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How to obtain financing for your business in Thailand
26/04/2022
The Thai cabinet recently announced the approval of the draft Royal Decree regarding income tax exemption for investment in Thai startups.
This amendment was issued under the Thai Revenue Code and can be applied to cases where the funding for a startup has come either directly or indirectly through Venture Capitalists (VC), Corporate Venture Capitalists (CVC), or private equity financing or trusts (PE Trust).
Essentially, this Draft Royal Decree aims to provide a capital gains tax waiver for investors interested in providing funding for local startups up under the Royal Decree No. 597 (B.E. 2559) and No. 636 (B.E. 2560). These tax benefits will be available for ten accounting periods, starting from the day after the Royal Decree has been announced in the Government Gazette and will last until 30 June 2032.
Key points
- An income tax exemption is available for cases where the funding for a startup has come either directly or indirectly through Venture Capitalists (VC), Corporate Venture Capitalists (CVC), or private equity financing or trusts (PE Trust).
- In order for an investment in a startup to qualify for the capital gains tax waiver, the startup must engage in the target activities as approved by the Committee on Policy for National Competitive Enhancement for Targeted Industries.
- The target investors can be split into the two following groups, Direct Investors and Venture Capitalists.
In order for the list of investors mentioned above to be able to obtain these tax exemptions for their investments in Thai startups, the following criteria has been set up which provides details relating to the tax benefits, conditions for receiving the exemptions and the exceptions.
What qualifies as a startup?
In order for an investment in a startup to qualify for the capital gains tax waiver, the startup must engage in the target activities approved by the Committee on Policy for National Competitive Enhancement for Targeted Industries. These specific industries must use technology as the basis for their production process.
As it stands, there are 12 targeted industries established by the Notification of the Committee on Policy for National Competitive Enhancement for Targeted Industries No. 1/2561. These targeted industries have been divided into 3 groups:
- 5 S-Curve industries: Next-generation Automotive, Smart Electronics, Affluent, Medical and Wellness Tourism, Agriculture and Biotechnology, and Food for the Future;
- 5 New S-Curve industries: Robotics, Aviation and Logistics, Biofuels and Biochemicals, Digital, and Medical Hub; and
- Additional industries: Defense and Education and Human Resources Development.
Who can qualify as a target investor?
All potential investors must hold shares in the startup, CVC fund or PE Trust for at least 24 months before the transfer of shares in order to qualify for the exemption. Furthermore, they must not exercise any rights granted to them under the previous Royal Decree No. 597 (B.E. 2559) and No. 636 (B.E. 2560).
The target investors can be split into the two following groups:
Direct Investors:
Direct investors can be divided into the following: (i) persons who are either Thai or non-Thai residents, (ii) juristic companies legally registered under Thai law, and (iii) foreign juristic companies registered under foreign laws.
Venture Capital (VC):
VC can be divided into the following: (i) CVC funds, (ii) PE Trusts, and (iii) shareholders or unitholders of CVC funds and PE Trusts.
CVC funds or PE Trusts can be registered in either Thailand or abroad. If the CVC fund or PE Trust has been established under Thai law, there must be THB 20 Million in paid up capital available on the last day of each accounting period. Furthermore, this paid up capital must be registered with the Securities and Exchange Commission.
Shareholders of the CVC fund or unitholders of the PE Trust are required to be individuals or corporate entities (who can only invest in Thai CVC fund and Thai PE Trust).
If either the CVC fund or PE Trust fails to meet the criteria set out above in any tax calendar year, the ability to rely upon the tax exemption will be revoked for that tax calendar year.
What are the tax benefits and conditions
a) Direct Investment
Any party that satisfies the criteria established above, either in Thailand or abroad will be eligible for income tax exemptions on the gains from the transfers of shares in a startup, providing the following is satisfied:
- The startup must be engaged in the Targeted Industries and;
- The startup must earn at least 80% of its total revenue from these target activities. This revenue target must be achieved in two consecutive accounting periods before the transfer of shares.
b) Indirect investment through VCs
The tax benefits available to VC funds will vary according to the level of investment of the CVC fund and PE Trust. More details for this can be found below:
i) Tax benefits for CVCs and PE Trusts
The CVC fund will be able to take advantage of the corporate income tax exemptions on any gains from the transfers of shares in a startup if the following criteria is satisfied:
- The startup must earn at least 80% of its income from the target activities for two consecutive accounting periods before the transfer of shares.
Please note that PE Trusts are not subject to corporate income tax.
ii) Tax benefits for shareholders of CVC funds and unitholders of PE Trusts will be granted, subject to the following:
- Gains from the transfer of shares in a CVC fund and PE Trust, where the shareholder/unitholders will receive personal or corporate income tax exemptions (in proportion to their total investment) will be possible when: The startup earns at least 80% of their income from the target activities in each accounting period for two consecutive accounting periods (before the transfer of shares).
- Any gains earned from the dissolution of the CVC fund or PE Trust will be based on the proportion of retained earnings received from the target activities of the startups. However, the startup must earn at least 80% of their income from the target activities in each accounting period for two consecutive accounting periods (before the dissolution).
How can our experts help you invest in a startup in Thailand?
For further information about how our team of tax experts can assist you prepare for the arrival of this new legislation or any other matters relating to startup tax benefits, please feel free to book a consultation here.
You may also browse the full range of our tax services here.
Please note that this article is for information purposes only and does not constitute legal advice.
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