On 9 August 2016, the Cabinet approved a new tax scheme with the purpose of encouraging individuals to carry on business as a company (or through a taxable person subject to corporate income tax). In compliance with the Cabinet's resolution, the Revenue Department and the Ministry of Interior have issued laws providing tax privileges and measures to facilitate the transfer of business to a company and to discourage business operations by individuals. The key contents of the tax scheme are as follows.
Tax Exemption and Fee Reduction for the Transfer of Individual Assets to a Company
To encourage individuals to set up their businesses as companies, Royal Decree No. 630 was recently promulgated to exempt the transfer of assets by an individual to a company from almost all taxes – i.e. personal income tax, value-added tax (VAT), specific business tax (SBT), and stamp duty. However, these tax exemption privileges will be granted only if all of the following conditions are satisfied:
(a) the assets must be transferred to a company at the market value;
(b) the individual transferor must receive the company's ordinary shares as consideration for transferred assets; in other words, the assets must be transferred by way of (in-kind) capital contribution;
(c) the value of shares issued by the company to the individual transferor must not be less than market value of the transferred assets;
(d) the transferee company must be incorporated between 10 August 2016 and 31 December 2017; and
(e) for real estate transfers, the transferor and the transferee must prepare and submit a letter affirming the transfer of real estate as capital contributions, in the form determined by the Revenue Department, to an official from the Land Department and the Director-General of the Revenue Department.
In addition, after the company has issued shares to the individual in consideration for the transferred assets, the individual must not dispose of these shares at a price less than the book value. Otherwise, the tax exemption on the transfer of assets will be revoked.
In the case of real estate transfers for which an ownership transfer fee is imposed, the transfer fee, for both land and condominiums, will be reduced from 2 percent to 0.01 percent of the official appraisal value by virtue of Notifications of the Ministry of Interior, provided that the transfer is made by an individual as a capital contribution to a company registered during the period specified above.
Additional Tax Deduction for Newly-Registered Company
To promote the incorporation of companies, the Revenue Department will partially subsidize incorporation, accounting, and audit expenses for newly-registered companies, by granting a double deduction privilege for these expenses. To be entitled to this privilege under Royal Decree No. 630, the company must be registered between 10 August 2016 and 31 December 2017, and must have paid-up capital of not more than Baht 5 million (at the end of each accounting period in which the double deduction privilege is utilized) and revenue not exceeding Baht 30 million (in the accounting period enjoying double tax deduction).
If the conditions are satisfied, the double deduction privilege will last for five consecutive accounting periods, commencing from the accounting period when the company is registered. However, the extra deduction (equal to the incurred expenses) is granted in the form of income exemption and so it cannot be carried forward to the next accounting periods if the company incurs loss. Therefore, this tax privilege may not be attractive for any company that expects losses during the first five years.
Reduction of Standard Deduction Rates for Individual Business Income
In addition to the tax incentives previously explained, the Revenue Department has also issued Royal Decree No. 629 to discourage individuals from carrying on business in their own capacity (or through a taxable person subject to personal income tax). This royal decree reduces the standard deduction rates for business income derived by an individual, under sections 40 (7) and 40 (8) of the Revenue Code. Previously, the standard deduction rates for business income ranged from 40 to 80 percent of gross business income. However, due to the initiative of shifting business operations from individuals to companies, from the tax year 2017 onwards, the standard deduction rates for business income which had exceeded 60 percent of gross income will now be capped at 60 percent.
This new tax scheme is very helpful both for business restructuring and for wealth management. It not only encourages individuals to change their businesses to company entities but also promotes the incorporation of holding companies. Additionally, as the government is about to revise personal income tax imposed on real estate transfers, this tax scheme provides a good opportunity for individuals to mitigate their tax on future disposal of real estate by transferring available-for-sale real estate to a newly-incorporated company at a step-up price. However, individuals should ensure that they can comply with all tax requirements before changing into a corporate tax regime; otherwise, this tax scheme may actually be harmful rather than useful to business owners.