Thailand Purpose of Business Corporate Tax Rule
Tax Insight | January 2012
Section 65 ter (13) of the Thai Revenue Code is the “purpose of business rule” for corporate tax deductions. It is drafted in simple terms, as follows:
“Any expenses not exclusively expended for the purpose of acquiring profit or the purpose of business” are not allowed as tax deductions.
But whilst it is drafted in simple terms, Thailand interprets the rule in a very similar way to that of other countries, and the Thailand Supreme Court has demonstrated that compliance with the rule is determined by an analysis of the whole transaction, including its manner, intention and substance.
Summarized below are just some of the Supreme Court cases that dealt with the “purpose of business rule” in Thailand.
Case No 1478/2531
A company borrowed money from a bank for the purpose of re-paying an advance that it had earlier received from a director. The Court's ruling was that the company could not prove the substance of the advance from the director, and therefore, as the loan had no commercial business purpose, the interest on the bank loan did not constitute a tax deductible expense under Section 65 ter (13).
Case No 4184/2533 and 4483/2533
A mining company entered into management services agreements with a newly-established company, both having the same shareholders. Every year, new management agreements were entered into. They were identical, except for the amounts of the management fees, and in order to pay the management fees, the mining company obtained a loan from a bank and claimed the interest as tax expenses. After its analysis of the whole transaction, the Court ruled that:
Case No 123/2540
A Thai subsidiary of a Dutch company bought property and assumed a debt from a related company in Thailand for Bt 300 million, but the assumption of the debt was not included in the agreement between the Thailand subsidiary and the related company. The Supreme Court's analysis revealed the related company had large accumulated tax losses and concluded that the purpose of the company entering into the transaction was not for the purpose of business but for the purpose of obtaining a tax benefit, and so, the interest on the assumed debt was not allowed as a tax expense under Section 65 ter (13).
Case No 6704/2541
A company buys a large amount of shares in SK for 50 Baht per share. Three years later, the company sells the shares in SK to a newly established 100% owned subsidiary for 1 Baht per share. The company claims the loss of Baht 49 per share as a tax expense, arguing that the loss was the result of reorganizing its business operations. The Court held that the loss on sale of the shares is not deductible under Section 65 ter (13) because there was no real business purpose for establishing the subsidiary for the purpose of reorganizing its business operations, but that it was done only for the purpose of claiming a tax expense.
Thailand's “purpose of business rule” for corporate income tax expenses is determined on an analysis of the whole transaction, including its manner, form, substance and intention (in a similar way to that of other countries).
This is a general information Tax Insight Article only. It should not be used to determine any matter without consulting with an experienced Thailand tax advisor.