Income Tax Implications for Loans Between Private Companies

A Revenue Department Advisory Opinion issued on January 21, 2015 provided guidance regarding income tax implications for loans issued between private companies. The facts were that Company A was registered as a limited company, with an unspecified amount of registered capital, and with no branch offices. The accounting period of the company was April 1 to March 31. The company was engaged in the business of freight forwarding and was registered for the Value Added Tax (VAT) system.

Company A used its own working capital (deposited in its bank account) to issue a loan to one its shareholders, Company B, who held 42.499% in Company A. The loan was issued on October 18, 2007 in the form of a promissory note valued at 30,000,000 baht. The borrower, Company B, issued the promissory note and also fixed the interest rate. The promissory note also had the condition that Company A could recall the entire loan amount upon making a demand in writing. Company B would return the loaned money within two working days. If the loan issued to Company B did not have any interest or fixed an interest rate below the market rate, the Revenue Officer would have authority to assess the revenue from the loan at an interest rate equal to the market rate at the time the loan was issued according to Section 65 bis (4) of the Revenue Code.

The definition of “market rate” will depend on the source of the funds that Company A used to issue the loan to Company. In the case where Company A used its own funds, then the market rate would be fixed at the interest rate for savings accounts on the date that the loan was issued. If, on the other hand, Company A used loan money to loan to Company, then the market rate should be considered the interest rate for loans issued under the same conditions on the date that Company A issued the loan. However, if it is not clear whether the source of the funds originated from Company A’s own funds or money that Company A borrowed from a bank, then the market rate will be considered the interest rate for loans on the date that Company A had originally borrowed the money itself.

Thai tax law is complex. It is advised that business operators in Thailand consult with competent legal counsel in order to understand the legal and tax implications of their business activities.

 

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