The current news about some of the investigations and actions of the military government have resulted in a panic among certain real estate investors regarding the security of their investment. What has led to this situation and how could it been avoided?

The most common issues that are now seeing heightened enforcement under the current military regime are regarding the legality of:

1) land ownership (or land titles); and

2) land use (specifically, construction on such land).

In order to avoid any potential issues relating to the property the investor intends to invest in it should be mandatory to perform a comprehensive due diligence into the property prior to the investment. Many well advised investors actually do ask their competent legal counsel to perform such a due diligence and generally follow their counsel’s advice. However, far too often, many other ill-advised investors follow incompetent and/or non-legal “counsel” (who often have a financial interest in the contemplated transaction). And then there are those who engage and hear the legal facts presented by the former but even then chose to follow the latter. These latter will tell the investor that “the law in Thailand does not matter” because either “there is no law on that here” or “they will never enforce it”. However, as we see above and as we are all now reminded of in the recent media reports — this is simply not true.

LAND OWNERSHIP

In order to avoid being caught up in an official land title investigation certain issues must be checked prior to any investment in real estate in Thailand. It should be noted that for such a comprehensive title investigation it is not sufficient to merely have a look at the title document itself. In fact, all of land plots at issue in Phuket purportedly have what appear to be legally issued title deeds. A proper examination of a title document is only the first step of a multi-step investigation process informed by skilled legal competency.

What cannot be found through merely reviewing the title document, however, is the title history or how the title was “upgraded” to its current title status. This investigation needs to be done at the respective land department by someone with particular competence and knowledge on what to look for and what to do if something unexpected is found. The investigation is conducted by reviewing the entire relevant title file(s) of the land plot.

Issues such as: an improper underlying document such as a “flying Sor. Kor. 1”; other flaws in the title issuance (besides any issue with regard to a National Park and to say that there are several such potential issues would be an understatement) such as the land owner did not possess the land early enough to be qualified for the title to the land; or that the area of the land in prior records does not accord with the area in later records, etc. can be (and unfortunately, all too often are) identified through such investigation.

Even if the land title is valid, an investor should also first confirm if the target land can serve its anticipated purpose. Thus, other important issues that do not necessarily involve the legality of the title itself that need to be investigated, such as the legal status of physical and utilities access to the land and the relevant land use laws.

LAND USE

As mentioned above, the second issue relates to the construction on such land itself. Buildings without any building permit are actually uncommon in Phuket. However, what about the legality of such building permit and why does it matter?

The relevant law for the issuance of a building permit administrative order is the Building Control Act (1979)(“BCA”). If a person wishes to construct, modify or move a structure, such person requires permission to do so. The administrative procedure is as follows. The applicant submits the application documents to the local administrative office. The responsible officer schedules a site visit. He will also verify the application documents (e.g. construction drawings and specifications, etc.). Then he will review if the contemplated structure is legally permissible by law. In certain areas of Thailand, like Phuket the land use restrictions are basically under three laws: (1) BCA; (2) The City Planning Act (1975); and (3) The National Environmental Control and Maintenance Act (1992).

All of these laws need to be complied with; if not, a building permit can be revoked. Legally, a building permit is merely an administrative order and administrative orders can be revoked through an appeal or by action of the relevant government administration itself. If the relevant government office finds that there is a problem with regard to a point of law or factual suitability that order may be revoked or amended.

The conditions for revoking and administrative order without appeal are strict. The relevant regulations, treatment and outcome of a revocation of an administrative order depends on whether or not original order was a lawful or an unlawful one. In other words, the revocation of a lawful administrative order is subject to compensation for damages arising out of the revocation; whereas the revocation of an unlawful administrative order is only subject compensation if the recipient of the administrative order was not aware of the unlawfulness of the order.

CONCLUSION

Any investment in real estate is usually a long-term and generally significant investment. “Slow to enforce” does not mean “no enforcement”. What cannot be repeated often enough is that there is law in Thailand and it does, sooner or later, matter — as the current actions of the military government illustrate.

