Tax Implications on a Decrease of the Capital Holdings and Paying Back to Shareholders

A decrease of the capital holdings is one of the important tools to solve the problems of accumulated loss in an account in order to improve the financial status of a business. In addition, the decrease of capital holdings also causes significant changes in financial ratios, such as Return of Equity (ROE), Equity on Asset (EOA) and Total Asset Turnover, because any changes of the amount of capital holdings under the process of decreasing capital holdings must be performed in accordance with the rules prescribed by the Thai Civil and Commercial Code; which is a special resolution issued by a shareholders meeting.

The shareholders in a company that decreases the capital holdings may be both natural persons and juristic persons, or merely natural persons. In this article, we focus only on the impact of shareholders who are natural persons.

• 1. Regarding the decreasing capital when there is an accumulated loss and no reserve appearing in the financial statements, even after the decrease of capital is paid back to the shareholders, the money paid back to the shareholders is not considered as taxable income.
• 2. Regarding the decreasing of capital when there is an accumulated loss but there is a reserve appearing in the financial statement, when the decrease of capital is paid back to the shareholders, it will be regarded as income but only in the amount paid not exceeding the total amount of profits and reserves according to Section 40 (4) (d) of the Revenue Code, as follows:

“Section 40 Assessable income is income of the following categories including any amount of tax paid by the payer of income or by any other person on behalf of a taxpayer.

(4) Income that is:

(d) a decrease of the capital holdings in a company or juristic partnership which does not exceed the total amounts of profits and reserves”

Example: The company has accumulated loss of Baht 4,000,000 and it has reserves in the account of Baht 1,000,000. The company decreases its capital at the value of Baht 5,000,000 in order to clear the accumulated loss and pay back Baht 1,000,000 to shareholders. The Baht 1,000,000 refunded to the shareholders is regarded as taxable income under Section 40 (4) (d) of the Revenue Code. The paying company is obliged to withhold tax on shareholders as follows:

• 1. In case of shareholders who are natural persons residing in Thailand, the payer is obliged to withhold tax at the income tax rate (progressive rate) under Section 50 (2) of the Revenue Code; and
• 2. In case of shareholders who are natural persons but not residing in Thailand, the payer is obliged to withhold tax at the rate of 15% under Section 50 (2) (a) of the Revenue Code.

The Ruling of the Revenue Department No. Kor.Khor 0702/3969 dated 25 May B.E. 2552 (2009) stipulates on Personal Income Tax in the case of income received from a decrease of capital holdings, which  this Ruling consists of 2 companies as follows:

1. Company B

Mr. A held 100,000 shares in Company B with a par value of Baht 10 per share, with a total value of Baht 1,000,000 and a purchase price of Baht 71.50 per share. Later, Company B registered for a decrease of capital holdings and paid back the decreased capital to Mr. A on 3 November 2005 of Baht 8,000,000 and withheld tax in the amount of Baht 2,520,000. Company B was registered on 13 May 1994 with the registered capital of 90,000,000 shares with a par value of Baht 10 per share, with the total registered capital of Baht 900,000,000. It delisted shares from the Stock Exchange of Thailand in 2000 and registered a decrease of capital holdings on 27 October 2005 of Baht 6,690,000t. By paying the decrease of capital holdings to the shareholders of Baht 34,768,800 at the end of the accounting period of 2004, Company B had unallocated profits of Baht 171,507,000 and a reserve according to the law of Baht 90,000,000, giving the total amount of Baht 261,507,000. Company B paid a dividend on May 2005 of Baht 194,811,000, the remaining reserve according to the law of Baht 66,696,000. Mr. A did not include the decrease of capital holdings received of Baht 8,000,000 in the calculation of personal income tax.

2. Company C

Company C paid-up capital holdings on 31 December 2005 of 350,000 shares with a par value of Baht 100 per share, with the total capital holdings of Baht 35,000,000. Company C decreased its capital according to the resolution of Extraordinary Meeting of Shareholders No. 1/2548 on 25 November 2005 and No. 2/2548 on 12 December 2005; by decreasing the number of shares by 60,000 shares at a price of Baht 100 per share, with the total value of Baht 6,000,000. Company C registered for a decrease of the capital on 27 April 2006 and thus had the remaining shares of 290,000 shares with a par value of Baht 100 per share, with the total value of Baht 29,000,000. Before the decrease of capital holdings, Company C paid a dividend to shareholders of Baht 14 per share, amounting to 350,000 shares with the total value of Baht 4,900,000 on 26 April 2006. By paying the decreased capital to the shareholders, Company C did not withhold tax on this amount in any way. [The available facts in these rulings do not indicate whether or not Company C retained profits and reserves, and how much]

The Revenue Department ruled that, in the case of (1) and (2), Company B and Company C had decreased capital holdings and paid the decreased capital back to the shareholders; the paid decrease of capital shall be regarded as assessable income but only in the part which is paid not more than profits and reserves. The decrease of capital received by the shareholders must be a return on capital which was recorded as profits according to the balance sheet of Company B and Company C, and was audited and certified by a Certified Public Accountant for the last accounting period, before the return of decreased capital deducted with dividends; but only the amount that Company B and Company C announced to pay to the shareholders before the return of decreased capital. If the amount of decreased capital does not exceed said amount, it shall be classified as assessable income under Section 40 (4) (d) of the Revenue Code. The shareholders who receive a return on decreased capital shall include this amount as assessable income for income tax calculation.

Regarding a case where the company paid the decrease of capital to the shareholders without withholding the tax, this ruling does not give an analysis because the taxpayer did not inquire on this issue. Nonetheless, Section 54 of the Revenue Code stipulates that the payer of income who does not withhold and remit tax shall be jointly liable with the taxpayer to pay the tax payable in an amount not withheld together with surcharges at the rate of 1.5% per month or part of a month under Section 27 of the Revenue Code. Consequently, the payer of income who does not withhold tax or has a deficiency withholding tax is at risk of being liable due to non-compliance with taxation practices.

Therefore, if you are a business operator who is going to decrease the capital holdings, you should seek legal advice from a tax expert in order to proceed with the decrease of capital holdings properly and legally. By receiving early advice from a tax lawyer, it will help you to be able to comply with the laws and reduce the risk of being retroactively assessed by the Revenue Officer in the aforesaid issue. Furthermore, tax planning is an extremely important matter and should not be ignored before making any decisions about the decrease of capital holdings because tax laws are complicated and sensitive issues in which advice from tax experts is imperative.

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