We detail Thailand’s Investment Visa in the current B&M issue

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DK on investing in Thai real estate in “The Address”

Our article on investing in real estate in Thailand appears on pages 37- 44 of the current edition of the international luxury life-style magazine ‘The Address’.

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Thailand Eases Restrictions on Properties Used for Short-Term Rentals

We have previously explained HERE (and with a further follow-up HERE) that most villa or condominium unit owners who are renting out their property on a short-term basis (that is, for periods of less than 30 days) are most likely violating the Hotel Act (2004) if they do so without having received a hotel license. The potential punishment for such violation includes significant fines, or imprisonment, or both.

Historically however, obtaining a hotel license for most such owners has been very difficult—if not impossible. A major reason why is that in order to obtain a hotel license the property must comply with the requirements for certification for use of the property as a hotel under the Building Control Act (1979)(“BCA”).

Yet, many are tempted to, and currently do, invest in properties to participate in this lucrative market without a requisite hotel license. On the other hand, tourism is one the most significant contributors to the Thai economy. This has created a tension between the need to enforce the law and the desire to maintain a robust tourism industry and investment market. As some, including us, have pointed out, one way to accommodate both of these very legitimate, and currently competing, concerns would be to liberalize restrictions applicable to so some number of such properties. Thus, we are pleased to see that the current government has recently taken one such step.

On 19 August 2016, Thailand’s Ministry of Interior Ministerial Regulation Prescribing Descriptions of Other Types of Building Used for a Hotel Business Operation 2016 under the Building Control Act (1979) (the “MR”), became effective. The MR should make it easier for more property owners to obtain a hotel license.

The MR will remain in effect for five years. However, it applies only to buildings that existed before it came into force and whose owners desire to use the property as “Hotel” (as defined by the Hotel Act) with either:

(a) rooms only; or

(b) rooms and food service/restaurant facilities.

The three categories of buildings that are eligible for this re-classification are as follows:

Type 1: a building with not more than two floors and not more than 10 rooms;

Type 2: a building that is not a Type 1 building and which does not have more than twenty rooms; and

Type 3: a building that is not a Type 1 building and which does have more than twenty rooms.

The MR liberalizes the various Hotel usage-building requirements under the BCA for these types of buildings. For example:

BUILDING TYPE  OLD REGULATIONS UNDER THE MR
Minimum open/unused space
Type

1, 2, and 3

Equivalent to 30% of “the area of the largest floor of the building
(MR. No. 55 Clause 33)
Equivalent to 10% of “the area of the largest floor of the building
Minimum width of the walkway
Type 1 1.5 M
(MR. No. 55 Clause 21)
1 M
Type 2 1.2 M
Type 3 1.5 M
Minimum width of stairs
Type 1 1.2 – 1.5 M
Based on area of the upper floor
(MR. No. 55 Clause 24)
0.9 M
Type 2 N/A
Type 3 N/A
Minimum Live Load
Type 1 200kg/SQ M
(MR No.6)
150 KG/ SQ M
Type 2 200 KG/ SQ M
Type 3 200 KG/ SQ M

An application to change the usage a building to a hotel under the BCA must be completed within five years from the date the MR came into force. However, if the building requires structural modification before applying to change its usage to a hotel, that application (or notification under Section 39(bis) of the BCA) must be filed within two years.

And it should be noted the building must still comply with other BCA regulations regarding hotel usage, in force at the time the building was originally constructed (or altered), regarding such matters as the building’s height, setback, and parking.

In closing, it should be noted that the MR does not mean that all owners who wish to rent their properties on a short-term basis and who’s properties do or can comply with the MR will now be able to legally do so. There are other laws that need to be considered and which may restrict such use—particularly with regard to condominiums, and all the more so with regard to foreigners. Thus, caution and clarity are advisable before taking steps to take advantage of the MR. That said, the MR is a very welcome step in the right direction for the tourism and real estate investment markets in Thailand.

____________________________________________________________________________________

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 over 100 other jurisdictions worldwide. Visit them at: duensingkippen.com

 

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Our “Lease-Mortgage” article in AMCHAM-Thailand’s current issue

Our article on the most secure way to structure long term leaseholds in Thailand is featured in the current issue of the American Chamber of Commerce of Thailand’s magazine.

t-ab_volume-4_2016-1t-ab_volume-4_2016-2t-ab_volume-4_2016-3

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Fact Checking Comments in the Media Regarding “Illegal Hotels”

Since we published our article, “Is your house or condo an illegal hotel” on 30 April 2016 there have been several media reports on the same subject. Unfortunately, not all of the comments quoted in the reports were legally accurate. And we have received several inquiries regarding the reports. Accordingly, we thought we would take the opportunity to provide a short legal “fact checking” of the following comments quoted in the reports that seemed to have peeked the greatest interest:

1.       “[Renting one’s condo] is a personal arrangement between the person renting out the condo and the person renting it – it does not concern the Employment Department.”

HALF TRUE

Section 5 of the Alien Workers Act defines “work” as follows:

“Work by using manpower or knowledge, whether those who perform the work want wage or any other benefits in return or not.”

Setting aside the circularity of the definition, any foreigner within Thailand engaging in any activity that meets that definition would need work permit. In our opinion, actively renting out your condo or villa on a daily or weekly basis could be considered a service. And using your knowledge or manpower to do so meets the Section 5 definition.

