Property Stimulus Package

[Siam International Legal Group]

Property Development: Profit from a Property Stimulus Package

The property development sector in Thailand has certainly seen its fair share of ups and downs. Like all businesses, it is quite dependent on the whims of market forces and other prevailing economic conditions. However, despite these fluctuations, in the past decade we have seen property development making steady progress and it has consistently triumphed over all the challenges if faces. This has been fueled largely by two factors. The first being the rise in income levels of local Thais and the emergence of a sizeable middle-class group in the country. The second is due to the increase of international interest in the high-end luxury accommodation market, particularly in popular resort areas such as Phuket, Hua Hin, Pattaya and Koh Samui. These places have long been popular for its natural beauty and in its ability to attract thousands of tourists each year.

Despite this, over the past year or so, confidence in the property sector diminished slightly due to the well-known military coup which ousted the former Prime Minister, Thaksin Shinawatra into a self-imposed exile. During the interim government’s tenure, we saw many prospective developers and buyers alike adopting a ‘wait and see’ approach although the market remained relatively strong. That wait is now finally over and although it is still early days, property professionals are confident that having a democratically elected government will benefit the sector greatly.

New Economic Stimulus Package

Indeed in early March, the Thai government approved a series of economic stimulus packages which will, among others, reduce some of the key taxes for property developers and their buyers. The Thai cabinet outlined the three main goals in introducing this package. They are, namely, to:

1. Increase the income of Thai citizens;

2. Promote and support the growth of SME businesses and;

3. Stimulate investment in the country and to enhance its competitiveness.

How This Affects Property Developers

There are a number of measures introduced by the cabinet, however, only a handful have direct relevance to property developers. The first is the reduction of the Specific Business Tax (SBT) from 3% to 0.1% for transactions which are made within the year after the package is enacted into the Royal Gazette. This is expected to be in April 2008. This is good news for property developers in Thailand as this is often a cost which they have to absorb in every transaction. Indeed the reduction will only be for one year so its main aim is to create a short term boost to the property sector. For large scale developers, this will inevitably help their bottom line depending on their backlog of properties due for transfer up until the first quarter of 2009. Smaller developers who concentrate on smaller projects such as low-rise developments or small scale housing projects could also benefit as they are often more flexible and able to acquire, develop and sell a project within one year.

Reduction of Transfer Fee

The property stimulus package has also reduced the transfer fee for property transactions from 2% to 0.01%. This is a large reduction and is likely to have the most impact compared to the other measures. This is significant as this will benefit both the property developer and property buyer alike as this cost is often shared between parties. This reduction will also boost the property sector as buyers will be keen on buying in order to take advantage of this.

Reduction in Corporate Tax for SMEs, Public Companies and IPOs in MAI and SET Markets

Some smaller property developers may also benefit from this stimulus package in another way. Small to medium size companies with a paid-up capital of five million Baht or less are exempted from corporate tax on the first 150,000 Baht of their net profits. This should help smaller property developers but probably would not have much effect on larger companies.

Newly listed property development companies or companies which are currently requesting for an IPO will have their corporate tax reduced from 30% to 20% for their first three years if they are listed in the MAI market. For those who are listed on the SET, this reduction will be from 30% to 25%. The reductions in the foregoing will only apply to companies seeking an IPO in 2008 and listed by 2009. Currently listed companies on the MAI and the SET will have their corporate tax reduced to 20% for its first 20 million Baht in net earnings and 25% for the first 300 million Baht in net earnings respectively.

Increase in Salary Base for Income Tax Exemption

Another fiscal measure which may benefit property developers and the economy as a whole is the raising of the base salary for which income tax is exempted from 8,300 Baht per month to 12,500 Baht per month. This measure may help boost the property market further by increasing low-income homebuyer’s ability to purchase property and therefore should benefit low-cost housing developers in general.

