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‘Substance Over Form’ Against Share Premium

1 Jun 2012

Normally, share premium is a part of shareholders' equity in the balance sheet but not part of profit and loss accounts for accounting purposes. The Thai Revenue Department's view, in the case of NEC and OxyChem share premium, deemed it to be taxable income. Taxand Thailand explores the development of anti-tax avoidance schemes by the Thai tax authorities.

Tax planning by share premium
When the share price is paid over the par value, it is deemed a share premium and is therefore regarded as part of shareholders' equity. In the past, share premiums were used for tax planning in Thailand to restructure company deficit. In addition, share premiums can also be a way to reduce the government fee for corporate registration.

Share premium and subsidy
In the NEC and OxyChem cases, the local subsidiary companies were in deficit status with huge losses and at risk of assuming insolvency status. The offshore parent companies of both subsidiaries injected funds to improve their financial status. The financial support was achieved by a capital increase has been made by way of huge share premium and not by declaring taxable income.

Tax authority attacks
The TRD in both cases argued that the substance of a share premium is not equity financing for the corporate perspective and it is deemed a subsidy. Therefore, in the view of the TRD, a subsidy fund is regarded as 'taxable income'. The Central Tax Court ruled on both cases in late 2011 (OxyChem) and early 2012 (NEC) that the substance of a huge share premium is not for economic purpose when considering the negative value of shares and company. The court then held on the same facts of both cases that the form of a share premium is not permissible and the substance of a subsidy shall be applicable for tax purposes.

Taxand's Take

The Thai tax authorities adopted the 'substance over form' rule to attack transactions which are deemed as tax avoidance. It is interesting to note that most taxpayers in these cases are MNCs with complicated arrangements involving very large transactions. Taxpayers should be aware on this development in tax practice and that gaps in tax collection are narrowing.

Your Taxand contact for further queries is:
Chinapat Visuttipat
T. +66 2632 1800


Taxand's Take Author