However, if you do so from outside of Thailand you do not need work permit.

2.       “In actual fact, according to Thai Law, foreigners allowed to purchase under foreign quota is [sic] only allowed for personal dwelling and not for business or income.”

FALSE, BUT…

It is true that the Condominium Act restricts the percentage of foreign ownership of a condominium,  but there is nothing in the Condominium Act that specifically restricts a foreigner’s use of their condominium unit.

However, if the registration of the condominium juristic person occurred after July of 2008 then commercial or business activities by anyone, foreign or Thai, are prohibited in any part of the condominium building that has not been officially reserved for such activities. In our opinion, short-term rentals constitute commercial/business activity. Any violation in this regard is subject to a fine of THB 50,000 plus an additional fine of THB 5,000 per day of the violation.

3.       “Rentals can be done from 30 days up and not less.”

HALF TRUE

The Hotel Act restricts rentals of less than 30 days without a license. But there is an exception to this for properties with four bedrooms or less and where the income earned from doing so is not the operator’s primary source of income, as we explain here.

4.        “If you are a Thai company you need not have a work permit as you have Thai directors.”

FALSE

Neither the Civil and Commercial Code nor the Foreign Business Act require a Thai company to have a Thai director.

Furthermore, if you are a foreigner, and the Thai company in which you are a shareholder or director is doing any business activity, and you are acting on behalf of the company for its business – you need a work permit (full stop)

5.       “It is inacceptable [sic] to operate an illegal hotel. The penalty for this is up to one year in jail or a fine of up to THB 20,000, or both.”

TRUE, BUT

Correct, but there is also an applicable fine of up to THB 10,000 per day of the illegal operation, as we explain here.

6.        “If a property is registered with the Land Department as a condo, then it cannot be registered as a hotel.”

FALSE

The Condominium Act regulates a type of real estate ownership, but not activities or businesses.

The Hotel Act regulates what it defines as the type of activity that constitutes hotel business.

As long as:

  1. a registered condominium building complies with the requirements of the Hotel Act (which also requires compliance with the Building Control Act’s requirements regarding hotels);
  2. all or part of the condominium is officially designated to be used for commercial purposes; and
  3. all of the owners of the condominium consent obtaining the hotel license, then

a condominium can, indeed, obtain a hotel license. And in fact, there are many such cases of registered condominiums for which hotel licenses have been obtained, including in Phuket.

Generally this is planned and processed when the development is set up. But it is also possible to change an pre-existing apartment building into a legally registered condominium and, therefore, a legal hotel as well, as we explain here.

7.          “To make them all legal can take time and some of them simply cannot be registered as a hotel simply because structurally they are not hotels.”

TRUE

As the Hotel Act stands at the moment, most illegal “hotels” cannot become legal, largely because they cannot comply with the requirements under the Building Control Act for legal hotels. And for those currently illegal hotels that could comply, it would require a significant amount to time for them to obtain legal status.

However, it should be noted that operators who are providing rentals of less than 5 bedrooms for less than 30 days AND only for “additional income”, could comply with the Hotel Act by simply reporting their activity to the relevant local authorities.

8.       “The Hotel Act needs to be updated to allow condominiums that do wish to obtain a hotel license and villa estates or properties a clearer pathway, as there are a many who are willing to obtain the necessary documentation.”

and

“A hotel business involves many laws, so solving this issue is not easy. The Ministry of Interior is working on this issue. I know the ministry is considering a proposal to allow other types of building to operate as hotel, which is now being considered by their policy committee.”

WE AGREE

This could be done without the need to amend the Hotel Act itself. As we mention above, there is already an exception to the definition of a “hotel” under the Hotel Act pursuant to a Ministerial Regulation under the Hotel Act which excludes operators with less than 5 bedrooms (and less than 21 guests at time) who are only doing such for “additional income”, from the definition of “hotel” operators.

We suggest that similar could be done for the many currently illegal hotels in Thailand by carving out one or more categories of exceptions to accommodations that would require a hotel license. Such additional categories of operation could perhaps require a lower grade license with much less onerous requirements and, of course, a fee payable to the Thai government. We believe the majority of such operators would be pleased to comply with such reasonable requirements and Thailand would not only gain direct fee income but benefit its tourism industry as well.

___________________________________________

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

 

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9 essential do’s and don’t’s when investing in real estate in Thailand

As a general matter, real estate in Thailand can be an excellent investment. Unfortunately, however, horror stories are not rare enough. But if you adhere to our following nine points, such tragedy can be avoided.

  1. Beware of real estate agents

“Real estate agents”, “estate agents”, or (as they are more properly referred to under Thai law) “brokers” are middlemen who make their living by being paid a commission for putting a buyer and seller together. Only when the deal completes, the agent gets paid. Thus, agents have a financial interest in every deal completing.

That is the reason why agents are commonly regulated in developed countries such as those in the Europe, the US, and Singapore. Such regulation generally imposes a “fiduciary” duty on the agent to act in the best interests of their clients with significant penalties applicable if they do not. This makes sense since such agents (like lawyers and accountants) hold your finances in their hands during a deal and they should not be allowed to knowingly guide you into making an unwise investment for the sake of their commission.