Final Word

So what does all this mean to the property development sector in Thailand? It is certainly a good sign and it shows the government’s commitment in the growth of property as the mainstay of its key economic policies. However, as is the nature of stimulus packages, it is a short term measure and property developers have to take this in mind if they wish to take full advantage of it. There are a number of things which may affect this. The major factor is timing. Developers must have the ability to execute a project from procurement to transfer within one year. For existing developments, success will mainly be dependent on the size of the current backlog of customers which are awaiting transfer. Depending on physical phases and contractual obligations, developers may also wish to complete any of the existing transfers by the first quarter of 2009. For new developers in the early and planning stages, it may be useful to consider smaller projects which can be completed and transferred within one year. Low-rise or exclusive housing estates may be ideal in these cases. Whatever the project may be, this stimulus is certain to help all property developers throughout the country. The extent to which they are successful may vary depending on circumstances. However, with good time management and planning, every property development should be set for further gains.

By Kert Stavorn

www.siam-legal.com/realestate

Kert Stavorn is a senior legal consultant for Siam Legal International. Kert’s practice primarily focuses on real estate, construction and corporate matters.

(Submitted to the Phuket Gazette for publication 08 March 2008)

[tangoll]

Thanks for the information. Does the reduction of transfer fee and specific business tax rates apply also to sale of condo units between individual seller/buyer? You refer to the reduction of rates being of benefit to property developers only. Any other changes to the rates for sale of condo units less than or more than 5 years of ownership?

Have these changes been enacted or are they still in the approval stage?

Thanks in advance for your reply and assistance.

[bingobongo]

brilliant, and now developers have another reason to keep adding to the oversupply.........i also like how the OP is a lawyer, specializing in real estate, nice sales pitch..........

Incentives aimed at wrong people, says consultant

New government incentives to spur the property market will benefit developers more than consumers and will also encourage more speculation , according to Sopon Pornchokchai, the president of the property consultancy Agency for Real Estate Affairs.

http://www.thailand-property-guide.com/ind...&NewsID=728

Edited March 10, 2008 by bingobongo

[dsfbrit]

I have a similar question to Tangoil.

Would this reduction in tax be of benefit to those of us with land/house in company name who may wish to move the house/land into the wife's name in the form of a Usufruct.

When I last looked into this I found I would have to pay about 6 percent overall for the Business taxes etc...

Simply put, would the total taxes now be less than 6 percent, or would I need to be a developer to get this reduction in taxes.

Thanks for you advice.

[quiksilva]

Broadly speaking SBT applies when an individual has owned the property for less than 5 years, and for commercial entities.

SBT is reduced across the board. It is not only to developers, although they will probably get the most benefit but only because they conduct more transactions than anyone else.

If you would usually have to pay SBT, your total transfer costs will be reduced to 1.11% (including withholding tax at 1%) of the government's appraised values or the transacted price whichever is higher.

I respect Dr Sophon, but this time I disagree with him. He argues that the property industry doesn't need any support, but speaking as someone at the coal face I welcome these Government incentives which can only encourage more transactions.

Edited March 11, 2008 by quiksilva

[tangoll]

quiksilva, thanks for your reply. So, under the old tax rates rules, sale of a condo unit in one year after purchase/transfer would cause a tax/fees liability of about 6%, which includes the income/withholding tax, specific business tax of 3.3%, and transfer fees of 2%. Whereas under the new rules, total tax/fees is only 1.11%. This is not considering whether the seller/buyer apportions the tax/fees between them. Are these calculations correct? If so, then under the new rates, the tax liability actually increases year by year and does not decrease for transactions after the fifth year, as had been the case under the old rates.

Are the new rates in effect already, and for how long will they be in effect? The OP article seems to say that these new rates are in effect for only one year.

[cclub75]

It's becoming boring to see people keep saying the same BS, over and over, by simply copy-paste the government's very poor propaganda, like running headless chicken.

Let's debunk this "stimulus-dildo-package" once and for all.

