What the New Thai In­her­i­tance Tax Rules Mean to You

Thai-American Business (T-AB) Magazine - - Contents - Writ­ten by: Jonathan Blaine

Re­cently, the Thai re­for­ma­tion gov­ern­ment en­acted the long awaited Thai In­her­i­tance Tax Act and changes to the Thai Rev­enue Code re­gard­ing the tax­a­tion of gifts re­ceived by in­di­vid­u­als. The en­act­ment of th­ese laws was not with­out its con­tro­versy and they went through var­i­ous it­er­a­tions be­fore fi­nally be­ing adopted and pub­lished in the Royal Gazette. Th­ese new rules will have ef­fect from Fe­bru­ary 1, 2016 and will im­pact Thais and non- Thais alike de­pend­ing on the types of as­sets be­ing re­ceived and the sta­tus of the in­di­vid­ual re­cip­i­ent.

This ar­ti­cle will fo­cus on discussing the In­her­i­tance Tax ( IHT) rules. Th­ese rules are com­pared and con­trasted with the U. S. rules to show 1) the ba­sic con­cep­tual dif­fer­ences be­tween U. S. es­tate taxes and the Thai rules and 2) spe­cific prob­lem­atic points of which U. S. cit­i­zens and tax res­i­dents need to be mind­ful, namely the po­ten­tial for dou­ble tax­a­tion with­out re­lief. This ar­ti­cle is of course meant to be a gen­eral dis­cus­sion of th­ese rules and as al­ways, ad­vice must be sought from your tax ad­vi­sor re­gard­ing how th­ese rules will im­pact your in­di­vid­ual sit­u­a­tion.

THAI IN­HER­I­TANCE TAX

The new IHT rules are meant to serve as a means of decon­cen­trat­ing wealth and pro­mot­ing equal­ity in Thai so­ci­ety. As a means of tax­ing wealth upon the death of an in­di­vid­ual, the rules are de­signed in a man­ner whereby RE­CIP­I­ENTS of cer­tain cat­e­gories of as­sets through a be­quest are sub­ject to tax on the re­ceipt of the as­sets. This is in sharp con­trast to the U. S. es­tate tax sys­tem, wherein the in­di­vid­ual dece­dent’s es­tate is sub­ject to tax prior to as­sets be­ing dis­trib­uted to heirs. Un­der the Thai rules each re­cip­i­ent is li­able for any taxes due and also re­spon­si­ble for com­plet­ing rel­e­vant tax fil­ings. As this tax is re­cip­i­ent fo­cused, the na­tion­al­ity of the dece­dent is NOT rel­e­vant. What mat­ters un­der the Thai rules is:

1. the types of as­sets be­ing re­ceived;

2. the cat­e­go­riza­tion of the re­cip­i­ent as ei

ther “Thai” or for­eign for IHT pur­poses;

3. the lo­ca­tion of the as­sets be­ing re­ceived;

and

4. the re­la­tion­ship of the re­cip­i­ent to the

dece­dent.

As each of th­ese items is im­por­tant, each will be dis­cussed in turn here.

TYPES OF TAX­ABLE AS­SETS

Due to the dif­fi­culty in be­ing able to iden­tify and track var­i­ous types of as­sets, the new IHT rules ap­ply specif­i­cally to four cat­e­gories of as­sets re­ceived from a be­quest as th­ese types of prop­er­ties are nor­mally sub­ject to reg­is­tra­tion of some sort and their trans­fer from a dece­dent to an heir is sub­ject to some sort of for­mal reg­is­tra­tion of own­er­ship trans­fer. The as­sets sub­ject to in­her­i­tance tax are:

1. Im­mov­able property, in­clud­ing rights to

use property and the like;

2. Se­cu­ri­ties, such as com­pany shares

whether listed or un­listed, bonds, etc.;

3. Money in bank ac­counts or sim­i­lar types

of monies;

