Uncertainty over change in business transfer rules delaying M&A deals
LAST YEAR the government issued a Royal Decree revamping the rules in regard to taxation of business transfers. While the new rules appear to be an attempt to update the M&A tax rules, uncertainty as to their application has businesses and tax advisers in
Previously, companies and their shareholders seeking to dispose of a business to others were provided with quite beneficial tax treatment under a mechanism known as an Entire Business Transfer (EBT). While the actual origins of this beneficial set of tax-free rules is not entirely certain, many practitioners assert that the EBT arose out of the 1997 currency crisis (“Tom Yum Kung” crisis) as a means of permitting struggling businesses and more importantly, their shareholders or owners, to be sold off to new investors, without any negative tax impact. The old rules required that all assets and liabilities of a company (ie, the entire business) had to be transferred to a new company. Once this transfer was completed, the old company would then have to be liquidated with the proceeds of the assets and liability transfer passing to the shareholders of the old entity free of tax. Without the EBT rules, a distribution of cash or other assets to shareholders pursuant to a liquidation would normally result in tax being due. The old EBT rules worked in a manner that allowed wealth transfer to troubled business owners tax-free. This was seen as a potential windfall to the old business owners as they were able to change their economic position by transferring business assets to a purchaser at a substantial gain, yet not pay taxes that would normally have been due on an outright sale of the business.
In 2012, a new Royal Decree was issued that modified the EBT rules. The wording of the Royal Decree covers both EBTs and an alternative form of merger known as an amalgamation. In an amalgamation, two entities transfer all their business assets and liabilities into a completely new entity, followed by a liquidation of the old entities, with the shareholders receiving shares of the new entity in exchange for the shares of the old entities. This effectively results in a merger of the two businesses with the shareholders of the old businesses having a combined shareholding interest in the new entity. This transfer of economic interests is not taxable as it is considered to merely be a change in form and not a change in economic substance. While this appears to be the same underlying motivation for the EBT, the language of the Royal Decree does not address each method separately but instead combines the language governing the two different merger schemes in such as manner as to make it unclear exact?ly how these rules should be applied.
An English translation of the word?ing in question reads, “There shall be exempt from income tax . . . the benefit received [by] registrants who . . . merge together or transfer the whole business to one another by swapping shares with the new company that has been merged with, or with the company who is the transferee of the whole busi?ness”. – Royal Degree No 10(5).
Under the new rules there is now some confusion as to the requirements because it seems to imply that shares should be swapped even though there is a question as to whose shares should be swapped. Is it that the entity receiving the assets and liabilities must issue shares to the shareholders of the entity transferring its entire business? Or, is it that shares of the receiving company should be swapped for shares in the distributing company? If the interpretation is the former, it would appear that these new rules are more in line with international mergers and acquisition rules, which allow for tax-free reorganisation of businesses as long as the fundamental economic relationships remain the same. However, if the interpretation is the latter then this causes confusion as it would change the nature of the transaction substantially to have the shares of the transferor swapped for shares of the transferee.
This lack of clarity has led practitioners to shy away from advising on the implementation of EBT transactions until such time as clarity is issued by the Thai Revenue Department due to the risks associated with providing incorrect advice on the tax implications of EBT transactions.
As such, some newly considered M&A transactions may run into delays as the risks caused by the uncertain language are ironed out. There is already some high-profile in-progress acquisitions that are also being slowed by the lack of clarity on how the rules function. Practitioners and businesses alike are eagerly awaiting clarification from the Thai Revenue Department and hoping that such clarification will not be long in coming.
This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.
Jonathan Blaine is Associate Principal at KPMG Thailand.
