Tax Issues when Reducing Share Capital

Keywords: Mazars, Thailand, Tax, Thai Revenue Code, Revenue Department, Civil and Commercial Code

13 March 2014

Another reason may be because of the provisions under the Civil and Commercial Code (“CCC”) that prohibits companies to pay out any dividends to shareholders whilst still having accumulated losses on their balance sheet. The quickest way to eliminate such accumulated losses from the balance sheet is to reduce the capital in order to offset against the loss.

There are tax implications that should be considered prior to reducing share capital:

• The shareholders may receive compensation when reducing the share capital. Will the amount received by the shareholders be chargeable to income tax?
• In some cases the capital reduction will result in a loss for the shareholders. Will the shareholders be entitled to claim the loss on investment?
• Can accumulated losses, which have been eliminated by reducing the share capital, be carried forward and offset against the company’s future taxable income?

These three issues are discussed in this article with reference to the relevant tax legislations and rulings.

• Will the amount received by the shareholders from reducing the share capital be chargeable to income tax?

Section 40 (d) of the Thai Revenue Code (TRC) provides that assessable income includes any distribution made by a company on the reduction of its capital to its shareholders to the extent the company possesses accumulated profits and any reserves set aside out of the profits.

Therefore, it is clear from the above provision that any distribution made by a company on the reduction of its share capital which does not exceed the total amount of accumulated profits and any reserves set aside out of the profits, will be treated as assessable income in the hands of the shareholders and taxed accordingly.

• Will shareholders that derive a loss on the reduction of the share capital be entitled to claim the loss on their investment? 

Under the CCC, a limited company may reduce its share capital either by lowering the face value of each share or by reducing the number of shares.

From a tax perspective, a loss deducted in the net income computation must be realised. The shareholders’ loss from the reduction of share capital, whether by lowering the face value or by reducing the number of shares, is not realised at the time of the capital reduction. Such unrealised loss could be considered as a “paper” loss which means that the loss is only incurred on paper. The losses are only said to be realised when the shares are sold.

The above implications have been confirmed by the Revenue Department’s Tax Ruling No. GorKhor No. 0811(GorMor.03)/240 dated 3 December 2001, Tax Ruling No. GorKhor No. 0706/3794 dated 3 May 2006 and, Tax Ruling No. GorKhor No. 0811/91 dated 10 January 2000. Furthermore, the Supreme Court’s Decision No. 58972550, which was handed down in 2007, upheld the Revenue Department’s rulings that the taxpayer was not entitled to claim the loss due to the reduction of the face value in the shares held in the company unless those shares were sold.

• Will accumulated losses eliminated by reducing the share capital be carried forward and offset against the company’s taxable income? 

Even though it is not clear from the legislation, the Revenue Department has generously confirmed in its tax rulings (e.g. Tax Ruling No. GorKhor 0802/21579 dated 16 October 1991, and Tax Ruling No. GorKhor 0802(Gor)/9936 dated 10 November 1992, etc.) that the company is still entitled to carry forward the accumulated loss to offset against its taxable income under Section 65 ter (12) of the Revenue Code.