Offering properties for “sale” to foreigners under a long term registered lease is becoming the norm for new developments in resort areas. Even condo developments limited to offering 51% of their freehold capacity to foreigners may offer the remaining units to foreigners on a long term leasehold.

If however you are considering purchasing a resale villa from another foreigner, you may very well find that it was purchased as a freehold property. As it is not possible for the foreigner to own the land, it would have been acquired in a Thai company in which he has a minority shareholding and Thai shareholders own at least 51% of the share capital and make up the majority of shareholders in number.

Sale structuring

In the current uncertain climate surrounding the interpretation and enforcement of Thailand’s land ownership and foreign investment laws, resales of these types of properties will most likely be structured as a sale of the owner’s Thai company. This way, transferring ownership of the company avoids the scrutiny of the authorities that a freehold sale of the property would otherwise attract which could prevent the sale going through.

The current owner will therefore end up selling his interests in the Thai company i.e. the company’s shares and any debt financing, rather than the property itself. In the past, a buyer may have preferred to start with a fresh Thai company rather than buy into an existing company and its history but these days this is less of an option for many foreign buyers.

Tax considerations

It can end up being very tax effective for a foreign owner to sell his company on to the next foreign owner. A sale of real estate attract a number of transfer taxes when a transfer is registered at the Land Department office and the gain made from the sale will be subject to corporate income tax of up to 30% and the payment of any gains out of the company in the form of a dividend will attract another 10% tax. It quickly becomes apparent to a seller that the sale of the corporate structure is the best exit strategy, as well as being probably the only viable route in most cases for foreign buyers.

One issue the new owner will face is that the Thai company will continue to record the value of the property in its books at the property’s original cost price and not the value that the new owner has paid. As a result, when the new owner comes to sell the property in the future he too will likely prefer selling the company on as well, otherwise a sale of the property out of the company will mean he ends up making a taxable gain that is equal to the real gain made by him plus the gain made by the owner before him.

The tax on the unrealised capital gain inherited from the seller may not necessarily be a problem in the future, if the current legal environment concerning foreign ownership persists and the sale of the company remains the most practical option. It is an important issue to be aware of however when taking over a company, especially if the property has been held for some time and it has appreciated considerably since it was first purchased. It is of course possible to record a revaluation of the property in the accounting records to reflect the current price paid for the property but this has no affect on the cost base for tax purposes.

Price considerations

The taxes saved by the seller needs to be appreciated early on by the buyer in the sales negotiations. Knowledge of this should give the buyer the ability to negotiate a price that takes into account the Thai tax savings that the seller will achieve from the sale, potentially at the expense of the buyer because of the unrealised taxable gain in the company that he inherits, so that both parties effectively end up sharing in the tax benefits of the share sale.

Taking over the Thai company owning the property will require the usual legal, financial and tax due diligence to understand what exactly the new owner is buying into and whether or not there are any potential liabilities or material issues that might pass over to the new owner. On the tax side for example, if the property has been used as a holiday home by the current owner, he should have been paying some rent to the company – there may otherwise be under declared income for tax purposes. Also the payment of house and land tax of 12.5% on the rental value of the property – payable regardless of whether rents have in fact been paid – should also be reviewed.

Leasehold option

A new owner may consider registering a lease over the property for the maximum term of 30 years to secure his rights to possess the property in the long term. This does not mean he ends up paying for the property twice – the rental can be payable on an annual basis over the lease term and will in many ways be akin to paying rent to himself.

Holding a leasehold interest in the property can then put the new owner in a position similar to many of the leasehold developments on offer – bearing in mind that many of the new developments offered as leasehold may also face the same freehold land ownership issues in the end.