4. Reg­is­tered ve­hi­cles.

Again, as th­ese items nor­mally re­quire some sort of for­mal trans­fer of own­er­ship process, they are fairly easy to track and thus the IHT fo­cuses on tax­ing th­ese types of as­sets from the out­set. There is one ad­di­tional cat­e­gory of as­sets that will be­come tax­able at some point in the fu­ture and th­ese are “fi­nan­cial as­sets”. This par­tic­u­lar cat­e­gory of as­sets is meant to be a sort of “catch- all” and could in­clude items such as jew­elry, art­work and the like. The items fall­ing into this group will be iden­ti­fied ac­cord­ing to min­is­te­rial reg­u­la­tions to be is­sued at a fu­ture date but un­til such time as th­ese reg­u­la­tions are is­sued, only those as­sets listed in cat­e­gories 1 through 4 above are sub­ject to IHT when re­ceived by an heir.

THAIS V. NON- THAI PER­SONS UN­DER THE IHT

Once it is de­ter­mined that an in­di­vid­ual will re­ceive tax­able as­sets, the next im­por­tant is­sue to be de­ter­mined is whether the re­cipi- ent is con­sid­ered “Thai” un­der the IHT rules. This is im­por­tant be­cause a de­ter­mi­na­tion as to “Thai­ness” has an im­pact on which of th­ese as­sets will be sub­ject to tax in the hands of the re­cip­i­ent. For IHT pur­poses be­ing “Thai” means be­ing ei­ther 1) a Thai na­tional, 2) a Thai reg­is­tered com­pany, 3) a for­eign com­pany that is ma­jor­ity owned or con­trolled by Thais, or 4) a for­eign na­tional hav­ing been for­mally granted Thai res­i­dency sta­tus un­der Thai im­mi­gra­tion laws. All other per­sons are con­sid­ered non- Thai for IHT pur­poses. Each group is sub­ject to dif­fer­ent rules re­gard­ing which tax­able as­sets are ac­tu­ally taxed de­pend­ing on the lo­ca­tion of the as­sets at the time such as­sets are trans­ferred to the re­cip­i­ent’s own­er­ship.

AS­SETS LO­CATED IN­SIDE AND OUT­SIDE THAI­LAND

Once a re­cip­i­ent has de­ter­mined their par­tic­u­lar sta­tus as ei­ther Thai or non- Thai, they will next need to de­ter­mine the lo­ca­tion of the tax­able as­sets be­ing re­ceived. This is be­cause Thais are sub­ject to tax­a­tion on all tax­able as­sets re­ceived re­gard­less of where th­ese as­sets are lo­cated. This is of­ten re­ferred to as “world- wide as­set” ba­sis tax­a­tion. Non- Thais by con­trast are only sub­ject to IHT on those tax­able as­sets lo­cated in Thai­land.

Where an in­di­vid­ual hav­ing Thai na­tion­al­ity in­her­its tax­able as­sets lo­cated ei­ther in­side or out­side Thai­land, such in­di­vid­ual will be sub­ject to IHT on those as­sets re­gard­less of where the Thai is liv­ing. Where an in­di­vid­ual is not con­sid­ered a Thai for IHT pur­poses, that in­di­vid­ual is only sub­ject to IHT on tax­able as­sets con­sid­ered as lo­cated in Thai­land.

PER­SONAL EX­EMP­TION

Hav­ing de­ter­mined the scope and cor­re­spond­ing value of tax­able as­sets sub­ject to IHT, a re­cip­i­ent then re­duces the value of tax­able as­sets re­ceived by Baht 100 mil­lion as each re­cip­i­ent is per­mit­ted to re­ceive Baht 100 mil­lion in tax­able as­sets from a dece­dent with­out hav­ing to pay tax on that amount. This is known as a per­sonal ex­emp­tion. This is very dif­fer­ent from the U. S.

es­tate tax sys­tem whereby the ex­emp­tion from tax ( USD 5.4 mil­lion in 2015) is specif­i­cally lim­ited to the es­tate. Un­der the Thai IHT sys­tem, each re­cip­i­ent is ex­empt from tax on as­sets less than Baht 100 mil­lion. Ac­cord­ingly, IHT can eas­ily be avoided by sim­ply in­creas­ing the num­ber of re­cip­i­ents re­ceiv­ing as­sets from an in­di­vid­ual es­tate.

