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Business Conversion Tax Incentives

4 Apr 2018 at 04:00 / NEWSPAPER SECTION: BUSINESS

Business Conversion Tax Incentives

Decree encouraging individuals to adopt company structures raises questions and problems that are still being resolved

Tax incentives often appear attractive in theory, but the reality of attempting to claim them can often cause difficulties for taxpayers.

Such has been the case with attempts to promote the conversion of businesses traditionally operated by those liable only for personal income tax (PIT) -- individuals, non-juristic ordinary partnerships and groups of persons -- into corporate entities such as a company limited or registered partnership. The ultimate goal is to encourage and better monitor tax compliance.

To this end, the government issued Royal Decree No.630 (RD 630) to exempt PIT, value added-tax (VAT), specific business tax (SBT) and stamp duties for individuals who made the conversion by means of transferring assets and goods used in their businesses to a newly incorporated company or registered partnership. The transactions otherwise would have been subject to taxes as for a sale.

The decree has now expired, although there are reports that an extension to the end of this year is being considered to give individuals one last chance before possibly facing a tough tax audit.

The notification of the Revenue Department director-general issued under the decree requires that, in order for tax incentives to apply, the assets transferred must have been utilised in the individual's business, and the transfer must be made in exchange for new shares issued by the new company.

Further, the individual undertaking the transfer must receive the shares with a value that is not less than the transferred assets. In the case of immovable properties, the value of the shares must be equal to the value of the properties appraised by the Land Department, or the cost price, whichever is greater. In claiming the tax incentives, the individual and the new company had to submit declaration forms to the Revenue and Land departments.

This type of business transfer often involves not only the two main parties to the transaction, namely the transferor and the transferee, but also other stakeholders through contracts with trade partners. Some properties may be subject to mortgages or held as loan collateral, in which case the financial institution may demand early repayment in exchange for the release from encumbrances before the transfer can be registered.

Difficulties could also arise with immovable properties owned by several individuals if some wish to convert the joint business into a new company while others would prefer to maintain the status quo. The transformation under this scenario may not be entirely tax-free, so one must consider which parts of the properties are eligible for privileges. For the portion that is not qualified, there may be a recapture of the taxes. In this regard, the Revenue Department advised in a recent ruling as follows:

n Where all co-owners of immovable properties transfer all of their ownership interest in exchange for the registered capital of a new company, they would be entitled to the tax exemptions granted under RD 630.

n Where only one co-owner transfers ownership, in order for such individual to benefit from the tax exemption, "his ownership portion of immovable property must firstly be separated from the common ownership before the transfer to the new company".

The trouble here is that this interpretation was issued after the deadline for transfers expired, and imposes a new requirement that was not mentioned in RD 630 or in any notification.

Such a requirement is impractical because, in order to separate the co-owned properties at the Land Department, the official must conduct a cadastral survey to divide the properties, which normally takes around three months. In any case, settlement among the co-owners could take forever.

It is understandable that the Revenue Department may not want a newly set-up company to become a co-owner of such properties with the remaining individuals, since co-ownership and joint use could constitute an unincorporated joint venture between the new company and the remaining individuals -- similar to a non-juristic ordinary partnership from a tax aspect. But what else could taxpayers do to solve this problem if the properties have already been transferred and this condition just came out recently?

Further, another revenue ruling dealt with an interesting question from an individual: if an asset was utilised in a business before the transfer, must the new company carry on the same line of business, or could it operate other businesses? The department responded: "In order for the individual taxpayer to be entitled to the exemptions for the transfer of assets and goods under RD 630, the new company must carry on the same line of business that had been operated by the individual before the conversion." In short, business continuity is the key to the tax privileges.

Theoretically, this is a rational requirement so that the tax exemptions will be granted only for a genuine business conversion. However, as it was never mentioned in RD 630 and in the subsequent notification, a few taxpayers may have missed it and an audit could be catastrophic for the taxpayer.

Most importantly, the department has never made it clear how long the original business must be maintained, as the business in the hands of the new company may need to be changed, depending on commercial needs.

If indeed the government follows through and extends the deadline for business conversions, it should certainly use this opportunity to clear up these problems.

By Rachanee Prasongprasit and Professor Piphob Veraphong of LawAlliance Limited. They can be reached at admin@lawalliance.co.th

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