To strengthen their balance sheets and look good to prospective investors, family-owned businesses with plans to IPO on the Stock Exchange of Thailand tend to first undergo restructuring.
To do so, they employ various mergers and acquisitions, or M&A, methods: transferring shares, swapping shares, acquiring assets, even transferring entire businesses.
The most effective? Mergers by way of amalgamation as described in the Civil and Commercial Code: Company A amalgamates with Company B to become a new Company C, with A and B ceasing to exist as legal entities and all their rights and liabilities transferring to C.
And that is about the extent businesspeople are generally aware of amalgamation – any more than this and they need to consult the investment bankers and financial advisor helping them file for the IPO.
Registering a merger with the Department of Business Development is quite straightforward. A and B must each pass a special resolution to amalgamate and obtain the approval of 75 percent of their shareholders. The special resolution must be registered within 14 days of the vote.
A notice of the shareholders’ meeting also must also be dispatched to each shareholder by registered reply mail (snail mail with yellow card returned to you bearing the recipient’s signature) 14 days ahead of the meeting, doubled up by advertising the notice in a local newspaper. The notice must contain the specific wording of the special resolution to amalgamate A with B.
The longest interval the merger process takes is a wait period of 60 days, during which Company A and Company B must allow all its creditors to protest the merger. A written notice must be sent to each creditor, publicized by a local newspaper ad. A protest by a single creditor will stall the process. The merger can move ahead only when a bank guarantee for the debt amount has been provided to the creditor. Or else the debt must be settled before the amalgamation can proceed further.
The process at the DBD is relatively straightforward and convenient; companies just have to follow the required steps and the time it takes for each step until completion, about four months overall.
Complications start to take hold post-merger when Company C is required to notify the merger to the revenue area office within 15 days of the merger registration, which woefully often precedes a tax audit of Company A and Company B. Any back tax will be paid by Company C. A failure by C to so notify will empower the tax man to impose an extra tax of 100 percent of the basic tax liability.
The Revenue Code deems that A and B have been dissolved and the provisions of that law applicable to dissolution of companies and liquidation are borrowed to be used with an amalgamation, giving rise to confusion as the civil and commercial law administered by the DBD requires no such dissolution and liquidation.
The tax law is short of clarity on the borrowed use of the dissolution and liquidation provisions as well as the responsibility of directors of C as liquidators.
Thus, there is an interpretation that the dissolution and liquidation apply “as the case may be” only to the duty of C to notify of the merger likely resulting in a tax audit, the filing by C of tax returns and pay taxes for A and B. No further dissolution, nor liquidation per se: no sale of assets, no full settlement of all debt, and most notably no distribution of the remaining capital back to the shareholders.
All the balance sheet, operating account, profit and loss account, income and expense account and income before expense account of A and B for the last accounting period ending on the amalgamation registration date will be prepared by C, which will have them audited and certified by a licensed auditor and approved by the shareholders of A and B, even though A and B already lost its status as legal entities. Here the tax law deems that A and B still exist as necessary to approve their audited balance sheets and other accounts for tax purposes.
The filing of tax returns, together with the audited and approved balance sheets and other accounts, and the duty to pay taxes for the last accounting period for A and B actually falls on C. If C neglects to file the returns, a criminal penalty in the form of a 2,000 baht fine is slapped on it. A late payment of tax beyond the 150 days of the merger registration date will also attract interest or surcharge at the rate of 1.5 percent per month or 18 percent per annum, calculated on the amount of tax payable – all is under C’s liability. In the case, C completely is ignorant of its duty to notify of the merger to the area revenue office, the office can add 100 percent extra tax to its misery, based on the amount of corporate income tax payable.
Notwithstanding these short-term tax complications, family business and big-name conglomerates reorganizing shareholding structures within their group fully embrace the merger via amalgamation. Why? There are huge tax breaks to be enjoyed! And they far outweigh the 5 months of tax uncertainties. The tax code exempts corporate income tax for corporate shareholders of A, B, and C arising from the merger, as well as personal income tax for their individual shareholders. Other types of taxes are also exempt: 3.3% special business tax, 7 percent VAT, stamp duty, and even the 2 percent land transfer fee when transferring land from A and B to C.
Only the period of 150 days after the merger registration presents a hiccup. In promoting the mergers and amalgamation of companies even further, the tax law should be revamped to remove those uncertainties and undue liabilities on the new Company C. The current legal reform plan in the pipeline to allow either A or B to survive the amalgamation, as an alternative to the creation of C, is the wrong approach to promote the M&A tool, as the new Company C is already able to use the name A, B or C after the merger. Changes in the tax code will propel amalgamations to wide popularity among business in general beyond the rewarding use in the circles of family business and big-ticket business of the same affiliations.
Wirot Poonsuwan is a practicing attorney and can be reached at firstname.lastname@example.org.