Real Estate Companies in Thailand, Accounting and Tax Challenges

Introduction

Thailand’s real estate market has been on an upward trend, attracting both domestic and foreign investors. From high end, luxury villas to state of the art skyscrapers, Thailand offers every type of real estate opportunities for investors. However, managing the financial aspects of a company owning real estate assets in Thailand can be a complex undertaking. Real estate accounting in Thailand requires a comprehensive understanding of the mandatory accounting practices, tax regulations, and reporting requirements. 

What are the Accounting Requirements for Real Estate Companies in Thailand?

Real estate companies in Thailand or companies holding real estate assets are subject to the same accounting and tax filing rules as other commercial entities. Even if a real estate company has few or no transactions, it must adhere to the same requirements as operating commercial companies. Such as Withholding tax filings, half year and annual corporate income tax filings, AGM and the annual audit etc.

Additionally, there are specific considerations due to the nature of real estate that are often overlooked.

Asset Booking and Depreciation

When a real estate company acquires property, it is mandatory to properly book the assets in the company’s accounts. The land and buildings should be recorded separately, and if there are multiple plots or buildings identified by multiple building permits, each property’s value should be easily distinguishable.

Depreciation is another important aspect to consider when booking buildings. Unlike land, buildings are subject to wear and tear, and their value is expected to decrease over time. In Thailand, the depreciation rate for permanent buildings is 5% per year, while temporary buildings can be fully depreciated upfront.

In certain situations, companies may be eligible for an accelerated depreciation rates, if the following conditions are satisfied: 

1. Total fixed assets value ≤ ฿200 million (excluding land)
2. ≤ 200 employees

Avoiding Undervaluing Assets

A common practice is to undervalue assets to reduce transfer fees when purchasing real estate. However, this practice can have unforeseen consequences, such as higher tax liabilities when selling the property. If assets are booked at an undervalued amount, the gains made upon resale may be subject to additional taxes, as the plus value will be calculated based on the difference between the resale price and the value recorded in the books.

Enregistrement à la TVA

Real estate companies whose sole purpose is to hold real estate and do not plan to hire foreign employees may choose not to register for Value-Added Tax (VAT). However, if the company annual turnover meets the ฿1.8 million threshold or plans to hire foreign employees, VAT registration is required. 

It is essential to note that once a company is registered for VAT, monthly submissions to the VAT office become mandatory, increasing accounting workload.

Business Activities and Company Purpose

As Thailand does not have a statute for dormant companies, companies should have a minimum level of activity. However, if the company’s sole purpose is to hold real estate with the intention of eventually selling the shares (which may likely result in less tax liability than transferring out the assets as there is no need to pay the transfer fee at the Land Office), it is advisable to avoid any risky commercial activities. During due diligence processes, potential buyers will scrutinise the company’s activities, employees, signed contracts, and agreements, and the presence of such activities may raise concerns about unforeseen liabilities.

Companies should also be able to demonstrate that it is operating for profit and a minimum level of activity is required to show the company is made for profit and truly operating. Such activity can include booking accounting and auditing fees, as well as maintenance fees. These expenses serve as evidence of the company’s operations and can be also deducted from taxable income. 

Additionally, generating some revenue (such as from leasing the company’s assets) allows the company to pay dividends to shareholders to justify the economic interest of the company.

Nominee Shareholder Risks

While it is not the duty of the accountant to verify the legitimacy of shareholders, there is a risk for companies owning real estate with foreign shareholders to be investigated for using Thai nominee shareholders. If the Thai shareholders did not invest in the company to pay for their shares and do not receive dividends, they will likely be considered a nominee shareholders in the event of an investigation. This is why it is important for the company to generate income and pay dividends to its shareholders like any normal company having a business activity. 

What Income can be generated by a Real Estate Company?

Real estate companies or companies holding real estate assets can generate income in a few key ways. If the properties owned, such as a house or villa in Koh Samui, is being used by the foreign director or being rented out to tenants or guests, the rental income should be recorded by the company. This rental revenue allows the company to demonstrate an active business purpose and revenue stream. 

Furthermore, this income can be offset by correctly booking the invoices related to maintaining the villa (cleaning, refurbishments, furniture etc.). These invoices can be used as deductible expenses, further deducting the tax liability of the company.

What Expenses Can be Generated By Real Estate Companies?

For companies holding properties like villas or houses, there will be ongoing maintenance costs for cleaning, refurbishments, furniture, electricity, and other upkeep. The invoices for these property maintenance expenses should be properly booked by the accountant.

Additionally, booking monthly accounting and auditing fees are also likely tax-deductible expenses. 

Real estate companies and companies holding real estate assets should make an effort to record all reasonable business expenses, as this documentation demonstrates an active operating purpose and can be used to offset rental income or other revenue when calculating corporate income tax liability.

What are the Corporate Income Tax (CIT) Rates for Real Estate Companies?

Real estate companies are subject to the same CIT regulations as other companies, with a few additional considerations. If the company is registered for VAT, monthly VAT submissions are required. If the company issues invoices or pays service providers in Thailand, a 3% withholding tax (WHT) must be paid, and WHT certificates must be filed on a monthly basis. For more information about WHT please see here.

