Effective from Jan 1, 2013 onwards, Thailand has a new alternative investment vehicle, the Real Estate Investment Trust (REIT), which provides greater flexibility in managing real estate assets. Interestingly, the REIT can not only invest in Thailand but also in real assets situated abroad. As the baht gains against major currencies, the REIT seems to have come at the right time, just as foreign investors have been shifting funds here.
A trust enables financial institutions to deal with property they control for beneficiaries. In 2007, Thailand launched a special law called the "Trust for Transactions in the Capital Market", or the Trust Act, starting the era of trusts in Thailand. But trusts are limited to certain investment activities in the capital market under Security and Exchange Commission (SEC) supervision.
The Trust Act allows a trustor to enter into a written trust deed with a trustee, whereby the trustor will transfer his trust assets to the trustee. To be precise, the role of the trustee is determined under the trust deed to obtain and hold the trust assets under his own name for the benefits of all beneficiaries.
A REIT is somewhat similar to a trust in many aspects. But there is an attempt to apply the current tax regime under Royal Decree 533 to REITs, though the decree was originally designed for trusts set up under the Trust Act, but life is not that easy.
Applying the decree to REITs requires careful attention. For instance, the scope of permitted investment activities is different. Let's walk through the laws and see whether REITs contain any pitfalls.
- 1. The trustor transfers the trust assets to the trust via a trustee
Any transfer of assets made between the trustor and trustee is generally exempt from taxes, e.g. income tax, value-added tax, specific business tax and stamp duty. This seems straightforward. Hence, when the trustor transfers trust assets to a REIT or the trustee transfers the trust assets back to the trustor, both are exempt from all taxes.
- 2. The trustee derives income from the operation of the trust assets
The trustee will only be entitled to the income tax exemption, but it is not applicable to the fee the trustee receives from the trust management service. Note that the law is silent on tax exemptions on value-added tax, specific business tax and stamp duty.
- 3. The trust pays a manufacturing dividend/the REIT pays a distribution to the trustor/beneficiaries
- 3.1 Under the current tax regime, the law intends to eliminate double taxation at both the underlying company level and at the shareholding level. Hence, if the trust pays a manufactured dividend to the trustor, which is a Thai company, half of the manufactured dividend will be exempt from corporate income tax.
If the trustor holds at least 25% or more of the total outstanding shares in the dividend-paying companies, or the trustor is a listed company, the trustor will be exempt from corporate income tax equivalent to the amount of manufactured dividend so received if there is no cross-shareholding and the holding period is not less than three months before and three months after the dividend date.
- 3.2 Beneficiaries have the option to pay a 10% final withholding tax on the manufactured dividend instead of a progressive tax.
The term "manufactured dividend" is defined to mean "money the trustee pays out of the dividend it receives through the holding of shares in trust". If the SEC and the tax authority attempted to apply Royal Decree 533 to REITs, they would have forgotten that REITs are structured not only to invest in the Thai capital market, which derives income from limited sources, i.e. dividends or capital gains from the sales of securities (including shares), but it can also be structured to directly invest in real property. Hence, if a REIT happens to directly invest in a real estate project that generates rental income, the distribution from a REIT will not fall within the definition of a manufactured dividend. This definition is crystal clear and does not require interpretation. If the trust applies the 10% withholding tax and the beneficiaries treat such withholding tax as a final tax, they will share equal tax liabilities.
The law is silent on whether the 10% tax only applies to unit trustholders who are Thais. For property funds, if the unit trustholders are foreign companies or foreign individuals, they are not subject to any income tax in Thailand.
If you are considering participating in a REIT either as a trustor/beneficiary or as a trustee, you should ask the SEC and the Revenue Department for clarity on the scope of the tax exemptions first, as a misinterpretation could expose you to higher taxes.
Prepared by Thanasak Chanyapoon and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th or 02-677-6300.