Tax Consideration on Capital Increase
The author addresses this development.
Capital is invested by shareholders to fund business operations, which are expected to turn a profit. At times, a company may opt to increase its capital to invest in another company, stage a takeover, or reduce interest costs driven by debt or a dependency on external creditors. Additional equity or an improved balance sheet structure by an increased debt to equity ratio are among other reasons for a capital increase.
Such capital increases are lawful if processes set out under the Civil and Commercial Code (CCC) are fulfilled. Funding from a capital increase compliant with the CCC has never been recognized as taxable income.
Capital increase which generates “income”
The Thai Revenue Department and the Tax Court, in recent years, have expressed doubt that share increases, both conventional increases and those with share premiums, are always intended to finance operations. For example, some companies increase their capital prior dissolution in order to avert insolvency or avoid reporting to the Stock Exchange of Thailand where insolvency is imminent. The Revenue Department, in such cases, required that share capital be included as income when the company calculates CIT, and despite the funds being injected through statutory capital increase processes.
Supreme Court & Revenue Department Rulings
A corporate taxpayer, in this particular case, increased its capital with a share premium. Such funds are generally treated as capital under Sections 1105 and 1202 of the CCC. However, the Court viewed, in this case, that such increase with a premium is intended to avoid taxable income as the funds were ultimately used to repay the company’s bank debt prior to dissolution. As the increased capital did not serve to continue the company’s business, authorities framed the share premium as a financial subsidy from shareholders.
Such share premium was, therefore, treated as taxable income. The company, hence, was required to include this income in its calculation of the net profits/losses. (Supreme Court Ruling No. 5812/2014)
The Revenue Department, in its Ruling Kor.Khor. 0702/3214, dated 12 June 2008, similarly determined that an issue of new shares with a share premium is usually not taxable income from the operation of the particular company’s business. However, where such increase does not follow statutory requirements or where the shares carry an exaggerated premium or are likely a disguise for a capital subsidy, then the portion of the share price in excess of fair price should be treated as taxable income of the company.
Non-Tax Deductible Expenses from Losses from Investment
Shareholders who participate in such capital increases may also suffer. The Revenue Department would bar such shareholders from treating the capital as tax deductible expenses where the shares are sold at a loss or where the shareholders receive returns of capital due to liquidation of the company in amounts lower than their investment.
The Revenue Department issues several rulings to affirm its position. For example, Revenue Department Ruling Letter No. Gor kor 0706/5694 dated 8 June 2007: Company A did not intend to purchase Company B’s shares in order to invest in Company B’s business; instead, its true intention was to use losses from the sale of such shares to be deducted as its own expense. Therefore, such expense, according to the court, is not a tax deductible expense, as it was not incurred for the purpose of making profits or for the business under Section 65 Ter (13) of the Revenue code. Such treatment resulted in Company A being barred from using the loss from the share sale as a deductible expense in the calculation of CIT.
The author, personally, does not agree with the Revenue Department’s view that capital increases to repay debt or liquidate without a costly bankruptcy are taxable income. This is, particularly where the capital increase was properly executed with the genuine intent of the shareholders and according to CCC processes. After all, the new capital is used to repay debts that the original capital incurred from doing business.
The Revenue Department could inadvertently discourage responsible, ethical companies from repaying debt and create a culture of non-performing debt. In any case, companies should be mindful of the possible tax consequences of their capital increases. Companies in Thailand must increase their capital with care.