A common assumption in the Thai real estate market is that when a company sells immovable property such as land, it is subject to a specific “capital gains tax,” or that the sale is taxed at the flat corporate income tax (“CIT”) rate of 30%. However, this isn’t necessarily the case.
First, while it’s true that a “gain” realized on the sale of immovable property must be recognized by the selling company in the accounting period in which the sale took place, companies in Thailand pay tax only on net profit. Section 65 of the Revenue Code (“RC”) defines “net profit” as income from business, or arising out of business, in one accounting year, less certain expenses. In other words, the net profit for the entire accounting year is the basis for taxation — not any single taxable event, such as the sale of immovable property.
The amount of tax payable also depends on the classification of the selling entity. The corporate income tax rate in Thailand is generally 30%, but this rate is reduced for so-called “small and medium-sized enterprises” (“SMEs”). SMEs are taxed on a progressive scale: 15% on the first one million Thai Baht of profit, 25% on profit between one and three million Thai Baht, and 30% on profit exceeding three million Thai Baht. Note that there are several special conditions affecting the computation of net profit or loss, such as exemptions, bad debts, and depreciation.
In most cases, the most substantial transaction cost on the sale of land by a company will be the resulting CIT. To avoid this and other costs, some sellers have occasionally resorted to under-declaring the sale price of land at the time of transfer. This is, of course, illegal — the seller is clearly evading corporate income tax and specific business tax in doing so.
However, the buyer of such undervalued land also ends up committing unlawful tax evasion. When a corporate entity sells immovable property, a withholding tax at a rate of 1% of the sale price must be deducted from the sale price and paid to the authorities at the time of transfer. The legal duty to withhold and pay this tax falls on the buyer. A surcharge of 1.5% per month applies to any late or inadequate payment of this withholding tax.
Beyond the legal exposure, undervaluation is also commercially unwise for the buyer. Since the land will be booked into the buying entity’s accounts at the undervalued amount, any subsequent sale of that land will trigger a larger taxable gain than it would have without the original undervaluation. Consider this simplified, hypothetical example:
In 2005, Company A actually buys land for THB 2 million, but the purchase is declared at only THB 1 million. In 2010, Company A sells the land for THB 3 million. The actual realized profit is THB 1 million, and the CIT owed should be approximately THB 300,000. However, because Company A originally declared the purchase price as THB 1 million, the actual CIT it must pay is approximately THB 600,000.
A corporate purchaser of an undervalued plot of land should therefore be keenly aware that, by going along with the undervaluation, the buyer effectively assumes the corporate income tax liability that should have belonged to the seller — on top of its own legal and tax exposure. That’s certainly far more (or perhaps “less”) than bargained for.