Come Jan. 1, 2020, 25 long and delicate years of work by 13 governments to bridge the economic divide of the Thai population will hit the books.

For the first time ever in Thai legal history, those with deep pockets will be forced to pay any tax on their houses at all. It will drive a redistribution of land, as those hoarding large, undeveloped tracts will face a powerful incentive to divest.

Commercial, residential, vacant and agricultural lands are the four types of taxable land and buildings that the new property tax law covers.

All in all, low- to middle-income people should not be affected much by the new law, which aims to increase revenues for local administrative organizations such as municipalities and sub-district government bodies by way of “taking money from the rich and distributing it to the poor.”

This is extra money from local land to fund the running of the villages to be extracted from ultra-wealth, although cynics are skeptical as to how much money from the low-tax rates and generous exemptions will actually be added to the village coffers, vis-a-vis traditional budget support from the central government.

Many see the push for historic wealth redistribution in the law – which comes just a few months before a general election – as an achievable, low-key starting point. Criticism has been aired over reduced tax ceilings, benefits of tax exemptions and great compromises for the rich.

Nevertheless, the law is historic, the first wealth redistribution law aimed directly at property holdings. Here are the highlights.

Commercial Property: 0.3% on Appraised Value

When the Act on Land and Building Tax comes into effect 13 months from now, it will replace the current 12.5 percent house and land tax with a 0.3 percent property tax on land and buildings used for commercial purposes. Looking at the percentages alone is misleading as they are each calculated on a different basis.

Today’s 12.5 percent rate is calculated from the annual rent a property could earn, while the upcoming 0.3 percent rate will be based on the property’s appraised value by the Treasury Department. That means every situation will be different, and owners will have to find out on a case-by-case basis if their tax burden will increase or decrease.

Someone with a 10 million-baht shophouse that rents out for 15,000 baht per month (180,000 baht annually) now pays 22,500 baht under the 12.5 percent rate. Their annual assessment will increase significantly to 30,000 baht, or 0.3 percent of the appraised value.

But if the property’s value is 5 million baht and also rented out at 15,000 baht per month, you’ll pay less under the new law – 15,000 baht.

Your condominium units for rent will be subject to a similar calculation.

An interim provision of the new property tax law already anticipates the possibility of an increased tax burden. It allows the taxpayer to pay the same amount they paid the year prior to the effective date of the new tax for each of the first three years, provided that the additional balance is fully repaid over the following three years.

The 0.3 percent rate applies to commercial land and structures with a total value of up to 50 million baht. The progressive rate gradually goes up to the highest rung at 0.7 percent for property worth over 5 billion baht. These applicable rates are expressed as temporary rates for the first two years of the new tax commencing in 2020.

Thereafter, new rates will be announced by the Finance Ministry, which administers the law, in a royal decree, an implementing regulation to be issued after the new law is in place. The maximum rate specified in the new law that royal decrees can go up to for commercial land is 1.2 percent.

The Legislation Process

The passage of the law on Friday, Nov. 16, 2018, by the National Legislative Assembly, or NLA, was surprising given that the first reading which approved it in principle was early last year. The second reading that considered the bill article-by-article was concluded Thursday, and the final reading, a binary vote of yes or no, one day later on Friday.

The next step is for the prime minister to go through a waiting period of 25 days under the Constitution before he signs the bill and presents it to His Majesty the King for the royal countersignature. The Constitution prescribes another 90 days for his Majesty to consider and execute the bill. An executed bill from the palace will be announced and published in the Royal Gazette, completing the process for the bill to become law.

In spite of the ample time permitted by the Constitution for the new law to be further processed, it is expected that this new property tax law will be published and have the force of law by the end this year or early next year, leaving the actual tax collection to start on Jan. 1, 2020. In the meantime, the old 12.5 percent land and house tax and the very cheap land development tax will continue to apply.

Never Before Have Wealthy Landlords Paid Taxes on Their Houses

Residential land and buildings are where the rich fully benefit. Individuals who own a parcel of land and house worth 50 million baht (USD$1.5 million) as their primary residence with their name shown in the household registration book are entirely exempt from tax.