In Thailand, however, agents are not regulated. We have first hand experience of far too many agents putting the interest in their commission above the interest of the buyer. We should emphasize that we are not saying not to use an agent but rather that you should be aware that it might be the case that your interests might not be the top priority of your agent. Therefore, if you intend to use and agent and you start to feel uncomfortable with too many statements like: “this is how its done in Thailand”, “it is standard that the agent holds the deposit on the sale”, that do not make sense, trust your instincts and walk away, or at the very least get other competent independent/non-interested advice.

We explain more about real estate agents in Thailand here:

http://www.duensingkippen.com/thailandpropertylawblog/?p=60

and here:

http://www.duensingkippen.com/thailandpropertylawblog/?p=62

Beware of estate agents.

  1. Get competent legal counsel

One of the best protections you can find when investing in real estate in Thailand is competent legal counsel. This should be obtained rather sooner than later (certainly before you sign any agreement with an agent or seller).

However, “competent” is the key. We are often amazed by what people say they were told by law firms in Thailand. Thailand actually does have a well-developed set of laws (most mirroring Western law). Thai law for the most part fits together logically, just like in most fully developed countries. Further, almost all the relevant Thai law is available in its English translation. Thus, if what you hear from a law firm in Thailand about Thai law sounds like it does not make any sense, if it sounds illogical, there is a good chance you are right. In such case, ask them to show you the law in question to read it yourself. If they are unable to explain their point then with the text in front of you both, or if they refuse to do so, you are well advised to find another law firm that will.

Furthermore, “competent” counsel doesn’t just know the law—competent counsel is also ethical. By ethical we mean compliance with internationally recognized standards for lawyers.

Thus, you should expect that your law firm has a fiduciary duty to you, in other words, that they will put your interests first, even above theirs, including their financial interests. In this regard, you should expect that your law firm does not and will never have any conflict of interest in representing you. They should not have any interest (including any of their own) the advancement of which would be detrimental to yours.

For example, your law firm should never accept commissions from others, like real estate agents or developers, to refer you to them.

Nor should you law firm represent both you and the other side in a transaction. There is no such a thing as a “non-conflicted transaction”. Every contract is a give and take and your lawyer should be looking out solely for your interest.

An initial evaluation is easy enough. Ask your prospective counsel to show you their formal legal credentials. Then ask them what code of professional legal ethics they are bound by and to show them to you. If they do, verify those credentials and review their professional code. If they cannot, or if you find their response unsatisfactory (for instance, “I have lived in Thailand a long time, I speak Thai, and I know many government workers”), you should find other counsel.

Finally, do not assume you are going to get the easy or correct legal advice from Thai government officials. They are very often wrong even about the law they are charged with administering. We explain more on that here: http://www.duensingkippen.com/thailandpropertylawblog/?p=75

Hire a good lawyer.

  1. Do your due diligence

Due diligence means checking for any negative legal issues with the property you are planning to buy. Due diligence is a must anywhere in the world, but especially here in Thailand. Once you’ve bought the property you’ve also bought any legal liabilities it might have.

More than once we have heard a remorseful purchaser tell us they did have a due diligence done: “my lawyer got a copy of the deed from the land office and translated it. The deed showed that the seller was the owner and there was no mortgage on the property.”

That, is not due diligence.

The minimum essential components of a real estate due diligence should include:

  • a full check of the entire history and validity of the title deed. Just because the deed is issued does not mean it was legally issued. A current title deed can later be found to be legally invalid. That can and does happen in a number of ways one of which we explain here: http://www.duensingkippen.com/thailandpropertylawblog/?p=68 ;
  • verification that the property has legal access rights;
  • if you are planning on building on the property, a full report on all land use laws and regulations governing construction on the land;
  • if you are planning on purchasing a property that requires special licensing like a condominium or a unit in a building that will also function as a hotel, then verify that the project is planned or built to properly qualify for such licensing. This does happen even in very high-end projects were you would not expect it. For example in Phuket a project was market and sold as a seaside condominium development that won awards for “best condominium project”, only later it was “discovered” that its access was not wide enough to qualify for a condominium license. It is now a hotel; and
  • if you are planning on “buying” a property by buying a company that owns such property (something that is generally not recommended) then a check of all corporate, accounting, and legal records of the company is required.

Do your due diligence.

  1. Be aware that a “lease” does not = “own”

Because foreigners are generally restricted from owning land in Thailand they commonly enter into a lease for such property instead. It is important to understand that leasing a property is not the same as owning it. Leasing is “renting” something pursuant to the terms and conditions of an agreement or contract with the person who really owns it. If you break any terms of your lease agreement the real owner can terminate the agreement and evict you from the premises.

Hence, a lease is just a contract to use something in exchange for payment—but for how long? A peculiarity of Thai law is that real estate can be leased for a term of no longer than 30 years. Such a term can be renewed by means of a “renewal clause” in the lease contract. However, and crucially, if the real owner (the lessor) changes (i.e. dies, goes out of business, sells the property, etc.) during the lease, then the new real owner will not bound by the renewal clause.

This means common real estate leases with renewal clauses in Thailand are not a long-term secure investment. As a result many developments marketing to foreigners what they call a “secured” or “collective” lease. It is neither of those as we detail here: http://www.duensingkippen.com/thailandpropertylawblog/?p=36

and here: http://www.duensingkippen.com/thailandpropertylawblog/?p=40

and here: http://www.duensingkippen.com/thailandpropertylawblog/?p=149

If you do wish to invest in a long-term lease, a better and completely legal and secure structure for your investment, renewal terms, and resale value is easy enough to arrange, as we detail here: http://www.duensingkippen.com/thailandpropertylawblog/?p=171

Beware if you lease you do not own.

