Opinion and Analysis
Tax issues when buying overseas homes
by Paul Ashburn
Tax issues to consider when purchasing overseas property
The tourist high season will often see some visitors to the Kingdom tempted into making a more permanent connection with Thailand.
If you are considering the purchase of a holiday home in Thailand, here are some tax pointers to help you on your way.
Probably the most straight forward type of purchase for foreigners: several taxes and fees apply when the transfer of ownership of a condominium is registered at the land department.
At the moment the transfer registration fee, normally 2 percent, and specific business tax rate, normally 3.3 percent, have been reduced to negligible amounts for condominium purchases in order to stimulate the real estate sector.
Buyers need to be aware that developments that will not be completed and transferred into their name by March 28, 2010, as they will not be eligible for the reduced rates unless the tax measures are extended.
Buyers should take into account the tax impact if the normal rates will apply. How much of an impact it will have will depend on whether the developer has included clauses in the sales contract that effectively shifts all or some of their tax liabilities to the buyer.
Buyers may wish to compare the terms of their sales contract regarding tax liabilities with the standard condominium sale and purchase contract drafted by the Consumer Protection Office.
Properties on lease
Foreigners may find that when they start looking into the legal details of purchasing a property in Thailand that they cannot become the owner of the property because of certain legal restrictions on foreign ownership.
In such situations a long-term lease of the property may be offered instead. The taxes payable on a long-term lease agreement are quite straightforward and less complicated than a direct sale. In most cases only stamp duty and lease registration fees totaling 1.1 percent will be payable at the Land Department. Leases of land and buildings do not attract VAT and so VAT should not be added to the rents charged. VAT may come into play, however, if the lease covers fixtures and fittings.
Under the law you will find that the lessor is liable for the stamp duty, whereas the registration fee should be borne by parties equally. The parties can agree otherwise and I have seen many contracts offered by lessors that make the lessee responsible for the duties and fees. Armed with a little knowledge of the law, the lessee may be able to negotiate this point to lower their acquisition costs.
Tax efficient ownership structure
Generally speaking, a foreign purchaser may consider purchasing the property in his own name or that of a foreign company.
On acquisition, the taxes payable are likely to be the same. If the property is rented out however, then the level of taxes payable on the rents received can differ depending on whether the property is owned by a foreign individual or company. Individual ownership may allow you to claim tax exemptions or claw back some of the taxes that apply whilst foreign company ownership does not.
Tax planning at the time of acquisition should take into account the exit strategy and the mitigation of taxes payable on the eventual sale of the property. Owning freehold property in your own name will allow you to take advantage of the special personal income tax treatment afforded to the sale of real estate.
For personal income taxpayers, the gain will be calculated based on the official appraised price of the property – the amount actually received on sale is not relevant in computing the tax payable on the gain. It is not unusual to find that the official appraised price of a property is lower than the current market value.
Individual ownership is the simplest way to hold the property and can have interesting Thai tax advantages for freehold owners. Foreign buyers should however also consider the tax laws in their home country when analysing the tax implications.
Some developments, particularly those in resort areas, offer rental schemes as part of the package, including guaranteed rental returns.
Some taxes to consider when working out how much of the rent goes to the taxman include:
7 percentVAT may need to be added to rentals, including short term rentals where the property is being operated as or similar to a hotel or serviced apartment.
12.5 percent of the rental value of a commercial property is required to be paid every year to the local authorities in the form of land and house tax.
15 percent withholding tax applies to rents paid to non-resident individuals and foreign companies not carrying on business in Thailand.
Being part of a rental pool should make a property owner a ´soft target´ for a tax audit. Records of the rents received by owners are maintained in Thailand by the rental pool manager. It is important that owners and property managers alike understand and comply with the tax laws if they are to avoid nasty surprises when the taxman eventually pays a visit.
Paul Ashburn is a senior partner of BDO Richfield Advisory Limited, a firm specialising in providing tax services to international clients in Thailand. BDO has compiled a collection of articles in Property Report over the years. Please contact Paul Ashburn by email at email@example.com for your free copy.
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