If you are a non-Thai who has purchased a condominium unit on a freehold ownership basis in Thailand, you may be under the impression that part of the value you purchased was the peace of mind in knowing that you could easily leave the unit to your heir. For quite sometime the inheritance of a condominium unit by a non-Thai person or entity was the subject of legal debate in Thailand. And until recently, and as we explained in our previous article on this subject, the prevailing opinion was not fortunate for a non-Thai person or entity.

By way of a bit of background we should explain that Thailand’s legislation on condominium ownership is laid out in the Condominium Act (1979) and as further amended (the “Condominium Act”). Only under certain conditions does the Condominium Act allow non-Thais to own a freehold condominium unit. Perhaps the best-known current foreign ownership restriction is the “49% foreign freehold quota”; with very limited exceptions, foreign freehold ownership cannot exceed 49% of the total floor space of a condominium project in Thailand. Furthermore, pursuant to Section 19 of the Condominium Act, even where foreign freehold space is available, only non-Thais who meet one or more of the following conditions are entitled to receive a freehold title to a condominium unit in Thailand, regardless of how they received the unit:

1)    Any non-Thai permitted to permanently reside in the Kingdom under the Immigration Act;

2)    Any non-Thai permitted to enter the Kingdom under the Board of Investment Act;

3)    A juristic person under Section 97 and 98 of the Land Code which was registered as a juristic person under Thai law;

4)    Any non-Thai juristic person qualified under the 24 November 1972 Announcement of the Revolution Committee No. 281 and which has had a Board of Investment Certificate granted under the Board of Investment Act; or

5)    Any non-Thai individual or juristic person who has brought foreign currency into Thailand or who has withdrawn Thai Baht currency from their foreign resident Thai Baht account or who has withdrawn money from a foreign bank on deposit in Thailand. [Pursuant to Section 19 ter (5) of the Condominium Act, the amount of currency required under this paragraph (5) is defined as “not less than the price of the unit to be purchased”.]

The Condominium Act outlines clearly that any non-Thai person who does not fulfill at least one of these conditions is not entitled to own a condominium unit in Thailand.

What does this mean with regard to inheritance? Obviously, if you are a non-Thai and your heir is a non-Thai then the 49% quota would not be an issue, as the unit would pass from one non-Thai to another maintaining the same foreign/Thai ownership ratio before and after inheritance. But it is possible, even quite likely, that your non-Thai heir might not meet any of the additional Section 19 criteria for foreign freehold ownership of a condominium. In such a case, it has been argued, and it was previously government agency policy, that your heir would not be legally eligible to continue owning the inherited condominium unit and that Section 19 septem of the Condominium Act, as follows, would then apply:

All non-Thais not qualified under Section 19 who receive the condominium unit either by inheritance or in any other way, must report the matter to the relevant administrative official within 60 days from the date they receive such property and they must then sell the property within one year from the date they receive it, otherwise, the provisions of Section 19 quinque shall be applied mutatis mutandis.

Thereafter, Section 19 quinque of the Condominium Act provides that if the said non-Thai heir failed to sell the condominium unit within the time allotted, the Director of Land Department would have the right to sell the unit. Thus, if your non-Thai heir inherited your condominium unit, he would be required to inform the relevant Land Office within 60 days of such inheritance. And then if, your non-Thai heir did not meet the criteria under Section of 19 of the Condominium Act, he would be required to comply with Section 19 septem Condominium Act and either sell the condominium unit or face the requirement that the unit be sold no later than one year after inheriting it.

The “legal debate” that we mentioned hereinabove relates to the issue of whether of not a non-Thai heir fulfills the conditions outlined in Section 19 (5) of the Condominium Act that would allow him to keep owning the inherited unit. In other words: is it legally possible for the heir to fulfill Section 19 (5) Condominium Act without the need to bring additional foreign currency into the Kingdom?

The Land Department has revisited this issue in light of the succession sections of the Civil and Commercial Code of Thailand (“CCC”). Section 1599 CCC and Section 1600 CCC provide that an heir inherits “properties of every kind, as well as his rights, duties and liabilities, except those which by law or by their nature are purely personal to him.” For some time many have argued that this means that an “heir” (any heir, Thai or non-Thai) inherits, among other things, the “right” to own a condominium unit if the original right was established by the deceased under Section 19(5) of the Condominium Act.

