Is internal funding via a holding company an acceptable plan
BESIDES INCOME TAX, a corporate lender can also be subject to an indirect tax called the specific business tax at 3.3 per cent on interest income earned.
In the case that the borrower is a “related party”, the SBT would be excluded, but this must be carefully considered because the Revenue Department has provided a strict definition of a “related party” for this purpose.
This refers to companies in which one party has a direct holding relationship in the other party of at least 25 per cent of shares with voting rights.
This condition must have been fulfilled for at least six months prior to the provision of the loan.
With this definition, a loan between brother and sister companies cannot enjoy the SBT exemption. Therefore, a group company may try to exploit this exemption by using its holding company as an intermediary when mobilising funds between one subsidiary and another.
However, before this type of tax planning is implemented, it is important for management to understand and be aware of the tax risks and factors that could lead to an adverse tax impact.
Although Thailand does not have a specific anti-avoidance law designed to disregard transactions that are only made for tax-saving purposes, the Revenue Department and the Thai courts can still void a transaction by applying the concept of a “sham transaction” under the Civil and Commercial Code and collect tax according to the true intention of the counterparties as evidenced by Supreme Court case no 12127/2558.
In this case, Subsidiary A provided a loan to its holding company and the holding company then provided the loan to Subsidiary B.
If simply based on the form of the transactions, SBT on the interest received by both parties should be exempt because each transaction qualified as a loan to a “related party”.
However, the court also considered other evidence and acts of the taxpayers to determine the true intention of the transaction.
These included internal memos, each company’s financial status, the terms of the loans and how they were funded, collateral used, repayment terms and the commercial reasons of each entity for providing the loans.
Since the taxpayers could not clearly explain the commercial reasons for their particular acts, especially having the holding company pass the loan from Subsidiary A to Subsidiary B, the court ruled that this was a conspiracy of the taxpayer to avoid paying SBT and therefore Subsidiary A must pay SBT, including penalty and surcharge, as if the loan had been provided by Subsidiary A to Subsidiary B.
It is very interesting that several issues were brought into the analysis before the court finally concluded that this was a sham transaction, so this case should not be interpreted as internal funding through a holding company is no longer allowed.
Instead, management should view it as a warning of the potential tax risks and be more prudent when undertaking any internal funding.
Since one’s intention can be understood from one’s actions, a loan must not be created merely with the objective of saving tax.
Funding through a holding company should still be allowed and be SBT exempt if the loan is initially driven by commercial circumstances and reasons.
Each party should receive fair remuneration for the level of risk, assets and functions assumed.
If the holding company is intended to be the financial hub for a group of companies, other documents should also support this commercial objective, such as the group financing analysis and policy and internal memos of the lender.
It is important for both form and substance to be consistent.
Management should ensure that when executing the transactions, the supporting documents and the method of implementation are aligned with the commercial objectives.
NOPAJAREE WATTANANUKIT is the tax and legal director at PwC Thailand.
