People have expressed excitement about the new law which enabled transferring land to a company to pay for shares without any personal income tax burden. Actually getting it done is no easy task, with hiccups here and there, as this is a novel transaction alien to officials at all three relevant government agencies: the Land Office, Revenue Office and Companies Registrar Office. It’s been a challenge to find an expert at any of these agencies to provide counsel.
Land transferors would need to take several trips to each of the three agencies to seek clarification until they can be sure of completing a transaction. In some areas, the advice of different agencies simply contradicts one another, resulting in an inability to register a transfer of land and the abandonment of efforts to enjoy the benefits of the new regulation. The Dec. 31 deadline is fast approaching, causing worries to those who have already set up a new company but become stuck and unable to proceed further to increase its capital and transfer land to pay for the capital increase, tax-free.
It is a shame the much-heralded Royal Decree 630, supposedly a big boon to taxpayers, has shown signs of fizzling.
Here’s what I’ve gleaned to help those still interested in pursuing these generous benefits.
First of all, citizens are unsure where to start, what to do and what practical steps to take. Now it is clear, they need to complete registration to establish a company first. Then take this company to the Land Office to receive a transfer of land to pay for the shares of the transferor. One area to watch out: You cannot let the appraisal value of the land exceed the amount of the registered capital of the company. Remember: The registered capital of the company can be more than or equal to the land value, but it cannot be less. This is to comply with the Notification of the Director General of Revenue No. 5, dated June 5, 2017.
An early milestone to reach is converting the land into shares, after the statutory meeting when you register a company. You should not set up a company first, hoping to increase its capital later and to transfer land to pay for the additional capital. Increases of capital have been the most complicated and confusing issue; the Land Office has refused to accept tax-free transfers of land in event of increased capital, citing that it is in the process of seeking a second ruling from the Revenue Department. The Companies Registrar Office likewise has a practice and opinion, opposite that of the Land Office in regard to capital increases. Capital increases are not recommended.
Notification No. 5 also requires that you must use land transferred to a new company to carry on your business, such as land and buildings leased to others. At the time of transferring the land, you will need to present to the Land Office evidence the land is being used for your business on the date of transfer, such as a copy of the lease agreement and receipts of rent collected. In addition, you and the company must, on the date of land transfer, submit a letter in a prescribed form to both the Land Office and the Revenue Office certifying the land has been used for business.
This requirement has just been added to the Notification No. 5 to plug loopholes in the previous notification issued March 20.
The original Notification No. 4 condoned the transfer of any land. Smart individuals owning high-value property, especially that obtained through inheritance, took advantage of of it to save tens of millions of baht in tax expenses. A mere three months later, the new rule was announced to close this possibility by requiring the land be used for business purposes. The theme is pushing individual landlords with personal real estate rental businesses into the company system for more efficient tax collection. The Revenue Department must have calculated that giving up the personal income tax on land transfers was a worthwhile sacrifice, taking into account the amount of corporate income tax to be collected from the land rental companies in the long-term.
The next problem is the seemingly large initial capital outlay, generally understood to be legally required to establish a new company. Superficially, it looks as if the Civil and Commercial Code, or CCC, requires up to 25 percent minimum paid-up share capital before a company can be set up. Individuals just don’t have the appetite to pay one-fourth of the land value in cash to save some tax expenses. Fortunately, this problem is now solved, as the Company Registrar Office has recently accepted registration of a company, with effectively 0.001 percent paid-up share capital in cash, which is perfectly legal. The remaining 99.999 percent share capital was entirely paid by land.
The solution to the above problem can be clarified as follows: The CCC Section 1105, third paragraph says “The money first paid for share capital” must not be less than 25 percent of the par value. This can be substantial. For example, the registered capital of 5 million baht would need initial paid-up capital of one fourth, i.e. 1.25 million baht — which many small individuals cannot afford — before a land transfer to pay for the remaining 75 percent of the registered capital takes place.
The targeted well-to-do individuals could face a worse situation. Who would want to invest hundreds of millions of baht to save tax? For instance, if a wealthy person has parcels of land worth 1 billion baht and considers joining the scheme. Let’s say he is setting up a new company to receive a transfer of the land. He would have to fish from his pocket 25 percent of the registered share capital/land value or 250 million baht in addition to paying official the company registration fee of 200,000 baht (every million baht share capital pays 1,000 baht fee, up to a 200,000 baht cap). This exorbitant cash up-front has deterred participation.
But the problem has been solved by the Companies Registrar having accepted registration of a company with a registered share capital of about 900 million in May 2017. The statutory meeting of this company divided the ordinary shares into two groups, according to the CCC Section 1108(5): The first part of the ordinary shares consists of cash shares to be paid up fully in cash, and the other part is land shares to be paid up entirely by land. The latter part is legally called, “ordinary shares to be allotted as fully paid-up otherwise than in money.”
The first group of ordinary shares is 100 shares with a par value of 100 baht each; the share capital of this group is 10,000 baht. The CCC Section 1105, third paragraph states that these cash shares must be initially paid up at least 25 percent of the par value, namely 2,500 baht as “The money first paid for share capital.” In our case study, in which the Companies Registrar has accepted company registration, this part of shares is paid up 100 percent: 10,000 baht. Mr. A alone owns the cash shares. His stake in the company thus totals 10,000 baht.
For the group of shares that are ordinary shares to be allotted as fully paid-up otherwise than in money or the shares paid-up 100 percent by land, the CCC does not require that this part of the share capital be first 25 percent paid-up, whether in “money” or in land—they can be fully 100 percent paid-up at one time by land. The Companies Registrar therefore accepted the registration of the company set-up so that it can proceed to receive a land transfer to pay for this part of shares at the Land Office. Provided that the company, jointly with the shareholding transferor, must write their separate letters to the Companies Registrar undertaking that the land will be transferred to the company and evidence of the transfer be presented back to the Companies Registrar within 90 days of company registration. A Land Office Certificate certifying the appraisal value of the land must also be delivered to the Companies Registrar as part of the application for company registration.
In our case where the company registration has been completed, the ordinary shares to be paid-up by land are huge: 900 million baht, allotted into 9 million shares of 100 baht each par value, totaling 900 million baht. Mr. B, a wealthy individual, holds these shares.
There must be at least three shareholders under the CCC. The other shareholder is Mr. C, similarly holding land shares. The appraisal value of his land amounts to 500,000 baht (five hundred thousand baht), divided into 5,000 shares of 100 baht each par value. The value of Mr. C’s holding is 500,000 baht.
The total registered share capital of the company from Mr. A, Mr. B and Mr. C combined looks like this: 10,000 baht + 900 million baht + 500,000 baht = 900,510,000 baht, divided into 9,005,100 shares worth 100 baht each. Mr. A holds 100 cash shares, Mr. B holds 9 million land shares and Mr. C has 5,000 land shares.
Effectively, this company chipped in only 10,000 baht initial capital investment in cash to be able to completely establish a 900 million baht company, a mere 0.001 percent of the registered capital – a very attractive proposition for the sponsoring individual landlord. There is no more what appeared to be the initial requirement of 25 percent first payment of over 225 million baht.
The company in our study still had to pay the official company registration fee of 200,000 baht, the ceiling for the 900 million baht registered capital.
The legal option accommodated by the Companies Registrar has proved to be valuable assistance to taxpayers to keep them away from having to pay a large amount of capital for a new company set-up. This will no doubt spur more participation in the tax-free land transfer scheme by individuals renting out land, whether they are the man on the street or high net-worth individuals, and entice them to enter the more desirable world of corporate income tax.
Wirot Poonsuwan is a practicing attorney and can be reached at [email protected].