There are a number of measures introduced by the cabinet, however, only a handful have direct relevance to property developers. The first is the reduction of the Specific Business Tax (SBT) from 3% to 0.1% for transactions which are made within the year after the package is enacted into the Royal Gazette. This is expected to be in April 2008. This is good news for property developers in Thailand as this is often a cost which they have to absorb in every transaction. Indeed the reduction will only be for one year so its main aim is to create a short term boost to the property sector. For large scale developers, this will inevitably help their bottom line depending on their backlog of properties due for transfer up until the first quarter of 2009.

One key word : "short term boost".

Another key word : 3 %

Okay, for 1 year (a joke for long term investment like real estate) developpers will have 2,9 % more on their "bottom line"... Really ? It will be certainly be offseted by... rising costs.

So ? A stupid and short sighted quick fix of dope, on a very small scale.

Reduction of Transfer Fee

The property stimulus package has also reduced the transfer fee for property transactions from 2% to 0.01%. This is a large reduction and is likely to have the most impact compared to the other measures. This is significant as this will benefit both the property developer and property buyer alike as this cost is often shared between parties. This reduction will also boost the property sector as buyers will be keen on buying in order to take advantage of this.

One key word : "cost shared". So on one condo at 2,5 millions THB, developper and buyer will save each... 25 000 THB.

Impressive ! One night at the Oriental hotel...

Let's be serious for a moment : opportunity effect. Do you think that a 25 000 THB bonus will convince people to buy, if they were reluctant and/or insolvent to buy ?

As for the other (the people who wanted to buy anyway, with the means to do so)... well they will be able to spend one night at the oriental hotel.

Effect ? Nil. Zero. Nada.

Increase in Salary Base for Income Tax Exemption

Another fiscal measure which may benefit property developers and the economy as a whole is the raising of the base salary for which income tax is exempted from 8,300 Baht per month to 12,500 Baht per month. This measure may help boost the property market further by increasing low-income homebuyer’s ability to purchase property and therefore should benefit low-cost housing developers in general.

How a so called lawyer can write such a crap ? It's unbelievable. He's not even able to know how the income tax system is working in Thailand.

Current system : first 100 000 THB salary are exempted

New system : first 150 000 THB salary are exempted

The guy is so stupid that he takes those figures, and divide them by 12 to get the monthly salary !

But hey guys... each employee has automatically a "tax payer allowance" of 30 000 to deduct from his "assessable income".

Therefore, with this automatic allowance... all employees with a salary less than

current system : 130 000 THB = 10 800 THB per month

new system : 180 000 THB = 15 000 THB per month

do not pay income tax.

But let's move further : we have other allowances to deduct from assessable income :

-if maried(30 000 THB for spouse)

-if children at school (17 500 per child)

-and other (again check on the RD website).

My point : ALREADY small and medium incomes DO NOT PAY INCOME TAX in Thailand. This is the reality !

As for the other (high and very high incomes), they will save... 5 000 THB PER YEAR (10 % on the difference between 100 K THB and 150 K THB), AKA 400 THB PER MONTH...

Will it be enough to "stimulate" them to buy more properties ?

So again, we need to be serious, and check the figures, and try to think for a minute, instead of writing non sense.

[quiksilva]

@ Tangoll yes they will last for 12 months, at the end of this period they will revert to previous levels, it is just a temporary measure.

@ cclub75 Agreed for the individuals it doesn't mean all that much but still 1.11% is dam_n sight better than 6.3% (or even 0.11% vs 5.3% if you want to be picky)

Now consider that a developer might be selling 1-4bn Baht's worth of property in a single project, a developer whose margins has been shrinking due to rising construction costs will certainly welcome a 5% relief from their expenses, wouldn't most firms?

In my experience in commercial transactions on high value properties, the difference of a few % can often be all that it takes for a decision to change. So yes, I do think that this will create more transactions.

Edited March 11, 2008 by quiksilva

[cclub75]

Now consider that a developer might be selling 1-4bn Baht's worth of property in a single project, a developer whose margins has been shrinking due to rising construction costs will certainly welcome a 5% relief from their expenses, wouldn't most firms?

Sure. But the real estate business is like any other kind of businesses : demand.

