganize their business operations to enhance their efficiency, I issued a memorandum to my fellow Revenue Department lawyer colleagues explaining the tax exemptions.
Royal Decree (No 542) did not change anything in my November 2008 memorandum, and for the purposes of clarifying Thailand taxation of EBTs, I reproduce my memorandum, as follows:
1. Tax Exemptions
Pursuant to the Government's introduction of tax exemptions in 1998 to assist companies with their organizational restructurings, Royal Decrees and Ministerial Regulations were issued to grant exemptions from Specific Business Tax on transfers of property and Stamp Duty Tax and also Income Tax for shareholders of companies or partnerships undertaking mergers or entire business transfer transactions. The Decrees and Ministerial Regulations did not grant exemptions from VAT or Corporate Income Tax because exemptions for those taxes are already provided in the Revenue Code laws.
For VAT, Revenue Code Section 77/1 (8) (f) prescribes that a transfer of assets under a merger or entire business transfer transaction is not a "sale" of assets, and therefore, it is exempt from VAT.
For Corporate Income Tax, Revenue Code Section 74 prescribes that a profit or loss from merger and entire business transfer transactions are not profits or losses for corporate tax purposes. This is discussed in more detail below.
2. Rules, Procedures and Conditions
For entitlement to the tax exemptions for mergers and entire business transfers, taxpayers are required to comply with the rules, procedures and conditions laid out in the Notification on Mergers and Entire Business Transfers, and are also required to notify their compliance to the Revenue Department within 30 days.
3. Revenue Department Tax Considerations
Specific Business Tax exemption is granted for transfers of immovable property and Stamp Duty Tax exemption is granted for instruments executed under mergers and entire business transfers. These SBT and SDT exemptions are not a problem for tax consideration.
For Shareholder Income Tax exemption, a shareholder of a merged company is exempt from Income Tax on any benefits received in excess of the investment in the merged company. This is also not a problem for tax consideration.
But if a shareholder of a transferor company under an entire business transfer does not become a shareholder in the transferee company, like the case of a merger under which shareholders of the merged companies become shareholders of the merged company, then shareholders of a transferor company are not entitled to Income Tax exemption.
Even though a transferor company liquidates, the money the shareholders receive are benefits derived from liquidation that are not entitled to Income Tax exemption under the entire business transfer exemptions. However, if it can be proved the shareholders under an entire business transfer are similar to shareholders under a merger, then they may be entitled to Income Tax exemption.
4. Corporate Income Tax Exemption
As mentioned, the 1998 Royal Decrees and Ministerial Regulations did not grant Corporate Income Tax exemption for mergers and entire business transfers because this exemption is already provided in the Revenue Code. According to Section 74(1)(b), which prescribes the method of computing net profit for merged companies or juristic partnerships, the valuation of properties shall be taken at the market price on the date of the merger, but such price shall not be treated as income or expense for computing net profit or loss.
Therefore, in the case of a merger transaction valued at market price on the date of the merger the difference between the market price of the properties and the book value of the properties as shown in the accounts is exempt from Corporate Income Tax. This also applies for the case of entire business transfers mutatis mutandis under Section 74(1)(c).
For merger and entire business transfer transactions, only the portions of reserves and net profits brought forward from previous financial years, which have not been subject to tax, and the portions of reserves and net profits, which have been set aside in previous fiscal years by insurance companies under Section 65 ter (1), shall be included in a computation of net profit or loss under Sections 74(2) and (3).
This Tax Insight Article is general information only. It should not be used to determine any matter without consulting with an experienced Thailand tax advisor.