  1. Be aware building permits do not = ownership

You may hear someone tell you that having their name in a building permit means they own that building…hopefully that (mistaken person) will not be you.

Although foreigners generally cannot own land in Thailand, they can own structures such as villas. In the past it was quite common for real estate developments marketing to foreigners to sell them “ownership” of a villa by promising a building permit in their name. Whether or not this was for “tax planning purposes” (selling a building permit incurs no real estate transfer taxes for the seller) or not we can only speculate. What is certain is that buying a building permit gets you nothing as we explain here: http://www.duensingkippen.com/thailandpropertylawblog/?p=49 .

Your name in building permit means nothing other than you have government approval to build an approved structure, at a given location, during a given period of time (full stop). And, although it is less common, we still find sellers, including developers, selling building permits.

Building permits—don’t be fooled.

  1. Do not use a company only to own real estate

Although common, using a company to own real estate in Thailand is generally unwise.

Legal Liabilities

It is true that a company registered in Thailand can own land, by having at least two Thai shareholders who own more than 50% of the company’s share capital. However, those Thais may not be mere “nominees”(i.e. in name only), they must be actual investors in the company having actually paid for the share capital that they hold and own.

If the authorities find that the Thai shareholders are not actual investors then both those Thai “nominees” (i.e. shareholders in name only, not real shareholders) and any foreigner who benefitted from a Thai acting as a nominee will be subject to imprisonment, fines, or both. In such case, the company can also be shutdown and the land office can force the company to divest itself of any land that it owns.

Furthermore, Thai law does not recognize “holding companies” (i.e. companies set up only to own assets but that not to do actual business). If a Thai company is not actually doing business (and as a practical matter, paying taxes) it will be subject to closure.

Commercial Liabilities

Using a Thai company to own property could also cost you a lot more than you expected, for example:

  • every year a Thai company must pay for: (1) an accounting to be prepared, independently audited and filed; (2) an annual tax return to be prepared and filed; and (after the first company’s first year) (3) a semi-annual tax return to be prepared and filed;
  • a Thai company must have a registered address. If the company does not have a qualifying property the company will have to pay for one;
  • the income tax applicable to the sale is generally much higher for a company than for a personal owner; and
  • under Thai tax law if you personally own a villa or condominium unit for five years or more, then on transfer a tax equal to 0.5% of the sale price is applicable. However, if a company owns the same property for five years or more, the applicable tax will be 3.3% of the sale price amount. We explain all the taxes applicable to the sale of real estate here: http://www.duensingkippen.com/thailandpropertylawblog/?p=12 .

Off-Shore Companies

Off-shore companies such as those registered in tax-havens like the British Virgin Islands are not a solution. While such a company does not entail the legal liabilities we mention it DOES implicate all of the commercial liabilities (except perhaps for the accounting and tax return but will certainly have annual running costs no matter where the company is registered).

And an off-shore company cannot own land.

With few exceptions there is simply no good legal or commercial reason to use an off-shore company to own real estate in Thailand.

Options Without Liabilities

Foreigners can own structures like villas and condominium units outright. And foreigners can lease land and that such leases can be structured in such a way as to legally secure the investment—without the liabilities above.

Don’t use a company to own real estate.

  1. Document the money you bring into Thailand correctly

When investing in real estate in Thailand it is very important that you document the transfers properly. This process begins when you are sending the money. So you should be sure to understand all the requirements before you send your first transfer. You will need to obtain the proper relevant documentation of the transfer from the receiving bank in Thailand. What that documentation is will depend on the amount transferred and its purpose.

Once obtained these documents should be saved in a secure location. If you are a foreigner buying ownership of condominium unit in your own name, you will need these correctly detailed documents (for every purchase price transfer) to complete the purchase. And if and when you sell your condominium unit or villa, you will need them in order to send the money back out of Thailand.

Document your money transfers.

  1. Pay your taxes

“If it goes without saying, don’t say it.” True, but in Thailand for some reason many people seem to think paying the correct taxes is not a serious issue. They are wrong. If you do not pay your taxes, for example income taxes from rental that was (or that should have been earned as detailed above) your property or your company’s property can be seized and sold.

We have mentioned most of the relevant taxes above with links to our other articles detailing them. However, one we have not and that is the all too common decision to under-declare the sale price of real estate to the authorities at the time of purchase. Besides the fact at this is criminal tax fraud, it is also commercially stupid because whether the property is owned by a company or a real person, you will almost certainly incur far greater tax liability on resale that what you “save” if you agree to illicitly under-declare your purchase price…not to mention the tax authorities could go after you for the under-declaration (and, if necessary, your property) while you own your property.

Pay your taxes.

