Leasing Or Rental Agreement?

[OKF]

Hi @ all,

I am planning to build a house on the land of my companies. I was thinking of putting a 30 year lease in place and build the house on my personal name rather then via the company.

Now my bookkeeper suggests just to do a rental agrement on an annual basis as she says we are talking a left pocket to right pocket business (and the taxman will get a little slice inbetween of course) because it is my company so it is my land. This would save the registration cost athe land department.

Is there an objection to do it that way. Am I missing out on something here. I am asking hat because from what I hear many people go the 30 year lease route?

Thanks & regards

Oliver

[richardt1808]

Hi,

A Thai company cannot be more than 49% owned by foreigners; which would mean that you should have other Thai partners who own at least 51% of your company, so you would have to ask yourself whether you would be happy to let such a major investment hinge on a simple lease, which, by law may not be more than 3 years at a time.

So; you probably own only 49% of the company and have family members/friends/nominees holding the remaining shares. If you control those other shares in any way, you are in breach of the Foreign Business Act and that will have serious crimal consequences when you are caught. In this case, any agreement entered into by the company would be void and aside from the fine and possible prison term, you could lose your property altogether.

If you have by some miracle circumvented the FBA and have a 100% legal company, then you may still want to reconsider. I read some excellent points in a similar thread a few days ago which all advised against building a house via the company route because of the FBA and other concerns. The majority opinion nowadays is that you should do a 30 year lease or usufruct from a Thai person (preferably not your girlfriend) which will give you fully protected rights to occupy the land legally and build your house. The lease is then registered with the Land Department with your name appearing in those documents, so you are fully protected.

[thaiwanderer]

If you are satisfied with the company ownership of the land will not result in your interest in and use of the land being lost (whether on personal trust or other means) and are happy to break the law in that control (which may or may not be the case) then there is no need for any lease to secure your interest.

If on the other hand you feel a lease to you personally is necessary then the 30 year lease should be preferred because (obviously) it's longer and more importantly it's registrable at the land office.

In such circumstances tax savings are a non-issue in deciding which to go for.

[OKF]

I have a legal cross share company structure (2 companies) so I am in full control of everything. No illegal (nominee) structure, no 51% Thai persons that control something or similar! I have no girlfriend and no Thai person that I depend on or want to depend on. I am not maried so I am completey independent. All this is not a miracle either but not to discuss here please. If somebody wants to know send me a PM.

So coming back to my problem or question. Looking at it now from that perspective, how can I gain more security by doing a 30 year lease opposed to a rental agreement? Is there any good reason for the 30 year leaing agreemnt under this circumstances?

Thanks for your time

@thaiwanderer: I do not understand your posting. What law(s) do I break? Is the 30 year lease a must?

Edited January 22, 2010 by OKF

[thaiwanderer]

A 30 year lease is to be preferred over rolling one year leases as they may stop rolling!

However IF your ownership of the land is complete and legal then there is no reason why any lease is necessary.

However I suspect your companies are not as watertight and legal as you assume (i may of course be wrong).

Minor exceptions aside the general rule of thumb is that the extent to which you have beneficial use and effective control matches the extent to which you offend the general prohibition on foreigners (assumption here) owning land or others being owners in place of foreigners.

I suspect your structure is such that it is less likely to come to the attention of the authorities but that of itself doesn't make it a legal structure.

It is one thing to know the weaknesses in your structure and be happy with the risk quite another to mistake the structure as therefore safe in itself.

[OKF]

Thanks for the expalantion. The only weakness if it is one that 5 out of 2000 shares and 5 out of 10000 share are held by Thai persons. (2 companies, holding structure). Overall it ia a legal structure nothing unlawful. Some way people do not use because of cost and lack of knowledge. I am quite happy with it.

So even if it would be the typical 49/51 nominee company who owns the land, what would be so special about the 30 year lease compared with a rental agreement and why should it be done that way?

[thaiwanderer]

IF happy with structure and tax cheaper on rolling yearly leases than I can see the advantage of that.

However its not at all clear your structure is legal especially on basis of 5/1000 and 5/2000 thai shares.

That of itself would appear to be even more oviously at odds with the law than the 'usual' nominee company structures????

[quiksilva]

Its quite simple to determine which is better, take the leasehold registration costs vs the taxes that you would pay over the same period.

Given that you are leasing to yourself, arguments such as greater security of tenure with a 30 year lease are moot. Do whichever works out cheapest over the same period.

It was your accountant's idea so ask them to compare the net present value of each option, over a 30 year term.

Its your lease and you are the tenant, which ever way you do it structure it in such a way to take advantage of the nature of depreciating value of money over time (i.e. no / minimal rental escalations) but note too that should future payments fall to levels below the government's appraised value then you may find yourself with a higher tax bill in the future, whereas one payment now avoids that.

Do the sums and let the numbers speak for themselves.

[OKF]

@thaiwanderer: no you took the wrong assumptions. It is legal and pretty safe as there is no 100% sefety in Thailand.

