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Baht/$ 33.30/33
Bid/Ask
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GOLD |
15,000
- 200
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TaxCORNER
LAWALLIANCELIMITED
If you own a property project and would like to play around with the assets to enjoy extra tax saving, setting up a property fund could be a wise choice.
Property fund has been the most popular vehicle for investors for a decade to acquire immovable properties and non-performing loans. While the use of a traditional form of operating vehicle such as a company or a joint venture is subject to ordinary tax, the fund receives a number of tax incentives from the government.
The fund was first promoted by the SEC with a goal to alleviate financial problems in the property sector. Not only to further boost the sagging property market, but also as a way to improve the balance sheet.
The pain is that you can only hold one-third of the units in the newly set up fund while two-thirds will be sold in the IPO.
If you have substantial amount of tax loss which will expire soon, you may want to prolong the loss or to find a plan to use it up.
One simple way is to sell the property out to a newly set up fund in exchange for an immediate payment. Not only can you use the tax loss to shelter profits that may arise from the sale, future profits earned by the fund are also cushioned from taxes due to special incentives granted to it.
If you do not have a tax loss, you may like to lease the property to the fund on a long-term period, say, thirty years, in exchange for an upfront payment, which will be capitalised as your taxable income over the lease term. Future profits earned by the fund are still tax exempted.
The Revenue Department does not care if the originator and the unitholder in the fund are the same person since the fund is not regarded as a pass-through entity under Thai tax law and is treated as a separate juridical entity.
As the fund cannot run the business by itself, it has to hire someone to operate the property. A special purpose vehicle is often set up to act as a management company to provide services to the fund in exchange for the fees, or perhaps to sublease the same property back from the fund in exchange for an annual rent. In the latter case, the SPV will then use the asset in its operation or on-lease them to retailed customers.
A few originators do not want to use a newly set up SPV to manage property for the account of the fund or to sublease the property back from the fund. Instead, they prefer to be the one to handle such property themselves.
While acting as a service provider to manage property for the Fund in exchange for the fees seems to be all right, leasing the property back from the fund by the originator could be problematic.
For example, the originator leased a plot of land to the fund for 30 years at an upfront payment of 300. On the same date, the originator leased the same assets back from the Fund for the same term at the annual rent of 12.
Recently, the Revenue Department published a guideline to not recognise the lease and the lease-back transaction by reasoning that since (i) both lease and lease-back agreements were entered on the same date for the same period, and (ii) the originator was acting as both the lessor (under the main lease) and the lessee (under the lease-back agreement), as well as the unit holder in the fund, at the same time, the parties did not have real intention to enter into the lease. Besides, the Revenue Department had a view that to constitute a true lease under the Civil and Commercial Code, the sub-lease must be made to the third person - not the originator.
In fact, most property fund structures have hardly been re-classified by the Revenue Department for tax purposes. It could have been much clearer to us if the publication of the Revenue Department would have mentioned as to how it would like to treat the payments instead of treating it as rental income and rental expenses. Anyway, it is the area that people who will involve with a new property fund transaction should keep an eye on.
Written by Prangtip Anantavipat and Piphob Veraphong. They can be reached at admin@lawalliance.co.th
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