What the New Thai Inheritance Tax Rules Mean to You
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;
4. the relationship of the recipient to the
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
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.
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.
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.