July 29, 2006, Bangkok Post ,
No single structure will fit all cases
When foreigners consider structures for real estate investment
in Thailand they should work out the costs and benefits, because
normally this only pays off for property of substantial value,
according to Paul Ashburn, a senior partner of BDO Richfield Advisory
Ltd.
Structuring is normally worthwhile only for property worth 20
million baht or more, since it costs money to maintain such structures
during the period one holds the property. "That's just a
rule of thumb, in each case you require an analysis to see whether
it will be worthwhile to think about placing an entity between
yourself and the property," he said.
Foreigners who consider buying freehold land would have to do
so through a Thai company that complies with the Land Code, because
one cannot use an offshore entity to buy land. The common use
of the latter is to buy a condominium or lease the land but actually
own the house that is built on it.
Mr Ashburn explained that an offshore investment could be structured
in such a way that there is no requirement under the law to pay
taxes on rents. However, if you use a Thai company there is an
assumption that the company has bought the property for commercial
purposes, so even if it is actually your own residence, it is
really a company that owns it and it is not your own property,
so under the law if you don't pay rent to the company the authorities
can assess this rent.
"Some foreign investors may get the impression they can
easily set up a Thai company and then just forget about it but
the company is a separate person from yourself, so if you bought
property as your residential home in a Thai company, you have
to be aware that the company should be given a reasonable rent
and return."
Mr Ashburn added and one cannot operate them as if they were
shell companies. "What will happen is it will be registered
just like any other company; you have to prepare proper accounts
and have them audited, file tax returns, so you will be registered
with the authorities.
"And from our experience now when you are setting up companies
the Revenue Department will very likely visit you early on to
make sure you're aware of your obligations under the Revenue Code."
The structure a foreign buyer may consider will be determined
in part by the legal structure adopted by the developer. Mr Ashburn
said that a visit he paid to a recent property show revealed that
few exhibitors were talking in detail about the financial structures
of the developments displayed there.
"When you're structuring an investment in Thai property
it is going to be determined partly by how the developer has structured
the sale because you have to look at all the laws involved, especially
the restrictions on foreigners owning land, so often it's not
a straight deal. You may be faced with several contracts to sign,
which is common.
"So on the surface it may look like another property deal
but when you get behind it, each deal can be quite different and
you need a lawyer to guide you through it if you want to understand
what you're contracting for and the risks involved."
This especially applies to Phuket because there are very few
big developers there, with much smaller developments being the
norm and these can all be structured differently.
Mr Ashburn pointed to the key advantage that a leasehold has
over freehold in that there are no restrictions on foreigners
taking out a lease in Thailand, which could be in their own name
or a foreign company's name. With a Thai company one definitely
has to pay tax, which aside from rental tax includes property
tax at 12.5% per year, depending on the circumstances, but it
may be that a foreign corporate entity could collect rent tax-free
on leaseholds.
He advocates foreign property buyers perform appropriate legal
and tax due diligence on leasehold structures because there are
a number of contracts involved and sometimes the buyer actually
receives a shareholding interest in the company that owns the
land being leased.
For example, 20 lease buyers might have equal shares in the land
holding company so they can end up with joint control of it. As
they control the company that owns the leases there should be
less risk that their leases, which are 30 years with developers
generally promising two 30-year extensions, will not be renewed.
It is possible for a Thai company that complies with the Land
Code to just hold the land and rent it out. The payments received
by the company for the lease of the land will be taxable.
The assets of the company that owns the land would be the land
itself plus perhaps common area facilities and improvements made
to the land the developer owns originally, but typically the developer
wants to get out.
Mr Ashburn advises foreign buyers to beware of any tax liabilities
they might assume as a result of a purchase because if they end
up owning shares in a Thai company they have to make sure that
it is clean, so that when they take it over they do not face tax
liabilities incurred by the developer prior to the transfer.
"I don't know how many investors really consider this point
... it's just something that one day may be of concern in a future
tax audit of the company. My general impression is that developers
are aware of this issue."
Some foreigners might say that it would be safest to buy a condominium
within the 49% quota allowed to foreigners in a building, but
Mr Ashburn is of the opinion that acquiring land leases, especially
in Phuket, is safe if structured correctly with appropriate protection
built into the contracts and structure.
"I don't think one is necessarily better than the other.
[It depends] what you are in the market for and how well the deal
has been structured and documented."
However, he said it would be helpful if the authorities made
it clearer what land holding structures with foreign interests
are acceptable, and if officials also ensured that the guidelines
were applied equally around the country.
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