The termination of the tax exempt status for property funds was recently approved by the Thai cabinet and the change will take effect next year after being published in Royal Gazette. RHB Securities believes the move is most likely to take effect some time in the second quarter of 2017. The key objective of this revision is to force property funds to convert their status to Real Estate Investment Trusts (REIT).
At the moment, the business operation of assets in Thai property funds are exempt from value-added tax (VAT), specific business tax and stamp duty. However, these expenses have been fully charged on the operation of assets in Thai REITs creating an interesting split between the two.
If this revision does take effect, RHB Securities noted that the tax-related operating costs for property funds will be as same as REITs. This means the cost advantages of property funds over REITs will disappear and could significantly impact the former. Currently there are 52 property funds listed on the Stock Exchange of Thailand with 47 of them paying dividends to unitholders continuously. If the revision does take place, this will result in an increase in tax-related cost of operating assets. According to RHB, pressure could be placed on property funds’ dividend yield on average and might see them decline from the 6.2 percent per annum they currently pay out.
Ticon Industrial Connection currently owns three property funds and one REIT and the company’s management commented that the revision cannot force the company or property fund unitholders to convert the fund status to REIT. The local institutional investors of the property fund would likely vote against any attempts to convert since they will have to pay 20 percent withholding tax on dividends received from REITs compared to property funds where no withholding tax needs to be paid.
RHB speculates that the government may revise the law relating to the withholding tax rate for property funds charged on local institutional investors in the future but doing so would be difficult. That’s because it will affect property funds and other types of mutual funds held by these local institutional investors.
