Thai Law: Secrets to Surviving the New Inheritance Tax

There are enormous tax breaks provided by the government. The problem is most people are completely unaware of them. Take the new inheritance tax which has been in force since February 2016. I have personally enquired at land offices and such agencies where one would ostensibly go for such information and found none familiar with it.

Maybe it’s too new. Perhaps it’s too complicated.

Citizens generally have no idea about the crux of the law and how much it would weigh on themselves and their families. First and foremost, surviving spouses are not liable for any inheritance tax – the state figures most surviving spouses are elderly and inheritance passed on to them should stay intact. And heirs of those who died prior to Feb. 1, 2016, won’t be liable as well.

The Inheritance Act 2015 was enacted July 2015, published in the Royal Gazette that August and went into effect six months later.

Heirs who are minors – under 20 – are subject to the tax, but their parents submit tax returns for them. What parents are really worried about is when their children are disabled or incapacitated: “Who will take care of my child if anything happens to me?”

In the United States and Europe, the problem would be solved by a trust fund set up under trust law, which Thailand lacks. The solution parents can adopt is to utilize the existing Thai law to request a Thai court to protect their children by adjudicating them as quasi-incompetent so that when the parents are not around, no one can deceive or trick them into signing any documents or agreements.

The order of the court for the child to become quasi-incompetent would put the child in the curatorship of his parents, who can rely on a will to appoint someone they trust to be a curator when they pass away. When that day arrives, the curator should apply to the court for a formal appointment and the curatorship to continue from the parents, although the child might have become sui juris, the Latin word for a mature person reaching a full legal age of 20. In the event the quasi-incompetent child receives insignificant inheritance, he is not subject to tax. But if his inheritance is valued more than 100 million baht, the part that exceeds the threshold amount is taxable. The 100 million baht threshold is cumulative, i.e. even if each time he is inherited to a property less than 100 million, the value of all inheritances since the effective date of the law combined will be measured.

Wirot Poonsuwan is a practicing attorney and can be reached at wirot@brslawyers.com.

The 100 million baht trigger amount applies to all heirs, not just quasi-incompetent children. So long as the de cujus (dead, in Latin legal language) died after Feb. 1, 2016, no matter how many inheritances an heir receives, anything topping 100 million baht is taxable.

The most crucial type of inheritance to attract tax is land. Next in importance are shares listed on the Stock Exchange of Thailand and securities under the Securities and Exchange Act. These two types of assets are more easily identified and located. Third in importance are cash deposits at a bank – not as highly targeted as land and listed shares, as cash comes and goes quickly and can be siphoned out of bank accounts in no time. The least of the inheritance tax target are registered vehicles, including cars, yachts and private planes – properties that quickly depreciate in value.

The Bling’s the Thing

You will notice this list does not include gold bars, gold ornaments, diamond, rubies and expensive jewelry. Those well-versed in tax planning thus invest heavily in gold bars and gold ornaments, in diamond rings fitted with a large several-karat high-quality diamond rocks, diamond earrings, diamond necklaces, pearl necklaces with large opaque pearls, oversized pearl earrings, luxury jeweled watches worth millions, even brand-name handbags priced at several hundreds of thousands of baht, paintings from famous Thai artists valued near 10 million baht each, and sculptures by renowned sculptors. Well-advised millionaires often spoil their wives and children with jewelry and personal accessories while they still possess earning power and keep the rest as future inheritance for their children, free of tax.

It’s not that the state is promoting collections of luxury stuff. In the eyes of the tax man, these moveable goods have low tax value. Given the difficulty in finding safe places to physically store all these eye-popping goods (“How much can they buy?”) Their home safe is actually not safe and is limited in size; bank safe deposit boxes can contain only so much; showcases at home can only flash the brand-name handbags; paintings on the wall, sculptures in the corners – not many can carve out gallery-sized spaces safely in their homes.

The tax man simply is not interested in stuff such as this.

Land is the most significant inheritance. As soon as an heir has registered ownership of land inheritance, the law requires the land official notify the Revenue Department of the transfer. Calculation of value of the land is based on its appraisal value, announced by the Treasury Department, the same as land transfers in general.