To -temporarily- increase the balance sheet of developpers... what's the point if the market, AKA the demand, remains depressed ?

This is why I maintain that this package is nothing but money thrown away.

It's not investment, it's not even consumption... It's just 42 billions (according to the government's calculations...) thrown away.

I mean, I don't want to be too political but it's exactly like the "stimulus package" of Bush in the States... US people will receive a check of 500 or even 1000 USD ? Great.

And then ? They will buy 1 more PC and 1 LCD TV (to the chinese) ? And then ?

It makes hardly sense.

[quiksilva]

Okay yes, I can see that, demand has been depressed, but it would be a mistake to think it's disappeared all together, it hasn't. For instance, two weeks ago during one weekend we sold over 160 million Baht's worth of condo's, but of course this was mostly to Thais.

Foreign demand of course was dealt a viscous blow last year by the proposed changes to the FBA, which have never materialised. This matter has been shoved under the carpet now, and I think they mean to keep it that way.

However, I believe the government really needs to address this matter and provide some reassurances about the future of foreign ownership in Thailand and clear this matter up for once and for all, this I believe would go much further to reignite foreign demand.

Edited March 11, 2008 by quiksilva

[dsfbrit]

Thanks for the response Quiksilva.

I used to be a bit of an expert in all this about a year ago, but almost lost the will to live discussing all the subtleties of Leasing versus Usufruct etc... and the cost seemed quite high. In my case the Business tax etc... on my house / land would come to about 300,000 Baht assuming the valuation of 5M-6M Baht.

So please forgive me if it seems I am too lazy to start getting excited about this all this again. I am just worn out with the whole issue and would appreciate you helping me!!

So simply put, if I go along to Sunbelt next week and ask them to set up the Usufruct for me, I will have to pay how much on this property valued at this amount.

I know the costs of shutting down the 'dodgy' company etc..., but is it really simply that I now pay about 30,000 Baht in taxes instead of 300,000 Baht

Thanks very very very much for your help

[quiksilva]

Its a little better than that actually, assume you transfer this to your wife for THB5.5M you'll be looking at THB ~6,000, instead of THB 291,000

However your company will then have a withholding tax of THB 55K to pay. For most cases this will be treated as a final tax but your company can use this as credit in the annual income tax return.

However, direct property taxes is about the limit of my understanding of the tax implications on a property sale. You may want to seek further advice with respect to the impact of managing corporate income tax, if applicable.

Perhaps another TV member can advise further?

Final note don't do it next week, wait until this proposal comes into effect, which is most likely going to be April 1st but that's not know for sure yet.

[dsfbrit]

Its a little better than that actually, assume you transfer this to your wife for THB5.5M you'll be looking at THB ~6,000, instead of THB 291,000

However your company will then have a withholding tax of THB 55K to pay. For most cases this will be treated as a final tax but your company can use this as credit in the annual income tax return.

However, direct property taxes is about the limit of my understanding of the tax implications on a property sale. You may want to seek further advice with respect to the impact of managing corporate income tax, if applicable.

Perhaps another TV member can advise further?

Final note don't do it next week, wait until this proposal comes into effect, which is most likely going to be April 1st but that's not know for sure yet.

Thanks Quiksilva. You have inspired me to look into this further. I am usually quite a 'proactive' sort of person, but I got to the stage that whenever I heard the words 'Usufruct', 'Lease' (in all its forms 30, 30+, 30+30+30+...) and FBA - I started to gibber and froth at the mouth

If this is as good as it sounds, I may actually be able to unravel the dodgy company structure without is costing a small fortune in taxes!!

Thanks again

[Devil]

"This is expected to be in April 2008"

I have a pending sale expected to transfer April, can anyone confirm this will come into effect April or when? or s this just speculation?

Thanks

[quiksilva]

Nope its sheer speculation that just happens to be shared by a lot of prominent legal firms. Not just the OP.

[Devil]

Ok

Well in my case it would be very good if happens in April.

