However, in Thailand, especially in resort destinations, such companies have frequently been used for a different purpose.
Many investors have chosen to use limited companies as a vehicle to own a holiday home – a villa or a condominium – in the Kingdom.
The choice of a Thai corporate holding vehicle is most often explained as a way to navigate stringent laws relating to freehold ownership in the Kingdom.
The legality of such an undertaking will not be discussed in this article. Instead, in the following, we present part one of a two-part article in which we take a brief look at the unfortunate and unnecessary tax consequences that may result from owning a holiday home in Thailand by means of the all too common but nonetheless ill-advised use of a Thai limited company.
Even though an investor can set up and use a local corporate vehicle solely for the purpose of owning a holiday home in Thailand, the Revenue Department does not see it this way. The Revenue Department will treat such a company as if its purpose is as outlined in the CCC: for making a profit.
The Revenue Department will, therefore, interpret all of the company’s actions in this light. And this, when combined with the Revenue Department’s power to upwardly assess income, can result in severe consequences not only for an investor’s company but also for an investor personally.
This is because the Revenue Department is empowered to tax an investor’s corporate home-owning structure in two ways.
First, the investor will obviously use the asset as a holiday home. He or she will stay in the acquired villa during holidays in the Kingdom. Typically, such a person will not pay any rent to the “company” during the holiday.
However, if the investor is also the director of their corporate vehicle that owns the villa or condominium, as is frequently the case, the Revenue Department will consider it as given that the company is providing accommodation to its director.
The Revenue Department then has the power to assess such a rent-free stay as taxable personal income. Section 40(1) of the Thai Revenue Code (“RC”) defines assessable income to include “monetary value of rent-free residence provided by the employer”.
The person liable for tax in Thailand who received this assessable income is required to report and remit income using the personal income tax return form PND 91 by the last day of March after the year in which the income was paid.
If our hypothetical director fails to do so, h may be assessed by the Revenue Department and penalized for failing to file an accurate return, or any return at all.
Apart from having to pay the assessed taxes, a penalty is payable. Section 22 of the RC defines this penalty as an amount equal to the tax payable. In event of failure to file any return at all, the penalty is twice the tax payable (RC: Section 26).
Second, not only an individual, but also the related company may be penalized as result of a director’s rent-free accommodation.
The company is required to deduct and remit a specified withholding tax on any assessable income – including rent-free accommodation income. If the company fails to deduct and remit the relevant withholding tax, it is jointly liable with the tax payer for the unpaid amount.
Failure to report such income can result in an assessment by the Revenue Department resulting in a penalty equal to the amount of the additional tax payable and a surcharge of 1.5% per month on the tax payable (but not exceeding the total tax payable).
One might think that an obvious solution would be to ensure that whoever uses a company asset for a rent-free stay is not an employee of the company.
However, this does not work either. This is because the Revenue Department has the right to assess rental income of a company. In cases where an asset of a company is used for a rent-free stay or a stay whereby only a peppercorn rental amount is declared, the Revenue Department is entitled to assess a higher rental amount.
This might occur if such a peppercorn rental amount is below the market rate. A company in this situation will be subject to corporate income tax on the assessed amount, even though such an amount was not actually paid.
Finally, it should be noted that a further tax, the House and Land Tax (“HLT”) is applicable to holiday home rental income. In Part II of our article we will point out the additional unfortunate and unnecessary HLT liabilities that result from the all too common practise of using a Thai limited company to own a holiday home.
DUENSING KIPPEN is a multi-service boutique law firm specializing in real estate and corporate/commercial transactional matters as well as arbitration proceedings arising therefrom. It is the only such firm in Thailand that also compliments its transactional expertise with a core tax law practice. DUENSING KIPPEN can be reached at: firstname.lastname@example.org or for more information please visit them at: www.duensingkippen.com