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Share Premium Come to The End
17 February 2016
Normally, share premium is a part of shareholders’ equity in the balance sheet but not part of the profit and loss accounts for accounting purposes. However, the share premium, in view of the Thai Revenue Department (TRD) and the Thai Supreme Court in case of Siam Electro Chemical, is deemed taxable income. Therefore, we, Siam City Law Offices Limited (SCL), have looked into the development of anti-tax avoidance schemes in the hands of Thai tax authorities.
Tax planning by share premium
When the share price is subscribed over the par value, it will be the share premium for corporate law purposes and it is regarded as part of shareholders’ equity. In the past, share premiums were used for tax planning in relation to the corporate restructuring of deficit companies instead of an intra-company loan from the parent company. In addition, share premium is also a way to reduce the risk of foreign business restriction after capital increase and to reduce the government fee for corporate registration.
Share premium and subsidy
In the case of Siam Electro Chemical, which is a Thai subsidiary of Oxydental Chemical Corporation (US entity), the subsidiary company was in deficit with huge losses and became insolvent. The US parent company of the subsidy injected funds into its business in order to improve their financial status prior to liquidation of the subsidiary. The financial injection is supported by a capital increase and has been made by way of a huge share premium and no taxable income declared.
Tax authorities’ attacks
The TRD in this case argued that the substance of the share premium is not equity financing for the corporate perspective; rather, it is deemed a subsidy. Therefore, subsidised fund is regarded as ‘taxable income’ in view of the TRD.
The Central Tax Court ruled on this case in late 2011 and the Thai Supreme Court held such ruling in 2014 (published in 2015) on the same decision; that the substance of a huge share premium was not used for “economic purposes” when considering the high negative value of shares and the company. The court then held said decision on the facts of the case; that the (legal) form of share premium is not permissible and the substance of subsidy shall be applicable for tax purposes.
Thai tax authorities adopted a ‘substance over form’ rule to attack corporate finance transactions which are considered tax avoidance with abused tax planning in many cases. It is interesting to note that most taxpayers in such cases are MNCs with complicated arrangements involving a large amount of transactions. Care should be taken on this development of tax interpretation and we should be aware of any gaps between the tax net narrowing down.
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