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Clarification on deductible investment losses

On 8 August 2008, Departmental Instruction No. Paw. 135/2551 (2008) was issued to clarify the deductibility of investment losses where a parent company, which is also the creditor of its subsidiary, subscribed for new shares issued by its loss-making subsidiary in the course of a business turnaround.

Paw. 135/2551 (2008) explains that the amount of subscription for new shares which is not refunded to the parent company will be deductible as a tax expense, only insofar as it does not exceed the amount of debts that the subsidiary owes to the parent company, and provided that the following conditions are fulfilled:

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the subsidiary is dissolved and liquidated within the accounting year that follows the accounting year in which the new shares are issued;

-   the parent company holds at least 25% of the subsidiary's shares with voting power from the time of its incorporation until the issuance of the new shares;
-   the debts that the subsidiary owes to the parent company are not prohibited as a deduction if they become bad debts; and
-   there are no means available for the parent company to recover the losses incurred from the subscription in the new shares.

The parent company is allowed to realize a tax expense in the accounting year that the subsidiary's liquidation is completed.

However, the above does not clarify the long-standing controversial issue regarding the deductibility of investment losses incurred by a parent company from the sale of new shares in a loss-making subsidiary that does not undergo a liquidation process. The Thai Revenue Department previously indicated in the Revenue Ruling No. Gor. Kor. 0706/5694 dated 8 June 2007 that such a loss is not deductible as it does not constitute an expense of the parent company which is spent for "business or profit making" purposes under Sec. 65ter(13). The ruling was in respect of a Thai operating company, which owed a large amount of commercial debts to its Thai parent company and which issued new shares after being dormant for 2 years. The parent company subscribed to the new shares in order to fund the subsidiary's repayment of debts to itself. When the parent company incurred losses from selling the shares in the subsidiary to a third party, the Revenue Department advised that the portion of losses incurred from the sale of the new shares was not deductible under Sec. 65ter(13), as the parent company did not subscribe to them for the purpose of seeking profits from the investment, but, rather, to generate a tax expense.

Incentives for listed companies

On 29 July 2008, Royal Decree (Vol. 474) was issued to extend the deadline during which a company newly listed on the Stock Exchange of Thailand (SET) or the Market for Alternative Investment (MAI) may qualify for a tax incentive under the Royal Decree (Vol. 467), i.e. a reduction of the normal corporate income tax rate from 30% to the following rates for the first 3 accounting years commencing on or after the listing:

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20% for a company newly listed on the MAI; and

-   25% for a company newly listed on the SET.

Originally, in order to be eligible for the tax incentive, the Royal Decree (Vol. 467) required the application for listing to be submitted between 1 January 2007 to 31 December 2007, with the listing completed before 31 December 2008. The deadlines have been extended by the Royal Decree (Vol. 474) to 31 December 2008 for submission of the application to the SET and to 31 December 2009 for the completion of listing. The Royal Decree (Vol. 474) went into effect from 7 August 2008 onwards.

In addition, the Royal Decree (Vol. 475) was issued to reduce the corporate income tax rate for companies listed before 7 August 2008 to the following rates for 3 accounting years commencing on or after 1 January 2008:

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20% on the first THB 20 million of net profits for companies listed on the MAI; and

-   25% on the first THB 300 million of net profits for companies listed on the SET.

In order to be eligible for the above incentive, the listed company must never have applied the incentive under the Royal Decree (Vol. 467) or tax incentives under the Royal Decree (Vol. 460), which provides an exemption for:

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25% of the expenditures spent in the expansion or improvement of assets utilized in a project with minimum value of THB 5 million; and

-   the proceeds from sale of machinery spent in purchasing the replacement machinery.

Where a company listed on the SET had previously applied a reduced tax rate of 25% on the first THB 300 million of net profits for 5 accounting years under the Royal Decree (Vol. 387), and such incentive has already expired, it will be eligible for the incentive under the Royal Decree (Vol. 475) until the 2010 accounting year.

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