Tax Minimization

There are two things in life that are certain: death and taxes! Therefore, the aim here is not tax avoidance , because that would be illegal but tax minimization , which means making the most of tax loopholes and benefits granted by the Revenue Department.

Individual Investors Portfolio

Since capital gain is tax free, therefore, the aim here is to invest in funds that do not pay any dividend. Since interest income is subject to 15% withholding tax while dividend income is taxed at 10%, mutual funds that reinvest both of these incomes shall not be subject to any withholding taxes. For example, you bought a fund at 10 baht and it pays 2 baht dividend. That dividend shall be subject to 10% withholding tax. Whereas if you bought a fund at 10 baht and sold it at 12 baht. The 2 baht profit is treated as capital gain and thus tax free.

As for special tax exempted mutual funds such as Retirement Mutual Funds (RMF) and Long-Term Equity Funds, not only are these funds tax exempted but the Revenue Department also grants special tax deductions to those that meet certain minimum requirements for long term investing. Contributions into both of these funds are be used as tax deductions up to Baht 300,000 (each fund) per year or 15% of gross income, which ever amount is smaller.

Institutional Investors Portfolio

As for institutional investors, tax treatments are not so favourable. Any capital gains shall be treated as income, which is subject to a corporate income tax of 30% Dividend income, on the other hand, is tax exempted for those investments that are held for the long-term.

•  Annual income

•  Age profile and marital status

•  Investment objectives

•  Level of risk tolerance

Once the above mentioned points have been carefully taken into account, one can start looking for the most suitable tax-exempted investment vehicles as follows:-

•  Bank Deposits

Interest income on normal bank deposits are subjected to 15% withholding tax. But there are certain types of special deposits, which are taxed-exempted. These deposits are long term in nature, between 2-5 years maturity and one has to make a regular monthly payment into the accounts; the amount of which can vary from Baht 1,000 to Baht 25,000 per month. The risk level associated with such deposit accounts are quite low in the short term due to the blanket guarantee by the government on all bank deposits. However, in the longer term the guarantee may be lifted and one will also be subjected to inflation risk.

•  Life Insurance Coverage

Provided that the term life is in excess of 10 years, the insurance premium paid is tax deductible up to Baht 50,000 per year. Moreover, the investment return plus the principal are tax-exempted. The risk level of life insurance contract can be quite high due to the long term nature of the contract and there is no secondary market.

•  Registered Provident Funds & Retirement Mutual Funds (RMF)

Those employees that are provided with provident funds by their employers and RMF for the self-employed, may contribute up to 15% of their salaries into such funds, depending on the rules of each company. Contributions into registered provident funds together with RMF are tax deductible up to Baht 300,000 per year. Furthermore, the earnings of the funds are tax-exempted and the same is true for the final lump sum payment, provided that the money remain invested in the funds until the mandatory retirement age (55 years old).

The tax benefits on registered provident funds are the most generous out of all the available tax-exempted investment vehicles. However, like all aspects of long term contractual savings, liquidity risk can be quite high and the investment performance of the funds really depends on how good the fund manager is.

•  Listed Stocks & Long-Term Equity Funds (LTF)

Capital gains from investing in securities that are listed on the Stock Exchange of Thailand (SET) are tax free but dividend income is subjected to 10% withholding tax. Like all equity investments, the associated risks can be quite high and capital losses can not be used for tax shelters. LTFs, on the other hand, enjoy special tax deductions of up to Baht 300,000 or 15% of your gross income which ever is lower. The only caveat is that one must remain invested in these funds for at least 5 years.

•  Mutual Funds

Like listed stocks, capital gains from investing in mutual funds are tax free and dividend income is subjected to 10% withholding tax. At the fund level, mutual funds enjoy the same preferential tax treatments as provident funds, whereby capital gains, interest and dividend incomes are tax-exempted.

The risks involved with mutual funds really depend on the types and investment objectives of each fund. But normally, mutual funds are quite well diversified; the only exceptions will be funds, which were set up to invest in specifically defined securities.

Types of funds

Essentially mutual funds can be either closed-end, whereby there are limited number of units with fixed maturity or open-ended, where they are perpetual in nature with unlimited number of units. Furthermore, mutual funds can be divided into various types depending on their investment objectives. A fund which is mandated to invest in stocks, is called an equity fund. Whereas a fund which invests only in fixed income instruments is called a fixed income or bond fund. And a fund that invests in both stocks and bonds is called a balanced fund