From a tax perspective, this will require consideration of the tax laws in Thailand as well as the tax laws in the owner’s home jurisdiction and an analysis of the impact on the investment returns after tax if an offshore company is interposed between the owner and the property.
An important tax issue to consider is the taxes payable on rental income.
Taxes on rental income
Foreign individuals will be subject to Thai personal income tax on rental income generated from real estate situated in Thailand.
In most cases, 15% withholding tax will be deducted from rental receipts paid to foreign individuals that are not tax residents of Thailand.
The tax withheld is not a final tax. On the other hand, if the property is held in a foreign company’s name and the rents are similarly taxed at 15% at source, the withholding tax is considered a final non-refundable tax payment for the company.
How to pay less than 15% tax
A foreign property owner residing outside Thailand could actually end up paying much less than 15% tax in Thailand if he has purchased the property in his own name.
For a foreigner to pay less than 15% tax on rental income, the first step will be to file personal income tax returns with the Thai Revenue Department to declare the rental income. The withholding tax deducted from rents can then be used as a tax credit to offset the tax payable on the return. The reward for filing a tax return is that the taxpayer can then request a refund of surplus withholding tax credits from the Thai Revenue Department.
Preparing and filing a personal income tax return in Thailand is not a difficult exercise. Rental income is normally assessed on a cash basis and should be easily determined from the property manager’s rental reports.
A property owner is allowed a standard deduction of 30% against rental income, no questions asked. A personal taxpayer does have the option of claiming the actual expenses incurred in deriving the rental income which are necessary and reasonable, but the expenses claimed must be supported by documentary evidence, which may very well need to be furnished for audit before the tax refund is approved.
A personal taxpayer can earn net income up to Baht 150,000 (approx. USD 4,500) in a tax year and not pay income tax in Thailand. Unlike some countries that seek to tax foreigners at higher rates or deny them the tax free threshold, the tax scales for residents and non-residents are the same in Thailand.
Individuals are liable to personal income tax in Thailand on their net income, after deduction of expenses and allowances, at the following rates:
|Net taxable income(Baht)||Marginal rate|
|1 – 150,000||0%|
|More than 4,000,000||37%|
As the rates of tax are greater than 15% for net income over Baht 500,000 (approx USD 15,000), there will come a point where the tax payable will be greater than the withholding tax credits.
By my reckoning, the property would need to be generating around USD 90,000 per annum in gross rentals before it came to the point where the withholding tax credits would not be enough to cover the income tax payable when the personal income tax return is filed.
The benefit of filing a tax return is best illustrated by an example. Let’s take the case where a property generates gross rental income of Baht 1,000,000.00 (approx USD 30,000) for the tax year. The following tax calculation for a typical property owner illustrates the potential tax refundable in this case.
|Taxable net income||Thai Baht|
|Gross rental income||1,000,000.00|
|Less: rental expenses (30% standard deduction)||(300,000.00)|
|Less: taxpayer allowance||(30,000.00)|
|Total deductions and allowances||(330,000.00)|
|Tax payable on net income||69,000.00|
|Less: withholding tax credits (15% of gross rental income)||(150,000.00)|
|Tax payable (refundable)||(81,000.00)|
The tax payable in this case is equal to 6.9% of the gross rental income, resulting in more than half of the withholding tax deducted from rents during the year being refundable.
The figures speak for themselves and clearly demonstrate one distinct tax advantage for foreigners owning Thai rental properties in their own name.
Source – BDO Advisory Board