OUR LAW TALKS 2021

Digital Asset

Written by Mr. Monchai Varatthan
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Business operators and individual investors are showing a spiking interest in digital assets as alternatives to traditional investments. In response to this trend, Thailand’s Securities and Exchange Commission (“SEC”) introduced a real-estate backed initial coin offering, an addition to the current laws, to allow business operators to procure funds for investment.

Regulated Digital Asset Activities

Government issued the Digital Asset Emergency Decree in 2018 to govern digital asset businesses and enable the SEC greater control of this new sector. The SEC now regulates both digital tokens offers (known as “initial coin offering” or “ICOs”) and activities under the Decree labelled digital asset businesses.

Digital tokens and cryptocurrency, issued and transferred using block-chain technology, are distinguished as follows:

1. Digital tokens are electronic data units created the “investment token” or “utility token” with the right to acquire products and services or other rights. The tokens are generally issued via initial coin offers (ICOs), similar to IPOs, but using block-chain technology.

The issuer will determine the rights of token-holding investors, e.g. share of profits from projects (investment tokens), or the right to acquire specific products or services (utility tokens) via block-chain technology under a so-called smart contract.
The legal status and integrity of ICOs and tokens is not clear, as neither meets criteria as an asset or a debt. Tokens carry various right rights, benefits, and conditions, but the owner does not - unlike shareholders of an issuing company.

2. Cryptocurrency is an electronic data unit created to primarily serve as a “medium” for exchanging goods, services, other digital assets. The familiar cryptocurrencies are Bitcoin, Ethereum, Ripple, etc. Cryptocurrency is not “money” under Thai law and cannot be used to lawfully pay off debts. Cryptocurrencies are popular, however, for their use to trade products and services with suppliers (familiar with Tesla?) and their ability to be traded for capital gain.

The Digital Assets Emergency Decree 2018 and the SEC regulate ICOs digital asset businesses as follows:

1. ICO

A company that wishes to host an ICO must first obtain approval from the SEC. The issuer, according to SEC qualifications, must:
  • be a private or public limited company;
  • offer tokens through an SEC-approved ICO portal (analogous to IPO underwriter); and
  • create and offer an investment prospectus.
Investors must also meet qualifications under the digital asset law.

2. Digital Asset Businesses

The Digital Asset Emergency Decree 2018, as mentioned earlier, also regulates certain digital asset businesses, e.g. digital asset exchange centers, digital asset brokers, digital asset dealer, as well as other businesses, under other laws, that trade and exchange of tokens and cryptocurrencies in secondary markets, e.g. custodian digital wallets, digital asset advisory, etc.

3. Real-Estate Backed ICO

SEC regulations to protect the rights of investors in real estate-backed initial coin offering (“ICO”) came into effect just this year. The underlying estates are, for example, real estate, shares of companies owning real estate and leasehold right.

Under the regulation, the token issuer can use underlying assets to back the issuance of the tokens, but with certain conditions, e.g. the assets must be 100% completed and free from or dispute, the value for investment must not be less than 80% of the total project or not less than Baht 500 million, among other requirements.

The token issuer would offer tokens to investors to raise funds to buy the revenue stream under a revenue sales and transfer agreement from a lessor who leases real estate. Token investors would receive returns of 4-8% depending on types of the tokens and risk profiles, the majority of which come from lease fees.

Investors have noted that Real-estate backed ICOs are now more similar to Real Estate Investment Trusts (or “REITs”).

The SEC, as of this writing, has received an application for SIRIHUB, a real-estate backed ICO worth Baht 2.4 billion.

Taxation: Individual & Corporate

In 2018, the Revenue Department also issued new tax laws to cope with income from digital assets. Specifically, the authority determined two new types of income under the Revenue Code, i.e. profit sharing (or other benefits from holding digital tokens) and capital gains from transfers of cryptocurrency and digital tokens. Both individual and corporate taxpayer who earn these income must pay income tax on these new forms of income.
Individual taxpayers must deduct 15% withholding tax from the income, and then include such income in their annual income to calculate annual personal income tax.

As of this writing the Revenue Department has not enabled any deduction or allowance for this type of income. And, unlike interest or dividend income, the 15% withholding tax is not final as it would be subject to a final tax of 5%-35%. Further, at present, such income is not tax exempt like capital gains from the trade of securities on the Stock Exchange of Thailand.

Corporate taxpayers are also required to include this income in its calculation of net profits/losses and corporate income tax, and pay tax at 20% of net profits.

Currently, the income from digital asset is not to be treated as a sale of goods or provision of services. Hence, it remains exempt from value added tax (VAT).

Author’s Note:

Digital assets are a new breed of assets that business operators and start-ups can use to raise capital. The issuer can effect an ICO without any performance track record which, unlike an IPO, making it faster to raise funds.

However, all operators must obtain SEC approval before their ICO and fully comply with its regulations and conditions. Civil and criminal sanctions may otherwise ensue.

Those who wish to engage in digital asset transaction, particularly ICOs, are also urged to be mindful of other related laws, e.g. those governing consumer protection, e-signatures, electronic transactions, and money laundering, among others. Digital asset issuers, holders, and investors must also be aware of their duty to correctly pay income tax to avoid any back taxes.