Fortunately for non-Thai heirs, the Land Department’s most recent formal legal opinion on the matter corresponds with this interpretation—in other words, that a non-Thai heir inherits not just the condominium unit but also the rights under Section 19(5) by which the deceased owner acquired such right which allows the heir to retain ownership of the unit indefinitely.

However, in closing it should be noted, that the Land Department’s interpretation has no legal effect. It is merely an opinion. And until the courts begin to sufficiently and consistently treat any such cases or better, the law in this regard is further clarified, the legal grounds of long-term ownership of an inherited condominium unit by a non-Thai remain uncertain.

In part 1 of this blog we outlined the potential negative corporate income tax consequences where a Thai company is used to own a holiday home in Thailand. We also detailed the potential personal income tax liability of a director using such holiday home as his residence as well as the potential withholding tax liabilities that the Thai company itself would incur as a result of such use. Income and withholding taxes are national taxes which are collected by the Thai Revenue Department pursuant to the Revenue Code of Thailand. However, there is also a local authority empowered to collect an additional tax payment for which such a Thai company may be liable. In this second part of our two part article, we take a closer look at this local tax, the House and Land Tax (“HLT”) and its consequences for a Thai company owning a holiday home in Thailand. Also, since it seems to be a common belief that the way to avoid the tax liabilities to which a Thai company is susceptible is to use an off-shore company instead, we also take a look at whether that is true. Is the use of an off-shore vehicle, such as a BVI company, to own such a holiday home in the Kingdom, truly a tax free proposition?

As stated, the HLT, in contrast to corporate income tax, personal income tax and withholding tax, is a so called “local tax”. Other local taxes are the Signboard Tax and the Local Development Tax. A local tax is not collected by the Thai Revenue Department. The municipality, or its equivalent depending on the location, is entitled to collect such local tax in order to use the proceeds to maintain and develop the area under its jurisdiction. The HLT is imposed at a rate of 12.5% on the owner of structures and land used in connection therewith if the owner of such structures and land receives, or should receive, rental income from these. In simplified terms: if a Thai company owns a holiday home in Thailand, that Thai company will generally be liable to pay HLT.

However, there are exemptions from HLT liability as provided by the House and Land Tax Act (“HLTA”). The most applied exemption is found under Section 10 of the HLTA. It is applicable if the “houses or other structures (are) inhabited by the owners thereof or by the agent to protect the place (…). It is not unreasonable to think that this exemption might apply where the director of a Thai Company is the one staying in the house. And, indeed, the treatment of a Thai company that owns a holiday home in the Kingdom and whose director uses such holiday home in relation to this exemption from the HLT was legally disputed for quite some time.

One argument that the Section 10 exemption applies to a juristic person, like our Thai company, was made based on the juristic person’s legal representative, like the director of our Thai company, being an “agent to protect the place”. After all, the legal representative of a Thai juristic person is a legal agent of the said juristic person. Thus, it was argued, that by way of the legal representative living in the house the “agent” “protected” “the place”. However, in 2006, the Supreme Court, in its ruling no. 1410/2549, did not concur with this reasoning. Instead, the Supreme Court ruled that an “agent to protect the place” requires that the said agent be actually assigned to protect the building and not just allowed to live there. Thus, a juristic person owning a structure and having its legal representative residing in the building for dwelling purposes is not eligible to that part of the Section 10 exemption.

Alternatively, it was also argued that the Section 10 exemption should apply where the legal representative of a juristic person inhabited the building because that was equivalent to the juristic person, i.e. owner of the building staying there itself. However, a year later in 2007, the Supreme Court, in its ruling no. 689/2550, disagreed. The Supreme Court held that a juristic person can use a structure it owns as, for example, a registered address and in the course of its business and that, therefore, it does not need its legal representative to dwell there. Moreover, since the individual legal representative of a juristic person is a distinct legal entity from the juristic person itself the legal representative dwelling in the building for residential purposes is not the equivalent of the juristic person itself inhabiting the building. Therefore, the “owner” exemption provided under Section 10 of the HLTA does not apply to such a case.