  1. Use arbitration

Finally, no one entering any agreement or contract, including one to invest in real estate expects nor certainly wants the deal to go bad and end up in a dispute. The fact is that it does happen and probably more often than you think. If that happens to you, and particularly if you are a foreigner, you almost certainly will be far better of (EVEN IF YOU LOSE) settling your dispute by legally binding arbitration than doing so in a Thai court. By “better off” we mean the process will be quicker, less costly, documents and proceedings can be in, e.g., English, the decision will be enforceable worldwide, and more as we explain here: http://duensingkippen.com/thailandcontractdisputeblog/?p=55

and here: http://duensingkippen.com/thailandcontractdisputeblog/?p=59

and here: http://duensingkippen.com/thailandcontractdisputeblog/?p=62

and here: http://duensingkippen.com/thailandcontractdisputeblog/?p=65

and here: http://duensingkippen.com/thailandcontractdisputeblog/?p=72

However, because binding arbitration requires the agreement of the parties, and because agreement about anything is unlikely once parties start to fight, you should be sure to include a well-drafted arbitration clause in you real estate investment contract(s).

Stay out of Thai Courts, use arbitration.

______________________________________________________________________________

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

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Is Your House or Condo in Thailand An Illegal Hotel?

Recently local authorities have promised to “crack-down” on illegal hotels. If you are a homeowner in Thailand you may think this is not a concern of yours. However, if you are renting your house or condo out – or if you are using a company to own it and are staying it yourself – this does indeed concern you. Local authorities are empowered under two laws to regulate and tax you in such cases: 1) the Hotel Act; and 2) the House and Land Tax Act.

Hotel Act

The Hotel Act (2008) requires any place that provides accommodation for less than a period of one month in exchange for payment is defined as a “Hotel”, regulated by the Hotel Act, and requires a hotel license.

There is a limited exception to this if:

1) the said place has less than five rooms; and

2) cannot accommodate over twenty guests at a time; and

3) the income being earned for such is merely “additional income”,

a license is not required. However, even in that case the owner must report to such accommodation activity to the relevant local authorities.

Anyone who operates Hotel without a license is liable for:

a) a fine of up to THB 20,000; plus

b) a fine of up to THB 10,000 per day of such illicit operation; and

c) imprisonment for up to one year (in the case of a company the person subject to such imprisonment would be director).

House and Land Tax Act

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 (1932) (“HLT“). The HLT tax is imposed on the owner of such structures, if they receive or should have received, rental income. And the HTL tax is one of the few taxes that localities, rather than the national revenue authorities, are empowered to collect. An important exemption from the HLT tax applies to “houses or other structures inhabited by the owners thereof (…). The amount of HLT tax is 12.5% of 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. Thus again, if your property is subject to assessable rental income for even one day, then the HLT tax is payable in an amount of 12.5% of the total rental value for the entire year.

Any owner of property subject to HLT tax is required to submit their official declaration of the annual rental value of the property for the foregoing year within 30 days after having received notice from the relevant authorities (or within the time frame outlined in the same notification). The relevant local authorities 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 local 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. Such assessment may be appealed if the owner submitted their official declaration. But not doing means the right to appeal the assessment is waived. Failure to file the official declaration or providing false information, or doing so in order to evade the proper calculation of the annual value, is punishable by fines, imprisonment, or both.

Liability when Using a Company

There are exemptions from the tax under the HLT. The most common is found under Section 10 and is applicable if the houses or condo is inhabited by either:

a) an agent (of the company) to protect the place; or

b) the owners thereof.

One might suppose that one or both of these exemptions must apply where the director of the company is the one staying in the house or condo. After all, isn’t it the director of a company legally obliged to protect the company’s property?

Unfortunately, however, in 2006 the Supreme Court did not concur with this reasoning (ruling no. 1410/2549). Instead, the Supreme Court held that an “agent to protect the place” requires that the agent be actually assigned to protect the building and not just allowed to live there. Thus, according to the Supreme Court a company 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, one might suppose that the other Section 10 exemption should apply to a company’s director. After all, isn’t the director basically the company itself with regard to interacting with third parties—in other words, isn’t the director staying in the building owned by the company the same thing as the owner of the building staying there itself? Unfortunately however in 2007 the Supreme Court said “no” (ruling no. 689/2550). The Supreme Court reasoned that a company can use a structure it owns as a registered address or in the course of its business and therefore it does not need its director to stay there. Moreover, said the Court, since the director is a distinct legal entity from the company, the director living in the building is not the same as the company living in the building. Therefore, the “owner” exemption provided under Section 10 of the HLT also does not apply to such a case.

Thus, if any company—whether Thai or off-shore—owns a house or condo in Thailand and someone, including the director, stays there even for one day, that company will be liable to pay HLT tax.

In closing, it should also be noted that the HLT tax is not the only tax applicable to such use of a building owned by a company. Rental income tax is also payable and assessable by the Revenue Department under the Revenue Code.

___________________________________________________________________________________

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

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Temporary reduction of Thai real estate transfer and mortgage registration fees: effective 29 October 2015 to 28 April 2016

The relevant details of the three regulations providing for the fee reductions are as follows:

1. UNREGULATED LAND AND BUILDINGS: Ministry of Interior Regulation Regarding Registration Fee under the Land Code for Housing (published in the Royal Gazette on 28 October 2015)

To boost sale and purchase of immovable property in Thailand, the Cabinet on 13 October 2015 has resolved to set registration fee under the Land Code for the transfer and mortgage of housing property as follows:

Clause 1: Registration fee for the transfer of residential: detached house; twin house; row house, and commercial building, and any of these buildings with land where the building is located and such land is NOT under Land Allocation Act or under any development by the government, and mortgage of the said transferred property, would be at the rate of 0.01%.

