Does a Company Have Tax Obligations When Reducing Registered Capital and Returning (or Not Returning) Capital to Shareholders?
Relevant Tax Law
Section 40(4)(d) of the Thai Revenue Code provides that:
Case Study 1: Capital Reduction with Cash Repayment
(Revenue Department Ruling No. กค.0702/4952 dated 20 June 2016)
Facts
Company A, as of 31 December 2012:
- Registered capital: THB 2,000,000,000
- Legal reserve: THB 200,000,000
- Retained earnings: THB 4,238,042
- Company A paid dividends to its shareholder company in Singapore in the amount of THB 4,238,042.
- Withholding tax was deducted at 10% under Section 70 of the Revenue Code.
- Company A registered a capital reduction of THB 1,500,000,000.
- The remaining accumulated profits and reserves totaled THB 200,000,000.
- Company A paid THB 1,500,000,000 as capital reduction proceeds to the Singapore shareholder.
Tax Treatment
Under Section 40(4)(d) of the Revenue Code, the portion of the capital reduction payment not exceeding accumulated profits and reserves constitutes assessable income.
Therefore:
- Assessable portion: THB 200,000,000
- Company A was required to withhold corporate income tax under Section 70 on THB 200,000,000 in connection with the capital reduction payment.
Case Study 2: Capital Reduction to Offset Accumulated Losses
(No Cash Repayment – Revenue Department Ruling No. กค.0706/4375 dated 19 May 2006)
Facts
Company K reduced its registered capital by THB 30 million by reducing the number of shares or par value in order to eliminate accumulated losses. No repayment was made to shareholders.
Tax Treatment
The capital reduction did not give rise to any income for Company K because it merely involved using shareholders’ equity to eliminate accumulated losses.
As a result:
- The reduction did not generate taxable income for the company.
- There was no income required to be included in the calculation of net profit or loss for corporate income tax purposes under Section 65 of the Revenue Code.
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Counterarguments
Several experts argue that:
- A registered capital reduction in all cases, regardless of whether cash is returned to shareholders or whether the reduction is carried
- out solely to offset accumulated losses, should not be treated as assessable income for shareholders.
- This is because retained earnings, under generally accepted accounting principles, are classified as part of shareholders’ equity (capital), not income.
- Therefore, a repayment arising from capital reduction should not be regarded as assessable income under Section 40(4)(d) of the Revenue Code.
Conclusion and Personal Opinion
What is the prevailing view?
Personally, I believe that taxpayers should comply with the Revenue Department’s rulings.
If companies with accumulated profits were allowed to reduce registered capital and return cash to shareholders without tax consequences, this could effectively be used as a substitute for dividend payments to avoid taxation.
This is an outcome that the Revenue Department would almost certainly disagree with.