TAX RATES

Tax­able as­sets re­ceived in ex­cess of the in­di­vid­ual ex­emp­tion are then sub­ject to tax­a­tion at one of two rates, 5 per­cent where such as­sets are re­ceived from a lin­eal rel­a­tive ( i. e., a par­ent, grand­par­ent, a le­git­i­mate child, or other per­son up or down the fam­ily chain) or 10 per­cent when re­ceived from all oth­ers with the no­table ex­cep­tion of reg­is­tered spouses, as there is an ex­emp­tion from IHT for all as­sets re­ceived from a spouse, as long as the spouse is a legally rec­og­nized and reg­is­tered spouse.

Th­ese rates are rel­a­tively small as com­pared to say the U. S. rate of ap­prox­i­mately 40 per­cent. One im­por­tant point to be made here, due to the dif­fer­ence in tax­able per­son be­tween the Thai IHT and the U. S. es­tate tax sys­tem, dou­ble tax­a­tion can oc- cur with­out re­lief. This would hap­pen in the fol­low­ing cases:

1) A U. S. in­di­vid­ual own­ing a con­do­minium in Thai­land leaves this condo to a Thai in­di­vid­ual, say an un­reg­is­tered spouse.

• In this case the Thai in­di­vid­ual would be sub­ject to IHT on the value of the property in ex­cess of Baht 100 mil­lion, and

• As the Thai is not le­gal spouse would be sub­ject to 10 per­cent tax on the ex­cess value.

• Ad­di­tion­ally, as­sum­ing the U. S. in­di­vid­ual has an es­tate in ex­cess of USD 5.4 mil­lion, us­ing the 2015 ex­emp­tion, then the U. S. in­di­vid­ual’s es­tate would pay taxes at a rate of 40 per­cent on the value in ex­cess of this ex­emp­tion, as the heir is not a legally rec­og­nized spouse.

• As the Thai in­di­vid­ual and the U. S. es­tate are dif­fer­ent tax pay­ers, the IHT paid by the Thai re­cip­i­ent would not be cred­itable against any U. S. taxes owed by the es­tate, re­sult­ing in dou­ble tax­a­tion.

2) A Thai in­di­vid­ual ( not domi­ciled in the U. S.) own­ing a con­do­minium in the U. S. leaves this condo to his or her le­git­i­mate Thai child.

• In this case the Thai child would be sub­ject to IHT on the value of the property in ex­cess of Baht 100 mil­lion, and

• As the Thai is a le­git­i­mate child would be sub­ject to 5 per­cent tax on the ex­cess value.

• The Thai dece­dent’s es­tate would also be sub­ject to U. S. es­tate taxes on the value of the U. S. condo in ex­cess of USD 60,000.

• Again, as the tax pay­ers are not the same peo­ple, dou­ble tax will arise on the value of the condo in ex­cess of Baht 100 mil­lion ( USD 3 mil­lion).

As can be seen from th­ese sim­ple ex­am­ples, the com­bi­na­tion of IHT and U. S. or other es­tate tax rules can yield un­for­tu­nate out­comes. Ad­di­tion­ally, trust and es­tate plan­ning geared to­ward IHT may also need to be tai­lored to ac­com­mo­date other po­ten­tial es­tate taxes. Cau­tion is ad­vised and pro­fes­sional guidance should be sought in un­der­tak­ing any tax plan­ning as al­ways.

Jonathan Blaine is a Tax Con­sul­tant at Baker & Mcken­zie. He can be con­tacted at: Jonathan. Blaine@ bak­erm­cken­zie. com.

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