Shares for Heirs

Some landowners map out their inheritance tax planning by transferring land into a company, then waiting some years before transferring some shares in the landowning company to their children. If anything happens to them, the children will inherit the shares in the company. On the condition that the land has been used by the landowner for his business on the date of the land transfer, such as on lease to a lessee, the land tax-planner is exempt from all his personal income tax and other registration expenses when the land is transferred to a company, according to a new royal decree that encourages individuals to change the way they do business by converting to a company system for tax collection efficiency. The state policy matches the benefit of the inheritance tax-planner: he doesn’t have to pay land transfer tax; when he transfers shares in the landowning company to his children, it can be made tax-free; if he is no longer around, and all his shares in the company will be inherited by his surviving wife and children, also tax-free.

Shares are a stark contrast to land. If landowners transfers land to their children now, they will be heavily taxed. Upon passing, their children who inherit the land will likewise have to pay expensive inheritance tax.

Sympathy for the Affluent

The tax savings that can be enjoyed by landowning tax planners from tax-free land transfers to a company under the royal decree is not negligible. The amount of tax saved, in some cases, could amount to a cost of living that would provide a high level of comfort for the rest of someone’s life. Rumors abound of certain landowners saving tens of millions of baht in taxes or even hundreds of millions for the most famous.

In late August, I completed such a land transfer for a landowner who conducted his inheritance tax planning for his children. The tax savings he enjoyed on the land transfer date, including his personal income tax, transfer fees, special business tax and stamp duty, worked out to 26 million baht, calculated on the appraised value of approximately 200 million baht. The land transferor paid only a specially discounted transfer fee of roughly 10,000 baht.

This has proven incredible generosity by the Revenue Department, something that might not come around again in a lifetime. The landowner is super happy to save nearly a million dollars, an amount of savings that can offer him another comfortable 30 years until he reaches 90.

The Revenue Department is ready to say congratulations on your tax savings, too, for you have agreed to come in from an informal personal business to a formal company regime.

As if the tax exemption were not enough, the normal privileges of changing from personal income tax to corporate income tax continue: the 35 percent personal income tax rate on rent that landlords pay has been substantially cut to 20 percent corporate income tax rate. Normal business expense deductions from taxable income apply in such a way the personal income tax system is not entitled to, such as salaries of landowners and their spouses as executives of the landowning company, financial leasing expenses for cars used in company business, rents payable to landowners for allowing companies to use homes as offices, etc. It’s the offer the tax-savvy landowner cannot refuse.

Again, it is unfortunate the general populace is not aware of these enormous tax breaks. Now that you are, please help spread the news. The last day this can be done is December 31, 2017. For those who are interested to join the scheme, you have to factor in an extra time for an unexpected delay. If you start taking the first step under scheme today, it won’t be too late. If you wait, there might not be enough time. The most time-consuming activities are the time that it takes to familiarize the 3 government units with the tax-free scheme: the local companies registrar office, the local land office and the area revenue office—the exploratory process could take a month or two. So if you start now, you could complete the whole package of a company setup and a land transfer in September or October. If you wait, you could finish in December or later, which is too late.

But after the officials at the three government offices are on the same page with you, it would take only two weeks to get the deal done and the numbers will appear clearly before your eyes how much tax and expenses you have saved on the date of the land transfer—it would feel like you have won the 1st prize of a Thai lottery jackpot.

Wirot Poonsuwan is a practicing attorney and can be reached at wirot@brslawyers.com

 

For reference, below is the calculation of taxes and expenses for the land transfer that I obtained from the Land Office, showing taxes in a normal transfer case (top table) and the land transfer tax-free as exempt by Royal Decree No. 630. The appraised value of the land was a bit under the rounded number mentioned above of approximately 200 million baht. All figures are rounded. The second table deducted from the first table shows total tax savings of 26,283,000 baht.

 

BEFORE: Calculation of Taxes and Registration Fees (Normal)

Official Transfer Fee (2% calculated from the appraised price) THB3,500,000
Personal Income Tax (calculated progressive rate from the appraised price) THB22,000,000
Stamp Duty (0.5% calculated from the appraised value of the land) THB800,000
Total THB26,300,000

 

AFTER: Calculation of Taxes and Registration Fees (Pursuant to Royal Decree Nos. 630 & 644 and Notifications of Director-General Nos. 4 & 5)

Official Transfer Fee (0.01% of the appraisal value of the land) TH17,000
Personal Income Tax (calculated progressive rate from the appraised price) -Waived-
Stamp Duty (0.5% of the appraisal value) -Waived-
Special Business Tax (calculated 3.3% of the appraisal value) -Waived-
Total THB17,000