For the first two years the new tax is enforced beginning in 2020, properties worth over 50 million baht are subject to applicable tax rates of 0.03 percent to 0.1 percent; the upper end of that range belongs to land and houses, condo included, worth over 100 million baht. Rates applicable after the first two years will be announced by royal decrees to be promulgated after the law is enacted. In addition to the initial two-year rates, the law itself specifies the low legal limit of 0.3 percent for residences, which future royal decrees of applicable rates cannot exceed.

50 Million is the Magic Number

Generally speaking, the wealthier you are with land past the 50 million baht mark, the higher property tax you need to pay – up to 0.3 percent. It’s the first-time ever in Thai legal history that those with deep pockets are forced to pay any tax on their houses at all.

The poor and middle class, whose properties are valued at far less, will be unaffected.

The 50 million-baht threshold finally survived an initial scare, as critics thought it was too high and wanted to bring it down to 25 million baht – by Thai standards the lesser amount still being beyond the reach of the middle class. In the end, the 50 million baht of the original draft stands. Yes, for a fluid transition to a new tax regime, some appeasement may be necessary.

For those foreigners who own homes that are located on rental tracts of land, the tax-free threshold is lower, at 10 million baht. Value beyond that starts paying taxes starting at 0.02 percent. No legal entity owners enjoy this benefit.

A mixed-use, commercial/residential property will be charged taxes at proportion to the areas used for different purposes.

Agricultural Land, Friendly Rates

As with residential land, agricultural land is tax free for the first 50 million baht of the official assessed value for land owned by individuals; legal-entity landowners are not so lucky. The high threshold means a significant number of well-to-do businessmen will be classified as farmers protected by the country, which takes pride in its agricultural roots. It is amusing to see how the nation’s agricultural background was cited in debates to keep the threshold for tax exemption at this current level.

Among the four types of taxable property, farmland attracts the lowest rate. The low-end of the scale for the first two years will begin at 0.01 percent for agricultural land worth up to 75 million baht, graduating to the highest applicable rate of the range at 0.1 percent for land valued at over 1 billion baht, while the legal limit written in stone in the act is fixed at a comfortable level of 0.15 percent.

And if the property owners are individuals, there is a generous grace period of three years counting from 2020 during which they don’t have to pay tax.

There is no such grace period for owners who are legal entities.

Vacant Land: Point of Attack

It’s time to do something with those overgrown, vacant lots that are a nuisance to your neighbors or vast holdings that serve no purpose in Suphan Buri

Undeveloped land is the lightning rod that draws the highest property taxes and the largest target of the new law. Land bank accumulation, a hobby of Thai millionaires for generations, has been discouraged since the outset of this legislative effort. It’s the type of land the most compromise was made to smooth out opposition from land accumulators. The originally planned 5 percent ceiling was lowered drastically to 3 percent.

What happens to undeveloped land under the new legislation will no doubt serve as a catalyst for land redistribution, the chief purpose of the law. The waiting period of one year in 2019 will inevitably see more vacant land offloaded to the market to escape the wrath of the 2020 vacant land tax, which will increase as the years go by.

True, the law stipulates the ceiling of the vacant land tax at 1.2 percent, but this is only temporary. The applicable rates for the first two years of the new tax collection range from 0.3 percent for the initial notch of 50 million baht – there are no exemptions here. The applicable rates rise step-by-step to 0.7 percent applied to a land worth over 5 billion baht, with the regulatory ceiling at 1.2 percent. The vacant land has simply mirrored the tax treatment of commercial land.

However, if the vacant land remains undeveloped for three years in a row, the applicable rate will creep up by another 0.3 percent in year four. An additional 0.3 percent kicks in every three years until the total vacant land tax hits the absolute limit of 3 percent.

Wealthy Thais sitting on vast swathes of vacant land can no longer have peace of mind: Either you must divest or wait until the law is revised by future elected governments, which may be inclined to ignore the small voting pool of tycoons in favor of the deep ballot trough presented by the grass roots and slap on even higher taxes.

It won’t be less, it’ll be more. The floodgates have been opened.

Wirot Poonsuwan is Senior Counsel and Head of Special Projects at Blumenthal Richter & Sumet in Bangkok and can be reached at [email protected].