2008 Financial Markets Meltdown
Taxation of Share Buy-Back Transactions
As a result of the 2008 financial markets meltdown, you could experience some publicly listed companies offering to buy-back your shares.
The ability for publicly listed companies to do this was sanctioned in the Public Limited Companies Act No 2 of BE 2544 (2001), which made it possible for public companies to buy-back shares from shareholders in accordance with the following conditions:
- The buy-back of shares is from shareholders who are objecting to a proposed change in the articles of the company in relation to voting rights and/or dividends rights on the basis that the changes are unjust to them;
- The buy-back of shares is for “financial manage-ment” purposes in cases where there are sufficient amounts of retained earnings;
- The company must dispose of the shares that are bought-back within the time fixed by a Ministerial Regulation (generally 3 years); and,
- If there is a failure to dispose of the shares or the shares are not entirely disposed of within the time limit, the company shall decrease its capital by registering a capital decrease for the amount of the shares bought-back and not disposed of.
Capital reductions tax liability
A capital reduction by any company is prescribed as a taxable transaction in Thailand, but only in the case where the capital reduction is a disguised “dividend” or a quasi “income from investment” transaction.
This is spelled out in Section 40(4)(d) of the Revenue Code, which prescribes that “a payment received as a result of reduction of capital of a juristic company or partnership in so far as the payment does not exceed the sum of the profits and reserves of the company or partnership” shall constitute the assessable income of the recipient.
However, in the case of a share buy-back by a public limited company for “financial management” purposes resulting from the 2008 financial markets meltdown, you should not be considered to be liable for capital reductions tax.
This is because, at the time of your share sale back to a public company under the company’s share buy-back program, the public company should not have decreased its paid-up capital through a registration of a capital decrease (which requires a public company to carry out a legal procedure).
Thus, if a publicly listed company offers to buy-back your shares, the taxman should not assess you under the provision in Section 40(4)(d).
Capital gains tax liability
What if the publicly listed company actually buys back your shares at a price that happens to be more than your purchase price?
A capital gain on a sale of shares is also a taxable transaction in Thailand. This is prescribed in Section 40(4)(g) of the Revenue Code, as follows:
“That part of the proceeds derived from a transfer of partnership holdings, shares, debentures, bonds, bills or debt instruments issued by a juristic company or partnership or by any other juristic person, which exceeds the cost of the investment” shall constitute the assessable income of the recipient.
But in relation to a public company’s share buy-back program that is carried out on the stock exchange, the capital gain should be exempt from tax pursuant to Ministerial Regulation No 126.
Legitimizing a Loss on Share Transaction for
Writing-off Related Company Loans/Debts
It is extremely rare for tax authorities anywhere in the world to sanction a tax-planning scheme, but this is what the Thailand Revenue Department has done for Thailand companies wanting to write-off a loan and/or a debt owing from a related company and claim a tax deduction for the write-off.
For a long time in Thailand, advisors have utilized a tax-planning scheme that converts a loan or a bad debt (which is owed by a related company) into share capital in the related company, and then disposing of the share capital to produce a tax loss.
This tax-planning scheme was utilized to circumvent the rather strict and difficult-to-comply-with rules that are prescribed in the tax law for writing-off bad debts. But whilst some advisors were advising their clients that the loss on the shares would be allowed as a tax deduction, the Thailand Revenue Department officers just about always saw it differently, and denied a tax deduction for the loss on the shares.
Typical tax rulings
Tax Rulings typically found in favor of the Revenue Department and denied the companies a tax expense for the loss incurred on the shares.
In almost every case, the Tax Rulings allowed a loss incurred on the original share investment made in the related company on the basis that the original share investment was made for the purpose of acquiring profit.
But for the loss incurred on the share investment that arose from a conversion of the loan or bad debt into equity, the Tax Rulings would typically determine that because there was no intention to acquire the shares for the purpose of profit, but that the company merely created a loss for tax purposes, a tax loss was denied to the companies.
The Revenue Department’s sanction
In August this year, the Director-General of Revenue sanctioned the above tax-planning scheme in his new guideline (Instruction No Paw 135/2551) issued to the Thailand Revenue officers. Whilst this guideline is not law, you should note that Revenue Department officers are bound to observe it.
Paw 135 prescribes that a loss on share transaction that arises from a loan or bad debt that is owed by a related company, shall be permitted as a tax expense from and including the 2007 financial year, provided the following conditions are met:
- The company owed the debt must have held at least 25% of the voting shares in the company owing the debt from the date of its incorporation until the date of conversion of the debt into share capital;
- The company owing the debt must increase its share capital for the purpose of solving its debt problems;
- The debt that is converted into share capital must be the kind of debt prescribed in the Revenue Code that qualifies for write-off; and,
- The company increasing its share capital must commence its liquidation in the accounting period after the accounting period it increased its capital.
If all of the above conditions are met, Paw 135 says that the company owed the debt shall be allowed a tax loss on the amount of the capital increase arising from conversion of the loan or bad debt into equity, and the tax loss shall be allowed in the accounting period in which the company owing the loan or debt completes the liquidation process.
The information herein was contributed by Steven Herring, an experienced and Senior International Tax Consultant, for RSM (Thailand) Limited.