As the hospitality industry struggles, taxes are knocking on the door

HLB International Transfer Pricing Centre of Excellence


One of the long-term effects of the pandemic – besides the business effects that vary between different activities in the hospitality industry – are the tax consequences that result from the dramatic changes due to COVID-19.

The hospitality industry in general, was performing at a great level until December 2019, while the pandemic was in gestation. Hotels, restaurants, adventure activities, airlines and all related services attached to that “normal” situation were in a booming stage; then suddenly every single activity related to hospitality reduced almost to nil.

Countries in full lockdown stopped hospitality and the freedom mobility value chain. Almost every flight was cancelled and a zero-tourism season – never seen before – became a reality. The nightmare started…

Despite all this well-known reality, governments have spent their scarce resources trying to address at least three priorities:

  1. To solve the health effects of the pandemic,
  2. To mitigate huge unemployment rates, another consequence of the lockdowns, and
  3. To compromise on both current and extraordinary expenditure; whilst income derived from taxes is also plunging, stressing the conditions of deficit severely.

The OECD has stressed the fact that governments must focus on getting the economy back to work, while acknowledging that fiscal equilibrium might not be the goal for 2020 -2022. Yet all jurisdictions are seeking innovative ways to obtain fresh fiscal income that will start the road towards the fiscal recovery.

Knowing this, the hospitality industry must prioritise transfer pricing and its impact in their taxable bases, when dealing mainly with cross border transactions. These cross border business relationships with related parties will become subject to scrutiny.

Thresholds vary from jurisdiction to jurisdiction and relevant documentation as well, yet most of the countries imposed the burden of proof on the taxpayer to document that those transactions with related parties are in accordance with the arm´s length principle.

On December 18th, 2020, the OECD issued a paper titled “Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic.” This document stresses the severe impact of the pandemic and the consequences of it, using several business models to illustrate the impact on the normal circumstances of transfer pricing adjustments, to be considered by both the tax administrations and taxpayers as well.

“Accordingly, this guidance focuses on how the arm’s length principle and the OECD TPG apply to issues that may arise or be exacerbated in the context of the COVID-19 pandemic, rather than on developing specialised guidance beyond what is currently addressed in the OECD TPG. This guidance focuses on four priority issues: (i) comparability analysis; (ii) losses and the allocation of COVID-19 specific costs; (iii) government assistance programs; and (iv) advance pricing agreements (“APAs”); where it is recognised that the additional practical challenges posed by COVID-19 are most significant.”[1]

[1] OECD. Guidance on the transfer pricing implications of the COVID-19 pandemic. Dec 2020. Pg. 2.


Be aware that matters that are obvious today, might not be clear some years from now; when businesses in general may get back to their regular operations. You should have highly well documented the elements of current circumstances, mainly those issues about comparability analysis of your support documentation of related parties’ transactions, awaiting the audits by tax authorities.

(Read more about the OECD Guidelines and the impact of COVID-19 on transfer pricing in Thailand).

Undoubtfully, economic activity for hospitality businesses would not be comparable to the pre-existing conditions prior to COVID-19. It is going to take many years to recover and get back on track, if ever, to those pre-2019 levels.

The OECD’s recommendation is to create the appropriate documentation that shows the effects of the extraordinary expenses needed to be incurred as result of the pandemic, in an isolated manner. It would also be wise to create a separate profit and loss statement that illustrates the evidence of these effects. The need to isolate this is critical for the comparability analysis, mainly for the first quarter of 2020 and any periods of permanent or temporary reopening, so that the database analysis can be adjusted when doing the extraordinary adjustments that will be triggered by the COVID-19 effect.

It is also important to have clearly segregated information in the P&L, such as the received government support programs when applicable. Do not mix such income with regular income that will distort comparable numbers.

It is highly recommended to contact your team of transfer pricing experts to solve multiple issues regarding COVID – 19. Consider that there would be a high level of uncertainty surrounding tax inspections in the future. Our best advice is to fully document everything, to prepare for huge and potentially massive audits induced by the lack of fiscal resources.

At HLB we understand the hospitality industry and have vast experience in cross border transactions that could become a new nightmare soon. We will move from the pandemic to the endemical effects in taxation and in transfer pricing matters.

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Real estate taxation – common area charges



Residential developments in resort areas come in various forms, but they mostly have one thing in common – common areas.

The framework governing the management and use of common areas will depend in some part on how the development is structured under the law. For example, Thailand’s Condominium Act contains provisions governing the framework for the use and management of common areas of condominiums. Housing estates developed in accordance with the Land Allocation Act will also have a statutory framework to follow.

Residential developments in Thailand’s resort areas that are marketed to foreign buyers may not be structured in accordance with such laws, due mainly to the restrictions on foreign ownership of land and condominium units. Under the law, a condominium is a building that is registered under the Condominium Act, which then allows the building to be divided up into units and owned by separate persons. In resort areas, a building that looks and feels like a condominium could in fact just be an apartment building with one owner, with foreign tenants taking possession under long-term leases. Common area services and charges may then be established by contract instead, often mirroring the statutory framework to some extent.

Where the management and use of common areas is governed by contract rather than statute, a number of tax issues will come into play, which may translate into higher common area charges for owners.

Income tax considerations

Owners paying common area charges under a contract will typically pay their common area charges to a corporate entity that is liable to corporate income tax on its profit, which can be as high as 30 percent. Such charges will be considered assessable income of the company for income tax purposes.

Twice a year the company will have to file a corporate tax return and pay tax in respect of its taxable profit. Although the common area charges are being collected to meet on-going expenditures, the way that revenues and expenses are recognised for tax purposes could result in the company recording a profit upon which it has to pay tax. 

This is particularly evident when sinking fund charges are collected at the start for meeting large repairs or capital expenditures in the future. Sinking fund charges will typically be recorded as revenues for tax purposes when they become due from owners.  At the same time, as these funds are being collected to meet future expenditures, there will likely be little or no direct expenses to offset the revenues in the year that they are subject to income tax.

In addition, some outgoings might not be allowed as an expense in the year of purchase but instead may be considered capital in nature and so will have to be capitalised and depreciated over their effective life.

In the case of a condominium however, the juristic person formed under the Condominium Act tasked with the responsibility of managing the condominium and receiving common area charges, is not an entity subject to income tax under the Revenue Code. Funds can therefore be collected from owners without having to consider any income tax implications.

VAT considerations

Another issue faced by providing common area services under contract is 7 percent VAT. Although the rental of immovable property is specifically exempt from VAT, service charges relating to the use of common areas will be subject to VAT. This means that 7 percent VAT must be added to the common area fees charged to owners.

The chance of making errors – and hence liability to tax penalties – normally increases once you enter the VAT system and are running VAT and non VAT businesses.

Small developments might be able to avail themselves of the small business exemption. Where the annual turnover from services chargeable to VAT does not exceed Bt1.8 million, the business does not have to register for VAT. This means the business could legally stay out of the VAT system and not add 7 percent VAT to any of the amounts charged to owners.
As you might have guessed, the treatment for a condominium is the exact opposite. The courts and a Board of Taxation Ruling have confirmed that the funds collected from owners to meet the costs of common area expenses and public utilities are not subject to VAT.

Where the use of common areas is provided under a service contract, such agreement may be a hire of work agreement as defined under Thailand’s Civil and Commercial Code and subject to stamp duty under the Revenue Code.

It is evident that by establishing the framework for the management and use of common areas through contract, a number of tax issues will also have to be managed. Understanding and planning for these tax issues can reduce additional costs that owners might face as a result.

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Capital gains and the Thai tax system

HLB 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.

Apartment lease

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!



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