@quicksilva: Thanks to you as well. So my overall impression was right. It is down to tax now. If I understand you right the annual lease would increase over the time as value of land may increase and so the rent would have to go up o avoid trobles with the tax man. That is a very good point but what do you think how much would the value increase over that period in Samui? That for me is difficult to judge for such calculation. My idea was take an apropriate lease and from that land lease the annual cost for bookkeeping are deducted. So there is a litle money over which will then be taxed. For the moment I have enough minus which would mean no taxes for a few years anyhow. Also losses can only be deducted for 8 years or so. If I would pay one sum it would enable me to get all the money back I have as a loan but still there would be quite bit overhang which would be taxed.

Edited January 25, 2010 by OKF

[quiksilva]

Its difficult to accurately estimate how much land prices will change over 30 years, anywhere.

Without access to lots of hard data you have to take a punt.

(However please note that I was talking about the government's opinion on rental value as opposed to capital value. )

If pressed I'd err on the side of the conservative and assume growth of 1% - 3% per annum, depending on location.

[thaiwanderer]

Not going to labour the point (too much) as OP's question appears to be answered by finding out the difference in tax liability between short and longer lease - assuming a lease is even required (as apparently it isn't for strengthening the hold on the land) - which his bookkeeper can answer.

However if the OP is so inclined i'd be interested to know how his structure differs in an advantageous way from a 'normal' nominee company.

On the basis of the above (and assuming a mistake distinguishing shares and voting rights hasn't been made by the OP?) Thais only own 0.25% and 0.50% of the companies - if not an exceptional case I cannot see how this doesn't offend the FBA or Land Code (even more so than atypical 51/49 or less foreigner weighted nominee companies)?

[OKF]

what does OP mean?

no mistake, as I said it is 2 companies, each company holds shares in the other (which is the important issue here to be a Thai Company) that is why it is called cross share structure. I control it via my minority shares plus the the holding in each other company as only 5 people held minor shares = voting rights. Forget what you know about the typical illegal nominee structure. This is different. You need to think cross share.

[thaiwanderer]

Thank you, I am well aware of 'cross share' companies as you put it as well as multi layered etc.

It was just i was intrigued that you seemed to be suggesting either yours was not a nominee structure or was not an atypical nominee structure or somehow had something new.

Will all due respect whilst yours is ever so slightly more 'complicated' than a single nominee structure it is by far and away still less complicated and more easily noticeable by even the laziest official should the time ever come than alot of widely used structures.

Your lawyer or bookkeeper may have suggested its 'more clever' but again with respect its not.

But as with all such efforts to illegally circumvent the law if your happy with it thats all that counts.

[OKF]

hm, I cannot see what you mean with a nominee structure. The fact that it has a few Thai people as minorty share holders means that? Looking at the typical nominee structure I find it a huge difference. Number 1 is that I am in full control of everything an do not have to differenciate between normal and preferential shares and number 2 is that the Thais had to pay such minimal capital for the shares which is easy to proof.

But if you think it is more or less the same do you then think a 30 year lease is a neccessity and if so why?

[thaiwanderer]

We may be confusing each other but on the basis of what you are now saying if its so easy to show its not a nominee company as you say then it seems its equally so easy to see that your company is out and out illegal for holding land.

The whole point of 'nominee' structures is for a foreigner to attempt (with greater or lesser degrees of success) to have beneficial ownership, use and control of land without highlighting this fact to the authorities and perhaps being able to withstand some low level scrutiny.

To the extent yours is not a nominee structure you may have more control than an atypical version but hand in hand with that is yours would appear to be more obviously in breach of the law (thais together owning a minority of share capital if i read you correctly?).

Regardless of that the advantage of the 30 year lease is that if the thais turn bandit on you for whatever reason you still have 30 years.

If you have as effective control as you say then that reason to favour a 30 year lease doesn't exist.

In your structure or any other nominee version the 30 year lease does not provide a cloak of protection if for any reason the landowning structure is ever investigated and there is any suggestion on the paper trail that you were complicit in the set up (in fact holding a lease will generally point a few fingers at you anyway).

This is of course all based on future unknown enforcement of current laws which themselves may also change, but to entirely ignore that posibility rather than assessing the risk and making your own choice as to what to do would suggest everyone may as well just squat on land and leave it at that.

I am not criticising you its just your posts appeared to indicate your structure was somehow better and to be entirely honest unless i am missing something yours would seem to be worse than the usual lazy nominee structures.

[OKF]

I understand yopur points, thank you for that, but I am sure you are missing something. Of course it is not only about the 5 Thai persons. The company shares in each company is 'Thai' as well but as it is the companies which I control. This is why it is a Thai company without having Thai people in. I will sent you a pm that is maybe better.

[OKF]

Hallo again

Accidentially I am in contact with a lawyer and accountant of my nationality working in a law office in BKK. He said my company construction is critical and risky and from what I understand he prefers the standard nominee structure (not 100% clear yet) and says I am in need for good advice regardless of what advice I got in the past. He also implements that the 30 year lease seems to be a neccessity.

In this posting 'thaiwanderer' said:

'However IF your ownership of the land is complete and legal then there is no reason why any lease is necessary'

So if it is not which is implemented that means I should do a 30 year lease. What would I gain from that? Lets say my company is found illegal and disolved by the authorities, what difference does it make to the agreement. If made with an illegal company it can be deemed illegal as well, right? I do not get the point about the 30 year lease.

Thanks & regards

Oliver