Clause 2: This regulation is effective from 29 October 2015 to 28 April 2016.

Note: 0.01% applies to:
– Transfer of any of these buildings;
– Transfer of any of these buildings + land that is not under Land Allocation Act or government’s land development;
– Mortgage of any of the above (if for example Mr. A receives a house by gift or inheritance then he mortgages, he will not get this reduced rate);
– Not applicable to raw land (that is not in the licensed development);
– Not applicable to land that is not the location of the building even though such extra land is transferred (and mortgaged) at the same time as the house + land.

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2. LAND AND BUILDINGS WITHIN A LICENSED DEVELOPMENT: Ministry of Interior Regulation Regarding Registration Fee under the Land Code for Immovable Property Licensed under the Land Allocation Act (published in the Royal Gazette on 28 October 2015)

To boost sale and purchase of immovable property in Thailand, the Cabinet on 13 October 2015 has resolved to set registration fee under the Land Code for the transfer and mortgage of immovable property that is in licensed development under the Land Allocation Act as follows:

Clause 1: Registration fee for the transfer of land, land and residential building: detached house; twin house; row house, and commercial building, under Land Allocation Act or under any development by the government, and mortgage of the said transferred property, would be at the rate of 0.01%.

Clause 2: This regulation is effective from 29 October 2015 to 28 April 2016.

Note: 0.01% applies to:
– Transfer of land only, or land and any of these buildings in the licensed development project or the government’s development project;
– Mortgage of any of the above (if for example Mr. A receives a developed raw land by gift or inheritance then he mortgages, he will not get this reduced rate);
– both first hand and resale.

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3. CONDOMINIUMS: Ministry of Interior Regulation Regarding Registration Fee under the Condominium Act (published in the Royal Gazette on 28 October 2015)

To boost sale and purchase of immovable property in Thailand, the Cabinet on 13 October 2015 has resolved to set registration fee under the Land Code for the transfer and mortgage of condominium unit(s) under the Condominium Act as follows:

Clause 1: Registration fee for the transfer of the following condominium unit under the Condominium Act and mortgage of such transferred unit, would be at the rate of 0.01%:
(1) Transfer, and mortgage of all units at once in any licensed condominium under the Condominium Act;
(2) Transfer, and mortgage of any condominium unit in any licensed condominium under the Condominium Act.

Clause 2: This regulation is effective from 29 October 2015 to 28 April 2016.

Note: 0.01% applies to:
– Transfer of the whole condominium building or individual unit;
– Mortgage of the above (if for example Mr. A receives a condominium unit by gift or inheritance then he mortgages, he will not get this reduced rate);
– both first hand and resale.

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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

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You Must Follow The Law When Building In Thailand . . . But There Are Exceptions

One of the most significant land use laws in Thailand is the Building Control Act (1979) (the “Act“). The Act regulates what and where can build in Thailand. To that end it empowers the Minister of the Interior to issue ministerial regulations (“MR“). These MR dictate:

-what the shape, size, and site of building can be;

-how far apart buildings must be;

-how much space can be built on;

-how close a building can be to a public road, the seaside, or other public place; and many others.

Each MR is generally effective within a specific geographic location, commonly within one of Thailand’s 77 provinces. But what if the MR that is effective where you want to build is either unclear as to whether you can build what you would like to or clearly prohibits it? Are you just out of luck and should forget such plans? Not necessarily.

Let’s look at the first situation. Say you want to build your dream house on your seaside plot of land but the relevant MR says: “Nothing may be built within 25 meters of the sea.” But the MR does not define where the “sea” begins. Your problem is you do not know exactly where the “sea” is. Is it the low tide line, the high tide line, perhaps the middle line between the two, or something else? You could just choose one of those and even get your building permit issued on the basis of your plans showing that your house will be “25 meters from the sea”. But if it turns out later you chose the wrong sea location, your house would be illegal (again even with the building permit issued) and could face demolition (as we have previously explained HERE). However, in such a case you could seek assistance from your relevant local government administration (“Local Administration“).

Section 10(1) of the Act allows a Local Administrations to issue a Consistent Bye-Law which further details any applicable MR as long as such bye-law is not contrary to the MR. A Consistent Bye-Law is effective once it is published in the Government Gazette. It can only be revoked or revised if the Minister, with advice from the Building Control Committee, later determines that in fact it is contrary to the relevant MR. Thus, if a building permit is issued under the Consistent Bye-Law while it is in effect, that building will be consider legally constructed.

Thus, returning to our hypothetical, say your Local Administration issued Consistent Bye-Law, which defined “sea” as “where the lowest tide line is”. You then applied for a building permit and built your dream house 25 meters from the lowest tide line. Later the Minister finds this Consistent Bye-Law to be contrary to the MR and orders it to be revoked. This would NOT affect the legality of your dream home.

Let’s look at the second situation, say your relevant MR clearly prohibits what you want to build. Staying with our hypothetical, say this time “sea” is defined as “25 meters from the highest natural tide line”. You want to build within 25 meters of the highest tide line, but more than 25 meters from a permanent sea wall that was recently erected to prevent erosion in that locality including in front of your property. The permanent sea wall well after the relevant MR was issued and clearly the “highest natural high tide line” is well past this manmade obstruction.

