Royal Decree No. 750 (BE 2565) issued under the Revenue Code regarding the exemption from income tax of investments in Thai start-ups (the “Royal Decree”) was recently published in the Government Gazette, where startup funding is provided directly or indirectly through venture capital (VC), enterprise venture capital (CVC) or a private equity trust (PE Trust). This Royal Decree aims to unblock capital gains tax on investments in startups under Royal Decrees No. 597 (BE 2559) and No. 636 (BE 2560). These tax advantages are valid for ten accounting periods until June 30, 2032. The firm predicts that these tax privileges will allow Thai startups to raise more funds from Thai and foreign investors, leading to faster growth in gross domestic product (GDP) in Thailand and an increase in the number of employed workers in Thailand.
In order for target investors to obtain tax exemptions for their investments in Thai startups, a startup’s criteria, target investors, tax benefits and conditions, and exception conditions can be summarized below.
1) Getting Started
A startup must engage in the target activities supported by relevant government agencies as prescribed by the Committee on National Competitiveness Enhancement Policy for Target Industries, which must use technology as the basis of its production process and of its services in accordance with the regulations stipulated by the Director General of Taxation (the “Target industries”). The government authorities that will be responsible for issuing the certification of the targeted activities are the National Science and Technology Development Agency (NSTDA) and the National Innovation Agency (NIA).
Currently, there are 12 targeted industries, as prescribed in Notification of Committee on National Competitiveness Enhancement Policy for Targeted Industries No. 1/2561, which are divided into 3 groups as follows:
- 5 S-curve industries: next-generation automotive, smart electronics, affluent tourism, medical and wellness, agriculture and biotechnology, and food of the future;
- 5 new S-Curve sectors: robotics, aviation and logistics, biofuels and biochemicals, digital and medical hub; and
- Other industries: Defense and Education and Human Resource Development.
2) Target investors
All target investors who will be eligible for income tax exemptions under Royal Decree No. 750 (BE 2565) must hold shares in the startup, CVC fund or PE Trust for at least 24 months before the transfer of shares and must not exercise their rights under former Royal Decree No. 597 (BE 2559) and No. 636 (BE 2560).
Target investors can be categorized into two groups, namely:
- Direct investors: Comprised of (i) persons who are Thai residents or non-resident Thais, (ii) legal companies registered under Thai law, and (iii) foreign legal companies registered under foreign laws.
- Venture capital (VC): composed of (i) CVC funds, (ii) PE trusts and (iii) shareholders or unitholders of CVC funds and PE trust.
A CVC or PE Trust fund can be registered in Thailand or overseas. If the CVC or PE Trust fund is established under Thai law, it must have paid-up capital on the last day of each accounting period of THB 20 million or more and must be registered with the Securities and Exchange Commission.
CVC fund shareholders or PE Trust unitholders must be natural or legal persons who invest only in Thai CVC funds and Thai PE Trusts.
If the CVC Fund or the PE Trust fails to meet the above criteria in a fiscal calendar year, its rights to tax exemption in that fiscal calendar year will be revoked.
3) Tax advantages and conditions
a) direct investment
A legal person or company registered in Thailand or abroad will be eligible for income tax exemptions on gains from transfers of shares in a startup, provided the startup engages in the targeted industries and derives at least 80% of its total revenue from the target activities over two consecutive accounting periods before the transfer of shares.
b) Indirect investment by VC
The tax advantages for venture capital funds will vary depending on the level of investment of the CVC fund and the PE Trust, and the level of investment of the shareholders of the CVC fund and the unitholders of the PE Trust, which can be summarized as following :
i) Tax advantages for CVC and PE Trust
The CVC Fund will benefit from corporate tax exemptions on gains from transfers of shares in a startup, provided that such startup derives at least 80% of its income from target activities during each accounting period for two consecutive accounting periods. before the transfer of shares.
PE Trusts are not subject to corporate income tax.
ii) Tax benefits for shareholders of CVC funds and unitholders of PE Trusts
Shareholders of CVC funds and unitholders of PE Trusts will benefit from tax exemptions on the following:
(a) Gains from transfers of shares of CVC Funds and PE Trusts, where shareholders of CVC Funds and unitholders of PE Trusts will enjoy personal or corporate income tax exemptions in proportion to their investments, provided that these startups earn at least 80% of their revenues from the target activities in each accounting period for two consecutive accounting periods before the transfer of shares.
(b) Gains from the termination of CVC Funds and PE Trusts based on the proportion of retained earnings derived from the Startups’ Target Businesses, provided that such Startups derive at least 80% of their revenue from the Target Businesses at course of each accounting period for two consecutive accounting periods before dissolution.