Thanks

[John 1]

Anyone found out when the reduced transaction fee and tax rate takes effect?

[tom yum goong]

Anyone found out when the reduced transaction fee and tax rate takes effect?

How about the OP, Siam International Legal Group. Can you confirm that the changes to the fees/taxes will definitely be enacted next month?

[Khun Jean]

I think they can confirm it on april 2nd.

Until then it is not certain.

Which of the following words do not relate to eachother

a ) confirm

b ) changes

c ) definately

d ) enacted

e ) Thailand

[thaigene2]

This is all just so funny.

KEEP BUILDING GUYS! Sino-Thai 20-somethings, KEEP BUYING ok? Thai Banks - KEEP LENDING to the young Sino-Thais so they can buy, ok?

Welcome to the pyramid.

he, he..

[cclub75]

Speaking about "stimulus"... There is one -good- news.

http://www.nationmultimedia.com/search/pag...amp;id=30068429

"Escrow law enforcement will help protect buyers' rights"

Apparently, this law was voted by the NLA (Legislative assembly appointed by the Junta...), just before the elections.

They are waiting now for a publication in the Royal Gazette...

Anyway, I think this idea is good, and it could stop the classic thai ponzi scheme "I build with the money of your deposit"...

Eventhough, it's clear that the aim of this law is also to protect the big boys from a too hot competition...

[thaigene2]

Anyway, I think this idea is good, and it could stop the classic thai ponzi scheme "I build with the money of your deposit"...

Eventhough, it's clear that the aim of this law is also to protect the big boys from a too hot competition...

Actually it's more like: "I build (or try to finish my 'other' projects) with your deposit (and you'll get your place as long as I can find someone else's deposit to build yours)" - a classic pyramid.

[Devil]

"However, it will be effective from April 1 and could come into force as late as mid-April."

That was taken from The Nation today http://www.nationmultimedia.com/2008/03/28...ss_30069352.php

So lots of transaction now being delayed unitl mid April.

[John 1]

The Tax breaks come into effect on the 1st of April so transfer that day and the .1% will apply, the only question I have here is, Business tax is reduced but says for property operators or do they mean property owners because if you own a house less than 5 years you have to pay business tax. Anyone know?

[quiksilva]

Anyway, I think this idea is good, and it could stop the classic thai ponzi scheme "I build with the money of your deposit"...

Eventhough, it's clear that the aim of this law is also to protect the big boys from a too hot competition...

Actually it's more like: "I build (or try to finish my 'other' projects) with your deposit (and you'll get your place as long as I can find someone else's deposit to build yours)" - a classic pyramid.

That's what he said. In the escrow system the deposit is held by a 3rd party registered escrow agent (that might be a lawyer, bank etc). Once deposited into the escrow account, those monies can only be released to the developer once certain conditions are met, e.g. completion of construction. If it is not completed, he doesn't get any money.

So in effect this escrow system, has put an end to the types of scams that you claim are common place and it is also an added cost for the developer. This is why it will likely clear the field of a lot of cowboys and is great news for the industry at large.

[tangoll]

I saw this notice from another site. Does anyone know if there is an official English translation or can someone here translate this notice. About enactment of the law on reduction of taxes and fees for property transactions. I guess it's enacted into law now.

<http://www.dol.go.th/low_ministry/notice/fee-reg/fee-condo.pdf>

Direct link here for Notice on Tax/fee Reduction

[Devil]

Tax breaks become official today Saturday March 29, 2008 Tax breaks for property buyers will become effective today with the official publication in the Royal Gazette, according to Suparut Kawatkul, the Finance Ministry's permanent secretary. Three laws would become effective, with the first reducing specific business taxes for property operators to 0.1% from 3% for transactions occurring over the next year.

http://www.bangkokpost.com/Business/29Mar2008_biz28.php

<script type="text/javascript">

[thaigene2]

Anyway, I think this idea is good, and it could stop the classic thai ponzi scheme "I build with the money of your deposit"...

Eventhough, it's clear that the aim of this law is also to protect the big boys from a too hot competition...