Section 10(2) of the Act allows a Local Administration to issue an Inconsistent Bye-Law, which is contrary to an applicable MR “owing to special necessity or special reasons for such locality.” An Inconsistent Bye-Law must first be submitted to the Building Control Committee, which has 60 days to approve or reject it. If the Building Control Committee does not act with 60 days the Inconsistent Bye-Law is considered approved and must then be sent to the Minister for consideration. If the Minister does not approve or reject it within 30 days, the Inconsistent Bye-Law is deemed approved by the Minister as well and will be effective upon publication in the Government Gazette. However, if the Minister, with advice from the Building Control Committee, later determines that the Inconsistent Bye-Law causes an excessive burden on the public or is a public health risk, the Minister may order the revocation or revision of the Inconsistent Bye-Law. But if a building permit is issued under and Inconsistent Bye-Law while it is effect, that building will be considered legally constructed.

Thus, in our second hypothetical, say your Local Administration were to have an Inconsistent Bye-Law approved perhaps due to the “special reason” in your locality that the permanent sea wall was there for the public good and since it is permanent its location was the highest point the tide would ever reach. You then obtain a building permit and build as planned less than 25 meters from the highest natural tide line but more than 25 meters from the manmade permanent sea wall. Your dream home would be legal regardless of whether or not that Inconsistent Bye-Law remains effective thereafter.

In closing it should be noted that the Act is not the only land use law to be considered in Thailand when deciding what and where to build. There are other laws to consider particularly those related to environmental protection and town and city planning. And, in fact, the Act itself stipulates that any bye-law whether “consistent” or “inconsistent”, as we have termed them, contrary to the law governing town and city planning will be superseded by the latter.

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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

 

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THE LEASE-MORTGAGE: The better way to protect investors and promote Thailand’s residential real estate market

 

Recent Thai court rulings which have held the so-called “collective leasehold” or “secured leasehold” (“Collective Lease”) to be void, have created quite a stir among Thai real estate developers and investors. This is because many developers who sell to foreign investors have been marketing and selling the Collective Lease for several years now in Thailand. Thus, the implications of these rulings could affect a significant segment of the real estate market in Thailand.

A long-term lease is a common means for a foreigner to invest in Thai real estate. This is due largely to the fact that Thai law, with some limited exceptions, prohibits foreign freehold ownership of real estate. However, under current Thai law, the maximum lease term is a mere 30 years. Thus, it has become rather common for developers, who are marketing to foreigners, to offer a long-term lease of 30 years with two additional successive 30-year term renewals.

Under Thai law, however, any such additional term is not an “extension” of the lease; rather it is merely a “renewal” of the lease. This means that the new term is essentially a new contract. The result is that if the owner of the property changes during the first lease term, the new owner will not be obliged to honor the renewal of the lease, even if the lessee has already pre- paid the original owner for the renewal term.

In an effort to address this insecurity, many developers offer the Collective Lease. They promise not only a lease but also acquisition of shares in a Thai limited company that owns the land that will be leased to the investor. Other investors in that same development would then do the same–lease their land and also become one of the owners of the land owning and land leasing Thai limited company. The idea is that eventually all of the investors in the development would “collectively” control the land owning and land leasing Thai company. Purportedly, this would then in turn ensure that the Thai company would renew all of the investors’ leases for the two successive 30-year terms—“guaranteeing” or “securing” the investors’ full 90 years.

We have already detailed in previous articles here and here why the Collective Lease does not achieve the security for the foreign real estate investors in Thailand that it advertises. Now added to that, we have the holdings of two Thai Trial Court and three Thai Appellate Court judges who have held the Collective Lease legally “void”, in other words, legally invalid. We have explained those rulings here. We wish to emphasize that this law firm does not agree with the legal holdings of these five judges. However, given that the Collective Lease fails to provide any real security and that Thai judges are not bound to agree with the legal opinions of this law firm, it is not surprising that real estate developers and investors in Thailand are looking for an alternative to truly secure real leasehold investments.

Any alternative must avoid the issues that might be created and which are not dealt with by the Collective Lease. It must address: (1) the risk that the lease may not be renewed for a second or third 30-year term, (2) the tax issues created by a lease renewal in light of the pre-payment for the commonly marketed 30+30+30 years lease; and (3) issues relating to the use of illegal Thai shareholding “nominees”. The only alternative that does all of this is what I will refer to here as the “Lease-Mortgage”. It is not only a simple structure; it reflects what is already actually happening in most of these common 30+30+30 year lease agreements in Thailand.

As alluded to above, these lease agreements are almost always “pre-paid” in full. However, the two additional 30-year renewal terms can only be granted and effected at the end of each prior 30-year term. Thus, the current landowner has merely promised he will give these additional terms to the lessee in the future, yet he has already received money for them. This is “money for nothing” in return or, legally speaking, a “loan”. Until such money is paid for something that is actually provided, under the law it is merely a loan. Thus, in all of these common structures where a single lease payment covers all 90 years, two-thirds of the payment is, from a legal standpoint, merely a loan. And what is the simplest and best way to secure loaned money? Do exactly what banks do — subject the loan to interest and register a mortgage against the land to secure the loan and applicable interest.

