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Cross-shareholding Rules and Dividend Tax Exemptions Clarified

19 Apr 2017 at 04:00


Cross-shareholding Rules and Dividend Tax Exemptions Clarified

Most people are aware that there are two major types of double taxation for income tax purposes. The first is juridical double taxation, in which one taxpayer is taxed twice on the same amount of income by two different jurisdictions. This is normally dealt with in the context of double-taxation agreements.

Today, however, we will look at economic double taxation, which applies when the same item of income is taxed twice in the hands of two different taxpayers. For example, when a company earning profits and subject to corporate income tax distributes dividends to its shareholders, the shareholders will be taxed again on the dividend amount.

Economic double taxation for individual shareholders is often eliminated by way of the dividend tax credit available under Section 47 bis of the Revenue Code. Corporate shareholders, meanwhile, can get relief by way of a reduction or exemption from the tax base.

Where there is a shareholding between two Thai companies, Section 65 bis (10) generally excludes half of the dividends from the tax base and imposes the normal corporate income tax rate on the remaining dividend amount. Most people, however, tend to believe incorrectly that the entire dividend is included in the tax base but the tax rate is reduced from 20% to 10%.

The tax privilege may go beyond that and a complete tax exemption may be available if the holding company is listed on the Thai stock market, or holds at least 25% of the shares with voting rights in the company that distributes the dividend, on condition that there is no direct or indirect cross-holding of shares.

In order to apply both tax reduction and exemption rules, the holding company must hold the shares for a period of at least three months before receiving dividends, and must not sell the shares from which the dividends are paid for at least three months after receiving the dividends.

More than 20 years ago, there was a court case in which the issue was how cross-holding status should be interpreted in the accounting year in which a non-listed company ("HoldCo") received dividends from an operating company ("SCo").

HoldCo purchased more than 25% of the shares in SCo about one year before SCo distributed dividends on Feb 1, 1995, upon which SCo closed its shareholders' register. HoldCo also continued to hold the shares in SCo for more than three months after receiving the dividends, and thus believed it had met all the conditions for a tax exemption under Section 65 bis (10).

However, since the parent company sold some HoldCo shares to SCo on June 1, 1995, a cross-holding occurred. The Revenue Department claimed that, since the cross-shareholding took place within the same accounting year as the dividend was paid, HoldCo did not fulfil the requirement. Thus, it was entitled to an exemption on only half the dividend amount.

The court ruled that "since SCo had never cross-held shares in HoldCo before the dividend distribution, even though SCo became a shareholder of HoldCo after the dividend distribution within the same accounting year, it would not deprive HoldCo of the right to a tax exemption".

While this court ruling allowed the cross-holding of shares "after" dividend distribution, the wording left some doubt as to whether cross-holding status "before" dividend distribution would make a firm ineligible for the tax exemption. Also, since the cross-shareholding in the above case took place four months after dividend distribution, one might ask whether the ruling would have been different if cross-holding status occurred within the three-month period before or after dividend distribution.

Last year, the Supreme Court rendered a decision that put some minds at ease. In this new case, a company distributing dividends ("NCo") cross-held shares in a holding company ("HoldCo") until Nov 1, 2007 when it sold them. Twenty-five days later, NCo paid a dividend to HoldCo.

Again, since the date of the cross-shareholding and the date of dividend distribution were within the same accounting year, the Revenue Department required NCo to withhold 10% tax from the dividends paid. It cited a decision of the Tax Scrutiny Committee that cross-shareholding before the dividend distribution date in the same accounting year was disallowed.

The court opined that "since NCo sold all the shares in HoldCo on Nov 1, 2007, and NCo closed its shareholders' register for dividend distribution on Nov 25, 2007, NCo did not cross-hold the shares in HoldCo upon the dividend distribution".

The court continued: "[S]ince the decision of the Tax Scrutiny Committee created additional conditions beyond the scope provided by Section 65bis (10), its application to create a negative impact on the taxpayer was disallowed".

Thus, the court upheld the exemption of HoldCo from tax on dividends under Section 65bis (10), and NCo had no liability to withhold tax.

The caveat in this case is that, even though cross-holding status exists during the three months before or after dividend distribution, the holding company will still be entitled to the tax exemption insofar as such cross-holding is terminated before dividend distribution. In any case, the ruling reminds us how important it is for taxpayers to keep good corporate records by closing the shareholders' register for each dividend distribution and updating it with the Commerce Ministry.

By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at

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