Share premium: capital or income?

What is share premium?

A share premium is a credited difference in price between the par value, or face value of shares, and the total value a company received for issued shares. You usually record the share premium as capital in the company’s balance sheet. Thus, you do not register the share premium in the company’s revenue and show it in the profit and loss account.

Thai Revenue Department’s view on share premium

Generally, companies incorporated in Thailand are subject to corporate income tax at the rate of 20% on profits arising from or resulting from the business carried on in Thailand. The profits are computed by deducting income, from the company or arising from business carried on in an accounting period, with expenses under the conditions of the Thai Revenue Code (“TRC”).

In the past, the Thai Revenue Department (“TRD”) has issued many rulings stating that the share premium is not considered as the company income, but it is shareholders’ equity. Consequently, the TRD has added a statement regarding if it appears to them that the shares were issued illegally, or the share premium is overvalued, or the taxpayer intends to conceal the subsidy by issuing new shares. As such, share premium can be considered an income of the share issuer and the share subscriber.

What does the Supreme Court think?

In a recent Supreme Court decision, the case was ruled in favor of the Thai Revenue Department that the share premium is considered a subsidy under the hand of a Thai company. Thus, the amount of share premium must be recorded as revenue of the Company.  The background and reasoning of the Supreme Court are described below.

Background

N co., a Thai company, has increased its capital by issuing new shares; its par value is 1,000 Baht per share. The new shares issued also have a share premium amounting to Baht 410,000,000. N co. recorded the shares as shareholders’ equity, and Japanese shareholders had subscribed to these new shares.  The TRD disagreed with this arrangement and assessed SE co. that the share premium should be considered a subsidy from the company’s shareholders.

Reason

The Supreme Court ruled in favor of the TRD because N co. has enormous losses and a debt-to-equity ratio at 40:1. Therefore, it is not reasonable for Japanese shareholders to be compared to other investors in the same circumstances. In addition, the Supreme Court did not believe that N co. intended to increase capital, and Japanese shareholders subscribed to new shares with a share premium to seek profit from N co.’s business.

Our observation

First, we were surprised when we reviewed this Supreme Court decision. As a civil law country, the court will establish the acts of the case, analyze, and apply the law issued by the legislatures. We did not see the application for which provision the court applied in this case.

Second, the analysis of this case appears that the Supreme Court applied an “economic substance doctrine”. If the transaction created by the taxpayer does not change their economic status but only for tax purposes, tax benefitห will be denied.

Finally, we suggest the company should be careful and take this case into account when the company intends to increase its capital with a share premium. The economic circumstance of the company should be one of the factors to consider before proceeding, and a tax advisor or tax lawyer should be involved in the planning stage.

Disclaimer

This article was prepared and accomplished by the author in his personal capacity. The opinions expressed in this article are the author’s own and is not intended to provide legal advice or suggest a guaranteed outcome as your situation may differ, and the law may have changed since publication. Also, this article does not reflect the view of Grant Thornton Thailand in this matter. For specific technical or legal advice on the information provided and related topics, please contact the author.

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