The Lease-Mortgage does exactly this and thereby simply provides the accurate legal structure for what is already happening as a practical matter (the lease for the first 30 years plus a loan for the next two 30 year terms) by adding what should happen in such cases (interest on the loan and a mortgage securing the loan for the next two 30 year terms) through the combination of: (1) the 30+30+30 year lease agreement with, (2) a loan and mortgage agreement. Once the agreements are finalized, the first 30-year lease term is registered on the land and a mortgage securing the loan of the rent for the two additional 30-year renewal terms is also registered on the same land.

If the lease is renewed, for the second 30 years, that portion of the loan is, again in non- technical language, “forgiven” because the parties agree that it then becomes rent for the second 30-year term. In other words, since the second term is actually provided at that time, it is no longer a loan but a rent payment — and the mortgage covering that portion of the loan is also then automatically removed from the land. The same would then hold true for the loan of the rent for the third 30-year term and the mortgage securing it.

However, if at the end of the first or second 30 years the lease is not renewed for any reason, then the investor will be able to immediately foreclose on the property, have it sold, and recoup his investment.

Let’s return to our points above.

(1) Does the Lease-Mortgage address the risk that the lease may not be renewed for a second or third 30-year term?

YES.

As outlined above, the investor’s prepaid investment and interest is secured by a registered mortgage on the land title deed. Thus, the investor’s security, the mortgage, “remains with the title deed” regardless of whether or not the land is ever transferred to a new owner. If the lease is not renewed as required, the investor may have the land sold and receive the sale price to cover his original investment and interest. However, even if the land were transferred, the more likely scenario would be that the new owner would be willing to honor the renewal term and await its end, rather than lose the land by a forced sale.

(2) Does the Lease-Mortgage address the tax issues created by a lease renewal in light of the pre-payment for the commonly marketed 30+30+30 year lease?

YES.

As explained above, the Lease-Mortgage reflects what is actually agreed upon between the parties: a total pre-payment for 90 years of lease, which shall be payment for three successive 30-year terms.

Under the Collective Lease, this is a major problem for the land owning and leasing Thai company. The Thai tax regimen will interpret full payment only for something actually provided. And as we explained, only the first 30-year lease term can be actually provided. Absent any other legal explanation for the payment, all of it will be considered income for that Thai land owning and leasing company for the first 30 years and it will all be taxed accordingly in the first 30 years. Thus, the Thai company will unfortunately have all of its lease income taxed 30 to 60 years in advance of when it should have been.

Furthermore, the Thai land owning and leasing company will not be able to account for income from the lease in the second and third 30-year terms. The Revenue Department will expect income for those later terms and may assess factious rental income and tax it; if not paid, the land will be seized and sold to a new owner. In such case, any lease renewal terms will be unenforceable.

However, none of this horror story is the case with the Lease-Mortgage.

The land owning and leasing company, the developer’s company, is not financially affected at all. It still receives the exact same amount as under the common pre-paid lease with two renewals. But under the Lease-Mortgage, the payment will be booked differently to accurately reflect the 1/3 rental income for the first 30-year term and the remaining 2/3 balance, as a loan. Loans are not taxed and, therefore, the Thai land owning and leasing company/developer thereby also benefits under the Lease- Mortgage structure by having (1) the rental income properly taxed over the correct 90- year period, as well as, (2) the liquidity of as yet untaxed loan cash available during the first and second 30-year terms.

(3) Does the Lease-Mortgage address the issues relating to the use of illegal Thai shareholding “nominees”?

YES.

A Thai company limited cannot own land and lease it if there are not at least two individual Thais who own shares directly or indirectly in that company. However, it is illegal for Thais to hold shares in a Thai company as “nominees” to benefit a foreigner. Thais cannot lawfully hold such shares “in name only” without actually having invested in that company. Unlike the Collective Lease, the Lease-Mortgage does not require an investor to risk using such Thai nominees because the Lease- Mortgage investor is not forced to become a part owner of any Thai company in order to purportedly secure his lease in Thailand. The Lease-Mortgage investor is, therefore, at no risk of losing his lease investment due to the use of any such Thai nominees.

Thus, the Lease-Mortgage is a much better alternative to the Collective Lease. Obviously, it is at best implemented in the beginning of a development before the first leases are entered into and that is the context in which we have discussed and detailed the Lease-Mortgage above.

However, it should be noted that existing developments and their investors may also benefit from the use of a mortgage as a security for the renewal of a lease. This is what we will refer to as a “Penalty-Mortgage”.

A Penalty-Mortgage can be implemented in an existing development to provide its investors with an additional layer of security in relation to the renewal of their leases. And it is quite easy to implement. The lessor and the lessee simply enter into a Penalty Agreement, which provides that lessor will be subject to a significant Thai Baht penalty in the event that the lease is not renewed as required under the lease agreement. That penalty is then secured with a registered mortgage on the leased land.

As with the Loan-Mortgage, the security provided to the investor by the Penalty-Mortgage also “travels with” the land title deed. Regardless of whether or not the land is ever transferred to a new owner, if the lease is not renewed as required, the investor may have the land sold. The investor is then entitled to receive the sales price to cover his original investment and interest as provided under the Penalty Agreement. However, even if the land were transferred, the more likely scenario would be that the new owner would be willing to honor the renewal term and await its end, rather than lose the land by a forced sale.

The simple elegance and accuracy of the Lease-Mortgage and Penalty-Mortgage provide uncomplicated security and enhanced resale value for investors, as well as, greater marketability and other financial benefits for developers.

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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

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