The number of new companies has increased by 20 percent over the same period last year, according to the Commerce Ministry, a fact it chalks up to favorable tax breaks involving the transfer of land used for business to pay for shares in new companies.
The condition that the transferred land must be used for business has raised questions, however. How long must the land be used for a business purpose? Does that use need to continue past the transfer date? It’s not clear under the new law.
A supplied example of a form letter to be filed with the land office says the land must be used for business “prior to” the date of transfer, which suggests that if that business use ends – say due to a lease expiring – the exemption will still be there.
It would be perfect if the person making the transfer (the ‘transferor’) has been renting out the entire property to the lessee for years, and the lease is still in effect on the transfer date. But what if the lease is interrupted before then? Will the transferor still be entitled to the exemption?
Let’s say a landowner found out about the handsome tax savings and decided to rent out his property to a family member at market rate, signing a valid lease just one week before the land transfer date, with the first month’s rent paid in advance. Would he qualify for the exemption? Or would he get in trouble for intending to evade taxes by fabricating a transaction?
Another common problem is how much of the land has to put to business use: The entire plot or just part of it? If only four rai is leased as a qualifying use on a 20 rai plot, would all 20 rai qualify for transfer, or just the carved out, four-rai portion?
Indeed, what would happen if the land office agreed to accept registration of the land transfer, for example for the entire 20 rai instead of the four, without assessing any taxes or transfer expenses? Would the transferor risk being the target of a witch hunt audit years down the road, on the grounds of having failed to meet the conditions for the exemption?
Tax-free land transfers are not just a matter of setting up a new company and transferring land to pay for its shares. No, they are about tax planning and involve several complicated tax and legal questions. A majority of citizens will transcend all these complications to focus on the completion of a company setup and registration of land transfer with the amount of tax savings as the highlight.
A common sense question also pops up: Would the tax breaks be worth the risk of owing back taxes? Entrepreneurs understand the purpose of the tax benefits is for their transition into the corporate tax system. But some acknowledge that their past personal income tax records might not be perfect, a common phenomenon in Thailand: Receipts for rent were never issued; tax returns were intermittently filed. Would coming out of the dark and into the light expose them more to back taxes, now that the revenue office knows the income’s original source?
This answer is determined by weighing the attractiveness of the tax perks against the tax risk from the past. Looking at the bright side, letters of representation from the transferor to the land and revenue area offices require only representation that the transferor has used the land for business prior to the transfer date. Surprisingly no proof, such as a copy of the land lease, is required. This indicates the revenue emphasis in bringing people out of the grey over the path back to the former days, even though no formal amnesty has been announced. Going after back taxes would scare people off from any such scheme in the future.
The key is to take this new law as your tax planning opportunity to explore various tax alternatives and pick the one best suited to you. Don’t take the matter as just simple registration of a company and land transfer. Bear in mind that once the registration is done, your tax position is locked and cannot be undone, for better or worse.
One must ascertain the purpose for holding the land: If it’s to leave for inheritance, the transfer might fit best. But if the aim is waiting for the right time to sell for a profit, one should examine whether the tax benefit meets expectations compared to the taxes the company would pay upon sale of the land to a third party. Taxation of share transfers to your children or other heirs and outsiders and options available should also be understood. One should become familiar with existing law to allow the appraisal price to be used when calculating transfer taxes for the individual transferor as against a rumored future change in that law that would require a higher actual sale price instead.
Some would-be transferors, after studying a comparison of various tax hypothetical cases, discover that the tax savings achieved are not that impressive.
Carefully weigh the alternatives before deciding whether or not to proceed with a company setup and land transfer tax-free. Ignoring the technical stuff to determinedly move ahead with the registration process without thoroughly understanding all the tax and legal impact of the scheme, or later finding out about those new aspects after the completion of the registration or after realizing you have to unexpectedly pay extras when the company sells land to others, might be too late to undo the abrupt decision.
Wirot Poonsuwan is a practicing attorney and can be reached at [email protected]. The advice offered in this column is intended for informational purposes only.