Money & law on Hua Hin Today

Taxation and leasehold for property investors

However, the day may come when the lessee would like to exit the lease, in which case he will most probably seek to sell his rights in the lease to another person. A long term lease agreement will normally provide that the lessee will have the right to transfer his interest in the lease with the consent of the lessor. Assuming such consent will be forthcoming, the lessee is free to transfer his interest in the property to another person, the same as if he had a freehold interest. The form that the transfer takes and the taxes payable on disposal are, however, quite different.

The lessee will normally make a contract to assign his rights and obligations under the lease agreement to the new lessee. The new lessee then takes over the lease agreement.

Where the lease has more than three years left to run, the change of lessee will normally be registered at the Land Department so that the lease is enforceable for the remaining lease term.

Fees and duties on assignment of a lease
As was the case when the lease was first registered, a 1 percent registration fee and stamp duty of 0.1 percent will be payable when the transfer of the lease is registered at the Land Department. The lease payments attributable to the period of the new lessee's tenure shall be the tax base for computing the registration fee and stamp duty in most cases.

Other taxes
The price that the new lessee pays to take over the lease does not figure in the calculation of the registration fee and stamp duty payable at the Land Department. The transfer price will, however, attract taxation in Thailand if other taxes, such as corporate tax and VAT, apply to the transfer. In this case, it will initially be up to the parties involved to determine their obligations and duties to pay any other taxes due under the law, which may then be audited in the future by the tax authorities.

Whether or not other taxes apply will depend largely on the particular circumstances of each party to the lease assignment. In this regard, I think that it would be fair to assume that where long term leases of residential properties in Thailand are concerned, both parties are likely to be foreigners.

Whilst the taxation of lease right payments between Thai taxpayers is generally quite clear, following several tax rulings and Revenue Department guidelines issued on the subject, the taxation of Thai lease transfers between foreigners is not. There is really not much in terms of tax rulings and precedent court cases in this case to fall back on when trying to interpret the broadly worded provisions of the Revenue Code, let alone the Revenue Department's view on the matter.

Corporate tax treatment
A case in point is Section 76 bis of the Revenue Code. Under this section, if a company organised under a foreign law, for example a BVI company, 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 deemed carrying on business in Thailand.

In such a case, the employee, representative or go-between shall, in so far as income or gains derived in Thailand are concerned, be deemed the agent of the offshore company for filing corporate tax returns and paying 30 percent corporate tax on profits to the Revenue Department.

Now when the assignment of a lease is registered at the Land Department, a foreign company will typically appoint an attorney, such as its lawyer, to act on its behalf at the Land Department. The question then arises as to whether the foreign lessee's attorney can be deemed his representative or go-between in Thailand for corporate tax purposes under Section 76 bis of the Revenue Code.

Earlier this year the Revenue Department published a ruling it gave to a law office concerning the registration of a lease assignment. A lawyer of the law office had acted as attorney for the assignor of the lease, a foreign company, for the purpose of registering the lease assignment at the Land Department. According to the facts given in the ruling, there was a clause in the lease agreement that said it was effective and binding on the parties since the date of the agreement.

The Revenue Department ruled that the lawyer was not a representative or go-between of his client for carrying on business in Thailand under Section 76 bis of the Revenue Code. In making its ruling, the Revenue Department relied on the fact that the lease assignment was already effective prior to its registration. In contrast, I expect that many long term leases will be assigned on the condition that the assignment will only be effective once it is registered at the Land Department.

Tax rulings given by the Revenue Department are not law but are nevertheless a useful guide to the Revenue Department's interpretation of the Revenue Code. It remains to be seen to what extent the Revenue Department's ruling in this case turned on its facts and whether or not all lease assignments by offshore corporate lessees will be free of Thai corporate income tax.