On the other hand, many holiday owners are using off-shore vehicles to own their holiday house or condominium unit in Thailand. The common belief is that such off-shore corporations are an efficient vehicle to avoid any taxation in the Kingdom to which, for example, a Thai company is susceptible. However, this is often not the case with regard to rental income tax liabilities and generally not the case when it comes to HLT.

In the case of HLT, as stated it is imposed on the owner of structures and land. As such the HLT and the Supreme Court rulings detailed above are equally applicable to any off-shore vehicle owning a house or condominium unit in Thailand. Thus, such an off-shore vehicle is not shielded from the tax liability that arises in accordance with the HLTA when its director resides in the company’s house/condominium unit. Like any Thai company that owns a holiday home in Thailand in which its director resides, the off-shore entity is liable to pay HLT. The purported off-shore tax saving structure thus fails in relation to HLT and that puts the users of these off-shore corporate structures in the same potentially expensive disadvantage as those using Thai companies for such purposes.

According to Section 1012 of the Civil and Commercial Code of Thailand (the “CCC”), the purpose of forming a limited liability company is to make profit. However, in Thailand, especially in its resort destinations, such companies have frequently been used for a different purpose. Many investors have chosen to use limited company as a vehicle to own a villa or condominium “holiday home” in Thailand. The choice of a Thai corporate holding vehicle is most often explained as being due to the stringent laws relating to freehold ownership in Thailand. The legality of such an undertaking will not be discussed in this article. Instead, in the following, we present Part I of a two part article in which we take a brief look at the, unfortunate and unnecessary tax consequences that may result by owning a holiday home in Thailand by means of the all too common but nonetheless ill-advised use of a Thai company limited.

Even though the said investor may set up and use a local corporate vehicle only for the purposes of owning a holiday home in Thailand, the Revenue Department does not see it that way. The Revenue Department will treat such a company as if its purpose is as provided in the CCC: making profit. The Revenue Department will, therefore, interpret all of the company’s actions in light of such purpose. And this, when combined with the Revenue Department’s power to upwardly assess income, can result in severe consequences not only for our investor’s company but also for investor personally. This is because the Revenue Department is empowered to tax our investor’s corporate home owning structure in two ways.

First, our investor will obviously use the asset as a holiday home. He will stay in the acquired villa during his holidays in Thailand. Typically such a person will not pay any rent to “his” company during his stay. However, if it is as typically the case that our investor is also a director of his corporate vehicle that owns the villa or condominium, it will be deemed that such company is providing accommodation to its director. In such a case the Revenue Department has the power to assess such a rent free stay as taxable personal income for such a director. Section 40(1) of the Thai Revenue Code (“RC”) defines assessable income as “monetary value of rent-free residence provided by the employer”. The person liable for tax in Thailand that received the assessable income is required to report and remit income using the personal income tax return form PND 91 by the last day of March after the year in which the income was paid. If the director fails to do so, he might be assessed by the Revenue Department and penalized for failing to file an accurate return or any return at all. Apart from having to pay the assessed taxes, a penalty is payable in accordance with Section 22 of the RC in the amount equal to the tax payable. In event the failure to file any return at all, the penalty is twice the tax payable (RC: Section 26).

Second, not only the individual, but also the company might be penalized as result of the director’s rent-free accommodation. Please note that the company is required to deduct and remit a specified withholding tax on any assessable income, including such rent-free accommodation income. If the company fails to deduct and remit the relevant withholding tax, the company is jointly liable with the tax payer for the unpaid amount. Failure to report such income can result in an assessment by the Revenue Department resulting in a penalty equal to the amount of the additional tax payable and a surcharge of 1.5% per month on the tax payable (but not to exceed the total tax payable).

