Published on January 31, 2005

Last week I discussed the considerable advantages in undertaking tax planning in any business, and provided you with my 10 principles of general tax planning. This week I would like to begin discussing specific tax-planning principles for the family business.

Choosing the right form of business entity as a holding company

You will remember that several weeks ago in this column I explained the importance of considering the usefulness of a family holding company to own certain key assets of the family business – to protect such assets, make succession easier and to provide a steady income, amongst other reasons. One of the most important tax-planning issues is the form of the holding company.

Alternative forms of business entity

There are many different forms of business entity, each with different tax implications. The suitability of the different forms depends on the nature and location of the business and the particular requirements of the family owners in question. Here are some examples of the different tax rates that apply to different types of entity:

l Tax rate of 20 per cent: A company listed on the Market for Alternative Investment (MAI)

l Tax rates of 25 or 30 per cent: A company listed on the Stock Exchange of Thailand (SET)

l Tax rates of 20, 25 and 30 per cent: An SME (small or medium-sized enterprise)

l Tax rate of 30 per cent: A limited company/public limited company/ordinary partnership

So you can see that it is extremely important to consider the tax-planning aspects in choosing the business entity to form the holding company as this will affect the rate of taxation of the profits. For a family holding company, a private company is usually best because this means that the company does not have to comply with extensive and complicated rules and regulations relating to the SET.

Initially, the company can be an SME with capital of up to Bt5 million to enjoy the lower tax rate. However, if the holding company requires more cash for investment in the operating company then the capital can be higher or a family member can lend money to the holding company.

Loans to the holding company: Why they are better

Another useful aspect of tax planning is the use of loans by family members to the holding company. If, for example, the holding company wishes to invest in the purchase of some assets, a loan may be taken from a bank; but the loan can also be provided by a shareholder who is a family member, and charges interest on the loan to the company. The family holding company can deduct the interest payments on the loan as a legitimate business expense. When the holding company pays this interest to the family member, the interest is considered as income of the family member. However, the family member can opt for the holding company to deduct withholding tax of 15 per cent from the interest payments. The family member would then have no further personal tax liability in respect of such interest payments.

Tax on dividends

Generally, the holding company will have to rely on dividend income, which can be tax exempt. But the holding company can generate other income (for example, rental income or service fees for future distribution to family members). It is not just the tax on the business income of the entity forming the holding company that must be considered. The tax treatment on the distribution of profit by dividend or profit-sharing must also be considered.

For example, dividends are normally subject to 10-per-cent withholding tax. A natural person will get a tax credit for this withholding tax. Subject to certain conditions, a juristic person (for example, a company) is exempt from tax on dividend income. A foreign company however, is subject to 10-per-cent withholding tax on dividends. Usually, a family holding company can hold shares in a different family operating company. This means that dividends can be paid from the family operating company to the holding company, taking advantage of the tax exemption on dividends. It needs to be remembered, however, that the family holding company must satisfy four conditions: (1) Holding 25 per cent or more of the shares in the family operating company; (2) this shareholding must have been held for at least three months prior to the dividend payment; (3) this shareholding must continue to be held for at least three months following the dividend payment; and (4) there must be no cross-shareholding by the family operating company in the family holding company.

Tax on profit from share transfer

The tax situation needs also to be considered from the point of view of the taxation of any profit made on the transfer of shares in the holding company, if a family member wishes to sell their shares. These are the different rates that may apply, depending on the entity:

l A natural person will be subject to progressive tax at the rate of 5-37 per cent. However if the shares are sold through the SET or MAI this will not apply.

l A juristic person will be subject to tax of 20-30 per cent.

l A foreign entity will be subject to tax of 15 per cent.

A juristic person in some countries with a double-taxation agreement with Thailand will be exempt from tax.

As you can see, tax planning in relation to family holding companies can make a substantial difference in the tax that is legitimately payable. There are other advantages too – for example, the use of the holding company to buy certain allowable assets for family members to use, such as a car or a home office. It should be borne in mind however that if the family wishes to have the family holding company listed on the SET, some restructuring of the shareholding may need to take place to ensure that advantage can be taken of the tax exemption on profits derived from share transfers through the SET.

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