Unlike other countries where a non-juristic partnership acts as a pass-through business and is therefore tax-transparent, in Thailand, a non-juristic partnership or group of persons is a taxable unit separate from its partners. Currently, conducting business as an ordinary partnership or group of persons is subject to unfavorable double taxation at progressive rates of up to 35 percent, save for a few certain situations which offer relief from said double taxation. For example, a partnership with two individuals operating a restaurant and earning 10 million baht of net taxable income (after tax deductions and allowances) is subject to a progressive tax rate of up to 35 percent. In addition, when the profits are distributed to each individual partner in the partnership, he or she is also subject to personal income tax the same progressive tax rates (up to 35 percent) on the same profits on which income tax was paid by the partnership. This causes the maximum effective tax rate to sky-rocket to 57.75 percent.

Recently, the Revenue Department has allowed partnerships and groups of persons to enjoy a tax-free swap of business assets to a company or juristic partnership under Royal Decree issued under the Revenue Code regarding Exemption from Revenue Taxes (No. 630) (Royal Decree no. 630) and Director-General Notification (No. 4), Subject: Rules, procedures, and conditions for the exemption of income tax, VAT, specific business tax, and stamp duty per Royal Decree no. 630 (2017) (DG Notification 4). Apart from enjoying this tax-free step out asset swap, a change in business vehicle from either an ordinary partnership or a group of persons to a company or juristic partnership will allow the business to pay tax at a flat rate of 20 percent of its net profit and 10 percent of its profit sharing or dividends distributed to each shareholder, thereby reducing the effective tax rate to 28 percent.

As the period to take advantage of the above mentioned tax-free swap of business assets and transfer fee reduction to 0.1% of government assessed value will end 31 December 2017, non-juristic partnerships and groups of person who want to avoid the current high and double tax trap should plan to set up a new company or juristic partnership and swap their business assets into such corporate entity before calendar year end.

The Revenue Department recently stipulated additional criteria for the above mentioned tax exemption and fee reduction on swap of business assets into a company or juristic partnership since we issued our previous client alert (Government Attempts to Encourage Individuals to Carry on Business Operations as a Company). The two key additional criteria required are as follows:

1. The transferred property must have originally been used in a non-juristic partnership's or group of persons' business operations; and

2. If the swapped property is immovable property, it must be transferred at either the government-assessed value as at the date of transfer or the acquisition cost as listed in the relevant purchase agreement registered with the Land Department, whichever is higher.