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Chad is the Managing Director of Creveling & Creveling Private Wealth Advisory. His experience in institutional research, corporate advisory, and private wealth advisory has given him a firm grasp of the financial issues and challenges facing his international clients, as well as the... More
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  • Tips For Thai Expats: Use RMFs And LTFs To Save On Thai Taxes 0 comments
    Oct 29, 2012 4:45 PM

    As the end of the 2012 tax year approaches, expats working in Thailand may wish to consider sheltering some of their income from Thai tax by contributing to Thailand's Long-Term Equity Funds (LTFs) and Retirement Mutual Funds (RMFs). With a little bit of planning, you can save up to THB 370,000 (or about USD 12,000) this year in Thai taxes by contributing to these tax-advantaged funds.

    Long-Term Equity Funds and Retirement Mutual Funds: The Basics

    Long-Term Equity Funds (LTFs) were set up under Thailand's IMF program to encourage longer-term investing in the Thai equity market. Retirement Mutual Funds (RMFs) were established to encourage people to save for retirement by providing Thai tax benefits on savings.

    Both LTFs and RMFs provide current-year Thai tax deductions on contributions, and earnings grow free of Thai tax. Subject to meeting LTF and RMF fund requirements, funds can also be withdrawn tax free.

    There are a number of different LTFs and RMFS managed by the various Thai asset management companies and distributed either directly or through affiliated bank branch networks.

    How You Save on Thai Tax

    For RMFs: Individuals can deduct contributions of up to 15% of their personal income (including salary, bonus, fees, commissions, severance pay, or investment income) or THB 500,000 per year (whichever is lower) from current Thai taxable income. If you have a provident fund at work, the total annual maximum tax deduction for both the provident fund and the RMF together is THB 500,000.

    For LTFs: Individuals can deduct contributions of up to 15% of annual compensation or THB 500,000 (whichever is lower) from current-year taxable income. This is in addition to any contributions made to a provident fund and/or RMF.

    For high-income earners, combined contributions can total THB 1 million (USD 33,750) and shield taxes of THB 370,000 (or roughly USD 12,000).

    What You Need to Know About RMFs and LTFs

    Here's what else you need to know you need to know about RMFs and LTFs.

    RMFs:

    • You get a current-year Thai tax deduction on contributions.
    • Depending on the fund's policy, the fund manager may invest in equity funds (Thai as well as international), debt instruments, or mixed funds.
    • Returns grow free of Thai tax.
    • The maximum annual contribution is the lesser of 15% of total annual compensation or THB 500,000.
    • If you contribute to a company provident fund, the total contribution to both the provident fund and RMF cannot exceed THB 500,000.
    • Contributions need to be recorded before the end of the calendar year.
    • Funds can be withdrawn free of Thai tax after age 55 (and if held for five years or more)
    • To qualify for Thai tax benefits, you must contribute at least every other year for a minimum of five years. The minimum contribution is 3% of taxable compensation or THB 5,000, whichever is lower.
    • If you fail to meet the required minimum contribution schedule or withdraw funds prior to reaching age 55, or have not met the five-year holding requirement, you will have to pay back any tax deduction you received along with penalty fees. In addition, any capital gains will be subject to a 10% tax.

    LTFs:

    • You get a current-year Thai tax deduction on contributions.
    • Unlike RMFs, LTFs invest primarily in Thailand-listed stocks. You'll therefore want to make sure a Thai-only equity holding makes sense in your diversified portfolio.
    • Returns grow free of Thai tax.
    • The maximum annual contribution is the lesser 15% of total annual compensation or THB 500,000.
    • Contributions can be made in addition to those made to provident funds and RMFs.
    • There is no need to make ongoing contributions to maintain tax benefits.
    • Contributions and earnings can be withdrawn free of Thai tax after five years.
    • If you withdraw before the five-year holding period, any tax deductions you received will need to be paid back along with penalty fees. In addition, any capital gains will be subject to a 10% tax.
    • Contributions must be recorded by the end of the calendar year.

    The rules regarding LTF and RMF contributions can and do change, so make sure you check the current status before making any contributions.

    Who Can Benefit from RMFs and LTFs?

    Aside from Thai citizens, many foreigners with a long-term commitment to Thailand through work, marriage, or lifestyle can benefit from contributing to LTFs and RMFs. Those on short-term expat assignments in Thailand will have to carefully weigh the potential benefits against the various rules and regulations required to maintain the tax-exempt status of each fund.

    Special Considerations for Americans

    There are additional considerations for Americans who are taxed by the IRS on worldwide earnings and compensation. The tax-advantaged status of the RMF and LTF is not recognized by the IRS. In addition, both the LTF and RMF are likely to be considered Passive Foreign Investment Companies (PFICs) by the IRS and therefore subject to special tax rules and filing requirements.

    Though the IRS does not recognize LTFs and RMFs as a tax-advantaged vehicle and classifies them as PFICs, they can still make sense for Americans, especially those whose compensation does not exceed the Foreign Earned Income Exclusion (FEIE). In this case, all compensation earned in Thailand would be shielded from tax by the IRS due to the FEIE. Contributions to an LTF and RMF would then save Thai tax. Even though earnings on the contributions would have to be reported annually under PFIC rules, you would still be ahead since you're investing with funds you would have otherwise paid to the Thai Revenue Department.

    If you earn in excess of the Foreign Earned Income Exclusion, contributions could still make sense, but the benefit diminishes as you enter the higher tax brackets. Compensation in excess of the FEIE will effectively be taxed at the higher of the U.S. or Thai rate. For someone in the 37% tax bracket in Thailand and the 33% or 35% bracket in the U.S., the 2-4% tax savings may not justify tying up the funds in an LTF or RMF. For someone in the 37% Thai tax bracket, but only in the 28% U.S. tax bracket, it still might make sense, but you'll need to do the math.

    Don't Ignore the Potential Benefits of LTFs and RMFs

    For many Thailand-based expats, the Thai tax benefits of LTFs and RMFs can be a great holiday gift to yourself. Do yourself a favor and check them out-just make sure you understand the rules and regulations, and for Americans, the potential tax consequences. For help in choosing an RMF and LTF, see our earlier blog post, "For Thailand-Based Expats: Year-End Tips for Selecting RMFs and LTFs."

    About Creveling & Creveling Private Wealth Advisory

    Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future. For more information visit crevelingandcreveling.com.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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