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Involuntary Partnership Tax on Sales of Land Highlighted

July 2015 - Tax & Private Client. Legal Developments by LawAlliance Limited.

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Published: Jun 2015 at 03.29

Newspaper section: Business

Involuntary Partnership Tax on Sales of Land Highlighted

A change to the Revenue Code last year repealed the exemption of personal income tax (PIT) on profits distributed from a non-registered partnership and a body of persons. It put an end to one of the most abusive tax-planning schemes used by the wealthy. However, it has also created onerous tax liabilities for individuals who have no choice but to run a business via such vehicles.

Individuals investing in shares of a company are liable to PIT on dividends at the effective tax rate of 28% — 10% at the dividend level and 20% at the company level. But partners in a non-registered partnership can face a rate of up to 57.75% — a maximum of 35% at the partner level and 35% at the partnership level. This has become a nightmare for those who have no intention to avoid tax but are innocent bystanders in the Revenue Department's crackdown on dodgy partnerships. One situation causing extreme anxiety involves joint ownership of land.

A department regulation issued in January stated a partnership was deemed to exist where there was a joint ownership in a plot of land. Taxpayers are now asking whether a sale of land by the joint owners would be subject to double PIT, as outlined above, under the new legislation.

If so, it would violate the spirit of a long-standing government policy that reduced the capital-gains tax burden on sales of land in order to encourage the property market by allowing a favourable PIT calculation. Proceeds from the sale of land are taxed separately from other income, with deductions ranging from 50-92% and net taxable income divided by the number of years the land was held. Taxing sales twice will discourage interest in the property market by limiting the joint investment ability of partners.

High land prices mean few investors have the means to invest by themselves and instead do so through some corporate vehicle. This means they forfeit the favourable tax calculation method granted only to individual investors. The only conclusion is the capital-gains tax structure in Thailand is being distorted unintentionally.

A Revenue Department ruling in March exacerbated the issue. It involved two individuals, A and B, who jointly acquired and held a plot of land for over 20 years. A decided to sell his ownership portion to one buyer, while B sold his portion to another. They acted separately but lawfully, without any intention to avoid tax. The sales were registered separately at the Land Department.

The Revenue Department advised that since the land area owned by each individual had never been specified in the title deed, the fact that the sales were separate was not relevant. The sales were treated as arising from joint ownership, and A and B were held liable for PIT as a non-registered partnership.

The department laid down the following criteria in its ruling:

1. Where joint ownership in a plot of land is a result of an inheritance, gift or adverse possession or the original owner allows others to hold the land jointly, each joint owner shall be liable for PIT on the sale of land separately for their portion of the sale proceeds.

2. Where the joint ownership results from a joint acquisition, the owners must pay PIT on the sale of land as a non-registered partnership or as a body of persons.

The second condition raises a question — what happens if the separate land areas owned by each joint owner are clearly registered in the title deed? Would A and B have been off the hook in such a case?

In another crackdown on abusive tax planning, the Revenue Department prohibited separate PIT calculation in a case where a land owner split a sale into 30 separate registrations for the purpose of ownership transfer — intending to reduce the progressiveness of his tax liability. Instead, the owner was required to lump all sale proceeds from the 30 registrations together for tax calculation purposes as if they formed a single transfer.

Obviously, separate transfers of land by each of two joint owners to two different buyers should be viewed differently from 30 registrations by one owner to one buyer. In the former case, it seems unduly harsh to burden someone who does not intend to avoid tax and enters into a separate sale of land for genuine business reasons.

Given the government's determination to promote equal treatment of all people, the Revenue Department should try to maintain equity in the tax system regardless of the business form a taxpayer adopts. In terms of tax treatment, it should at least distinguish between those who have a commercial need to use a non-registered partnership and those who are the real tax villains.

This article was prepared by Rachanee Prasongprasit and Prof Piphob Veraphong. They can be reached at