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Wednesday, March 21, 2007

Foreign property owners are not all taxed the same

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Foreign property owners are not all taxed the same

By Paul Ashburn, Senior Partner, BDO Richfield Advisory Limited

One of the major factors affecting the amount of tax a foreigner property owner must pay in Thailand will be whether the property owner is an individual or a company.

For foreign individuals owning real estate Thailand-which can normally only be a condo or a building due to restrictions on foreign ownership of land under the Land Code-all rental income will be taxable. The foreigner’s nationality or residence status is not relevant nor does it mater whether the rent is received in or outside of Thailand.

This is because the Revenue Code provides that every individual who derives rental income from property situated in Thailand shall pay personal income tax on such income, whether such income is paid within or outside Thailand. Personal tax rates are relatively high for the region, ranging from 10-37 per cent. Once you earn the equivalent of US$ 25.000 you will start paying 20 per cent tax. Above US$ 100,000 the rate is 37 per cent.

Foreign corporate property owners

For a foreign company owning real estate in Thailand-which will normally be limited by law to investments in condos or buildings similar to that owned by foreign individuals-the income taxes it has to pay in Thailand will depend on whether or not the company is carrying on business in Thailand. Unlike the personal income tax laws, the mere fact that a foreign company owns real estate in Thailand does not automatically mean that it will be liable to tax in Thailand on rents.

There are two main provisions of the law to consider:
1. Under Section 70 of the Revenue Code, rental income paid from or within Thailand to a foreign company not carrying on business in Thailand is subject to 15 per cent withholding tax.

This source rule means that foreign company not carrying on business in Thailand can receive rental income from outside Thailand free of Thai tax. So when is a foreign company considered to be carrying on business in Thailand?
2. Under Section 76bis of the Revenue Code, if a company organized under a foreign law has an employee, a representative or a go-between to carry on business in Thailand and Thereby derives income or gains in Thailand, such company shall be demand carrying on business in Thailand.

In such a case, the employee, representative or go-between shall, insofar as income or gains derived in Thailand are concerned, be deemed the agent of the off-shore company for filing corporate tax returns and paying 30 per cent corporate tax on net profits to the Revenue Department. The remittance of the taxable profits out of Thailand shall also be subject to 10 per cent income tax. In short, the foreign company ends up being taxed similar to a Thai company in many respects.

The appointment of a real estate agent in Thailand to find tenants for the property should clearly fall within the meaning of a representative or go-between Rental income derived by the foreign company through the efforts of the agent should therefore result in the foreign company being deemed carrying on business in Thailand and liable to corporate taxes in Thailand on profits derived from the rental property.

Where agents of foreign companies are concerned, tax law sometimes distinguishes between a dependent agent and an independent agent. An independent agent may not have a duty and liability to file tax returns and pay tax on behalf of its foreign principal.

An independent agent in normally one that acts as an agent in the ordinary course of its business and does not act specifically or mainly for one customer. There is no law allows real estate agents in Thailand to be treated as independent agents for Thai tax purposes.

Thailand has an extensive network of double tax agreements that can reduce the amount of tax a foreigner has to pay Thailand. These double tax agreements typically follow the same from when it comes to the taxation of income from real estate-that is, Thailand retains its right to tax income from the rental of real estate situated in Thailand. In short, a double taxes agreement will not help to alleviate the liability to Thai income tax on rental income.

The tax treatment adopted in practice by foreign companies may of course be completely different to what I have described above. I do have a feeling that most foreign companies are not aware that they could be deemed carrying on business in Thailand for tax purposes, especially if they have an agent in Thailand to manage the property on their behalf. Foreign property owners would be well advised to check that they are paying income tax in accordance with the law.