Tax Implications of Thai Fractional Property Ownership
Fractional ownership of holiday homes is a relatively new concept in Thailand. It offers the benefits of owning a holiday home for a fraction of the cost. The tax considerations for fractional property owners are similar in many respects to traditional ownership of real estate in Thailand.
In brief, the points to consider are:
- The transfer taxes and fees imposed on entry and exit. Where joint ownership in a property occurs at the same time, personal income tax on the transfer shall be paid on a collective basis rather than in accordance with the purchaser´s fractional ownership in the property.
- Tax planning for the purchase should consider the end game from the very start. In particular, the question of tax on any capital gain made on exit and how to minimize that tax.
- The taxes payable if the property will be used to derive rental income. Joint ownership of properties by individuals could be taxed collectively rather than on an individual basis.
- Property taxes. At the moment the property would be taxable at the rate of 12.5 per cent per annum on its deemed rental value.
- For foreign owners, there will be a focus on not only the taxes payable in Thailand but also in their home country.
In its simplest form, the legal ownership of the property may be structured so all owners are registered as the owners on the ownership documents. In Thailand, developers selling to a mainly foreign audience are likely to consider using a legal structure that sees indirect ownership of the property being offered instead.
The ability to structure real estate holdings tax effectively in Thailand is largely governed by the nature of the development, i.e. landed villas, condos or apartments – which unlike condos are not deeded properties – and the legal structure that is being used to ´sell´ the property to the foreigner.
The basic ingredients of the legal structure for selling fractional ownership in Thai property to foreigners can often be similar; long term leases with renewal options if freehold is not permitted; a Thai special purpose vehicle (SPV) to hold land, condo units or apartment buildings that the foreign buyer cannot own in their own name; and offshore companies in tax haven jurisdictions to act as a collective ownership vehicle for foreign owners.
Sometimes the structuring stops there. How well the structure has been fine tuned from both a financial and tax perspective will influence the amount of tax paid by the developer and future owners.
Effective tax planning for selling fractional ownership in Thai properties using an offshore vehicle as the collective owner involves financial modeling and an appreciation of the Revenue Department´s approach if the whole structure comes under scrutiny.
For example, the use of offshore companies in tax havens to act as a collective owner of a Thai SPV is often abused. At the outset it will have a real practical benefit – which is not tax related. The offshore company will have an advantage of operating under a legal framework that is more familiar to foreign owners, and will allow greater flexibility to arrange the articles and rules of association between the owners. Of course, being in a tax haven also allows the affairs of the company to be organized in a tax-free manner so it acts as a conduit with no related tax leakage.
A developer may then perceive an opportunity to use the offshore structure to generate profit in the offshore company tax-free. The Revenue would appear to be aware of such practices to a degree – asking in tax audits to see the sales brochures, checking the websites of the developer and sales agents to see how much they are advertising the property for sale, and how much is finally being recorded in tax returns filed in Thailand.
Where such structures are used, prospective buyers should consider the risks they might be assuming from the by becoming the owner of the offshore vehicle.
In fractional models where deeded ownership is not offered, a Thai SPV may be employed in the property holding structure. In general, Thai law does not provide for special entities to be created to hold properties. One exception is the ability to establish Thai REITs under securities laws, but these are subject to a number of qualifying conditions.
Thai limited companies are therefore used as SPVs in fractional models where deeded ownership is not offered. Achieving tax neutrality in the Thai SPV, or something close to it, should be an important goal.
Whose goal is this? This might not be the goal of the tax authorities. Their primary role is to simply administer existing laws which contain a number of obstacles to achieving tax neutrality. If the Thai SPV does not make a profit and continues to trade year after year it will automatically move up the list as a target for a tax audit. Hence these two opposing goals must be balanced to avoid additional tax liabilities from the use of the Thai SPV, but at the same time complying with Thailand’s tax laws. And, of course, a developer will want to achieve a cash neutral result in the Thai SPV and avoid triggering taxes on the withdrawal of the cash from the Thai SPV.
Where a Thai SPV is used in the ownership structure, prospective buyers should try to evaluate how well the developer has structured the financial affairs of the company from a tax compliance perspective.
Given that Thais are free to own real estate in Thailand, you would think that a fractional ownership model targeting Thai buyers would be structured on the basis that their names will appear on the title deed. But could the tax consequences of deeded ownership and the apparent tax advantages of indirect ownership via a foreign company win them over in the end?
Apart from the obvious advantage of legally avoiding the transfer taxes and fees that apply to transfers of immovable property registered in Thailand, there are also remittance rules that apply to foreign sourced income that may work to the advantage of a Thai fractional owner.
If the owner sells their fractional interest, there is no doubt that a gain made from the sale of shares in the offshore company would be assessable for personal income tax purposes under the Revenue Code. However, the gain is only taxable in Thailand if it is remitted into Thailand in the same year the gain is made. Correctly structured, Thai tax residents can legally pay no Thai income tax on the disposal of their fractional interest.
It will be interesting to see how effective the legal structures used for fractional property ownership in Thailand will be in managing the tax issues for both the developer and buyers.
