The Thai Revenue Department (TRD) recently issued a ruling concerning the relationship between two companies based on their common shareholding. The case revolved around assessing whether Arare Company Limited (Arare) and Fahsai Company Limited (Fahsai) are related to each other based on shareholding and control dynamics.
Brief facts of the case
Arare is in the business of operating schools. The shareholding of the company is as follows.
Name | A Co., Ltd. | Z Co., Ltd. | Mr. Piti | Mr. Mana | Miss Manee | Total |
Shareholding | 48% | 1% | 46.06% | 2.47% | 2.47% | 100% |
Some of the shareholders of Arare also held shares in another Thai entity; namely, Fahsai, which is in the business of buying and selling real estate properties. The shareholding in Fahsai is set out below.
Name | Mr. Piti | Mrs. Chujai | Mrs. Deejai | Mr. Mana | Miss Manee | Total |
Shareholding | 20% | 20% | 20% | 20% | 20% | 100% |
During the financial years under review (i.e., FY 2020 and FY 2021), Arare did not prepare or file any transfer pricing disclosure forms, as it neither had any related parties nor any transaction values with related parties based on its following understanding:
No juristic person held 50% or more of the total capital, either directly or indirectly, as required by Section 71 bis (1) of the Thai Revenue Code (TRC); and
None of the shareholders, either directly or indirectly, held 50% of the total capital of Arare, as required by Section 71 bis (2) of the TRC.
Apart from referring to the aforementioned provisions, Arare also provided the following information related to the voting rights of its shareholders.
Name | A Co., Ltd. | Z Co., Ltd. | Mr. Piti | Mr. Mana | Miss Manee | Total |
Voting rights | 89% | 2% | 9% | 0% | 0% | 100% |
Given the above information, Arare argued that interpreting the term ‘group of shareholders’ holding more than 50% as a related party is a very broad consideration and is not aligned with the provisions of Section 71 bis of the TRC. Moreover, the combined voting rights of the common shareholders in the company were merely 9%, reinforcing the argument against considering them as a control group.
The voting rights of A Co., Ltd. can be viewed as having the right to control Arare, according to the provisions of Section 71 bis (3) of the TRC. However, Arare contended that the TRD has not issued any ministerial regulations specifying the nature and circumstances of control, management, or capital to establish a relationship between two entities.
Based on the above arguments, Arare decided not to file transfer pricing disclosure forms for the financial years under review.
The TRD’s guidelines
In April 2024, the TRD held that Mr. Piti, Mr. Mana, and Miss Manee collectively hold 51% of the shares of Arare and 60% in Fahsai, so Arare and Fahsai meet the criteria for related parties under Section 71 bis of the TRC. The TRD viewed such a relationship as a direct or an indirect shareholding leading to control over both entities through a “group of common shareholders”.
The TRD mentioned that Arare should have disclosed Fahsai as a related party in a transfer pricing disclosure form and reported any relevant related-party transactions, given the interpretation that a collective shareholding, regardless of any relationship between individual shareholders in the group of common shareholders, constitutes a relationship.
HLB Thailand’s take
Taxpayers are required to identify and report their related parties in following the provisions of Section 71 bis of the TRC.
Tabulated below is a brief analysis of the provisions of Section 71 bis of the TRC.
Analysis points | HLB Thailand remarks |
Section 71 bis does not contain the terms ‘groups of shareholders’, ‘collective shareholding’, nor any similar terms while explaining the scenarios whereby two entities become related to each other. | Given the merits of the instant case, the TRD’s view that collective shareholding by a “group of common shareholders” constitutes a related-party relationship does not have explicit citing in the provisions of Section 71 bis of the TRC. Additionally, the TRD’s list of illustrations in its transfer pricing disclosure form guidelines (Diagnostic Guidelines Kor Kor 0702-217, and Diagnostic Guidelines Kor Kor 0702-3356), released in February 2022, provides examples of companies considered as related parties, specifically those fulfilling the shareholding criteria. It does not include any scenario establishing a relationship between two companies through a group of common individual shareholders. The TRD’s Q&A regarding the Annual Report Filing for Companies or Partnerships with Related Parties under Section 71 bis of the TRC (the TRD’s Q&A) (this is an unofficial translation; for the original article, refer to this link), released in February 2022, also does not specify any circumstance(s) concerning the exercise of control and thereby establishing a relationship between two entities through a group of common shareholders. |
Section 71 bis only refers to “related companies”, “juristic partnerships”, and “juristic persons” (Section 77/1 of the TRC defines a juristic person as a company or partnership, a governmental organisation, a cooperative, or any other entity designated by law as a juristic person). | The TRD has taken a similar position in other rulings (i.e., Kor Kor 0702/217 and Kor Kor 0702/3356), where the TRD held that a “group of common individual shareholders” holding more than 50% of the shares of two unrelated entities makes them related. However, the provisions of the section merely refer to the legal form of business; i.e., “companies” and “juristic persons” to establish a relationship between two or more independent entities. The provisions do not cite the terms ‘individuals’ or ‘natural persons’ as they do not fall within the definition of juristic persons as provided in Section 77/1 of the TRC. |
The TRD’s view that a related-party relationship was established by having a “group of common shareholders” achieve an aggregate of more than 50% of a shareholding is not supported by the provisions of Section 71 bis of the TRC. Moreover, it has been clearly mentioned in the TRD’s Q&A that the ministerial regulations have not defined the ‘control’ principle in the provisions of Section 71 bis, and, thus, if the TRD’s view is that the “group of common shareholders” achieved control over both entities through ‘a group of common shareholdings’, then it would contradict the TRD’s response in its Q&A.
Notwithstanding, the TRD did not provide any evidence to establish that the shareholders were acting in concert. Accordingly, where there is no arrangement between a group of shareholders to act in concert, there can be no joint control that would give rise to the entities being considered as related.
Additionally, even the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (referring to Article 9 of the OECD’s Model Tax Convention Model Tax Convention on Income and on Capital) do not specify any circumstance(s) concerning direct or indirect participation in management, control, and capital to establish a relationship between two entities.
Thus, Section 71 bis of the TRC does not permit the TRD, suo moto, to treat a group of individual shareholders as constituting a controlling group, especially where there is no agreement for them to act in concert, and, accordingly, Arare was justified in not filing any transfer pricing disclosure forms during the financial years under review.