One might think that an obvious solution would be to ensure that the person that uses the company’s asset for a rent-free stay is not an employee of the company. However, such is not the case. This is because the Revenue Department has the right to assess rental income of the company. In case the asset of the company is used for a rent-free stay or a stay whereby only a pro forma rental amount is declared, the Revenue Department is entitled to assess a higher rental amount. This might occur if such pro forma rental amount is below market rate. The company will be subject to corporate income tax on such assessed amount even though such amount was not actually paid.

Finally, it should be noted that a further tax, the house and land tax (“HLT”) is applicable to such holiday home rental income. In Part II of our article we will point out the additional unfortunate and unnecessary HLT liabilities that result from the all too common but nonetheless ill-advised use of a Thai limited company to own a holiday home.

If you or your company own a condominium unit or villa here in Thailand that was used, even if only for one day, by someone other than its legal owner (with or without you having received rental income),  then you or your company have incurred liability under the House and Land Tax Act (A.D. 1932) (“HLT“). The HLT is imposed on the owner of such structures, if they receive or should have received, rental income. Local authorities in Thailand have the right to collect this tax from certain structure property owners. It is one of the few taxes that enable the local municipalities, rather than the national revenue authorities, to collect tax.

An important exemption from the HLT applies to “houses or other structures (are) inhabited by the owners thereof (…). But note again, if your property is subject to assessable rental income for even one day, then the HLT is payable in an amount of 12.5% of the total rental value for the entire year. The amount of HLT is 12.5% is an amount equal to the annual “rental value.”  It is calculated based on the total annual rental value of the foregoing year. The annual “rental value” is defined as the “sum for which the property might reasonably be expected to let from year to year. When there is a lease, the rent is the basis of the annual value (…)”. Thus, for example, if you allow an acquaintance stay a few days in your villa or condominium without you, the authorities have the discretion to determine that you did, or should have, charged rent. They may then charge you an amount equivalent to 12.5% of total amount of money that they think you did, or could have, earned by renting it during the entire preceding year.

Any owner of property subject to HLT is required to submit a “Por. Ror. Dor. 2” form within 30 days after having received notice from the relevant authorities (or within the time frame outlined in the same notification). This form provides your official declaration of the annual rental value of the property for the foregoing year. The relevant municipality may then use this information to determine the annual rental value of the property and the amount of tax to be paid. However, if the municipal authorities do not agree with the rental value figures submitted, or if no figures are submitted, they are empowered to assess and assign the  rental value themselves.

By not submitting the above-mentioned form, the right to appeal the decision (i.e. “assessment”) of the relevant municipal authorities is waived. Further, a fine not exceeding Thai Baht 200, is applicable. Providing false and wrongful information, or making a false statement for the purpose of evading the proper calculation of the annual value, could also result in punishment with imprisonment not exceeding six months, or a fine not exceeding Thai Baht 500, or both.

Unfortunately the municipal authorities’ discretion to assess the HLT also sometimes provides an opportunity for a  “discussion and negotiation” with the liable tax payer regarding the amount HLT payable. This and other inefficiencies relating to the HLT has inspired the government to consider drafting a more modern and comprehensive property tax that would change the basis of the taxation of property with structures from the assessed rental value of the immovable property to the assessed value of the property itself.

In such case, the municipal authorities would no longer be empowered to determine the tax payable themselves. The assessment of the value of the property would be performed by the already existing Valuation Committee under and in accordance with the Land Code, using the he same valuation method is actually already in use as the basis for calculating the fees and also the personal income tax payable at the land department upon transfer of immovable property in accordance with Section 49bis of the Revenue Code. This method is based on valuations using actual market value pursuant to Section 103 et seq. of the Land Code, as opposed to rental value.

A comprehensive and modernized real estate tax that would replace the outdated and inefficient HLT would be a welcome improvement to Thailand’s real estate tax regimen. However, it remains to be seen if and when the Thai government will implement a modern real estate tax. Until such time, the HLT remains applicable.

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DUENSING KIPPEN is an international law firm specializing in business transaction and dispute resolution matters, with offices in Bangkok and Phuket, Thailand and affiliated offices in 45 other countries. Visit them at: duensingkippen.com