Actually it's more like: "I build (or try to finish my 'other' projects) with your deposit (and you'll get your place as long as I can find someone else's deposit to build yours)" - a classic pyramid.

That's what he said. In the escrow system the deposit is held by a 3rd party registered escrow agent (that might be a lawyer, bank etc). Once deposited into the escrow account, those monies can only be released to the developer once certain conditions are met, e.g. completion of construction. If it is not completed, he doesn't get any money.

So in effect this escrow system, has put an end to the types of scams that you claim are common place and it is also an added cost for the developer. This is why it will likely clear the field of a lot of cowboys and is great news for the industry at large.

Not really, what I meant was this:

1. You place your deposit -

2. I use that deposit to continue building another project we have -

3. Eventually once we have enough 'deposits' from a variety of 'new' projects unassociated with the one you are buying into, we can finsih the older ones then move onto yours - the bank just needs to see the cash flow (and doesn't nit pick about which project the money came from as long as the flow is there). That assumes the escrow account is in the developer's name - not the 'project' name (if it is indeed the project name then yes that's better)

4. Evidently, that means we have to keep launching new proejcts every efw months and get people in the door with more deposits so we can start building the one you are 'buying'

A never ending cycle that needs more and more 'new' development launches, but like all pyramids it eventually runs out of chumps and many get stranded having paid some of their money but no way to get it back because it was spent elsewhere.

Maybe this loophole is being closed? Is that what you mean?

Edited March 30, 2008 by thaigene2

[quiksilva]

Yes exactly so.

The developer in this instance simply will not have access to your deposit for funding construction in the manner you described.

Yes the bank is concerned with seeing cashflow however what they really want is to see the project sold out, so that they can realize full earnings.

With a third party escrow system, the developer must deliver the product in order to receive the funds. The details of how it will work will likely boil down to the escrow agency terms.

I suspect that reasonable developers will have a term that states that if they don't deliver within a specified period of time, (allowing for usual delays) then the deposit would be refunded.

Only the big boys can offer terms like these, which is good for the market. So much of the problems in the industry here stem from Mom & Pop developers, who whilst wily operators in the industries where they made their money, are inexperienced with property having only entered this industry motivated by greed and ego.

It would be good for the consumer to see these guys shut out of the market. Unfortunately though I suspect that may not happen if 3rd party escrow agents are not mandatory, market forces then must come into play, and these guys will have to offer products on the cheap to make sales.

This will not solve the problem overnight of course, but it is a very promising step in the right direction, we now have to watch to see how this pans out.

[seasider]

Yes exactly so.

The developer in this instance simply will not have access to your deposit for funding construction in the manner you described.

Yes the bank is concerned with seeing cashflow however what they really want is to see the project sold out, so that they can realize full earnings.

With a third party escrow system, the developer must deliver the product in order to receive the funds. The details of how it will work will likely boil down to the escrow agency terms.

I suspect that reasonable developers will have a term that states that if they don't deliver within a specified period of time, (allowing for usual delays) then the deposit would be refunded.

Only the big boys can offer terms like these, which is good for the market. So much of the problems in the industry here stem from Mom & Pop developers, who whilst wily operators in the industries where they made their money, are inexperienced with property having only entered this industry motivated by greed and ego.

It would be good for the consumer to see these guys shut out of the market. Unfortunately though I suspect that may not happen if 3rd party escrow agents are not mandatory, market forces then must come into play, and these guys will have to offer products on the cheap to make sales.

This will not solve the problem overnight of course, but it is a very promising step in the right direction, we now have to watch to see how this pans out.

I have some land i'm selling, value about 1 million baht.

Can someone tell me what the fees would have been and what they would be now, based on a figure of 1 million baht.

Reason i ask is the potential buyer offered a lower price but said he would pay all the transfer fee's. The difference between the lower offer and original price is, i think, a similiar amount to what the savings on the fees would be.

Maybe he knew about the reduced land fee's. I can now offer to pay the fee's and keep the original price.