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Capitalising taxable income over 90 years? Yes, It can be done

February 2013 - Tax & Private Client. Legal Developments by LawAlliance Limited.

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Published: 26 Feb 2013 at 00.00

Newspaper section: Business

Capitalising taxable income over 90 years? Yes, It can be done

Have you ever thought that you could capitalise taxable income over a very long period of time and pay corporate income tax year by year, even if you have already received all the upfront payments from customers? This sounds common enough in cases where you have a long-term contract with one period of time for the provision of services.

For example, it is common for rent of, say, 300 million baht, payable upfront on day one under a 30-year contract, to be capitalised over the full lease term. You will then realise the upfront rental income on a straight-line basis of 10 million baht a year and pay corporate income tax on the net profit in each relevant year until the end of the lease term.

Of course, a different concern may exist if the long-term service contract is not in the nature of a lease or a construction service _ for example a golf club membership, in which case tax regulations limit the capitalisation period of the upfront payment to no more than 10 years _ an effort by the Revenue Department to prevent abusive tax planning by deferring payments. This rule has no impact on the lease of real property, which is our focus today.

What would you do if you wanted to fool around with the realisation rule by deferring the tax payment of the upfront rent to more than 30 years? Complications are added to this planning, as you can only register the lease at no more than 30 years for each period. While it used to be impossible to find leeway for this in the past, people started to have hope after the Land Department decided to allow multiple lease registrations.

As Thailand has strict rules on foreigners owning land or condominium units, long-term leases have become an alternative. Nonetheless, as foreign customers are paying an amount equal to the freehold acquisition, a 30-year lease term is too short and is not attractive for someone paying that price.

To stimulate the property industry, the Land Department now allows multiple lease terms to be registered at the same time. Hence, you can get a foreign customer to pay for a piece of property as if he were purchasing it, and you will register two lease terms at 30 years each. Such arrangements now make real estate in Thailand attractive enough to market in Hong Kong or in Singapore.

As the lease registrations state that the first lease term runs from Jan 1, 2013 to Dec 31, 2042, and the second term from Jan 1, 2043 to Dec 31, 2072, can you really amortise the upfront rent over the total lease period of 60 years?

As it happens, the Revenue Department has gone even further than this. It recently issued a private ruling for one property project located at the heart of the business centre of Bangkok. The transaction involved three lease registrations at 30 years each totalling 90 years _ with tenants paying all rents for the entire lease period before the start of the lease.

Two simple and straightforward questions were raised: first, whether or not the company could capitalise the total rent already paid to it over the 90-year period, and second, whether or not it could depreciate the construction costs over the lease terms. It was ruled that the company was required to realise income and expenses on an accrual basis in proportion to the lease term, and in line with Clause 3.4 of Departmental Instruction No. Tor. Por. 1/2528 dated Aug 28, 1985.

What does this mean and how would it affect your tax planning?

Although the revenue ruling did not say out loud that the company could capitalise the entire upfront rent over 90 years, the content was sufficient to interpret it that way. Hence, it sounds as though multiple lease registrations do not bar you from capitalising the overall upfront rent over the combined lease term insofar as the lease contract makes a clear reference that such upfront rent is for all three lease periods.

Perhaps the tax authorities in this case were a bit shy about explicitly spelling out "90 years", as it could attract a lot of disagreement and concern _ being the first such ruling of its kind _ but the situation should be clearer in the future.

Bear in mind that, with such a long capitalisation period, you are almost not paying corporate income tax at all, as the tax payments are in fact funded from interest earned from the tax-deferral scheme.

Is there something else that you can do to add value to the project via such tax planning?

Well, if you try to match the depreciation of construction costs with the total lease period of 90 years, you will lose the time value of the tax saving from the depreciation deduction. In fact, this is a fair game, as the depreciation deduction should go together with the realised rental income for tax purposes.

Having said this, insofar as you continue to hold ownership in the property, you are not bound to depreciate the construction costs over the lease period of 90 years and you can choose to depreciate the property over the useful life period as prescribed by the tax law, i.e. 20 years for an apartment building.

As a result, careful calculation and management will allow you to get a "positive mismatch", whereby you can depreciate the construction costs over the shorter useful life period while realising upfront rent as taxable income over the longer total lease term.

You just need to keep your eyes open to see if the tax authorities will come up with any new interpretations in this aspect.


By Professor Piphob Veraphong. He can be reached at