Companies with an annual turnover of less than ฿30 million and a registered capital of less than ฿5 million may be eligible for the SME reduced CIT rates. These rates range from: 

• 0% for net profits up to ฿300,000
• 5% for net profits between ฿300,001 and ฿3 million, and 
• 20% for net profits exceeding ฿3 million. 

Companies that do not meet these criteria are subject to the standard 20% CIT rate.

Do Real Estate Companies Need to Pay Land and Building Tax?

In 2019, Thailand introduced a Land and Building Tax to promote proper land usage and discourage land hoarding and empty and unused land. This tax applies to both land and buildings, including agricultural land, residential properties, and properties used for other purposes, as well as empty or unused land and buildings.

The tax is calculated based on the assessed value of the property, as determined by government authorities. The maximum tax rates vary depending on the property’s purpose, with agricultural land being taxed at 0.15%, residential properties at 0.3%, properties for other uses at 1.2%, and empty or unused properties at 1.2%. 

For properties left empty or unused for more than three consecutive years, an additional 0.3% rate is applied every three years, up to a maximum of 3%.

What are some Common Mistakes and the Importance of Proper Accounting for Real Estate Companies?

Real estate companies often prioritise minimising accounting costs due to the perceived lack of transactions.  We have seen cases especially in island areas where  local accountants merely prepare the balance sheet without asking for any supporting documents (invoices, bank statements etc.) to be provided. The failure to properly execute the accounts resulted in a discrepancy between the company’s real financial situations and audited financial statements.

Proper accounting practices can provide significant benefits. Booking monthly accounting fees and maintaining regular invoices for maintenance or other expenses can be deducted from taxable income. Additionally, these activities, along with bank statements showing regular transactions and dividend payments, help demonstrate the company’s legitimacy and mitigate potential risks during due diligence processes.

Failure to reconcile accounts properly or neglecting to account for undervalued assets can lead to potential tax risks and liabilities. If assets are undervalued at the time of purchase, the company may face higher tax rates (up to 20%) on the gains made upon the transfer or sale of those assets.

When closing a real estate company, it is important to ensure that all accounts are properly reconciled, audits are completed, and taxes are paid. This process can take approximately six months, and the remaining directors cannot resign until these steps are completed, as they remain liable for the company’s obligations.

What are the Risks of Not Properly Completing Accounting and Tax Filings?

Failing to properly complete accounting and tax filings for a company carries significant risks. For example, improper accounting could have a serious effect on the following:

Liability of Directors

Directors can be held personally liable, facing potential fines and even jail time for improper accounting and the company failing to complete their mandatory compliance regulations. 

Investigations into Nominee Shareholders

If there is an investigation into the suspected use of nominee shareholders, not having proper accounting documentation such as proof of dividend payments opens the door to investigations and penalties. Shareholders could be fined, jailed, or even have assets seized in such a situation. 

Selling the Company

During the sale of a real estate company through a share transfer (the quickest and easiest way), inadequate accounts discovered during due diligence could threaten the entire deal. If the shares cannot be sold due to due diligence issues, the company may have no other choice than to transfer the assets out of the company which is subject to tax. Furthermore, if the accountant had undervalued those assets, artificially deflating valuations and leading to an artificial prevalue, the transaction would be subject to higher taxes (of up to 20% corporate income tax on the sale and tax on dividends used to distribute the income to the shareholders) 

If a real estate company has transferred their assets out of the company, in most cases there will be no reason for the company to remain active, it would require formal dissolution, a process taking at least 6 months. The process for dissolution has a lot of time consuming steps including settling all debts, accounting, and paying any outstanding taxes.

What are the Documents to Check to Ensure the Accounting for a Real Estate Company has Been Done Properly?

To ensure proper accounting for a real estate company, it is essential to review several key documents. 

First, the accountant must receive all invoices issued for expenses on a monthly basis to accurately record transactions. 

Additionally, withholding tax (WHT) certificates should be filed and maintained as required. 

Requesting copies of previous financial statements and analysing the balance sheets can provide insight into the historical accounting practices and provide information about whether the companies accounting is in good order, for example are the assets properly valued and booked. 

If you would like to check whether your accounts for a real estate company or company holding real estate are in order and have been prepared properly, please feel free to contact our experts.

What are Annual Duties of a Company?

Companies in Thailand have several mandatory compliance requirements that they must complete each year. These requirements include:

At a minimum, corporate income tax returns must be filed half yearly and at the end of the financial year, typically on December 31st. 

Companies are then required to close their accounts at the end of the financial year  and prepare their annual financial statements. These financial statements must be audited by an independent Thai auditor.

Once the audit has been completed, the company must hold its annual shareholder meetings to review the statements and approve the audit. Once the audit has been approved by the shareholders meeting, it must be filed and registered with the Ministry of Commerce.

Notre réflexions

Having proper accounting is important to protect assets in the long term and avoid higher tax and penalties. Accurate bookkeeping and compliance to accounting regulations ensure an accurate valuation of properties and other assets on the company’s books. This protects the company against potential undervaluation which could lead to higher taxes owed upon the sale or transfer of those assets down the line. Comprehensive accounting records also provide complete documentation during audits, investigations into allegations like nominee shareholding, or due diligence for company sales – helping to avoid fines, seizure of assets, or even criminal liability for directors. By prioritising accounting best practices, real estate companies can maintain compliance, minimise tax exposure, and safeguard their asset holdings for the long-term future of the business.