Capital gains and the Thai tax systemHLB Thailand Tax Team
Foreign property owners interested in maximising the financial returns from their foray into the Thai property market should take a moment or two to understand the impact taxes will have on their financial returns.
A savvy investor will often seek tax advice about tax planning that can be done – in compliance with the prevailing laws – to mitigate the taxes payable.
An important aspect of tax planning for property investment is the mitigation of tax liabilities arising upon disposal of the property. Tax planning to maximize the capital gain on exit normally requires planning at the start.
Depending on where you get your tax advice, you may think that Thailand does not have capital gains taxes. While that may be true, there are certainly taxes on capital gains, which may be as high as 35%! The point being that capital gains are taxed just like other forms of income from investment or trading.
Taxes on capital gains
Your liability to Thai income tax when you sell real estate in Thailand and the level of tax payable will depend on a number of factors, including:
- Whether you have bought the property in your own name, through a Thai company or in the name of a foreign company – personal tax and corporate tax rules differ significantly.
- The legal form in which the property is held, which can vary due mainly to the restrictions on foreign ownership of land e.g. an apartment held on a long term lease, freehold land and villa owned via a Thai company or a lease over land combined with freehold ownership of the villa on the land, to name a few of the legal forms used.
- How you structure the deal on exit – there can be different aspects to the sale that may need the sales price to be apportioned, which can affect the liability to tax. Sometimes the deal ends up being structured as the sale of the corporate vehicle holding the real estate rather than the property itself.
- Whether the sale needs to be registered with the authorities in Thailand, and if so, whether there will be some form of withholding tax imposed.
- Whether or not a double tax agreement exists between Thailand and the seller’s country of residence – this might be overlooked because double tax agreements often don’t help when it comes to real estate. However if the deal involves a leasehold or sale of a corporate vehicle, then a double tax agreement may have a substantial impact.
So you can see that there are a number of factors that can affect whether or not you pay tax in Thailand on a capital gain and the level of tax payable.
The best way to illustrate how the Thai tax system works is to run through an example. Let’s consider the case where you take a long term lease over an apartment, which is a common structure used in resort areas catering exclusively to foreign buyers.
If you make the lease in your own name, Thailand’s Revenue Code provides that an individual deriving assessable income from property situated in Thailand is liable to personal income tax, regardless of whether such income is paid within or outside Thailand and whether you are a tax resident of Thailand or not.
The Revenue Code does not prescribe under what circumstances property will be considered “situated in Thailand”. It is a pretty safe bet though that the lease, which is a form of property distinct from the real estate under lease, would be considered property situated in Thailand for tax purposes.
Personal tax on transfer of a lease
The gain on transfer of the lease would be subject to personal income tax at the marginal tax rates ranging from 5% to 35%. There won’t be any tax withheld when the lease transfer is registered, so it will be up to the seller to file a personal income tax return. Obviously the tax authorities may face difficulties collecting tax from a foreign seller if a return is not filed – there are provisions however that impose a duty on the agent appointed to manage the property to file tax returns on behalf of the property owner which could be enforced.
Double tax agreements
Thailand has a comprehensive collection of double tax agreements, with over 60 countries currently signed up to prevent double taxation of their residents.
These agreements normally prevent double taxation by either allowing one country only to tax the income or granting taxing rights to both, in which case the foreign taxpayer will only pay tax in his home country if the tax paid in Thailand is insufficient to offset his tax liability at home.
So how would the transfer of an apartment lease be taxed under a double tax agreement? Much depends on the terms of the particular agreement, because although the agreements generally follow a similar form on the whole, the taxation of capital gains is one area where the terms do vary from country to country. It will be important to properly characterize the lease to determine which provisions of the double tax agreement apply to the gain.
Where a double tax agreement does provide protection from Thai tax on capital gains made from the transfer of a lease, greater attention will be given to mitigating the taxes payable in the taxpayer’s country of residence. Of course, this will not be an issue for those living in countries with no capital gains taxes!